PERFORMANCE EVALUATION OF NON-BANK FINANCIAL INSTITUTIONS OF BANGLADESH: A TREND ANALYSIS

Transcription

1 JBR Journal of Business Research C 2015 Journal of Business Research Vol. 1 No. 1, December Faculty of Business Studies Begum Rokeya University, Rangpur, Bangladesh [ISSN ] PERFORMANCE EVALUATION OF NON-BANK FINANCIAL INSTITUTIONS OF BANGLADESH: A TREND ANALYSIS ABSTRACT Shah Alam 1 Appel Mahmud 2 The non-bank financial institutions comprise a rapidly growing segment of the financial system in Bangladesh. They are gaining increased popularity in recent times. This study attempts to show the picture of performance evaluation of nonbank financial institutions of Bangladesh based on the annual report data of respective companies over a six-year period of time. In this paper researchers examined the trends of investments, leases & loans, total assets, total liabilities, total equity, profit after tax, debt-equity ratio, return on equity, and return on assets as the performance indicators. The results show a mixed look. Some of the variables have stable and increasing trends, and some variables have zigzag trends with many ups and downs. Some of the variables which are expected to respond with the response of other variables did not actually respond as expected. The study shows the performance analysis over time based both absolute and relative measures.] Keywords: Non-Bank Financial Institutions, Performance Evaluation, Trend Analysis 1. Lecturer, Department of Accounting & Information Systems, University of Dhaka, Dhaka-1000, shahalam@du.ac.bd 2. Assistant Professor, Dept. of Accounting and Information Systems, Faculty of Business Studies, Begum Rokeya University, Rangpur, mahmudappel@yahoo.com

2 56 Journal of Business Research INTRODUCTION Non-bank financial institutions (NBFIs) are the financial institutions that provide financial services including banking, though they do not hold a banking license. Non-bank financial institutions in Bangladesh are gaining increased popularity in recent times. Though the major business of most NBFIs is leasing, some of them are diversifying into other lines of businesses, like term lending, real-estate financing, merchant banking, equity financing, venture capital financing, etc. These institutions are not allowed to take deposits from the public. The development of non-bank financial institutions as financial intermediaries, complementary to commercial banks, is noticeable in Bangladesh. Started in 1981, the size of the nonbanking financial sector has grown in both absolute and relative terms. However, the research on the sector remains substantially insignificant. The development, growth and the changes over time of this sector as well as its impact on the economy have been analyzed by many researchers to evaluate the structure of this industry. Various changes in this industry initiated by the financial reform policy make the analysis even more important to the policy makers. In the relatively advanced economies there are different types of non-bank financial institutions, namely, insurance companies, finance companies, investment banks and others dealing with pension and mutual funds, though financial innovation is blurring the distinction between different institutions. Usually, financial institutions provide both banking and non-banking financial service packages to meet the changing requirements of the customers. In the Bangladesh context, NBFIs are those institutions that are licensed and controlled by the Financial Institutions Act of 1993 (FIA 93). NBFIs give loans and advances for industry, commerce, agriculture, housing and real estate, carry on underwriting or acquisition business or the investment and re-investment in shares, stocks, bonds, debentures or debenture stocks or securities issued by the government or any local authority; carry on the business of hire purchase transactions including leasing of machinery or equipment, and use their capital to invest in companies. The importance of NBFIs can be emphasized from the structure of the financial system. In the financial system of Bangladesh, commercial banks have emerged in a dominant role in mobilizing funds and using these resources for investment. Due to their structural limitations and rigidity of different regulations, banks could not expand their operations in all expected areas and were confined to a relatively limited sphere of financial services. Moreover, their efforts to meet long term financing with short term resources may result in asset-liability mismatch, which can create pressure on their financial base. They also could not broaden their operational horizon appreciably by offering new and innovative financial products. These drawbacks led to the emergence of NBFIs in Bangladesh for supporting industrialization and

3 Performance evaluation of Non-Bank Financial Institutions of Bangladesh: A Trend Analysis 57 economic growth of the country. The purpose of this paper is to highlight different features of NBFIs, their contribution to the overall economy and product base of NBFIs. The paper also demonstrates the performance of NBFIs measured by different financial indicators, along with the effects of banks entry into the non-bank financing area. LITERATURE REVIEW From the very beginning, bank financial institutions (BFIs) plays very significant role in economic and infrastructure development of Bangladesh. The history of NBFIs is not as old as BFIs, but with the passage of time NBFIs become an integral part of the financial system of Bangladesh. Goldsmith (1969) opines that NBFIs alongside the banking sector contributing prominently in influencing and mobilizing saving for investment. Beck and Rahman (2006) has shown the robust relationship between the development of financial intermediaries and economic growth. They also added that financial intermediaries not only contribute to the economic growth, but also control the reverse causation of economic growth. Islam & Osman (2011) examined the long-run relationship between per capital real GDP and the NBFIs based on Malaysian market. They revealed that there is a long run stable relationship between per capita real GDP and the NBFIs investment, trade openness, and employment. From their empirical result they showed that NBFIs is a vital component of the financial sector through which flow of financial resource effectively channelized from the surplus units to the deficit units and promote long-run sustainable economic growth. Pirtea, Iovu & Milos (2008) expressed that with the development of NBFIs, financial system and domestic capital market also develop, that in turn contribute to the overall economic development of the country. Thus sustainable economic growth largely depends on the development of efficient financial intermediation. Vittas (1997) opines that creating new marketable securities in the area of leasing, factoring and venture capital, NBFIs creates long-term financial resources and provides a strong stimulus to the development of capital market. With regard to the literature concerning the nonbanking sector, limited number of studies has been conducted so far in Bangladesh. Hossain and Shahiduzzaman (2002) focused on the importance of non-banking sector as a vehicle for the economic development of the country and identifies the underlying problems existed within the sector. Sufian (2007) opines that BFIs and NBFIs enhance the overall growth of the economy with the support of efficient money and capital market and NBFIs plays important role in providing complementary facilities offered by the commercial banks. Sufian (2007) also opines that with the development of health of NBFIs, health of capital market is also increase. He also added that as the key player in the development of capital market, efficient and productive NBFIs lead the market based economy move forward. Ahmed and Chowdhury (2007) opine that NBFIs intensify the country s financial system, contribute to the economic development of the country through diversified

4 58 Journal of Business Research financial services in the market. They deal with different features, contribution, and challenges faced by NBFIs in Bangladesh. At the same time they also focus on performance analysis of NBFIs by adopting traditional financial indicators like current ratio, debt-equity ratio, productivity ratio, return on equity, etc. and report that in spite of the presence of several constraints existed in the sector, NBFIs have been performing considerably well. Nasreen and Jahan (2007) conducted a research on leasing companies regarding the accounting practice. However, none of the above mentioned studies analyze the growth of the nonbanking sector of Bangladesh over a long period of time and their contribution of economic growth, which creates an opportunity to deal with through an investigation. The NBFIs offer wide range of products and services to mitigate the financial intermediation gap and thereby, play an important complementary role of commercial banks in the society (Shrestha, 2007; Sufian, 2008; Vittas, 1997). According to Ahmed and Chowdhury (2007), the fundamental limitations existing in the banking sector are, in fact, initiated the foundation of the accelerated development process of NBFIs. Firstly, the regulations adopted by the central bank of a country do not allow banks to embrace financial services for all areas of business; secondly, banks always face a mismatch in maturity intermediation, since they have to fulfill the long-term financing needs with short-term resources; and finally extending the operational horizon through product innovations is not always possible for banks. These areas create new opportunities for the NBFIs to grab with utmost success. However, the research on various issues of NBFIs remains substantially scarce (Sufian, 2008), in spite of the fact that recent emergence of NBFIs as financial intermediaries is noticeable not only in developed countries, but also in developing countries. Empirical evidence to evaluate the development and growth of the non-banking sector stays even more insignificant, particularly in the context of developing countries. Although both direct and indirect forms of financial intermediation are available in Bangladesh, similar to many developing countries, the indirect form (Beck & Rahman, 2006) dominates the other form in the financial market to a great extent (Uddin & Suzuki, 2011). OVERVIEW OF NON-BANK FINANCIAL SECTOR OF BANGLADESH The development of a country depends on the development and growth of all economic entity. The financial system is the ultimate engine for achieving economic prosperity of a country, and is involved in the mobilization of financial resources from the surplus to the deficit sector. Non-bank financial institutions play a significant role in meeting the diverse financial needs of various sectors of an economy and thus contribute to the economic development of the country as well as to the deepening of the country s financial system.

5 Performance evaluation of Non-Bank Financial Institutions of Bangladesh: A Trend Analysis 59 According to Goldsmith (1969), financial development in a country starts with the development of banking institutions. As the development process proceeds, NBFIs become prominent alongside the banking sector. Both can play significant roles in influencing and mobilizing savings for investment. Their involvement in the process generally makes them competitors as they try to cater to the same needs. However, they are also complementary to each other as each can develop its own niche, and thus may venture into an area where the other may not, which ultimately strengthens the financial mobility of both. The development of nonbank financial institution as financial intermediary balancing commercial banking activities is noticeable in Bangladesh. OBJECTIVES OF THE STUDY The broad objective of the study is to give an overview of financial performance and position of non-banking financial institutions of Bangladesh. Specific objectives of the study include introducing with non-banking financial business in Bangladesh, giving an idea of tools for performance evaluation, sketching a picture of performance evaluation of non-banking financial institutions of Bangladesh, and having an idea of the trends of variables of performance evaluation of non-banking financial institutions of Bangladesh METHODOLOGY In order to compute the trend over time of different variables, investments, leases & loans, total assets, total liabilities, total equity, profit after tax, debt-equity ratio, return on equity, and return on assets are used in this study from a sample of 12 companies for a period of 6 years from 2009 to The sample was extracted from listed companies in the Dhaka Stock Exchange. Random sampling method has been followed to select 12 companies from 23 listed companies. Table 1 presents listed companies and number of the companies taken as samples. Sector Financial Institutions No. of Companies Listed with DSE FINDINGS & ANALYSIS No. of Companies Taken as Samples of Companies Taken as Samples No. of Years of Sample Company No. of Firm Years of Sample Companies Table 1: Details of companies taken as samples The performance of non-bank financial institutions is evaluated on the basis of various aspects of financial figures. Table 2 below shows the overall results

6 Year Investmen ts (in million Taka) Loans & Advances (in million Taka) Total Assets (in million Taka) Total Liabilities (in million Taka) Total Equity (in million Taka) Profit After Tax (in million Taka) Debt- Equity Ratio (times) Return on Equity Return on Assets 60 Journal of Business Research found from the annual reports of 12 sample non-bank financial institutions the details of which are given in the appendix. The table shows the average results of different variables for a specific period as well as for the sample periods as a whole. The trends of important variables are highlighted in the following graphs. Table 2: Positions of different variables over time ,694 8,004 6,669 1, ,624 10,076 7,704 2, ,132 8,063 11,288 8,565 2, ,694 12,945 10,210 2, ,000 12,627 16,490 13,301 3, ,356 14,995 19,654 16,320 3, Avera ge 991 9,616 13,076 10,461 2, Source: Constructed by the authors based on data from annual reports of sample companies Investments, leases & loans, and total assets are some of the good indicators of performance of non-bank financial institutions. Based on the positions of table 2, the following graph is drawn that shows the trends of three variables over the sample periods. The trend of average investments of sample companies over sample periods is upward, but the slope of the investment curve is almost horizontal. That is, average investments are increasing at a slower rate, with a jerk in This means that the sample non-bank financial institutions show somewhat poor performance in case of investment. However, the trends of average leases & loans and total assets are upward sloping with a faster rate. The amounts of average leases & loans in 2009 were Tk. 5,694 million, whereas the figure was Tk. 14,995 million in 2014 with increases every year. The figures of average total assets of 2009 and 2014 were Tk. 8,004 million and Tk. 19,654 million respectively. The figures of both of these variables tell about a good performance trend over the sample period.

7 Performance evaluation of Non-Bank Financial Institutions of Bangladesh: A Trend Analysis 61 Graph 1: Trends of investments, leases & loans, and total assets over time ,654 16,490 12,945 12,627 14,995 10,076 11,288 9,694 8,004 8,063 5,694 6, , ,000 1, Investments (in million Taka) Loans & Advances (in million Taka) Total Assets (in million Taka) Source: Constructed by the authors based on the results of table 2 above Profit after tax is one of the vital variables, which is frequently used as performance indicator of any organization. Now based on the following graph it is visualized the trend of profit after tax based on the table 2 data. The graph shows that the trend of profit after tax of non-bank financial institutions over the sample periods is in a zigzag position. In 2009, average profit after tax was Tk. 309 million and in 2014 the figure is the same as before, but there were many ups and downs in between the sample periods. This means that the non-bank financial institutions may be growing in the size of investments, loans & advances, total assets, total liabilities, total equity, etc., but they are not generating so much profit after tax as expected based on the other variables. Graph 2: Trend of profit after tax over sample period Profit After Tax (in million Taka) Source: Constructed by the authors based on the results of table 2 above Where absolute measures may give rise to wrong conclusions, the relative measures are used. Two of the variables, return on equity and return on assets, are relative measures. the following graph shows the trends of these two relative measures over the sample periods. The trends of relative measures like return on equity and return on assets are downward sloping. In the earlier periods of the total sample periods, the average return on equity and return on assets were good

8 62 Journal of Business Research enough, but in the later periods, they fell down much though in the last period they showed a somewhat upward trend. Overall relative measures do not seem so good. Graph 3: Trends of return on equity and return on assets over time Return on Equity Return on Assets Source: Constructed by the authors based on the results of table 2 above CONCLUSION In spite of short operating period, NBFIs are meeting the gap of services of the financial system of country. Over time it may develop as more contributing area. The results indicate that the loans & advances provided by non-bank financial institutions over the last six-year time period are increasing at a faster rate. Their financial positions are also getting enhanced over time in terms of total assets, total liabilities, and total equity. However, their sizes of investments are not that much increasing. Most surprisingly, the figures of profit after tax are not as good as expected. There are many ups and downs in the position. Again, the relative measures of performance evaluation, return on equity and return on assets, are not also so good as expected based on the other variables. Concerned authorities should patron this sector to develop as contributing sector to the whole economy. The future researches may attempt to observe a more intense trend. REFERENCES Ahmed, F. (1995), Performance of Commercial Banks in Bangladesh-A Note on Current trends, Journal of the Institute of Bankers, Bangladesh, Vol. 41, June Ahmed, M. N., & Chowdhury, M. I. (2007). Non-bank financial institutions in Bangladesh: An analytical review. Working Paper Series: WP 0709, Bangladesh Bank.

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