Finance

Finance refers to accumulation of funds from diverse sources and transferring them mainly from lenders to borrowers to undertake any kind of expenditure and subsequent repayment flows under specified terms and conditions. The transfer of resources may also take the form of the purchase of share capital and returns in the form of dividends and proceeds from the resale of the stock. In essence, finance is a sub-field of economics focusing primarily on the working of capital markets and the supply and pricing of capital assets with the four basic institutions, efficient markets, risk and return, substitution and arbitrage or 'option pricing' and 'corporate finance'. Finance in Bangladesh may broadly be grouped in four types viz, agricultural finance, industrial finance, trade finance and housing finance.

Agricultural finance refers to providing funds (grants and loans/credit) to finance the activities of farmers and other borrowers involved in production, storage, processing and distribution of agricultural products. The agricultural sector needs the fund to finance the costs of agricultural inputs and post-production activities. The requirements may be long-term for investment and also short-term for financing subsistence during pre-harvest period or for marketing of crops and processing agricultural produce. Short-term agricultural financing is used in preparation of land, purchase of seeds, fertiliser, insecticides and cattle, employment of labor, repairing equipment and meeting other recurring expenses. `The medium- and long-term financing helps the farmers to meet development expenses of non-recurring type, namely buying various agricultural machinery and their installation, land development, fencing and irrigation equipment.

The sources of agricultural finance may be both formal and informal. The informal sources include private moneylenders, friends and relatives, well-to-do rural people, shopkeepers, and marketing intermediaries. The formal sources are the commercial banks, rural banks, agricultural development banks, agri-product credit corporations, various government agencies for agricultural development, agri-product marketing associations, land mortgage banks and co-operative banks and societies.

The growth of the sector had, however, remained historically sluggish due to inadequate and inefficient flow of capital. From ancient times throughout the Mughal and the major part of the British regime, agricultural activity in Bengal relied largely on informal sources of financing. The credit providers of that times were mahagans, rich neighbors, friends and relatives, itinerant Kabulis, various types of farmers/growers associations, and local and foreign merchants and companies (including the British and Dutch East India Companies) engaged in export of Bengal's agri-produces. The establishment of provincial co-operative banks throughout British India including Bengal (under the Co-operative Societies Act 1904) in 1912 became the first formal source for agricultural financing. At least 17 loan offices and 15 commercial banks came into being before the partition of Bengal in 1947 and remained active in credit-giving activities including agriculture in the Bangladesh region. The East Pakistan Provincial Co-operative Bank Ltd was established in 1948.

The problem of agricultural financing in Pakistan acquired a new dimension after 1947 due to increased emphasis placed on agricultural production. The need for strengthening institutional set-up for agricultural financing was widely stressed. As a result, the Pakistan government endeavored to provide institutional credit financing to the agricultural sector. Major institutions coming forward in this regard were co-operative societies, the Agricultural Development Bank of Pakistan, the Agricultural Development Corporation, and the State Bank of Pakistan. Loan financing by the provincial government of East Pakistan for agricultural sector was Rs 28 million in 1956 and Rs 25 million in 1961-62. Through the takavi loans for West Pakistan and agricultural loans for East Pakistan, the central government took the part of a direct lender with no intermediate links between it and agriculturists.

Co-operative societies and organizations played a significant role in providing agricultural credit financing. Total credit financing provided by East Pakistan credit societies for agriculture was Rs 27.5 million in 1948-49 and Rs 4 million in 1959-60. The non-credit co-operative societies provided Rs 1.6 million in 1948-49 and Rs 0.056 million in 1959-60. At the end of 1959-60, there were 8 land mortgage banks in East Pakistan and they advanced Rs 0.632 million to agriculture for redemption of old debts and permanent improvement of land. There were 83 central co-operative banks in East Pakistan in 1948-49 and their total credit to the agricultural sector was Rs 17.941 million in 1948-49, Rs 10.637 million in 1955-56, and Rs 28.803 million in 1959-60. The Agricultural Development Bank of Pakistan was reorganized into the bangladesh krishi bank (BKB) after the birth of Bangladesh.

agriculture contributed about 33% of the GDP of Bangladesh in 1980-81 and the share of agriculture in GDP gradually declined to 18% in 2010-11 and further to a little over 13% in 2019-2020 (Ministry of Finance, Finance Division, Bangladesh Economic Review, various years). However, although the share of agriculture in GDP declined over time, the sector experienced consistent growth largely because of support to the sector through credit and subsidies in input supplies.

To increase the flow of finance for agriculture, the government inducted the Nationalized Commercial Banks (NCBs) into the field of agricultural credit in 1976 under a new program called Special Agricultural Credit Program (SACP) which was designed to cater to all season crop loans. Rural branches of NCBs now provide agricultural credit. As against a total disbursement of Tk 860 million by commercial banks in 1976-77, agricultural loans rose to Tk 3.75 billion in 1980-81, Tk 11.5 billion in 1984-85 and Tk 76.3 billion in 1999-2000. The government and private banks had disbursed more than Tk 90 billion as agricultural credit in FY 2008-09. BKB with 844 branches and the rajshahi krishi unnayan bank (RKUB) with 301 branches currently provide agricultural financing through their credit windows. Table 1 shows the disbursement and recovery of agricultural credit by banks in Bangladesh.

Table 1 Disbursement and Recovery of Agricultural Credit by Banks (amounts in Crore Tk)

Fiscal year	Target	Disbursement	Recovery	Balance
2012 – 13	14130	14667.49	14362.29	31057.69
2015 – 16	16400	17646.39	17056.43	34477.37
2018 – 19	21800	23616.25	23734.32	42974.29

Source Ministry of Finance, Finance Division, Bangladesh Economic Survey 2020

Industrial finance refers to providing funds, mainly by banks and specialized financial institutions, to industrial units for smooth running of their production and for distribution of goods and services produced by them. Industries require funds for implementing new projects, meeting working capital needs, and for expansion, modernization and reconstruction of business establishments. Funds for these purposes are raised from both domestic and foreign sources. Domestic sources are again internal and external. The various internal sources are equity capital, preference capital, ploughing back of profits, general and other reserves such as depreciation reserves, tax reserves, development reserves, and profit and loss account balance. Domestic external sources of industrial finance are issue of debentures, loans from specialized financial institutions, government agencies and banks, and credit from suppliers of machinery or goods. Foreign sources of industrial finance include [[ Foreign Direct Investment|foreign direct investment]], joint venture capital, suppliers credit, loans and grants from international development agencies such as IFC, World Bank, and OECD, and other flows of capital from abroad, including remittance of wage earners. Raising of funds from any of the above sources depends mainly upon the nature of industry (cottage and small industries, medium scale and large-scale industries), psychology of investors, condition in the capital market, and the amount of funding required.

Industrial financing in Bangladesh originated in the industrial structure of Pakistan where industrial development took place under the active support of military rulers and the bureaucracy. Originally, East Pakistan had a very poor industrial base and whatever development took place in the sector during the Pakistan period showed East Pakistan lagging far behind West Pakistan. The Pakistani government used to follow a policy of sponsoring development of private industries with the help of state money mainly to upgrade the economy of West Pakistan. While industrial development in East Pakistan took place mainly in the public sector, public limited companies could raise funds from the capital market after the establishment of stock exchanges at Karachi and Dhaka. Besides, the industrial enterprises in Pakistan obtained their required funds from specialized financial institutions such as the National Investment (Unit) Trust, the Industrial Corporation of Pakistan, the Industrial Development Bank, and Pakistan Industrial Credit and Investment Corporation.

Soon after the birth of Bangladesh, the government nationalized medium and large industries in July 1972 and imposed limits on the ceiling on private investment. The small industrial units that remained open for private investment were of assets valuing not more than Tk 2.5 million. The ceiling was later enhanced to Tk 3.5 million, including the investment of profits. The government revised the investment policy in 1974 making greater room for private industrial enterprises and raising the ceiling for private investment to Tk 30 million. The policy was then reformulated to allow foreign private investors into Bangladesh. A substantial amount of foreign capital has been injected into the economy in the form of industrial finance.

In the beginning, state-owned development finance institutions (DFIs) were major providers of long-term funds to industrial enterprises at concessional and directed interest rates. bangladesh shilpa bank (BSB) and bangladesh shilpa rin sangstha (BSRS) provided long-term capital by way of loans, equity participation, etc. for setting up of new industries as well as for balancing, modernisation, replacement and expansion (BMRE) of existing ones, both in the public and private sectors. Later, BSB and BSRS were unified into a single DFI called the Bangladesh Development Bank in 2011. The Bangladesh Small and Cottage Industries Corporation (BSCIC) is another institution that provides medium- and long-term loan to small industries, either directly, or through consortium of commercial banks.

investment corporation of bangladesh (ICB), established in 1976 provides support to meet the equity gap of industrial enterprises having public limited company status. It is also engaged in industrial financing through underwriting of public issue of shares and debentures, and providing bridging loans against underwriting in the priority sector. ICB participates in direct purchase and sale of shares, debentures and bonds and contributes to increase the flow of funds for industrial development.

Industrial financing in Bangladesh is mostly credit based. The role of self-financing in the industrial sector is very insignificant. Of the total bank credit of Tk 8.63 billion in 1973-74, Tk 2.59 billion or 30.02% was allocated to the country's industrial sector. 85.10% of total industrial credit was disbursed to public sector industrial units while 14.90% went to the private sector ones. Total credit to industrial sector was Tk 9.28 billion (38.40% of total credit) in 1979-80, Tk 54.95 billion (27.60% of total credit) in 1989-90, Tk 58.95 billion (17.87% of total credit) in 1994-95 and Tk 153.52 billion (28.44% of total credit) in 1998-99.

The annual growth rate of industrial credit was negative (- 3.23%) in 1982-83, 4.36% in 1986-87, 3.83% in 1994-95 and 0.48% in 1998-99. Up to 1990, the growth rate of industrial financing through credit has shown a mixed trend. Since 1991, the growth rate has declined sharply, largely because of a slowdown in industrial development coupled with the restriction of sanctions of industrial credit in an effort to combat the problem of loan defaults. However, despite alarming proliferation of the loan default practices, banks generally adopted liberal industrial credit policy and bank loans to the industry sector grew significantly in the years between 2001 and 2009. The volume of industrial loan disbursement and recovery has been increasing over time which may be seen in Table 2.

Table 2 Industrial Loans Disbursed and Recovered by banks in Bangladesh (in Crore Tk)

Fiscal year	Disbursement			Recovery
Fiscal year	Working Capital	Term Loan	Total	Working Capital	Term Loan	Total
2010–11	71300.35	32163.20	103463.55	56694.99	25015.89	81710.88
2015–16	199349.21	65538.69	264887.90	149762.72	48225.29	197988.01
2018–19	319006.98	80850.08	399857.05	243194.05	76568.81	319762.87

Source Ministry of Finance, Finance Division, Bangladesh Economic Survey 2020

Trade finance refers to providing short-term funds to traders, including exporters and importers, and manufacturers to settle trade-based transactions and to meet working capital requirements, including payment of wages and rents and purchase of raw materials. Exporters need pre-shipment trade financing to acquire inputs or raw materials from both domestic and foreign markets, and to pay for domestic value-added components (such as wages, interest charges, and rents) and inventories of finished commodities. Post-shipment export financing is short-term and self-liquidating, and required for a turnover time until the foreign buyer pays his bill. Short-term post-shipment financing is needed to finance export sales on credit, normally for up to 180 days. It is normally granted for accepted bills of exchange. Expansion of pre-shipment and short-term post-shipment financing depends on the availability of rediscounting facilities for export bills of exchange.

The four methods of trade financing prevalent in Bangladesh are self-financing, company credit, bank credit, and bank loan. Under self-financing, often made from retained earnings, traders meet their trade financing needs with their own funds. Company credit is based on inter-firm trade that involves risks. Such financing is widely used among multinational companies (MNCs), which have large financial resources. Trade financing based on company credit does not involve banks. It does not rely on bills. Company credit involves selling and buying on credit between affiliated companies and suppliers. Bank credit refers to bankers' acceptance financing, under which banks accept or purchase company commercial papers or export/import documents. Such financing requires rediscount facilities by the central bank. Institutions and instruments of bank credit-based trade financing are banks, which have the capacity to internalize risk-taking; credit instruments associated with trade transactions such as L/Cs, and accepted trade bills. Bank loans are advances to traders made against physical collateral. When a bank provides a loan, it lends money and when it creates bankers' acceptance, it lends credit.

Choosing among the alternative modes of trade financing depends, among other factors, on the sophistication of the banking industry and the money market, the structure of trading companies or exporters, and the amount of own funds to be used for trade financing. The total credit-based trade finance by the banking system in Bangladesh has increased from Tk 2.51 billion (29.08% of total loans disbursed by the banking system) in 1973-74 to Tk 7.96 billion (32.93%) in 1979-80, Tk 56.27 (30.75%) billion in 1989-90, and Tk 146.93 billion (27.22%) in 1998-99. The annual growth rate of trade financing by the country's banking system was 6.74% in 1986-87, negative (-0.50%) in 1989-90, 13.25% in 1994-95 and 4.12% in 1998-99. The volume of trade financing by banks in Bangladesh has significantly increased in the last two decades simply because of the fact that the trade volume of the country has experienced a huge expansion in terms of both physical quantity and money value. The import payments of Bangladesh in 2000-01 accounted for US $ 9335 million, while the corresponding figure for the year 2009 -10 was US$ 23738, and for 2018-2019, it was US$ 59915.

Housing finance refers to raising and utilization of funds for constructing single or multi-family residential houses. During the Pakistan period, Public Works Department and some other government departments carried out independent and self-financed housing programs for government employees. House building credit to individuals and private housing societies, however, was provided by only two agencies during that period. One of them was the House Building Finance Corporation (HBFC), an autonomous body formed under the House Building Act 1952, with headquarters at Dhaka. The other agency was a private body established and based in Karachi. HBFC provided long-term loan at 6.50% interest, payable in monthly installments over a period of 15 years. It had two regional and six-sub-regional offices in East Pakistan. These offices provided credit facilities for house building purposes to the people of 70 towns and cities of the province. Until 1965, the corporation had sanctioned a total loan of Rs 337.3 million. With the aid of these loans, individual borrowers built or bought over 7,000 houses. Over 17,000 houses were built or bought by co-operatives. There were about 400 co-operative housing societies in urban areas of the country. However, heavy reliance was placed on the private sector in the housing program of Pakistan, while the public sector confined itself mostly to creating necessary facilities and developing plots for the construction of houses.

The regional and sub-regional offices of the HBFC located in East Pakistan remained inactive until 1973 when it was reorganized as the bangladesh house building finance corporation (BHBFC) under the Presidential Order No.7 of 1973. Other sources of housing finance currently available in Bangladesh are commercial banks, employee loans, life insurance policies, and informal means. In the rural sector, the housing co-operatives are the major providers of housing finance. Up to March 2000, total loans and advances of the BHBFC amounted to Tk 27.40 billion. In 2007-08, the corporation had sanctioned and disbursed housing loan of Tk 2.26 billion and Tk 1.47 billion respectively. The total housing related advances of the country's banking sector in 1999 was approximately Tk 18 billion, about two-thirds of which were made by the nationalized commercial banks. The housing loans by the banking sector amounted to only 4% of their assets. The banking sector's housing loans were made largely to individuals (54,000) and the housing societies received only about 14,000 loans. A third category of borrowers of the housing loan is the banks' own staff, who receive such loan under special terms and conditions.

Several public agencies, such as the National Housing Authority, Public Works Department, Local Government Engineering Department and City Corporations are involved in the financing and development of housing and residential infrastructure projects. Grihayan Tahbil Project, a Housing Fund administered by the Prime Minister's Office, provides funds to [[ Non Government Organisation|non government organisation]]s and private sector developers for the construction of houses for low-to-moderate-income group people.

The enactment of the Financial Institutions Act 1993 opened the door for private housing finance companies. There are now 25 private companies that extend housing finance in Bangladesh. Prominent among them are the delta brac housing finance corporation Limited and the national housing finance and investment Limited. These companies make loans for the construction of houses, acquisition of flats and houses, extension and improvement of existing housing, and the purchase of housing plots.

The co-operative sector in Bangladesh has not played a large role in the financing of housing. Among the 145,000 cooperative societies in Bangladesh only about 150 are housing cooperatives. Most of these cooperatives are set up by high and middle-income households to allow them to jointly acquire land for the construction of housing units for their members.

The NGO sector or, more precisely non-government micro finance institutions (MFI), are also involved, though marginally, in housing finance in urban and rural areas. Dominating among them aregrameen bank, proshika, BRAC, and ASA. Grameen Bank's Moderate Housing Loan Program started in 1994 with a current loan maximum of Tk 25 thousand. After the floods of 1987, it had introduced a Basic Housing Loan Program, which now provides a loan maximum of Tk 12 thousand for housing structures and pit latrines. Total outstanding housing loans of Grameen Bank up to 30 June 2009 stood at Tk 2.79 billion. Proshika started a housing program in rural areas in 1988 and in 11 years since its inception has provided assistance for the construction of more than 30,000 houses. The total amount disbursed by the organization for housing up to 30 June 1999 was Tk 193 million. BRAC's housing finance program for moderate-income rural people provides loan up to Tk 20,000 to an individual borrower. It also initiated a home loan program for its own staff members applicable for houses of a maximum size of 500 sq. ft. The repayment period for loans under this program is 15 years and the flat rate of interest charged is 10%. ASA started a rural housing credit program in 1989/90. It also charges a 10% flat rate of interest and its loan size is limited to Tk 9,000. With growth of housing and real sate sector in Bangladesh and the liberal policy of the government in encouraging loans to real estate industry, as well as to the clients of housing/real estate loans, borrowers, the housing finance has experienced significant expansion in the last two decades.

The financial system Both formal and informal institutions constitute the financial system of Bangladesh. These various types of financial institutions are greatly interconnected. As the central bank, bangladesh bank lies at the core of the formal financial system and is responsible for the control of money supply and the general supervision of organized financial activities. Commercial banks comprise the most viable and vital formal component of the financial system and work as acceptor of deposits and granter of short-term credit. Other elements of the formal financial system include specialized financial institutions, insurance companies, investment/merchant banks, discount houses, securities and financial markets, pension funds and non-bank financial institutionss (NBFI's).

The formal financial system of Bangladesh comprises banks, non-bank financial institutions, insurance companies and microfinance institutions. Bangladesh is still in a transitional phase and is undergoing a reform process. Table 1 presents the number of banks in the country by types: state-owned commercial banks (SOCBs), specialized public banks (SPBs), private commercial banks (PCBs) and foreign commercial banks (FCBs).

Table 2.1 Number of banks during the period from 1971-72 to 2019-20

Period	Total	SOCBs	SPBs	PCBs	FCBs
1971-72	15	6	0	-	9
1980-81	18	6	3	-	9
1990-91	24	4	4	7	9
2000-01	49	4	5	30	10
2010-11	48	4	5	30	9
2019-20	59	6	3	41	9

Source Bangladesh Bank.

The non-bank financial institutions (NBFIs) started operation in Bangladesh in 1981. Lease financing is the key product or services of the NBFIs but they are also engaged in hire purchase, house loan and real estate financing, factoring and receivable financing, corporate finance (bridge finance, syndicated loans), and merchant banking including underwriting and portfolio management and securities services. The first among the NBFIs established in Bangladesh was The Industrial Promotion and Development Company and by 2005, the total number of NBFIs in the country stood at 28, and the figure at present is 34, of which 3 are government-owned, 12 are joint ventures with foreign participation, and the rest 19 are private-owned local companies. In all the NBFIs of Bangladesh has 273 branches, 67 of them are in the district of Dhaka and the remaining 179 are located in 34 districts across the country (Bangladesh Bank Annual Report, 2019-20). Two special NBFIs in Bangladesh are the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange CSE). Both stock exchanges are regulated by the Bangladesh Securities and Exchange Commission (BSEC). The number of listed securities in DSE and CSE in June 2019 was 584 and 326 respectively (BB Annual Report, 2019). Also, there are 57 merchant banks, 383 stock brokers/dealers, 36 asset management entities, 13 custodians, 16 trustees, 12 fund managers, 8 credit rating companies, and a central depository company (Central Depository Bangladesh Limited) in 2019 and all are regulated and monitored by the BSEC (Ministry of Finance, Government of Bangladesh, Report on Financial Institutions (in Bangla), 2019).

In December 2019-20, the number of insurance companies in operation in Bangladesh was 78, of which 32 were life and 46 were non-life insurance companies with close to 8000 branches. At that time, there were 752 microfinance institutions (MFIs) with over 18000 branches in operation in the country in November 2020 (MRA Website) and these MFIs serve over 32 million members throughout the country (IFPRI Website).

Apart from the institutions above, financial services are also provided by Post Office Savings Bank and the Postal Life Insurance Schemes. The assets of the country's financial system are heavily concentrated in commercial banks. NCBs and specialized banks in the public sector dominate the banking system and account for about 70% of total deposits and about 75% of all advances.

The financial system also embraces the country's co-operative and credit co-operative societies. There are 145,000 co-operatives in Bangladesh. The great majority of them consist of farmer and agro-farm co-operatives. The number of credit co-operative societies was 20 in 1999 and their total resources valued at Tk 164 million. Bangladesh Samabaya Bank Limited is the apex institution of the co-operative sector. There are over 1,200 non-governmental and non-profit micro finance institutions. Together, they also form a component of the country's financial system. The major informal components of the financial system of the country are moneylenders, pawnbrokers, and inter-family transfers.

In addition to traditional financing methods that are related to the liability side of the balance sheet, some alternative sources of financing related to the asset side of the balance sheet have also emerged in Bangladesh. Financing by lease and hire purchase are two examples. A special form of financing is project financing, by which a particular economic unit is funded in such a way that a lender is satisfied in finding that the earning of the project can repay the loan. Project financing is now widely used in financing development of infrastructure, especially in the power, road and telecommunication sectors. [S M Mahfuzur Rahman]