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					                           Financial and Capital Market of Bangladesh




The financial sector in Bangladesh comprises the money and capital markets, insurance
and pensions, and microfinance. In addition to the Bangladesh Bank—the central bank of
Bangladesh— there are 4 state-owned commercial banks (SCBs), 5 state-owned specialized
banks, 30 domestic private commercial banks (PCBs), 9 foreign commercial banks, and 29
nonbank financial institutions (NBFIs) as of 2008. Figure 1 below depicts the nature of the
financial sector in Bangladesh.




                                                 Financial Sector
                                                  In Bangladesh



                 Money Market                                                                               Micro
                                         Capital Market                                                    finance

                                                                                     1. Nongovernment
 1. Bangladesh bank       Security                                  Insurance and    Organizaons
                          Market                                    Pension and
 2. All banks                                                       profident fund   Affairs Bureau
 3. Non- Bnk                                                                         2. 2. Palli Karma
 financial Institution                           1.Controller of
                                                                                     Shahayak
 4. Money Changer                                Insurance                           Foundation
                                1. Sequirities
                                                 2. General and                      3. Grameen Bank
 5. Credit rating               and Exchange
 Agency                         comission        life insurance                      4. Bangladesh Rural
                                                 companies                           Development
                                2. Stock
                                Exchanges        3. Government                       Board and other
                                                 Pension Scheme                      nongovernment
                                3. Investment
                                                 4. Central Provident                organizaons,
                                Bank
                                                 Fund                                microfinance
                                4. Merchant      5. Private sector
                                bank                                                 institutions
                                                 pension funds
                                                 (typically small)




           Performance Evaluation of Non-Banking Merchant Bank in Bangladesh                                 1
The Capital Market


Bangladesh has achieved stable growth over the last 9 years. It seems that the global
financial crisis has not significantly affected Bangladesh mainly due to growth in exports
and remittances. Although pressures from the global slowdown are building up and the
financial crisis in the developed countries is unfolding and recession lasting longer than
expectation, we had a growth rate in the range of 5.5 per cent to 6.0 per cent (data: June
2009). Although external debt is on the rise in recent years, it looks manageable because of
declining ratio of exports to external debt.


Compared to the neighboring countries, the Bangladesh capital market is small and has yet
to play a bigger role in the economy. The share of domestic debt securities in the country’s
GDP was approximately 12% in 2006 and that of India and Pakistan was 35.9% and 26.3%,
respectively. Likewise, equity market capitalization over GDP was substantially lower
among the South Asian countries. Therefore, Bangladesh has to accelerate to develop the
capital market because it has a pressing need for investment resources to bolster its
stretched infrastructure resources, to build more power stations, bridges, ports and gas-
pipelines to empower the people in the development of enterprise and the creation of jobs.
Debt markets are an extremely effective mechanism for matching the long term needs of
savers with those of issuers.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                      2
Financial Market Profile (2006)




Source: World Bank “South Asian Bond Markets” (2008)




Regulatory bodies of the capital market


The Securities and Exchange Commission exercises power under the Securities and
Exchange Commission act 1993. It regulates institutions engaged in capital market
activities. Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and
regulates institutions engaged in financing activities including leasing companies and
venture capital companies.
Further to the regulations the following regulations also cover the capital market
operation:
1. Dhaka stock exchange Automated Trading Regulation, 1999
2. Dhaka stock Exchange Investors protection fund Regulations, 1999
3. The listing Regulation of the Dhaka Stock Exchange Limited
4. SEC Margin Rules, 1999
5. DSE Settlement of Stock Exchange Transaction Regulation, 1998
6. Dhaka Stock Exchange (Members Margin) Regulation, 2000
7. SEC Corporate Governance Guidelines, 2006



Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                   3
Activities in the capital market:
Activities in the capital market can be classified as follows:
   1. Primary market activities
Securities are issued in the primary market by one or more of the following methods:
   a) Public Issue
   b) Private placement
   c) Right issue
   d) Offer for sale


   2. Settlement and securities administration:


   a) Settlement: The Chittagong and Dhaka Stock Exchanges each have their own
       automated trading system. The clearance system has daily netting facilities. The
       settlement system allows for early settlement of securities and funds. Failed trades
       are squared up by the stock exchanges and members are penalized for such failed
       trades.


   b) Collection: Dividends on shares are usually paid to the holders annually. Interest on
       debentures in paid semi-annually. Payments are made by banks cheque. The benefit
       of the share/debenture goes to the person whose name is on register during a pre-
       declared book closure period. Interest calculations are based on the normal
       calendar year.


   c) Capital changes and recognition: In case of right issues, existing shareholders are
       required to accept or renounce the shares within a specific time period. On the other
       hand, in case of bonus issues, share holders receive the share certificates by mail.
       Bonus shares are issued within 60 days of reopening of share transfer register.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                     4
The recent development of capital market:
The role of capital market in financing private investment remained at a nascent stage in
the context of Bangladesh. Banks and financial institutions disbursed BDT 96.5 billion as
industrial term loans during FY06, whereas only BDT 1.7 billion was raised in the capital
market through private placements and public offerings (BB Annual Report FY06). As of
December, 2006 a total of 310 securities were listed at DSE comprising 255 companies, 13
mutual funds, 8 debentures and 34 treasury bonds as opposed to a total of 249 securities
comprising 230 companies, 10 mutual funds and 9 debentures as of December 2001. Thus
during the last five years only 54 new companies got listed in the DSE of which only three
were listed by direct listing route, and the rest were listed by public offering. Total market
capitalization of all listed securities in DSE, however, increased substantially (by around
130 percent) in 2004 to BDT 224.9 billion. At the end of December '06 it stood at BDT
323.4 billion. DSE market capitalization as share of GDP fell to 5.41 in June '06 from 6.06 in
June '05.


                                      MERCHANT BANK




Financial institution that specializes in services such as acceptance of bills of exchange, hire
purchase or installment buying, international trade financing, long-term loans
and management of investment portfolios. Merchant banks also advise on
(and invest own funds in) acquisitions, mergers, and takeovers. Merchant banking is an
emergent sector in the capital market. According to Securities and Exchange Commission
(Merchant Banker and Portfolio Manager) Rules, 1996, merchant bankers is defined as “…
those who manage portfolio on behalf of its clients or performs the business of
underwriting or are related to securities as underwriter or advisor or are providing
corporate advisory services on completion of all the activities relating to Issue
Management.” Generally the term merchant banking refers to a negotiated private equity
investment by financial institutions in the unregistered securities of either privately or
publicly held companies.



Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                      5
Investment banking is an American synonym of merchant banking. Investment Banks
provide advice on mergers and acquisitions and are involved in financing industrial
corporations through buying shares and selling them in relatively small lotto investors. In
the context of Bangladesh, merchant banking includes all financial institutions that
combine the functions of both development banking and investment banking.



Origin of Merchant Banking:

Merchant banks first arose in the Italian states in the Middle Ages, when Italian merchant
houses—generally      small,   family-owned      import-export       and   commodity   trading
businesses—began to use their excess capital to finance foreign trade in return for a share
of the profits. This trade generally consisted of lengthy sea voyages. In late 17th and early
18th century Europe, the largest companies of the world was merchant adventurers. The
colonies of other European countries were started in the same manner. For example, the
Dutch merchant adventurers were active in what are now Indonesia; the French and
Portuguese acted similarly in their respective colonies. The American colonies also
represent the product of merchant banking, as evidenced by the activities of the famous
Hudson Bay Company. Later, the center for merchant banking shifted from the Italian
states to Amsterdam and then, in the eighteenth century, to London, where immigrants
from Prussia, France, Ireland, Russia, and the Italian states formed the core of early British
merchant banking. As the nineteenth century opened, virtually no mercantile houses
remained focused on both trade and finance. During the 20th century, however, European
merchant banks expanded their services. They became increasingly involved in the actual
running of the business for who the transaction was conducted. Today, merchant banks
actually own and run businesses for their own account, and that of others.


Merchant Banking in Bangladesh:
The concept of merchant banking is in a development phase in our country. Regulatory
bodies and Government is always trying to develop the capital market focusing the welfare
of the investor through building a stable and secured market. The first ever stock exchange
came into existence in Bangladesh (then East Pakistan) in the name of “East Pakistan Stock


Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                     6
Exchange Association Ltd”. It took two years more to launch its formal operation. 1964, the
name of East Pakistan Stock Exchange Limited was changed to "Dacca Stock Exchange Ltd."
Investment Corporation of Bangladesh (ICB) was the pioneer in the country that has
performing with strong reputation in the country’s capital market spreading its activities in
all the segments of capital market. In 1987, the Bangladesh Government prepares and
presents the Securities & Exchange Rules. In 1993, DSE took step ahead to update its all
share price index on the basis of the design suggested International Finance Corporation
(IFC). In 1994, Securities & Exchange Commission (SEC) published rules regarding the
activities of dealers and brokers. The title of the rules is set (Stock-dealers, Stock-brokers
and Sub brokers). In 1996, SEC introduces SEC (Merchant Baker & Portfolio Manager)
Regulations, along with SEC (Mutual Funds) Regulations, 1996. Except the activities of ICB,
merchant banking in Bangladesh had started their activities. Now there were no legal
obligations of the issuer companies to engage an issue manger at the time security issue. In
1997, some bank and non banking organization give proposal to get the permission of
operate merchant banking operation. In 1998, DSE introduced automated trading; it is a
great break through both for the country and stock exchange. IDLC of Bangladesh got
license full-fledged merchant banker. It is the first licensed full-fledged merchant banker in
the country. Another 10 full-fledged merchant banker introduces in this. In 1999, another 5
non banking organization started as full-fledge merchant banker. Prime Finance and
Investment Limited started their full-fledge merchant banking operation from this year. In
2000, only one non banking organization introduced as a full-fledge merchant baker. In
2001, Prime Bank and Arab Bangladesh Bank started their operation as a merchant banker,
another 2 non-banking organization started their merchant banking operation. From 2002
to 2009, another 10 merchant banker are introduced and most of them are private
commercial banking organization. The number of full-fledged merchant banker is now 29.
Another two companies is also registered as merchant banker but currently deals with
issue management and portfolio management only.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                    7
To register as a merchant banker, SEC placed some requirements. They are discussed
below:

Issue Manager              At least 1 (one) proposal for public issue be submitted
                           to the Commission in each calendar year
Portfolio Manager          In addition to own portfolio, at least 5(five) new
                           portfolio accounts be opened in each calendar year
Merchant Banker            1 (one) issue management, 2 (two) underwriting,
                           5(five) new portfolio accounts be opened in each
                           calendar year



Besides these, merchant bankers need a pre-condition of capital of TK 100 million for the
registration of full-fledged merchant banker. Tk 10 million of capital is needed of a
company is registered for issue management and underwriting or portfolio management
only. For issue management, it is needed 2.5 million only.

Merchant Banking activities in Bangladesh


Although in the U.S., merchant banks offer a wide range of activities, including portfolio
management, credit syndication, acceptance credit, counsel on mergers and acquisitions,
insurance, etc, in case of our country, these services may differ. In Bangladesh, a merchant
bank can perform multiple activities including underwriting, issue management, portfolio
management, merger & acquisition etc. The merchant banking activities were largely
fostered by two distinct developments: Merger &acquisition activities and increased
demand for venture capital.


   1. Underwriting:
Underwriting operation is one of the important functions of a merchant banker by which it
can increases the supply of stock/shares and debentures in the market. It is an
arrangement whereby the underwriter undertakes to subscribe the unsubscribed portion
of shares/debentures offered by any public limited company. These encourage the



Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                  8
prospective issuers to offer shares/debentures to the public for subscription and they can
raise funds from the public.


One or more investment banking firms may underwrite public offerings. The underwriters
have the responsibility of pricing new shares and selling them to investors. The company
pays the underwriters a fee. Underwriter also provides advice to a company issuing
securities or to an issue manager. Before granting authority to17 non-bank financial
institutions in 1997 to conduct merchant banking business in Bangladesh under the
Securities and Exchange (Merchant Bankers and Portfolio Manager) Regulations 1995,
specialized financial institutions, and the nationalized commercial banks and insurance
companies were the key underwriters in the country's securities market.


   2. Issue Management:
Issue Management function of merchant Banking helps capital market to increase the
supply of securities. Being a Issue Manager these FIs provide assistance to the Private
Limited Companies intended to be converted into Public Limited Companies by way of
obtaining necessary permission from the relevant authorities, preparing prospectus for
public issue of shares and debentures, involving itself in the collection of application money,
scrutiny of applications, arranging for lottery relating to allotment, if required, allotment of
shares and debentures, refund of application money etc.


   3. Portfolio Investment Management Services:
Portfolio means a collection of investments owned by an investor, an institution or a mutual
fund and portfolio manager means the entity responsible for investing a mutual fund's assets,
mapping out its investment strategy and managing day-to-day securities trading. Portfolio
management is the process of building, managing and assessing an inventory of company
products and projects. One of the most important functions of merchant banking is to
provide Portfolio Management service to the customer. Basically, Portfolio Management
Services program has four different wings to provide portfolio investment management
services.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                        9
The SEC allowed banks to launch merchant banking operation through opening of separate
wing mainly to deal in portfolio investment on behalf of clients' account in order to channel
pool of investors' fund into the stock market in an organized manner.
   4. Merger and Acquisition:
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling and
combining of different companies that can aid, finance, or help a growing company in a
given industry grow rapidly without having to create another business entity. Merchant
banking helps to negotiate companies in this case.
Other functions that differ from FIs to FIs are Factoring, Asset Securitization, OTC Market,
Capital Re-Structuring etc. In addition these FIs can also perform the activities of:
      Project counseling
      Lending to stock investors
      Pre-Investment Studies, etc


Customers of Merchant banking:
In our country, the customers of merchant banking are as follows in general:
1. Any Bangladeshi over 18 years of age.
2. Any Corporate body.
3. NRB (s) through NITA Account.



Role of merchant banks

The role of merchant banks can be categorized into two broader phases-

   1. Primary       market     making: Merchant       bank     performs the role of advisory
       management, administrative services, underwriting, private placement, and banker of
       the issue.
   2. Secondary market making: Merchant banks play an important role in the
       development of the capital market for previously issued securities providing a
       number of merchandising services.



Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                      10
Performance of merchant banks

The overall performances of the merchant banks are not very impressive. Most of the
merchant banks are engaged only on issue management and underwriting. In case of
portfolio management, only three companies are fully operational in the market. The
remaining areas untouched mainly because of the limited scope of business in the context of an
under-performing capital market of Bangladesh. This makes some of the merchant banks
dormant.




Actual picture of Merchant Banking activities in Bangladesh:

In reality, merchant, banks of Bangladesh operates only in three functional areas, i.e., issue
management, underwriting and portfolio management (as corporate advising being
untouched).Of those, the first two are fee-based business, while the latter one is fund-
based. But the cost of fund for merchant banks is much higher than that of the commercial
banks. In a step to make merchant banks fully operational, SEC recently amended the
Securities    and     Exchange Commission (merchant banker and portfolio manager)
Regulation, 1996 which permits the commercial bankers to conduct the portfolio
management business with their own fund. This -step was taken as an attempt to help
commercial banks to conduct portfolio management more profitably. As a result, all the three
companies that are doing portfolio management are the commercial banks. Under the
limited scope of business it would be very difficult for other merchant banks to operate
competitively as the earning potential for these companies are very restricted.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                    11
                              PERFORMANCE EVALUATION




Uttara Finance and Investment Limited a joint venture leasing and financing company
registered as a NON-BANK FINANCIAL INSTITUTIONS under the Financial Institution Act 1993 and
the   COMPANIES ACT   1994. It commenced business on 1 November 1995 with an authorized
capital of BDT 250 million divided into shares of BDT 100 each. The paid up capital of the
company is BDT 120 million. Of the total share capital, 25% is held by Bangladeshi
sponsors, 20.83% by foreign sponsors (Singaporean), 14.10% by the                  INVESTMENT

CORPORATION OF BANGLADESH ,    0.09% by its employees and 39.98% by the general public. The
company is listed with both Chittagong and Dhaka Stock Exchanges.


Main areas of business operations of the company are related to leasing for providing
benefits of asset-based lease facilities. The company signed business contracts on lease and
term finance for BDT 423.44 million in 2000. Of the total contracts processed, those for
BDT 383.71 million were executed. Up to 31 December 2000, total amount of net leased
assets and net term finance of the company stood at BDT 624.14 million. Assets of the
company comprised leased assets, term finance, investment in shares, and other current
assets. The company earned a net profit of BDT 33.99 million in 2000.

Principal Activities

General:

Uttara Finance maintains an as and when decision making policy in both securing and
investing fund, basing on over-all micro and macro socio-economic-political scenario.

         Lease: Uttara Finance extends Finance Lease facility to acquire capital assets to any
          sector preferably to ongoing concerns.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                     12
      Loans:    Uttara Finance extends short to mid Term Loans in following areas:
       Working Capital Loan, Bridge Finance, Personal loan, Home Loan.


      Small and Medium Enterprises: Uttara Finance extends this facility to enterprises
       as defined by Bangladesh Bank from time to time.


      Deposit schemes: Uttara Finance offers competitive rate of interest to individuals
       for tenure of 12 months to 36 months and to and corporate business houses for
       tenure of 6 months to 36 months.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                13
Merchant Banking Unit:

Uttara Finance offers full range of asset management services like Underwriting; Portfolio
management; Bridge Finance; mutual fund; Individual investor's accounts in capital
market.

Zero Down Payment Scheme: The scheme has been introduced to assist individuals and
business concerns to facilitate acquiring of vehicles. Profit and Loss Statement of Merchant
Banking Operations is as follows:




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                  14
Some important ratios are presented below for evaluation of this unit’s performance:



                            Ratios                                   2008     2009
         Return on Assets                                            0.32%   1.62%
         Return on Equity                                            1.95%   9.87%
         Net Interest Margin                                         0.08%   1.22%
         Reserve as a percentage of loans                            7.19%   9.13%
         Long Term Debt to Total Liabilities and                 27.74%      23.65%
         Equity
         Loans to Assets                                         67.58%      51.91%
         Equity to Assets                                        16.57%      16.40%
         Capital Adequacy Ratio (CAR)                            15.05%      13.91%




      Return on assets and equity has increased but it is still very low. Net Interest Margin
       is very low but increasing. But this is due to the fact that we have considered the
       profit and interest income of only merchant banking unit with total asset and equity
       of the firm.
      Reserve as a percentage of loans has increased. This is a bad indication. It suggests
       that company is giving out loans that higher default risk. So they are maintaining a
       higher percentage of loan loss reserve.
      According to Banking Regulation & Policy Department of Bangladesh Bank, Uttara
       finance is maintaining a CAR of greater than 9% but it has decreased 1.14% from
       last year.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                    15
Industrial development Leasing Company of Bangladesh (IDLC) a multinational joint
venture public limited company and the first leasing and multi-product non- bank financial
institution in Bangladesh. It became a listed company in Dhaka stock Exchange on 20
March 1993 and in the Chittagong stock exchange on 25 November 1996. IDLC started to
accept deposits after receiving the license from BANGLADESH Bank on 10 September 1994.


Issue management:


IDLC provide innovative solution for raising capital (debt and equity) from the market
suiting the unique needs and constraints of the corporate clients. Issue Management
services of Merchant Banking Division include Public Issue Management of Initial Public
Offering, Repeat Public Offering, Bond Issuance, Rights Share Offering, Corporate Advisory
Service in various matters. IDLC has a qualified, experienced and innovative team to
provide best solution in terms of managing public offers.


Issue                                          Issue Size             Year of issuance
Bank Asia Ltd. (co-manager)                    BDT 300M                     2003
Berger Paints Bangladesh                       BDT 139M                     2005
Ltd.
Marico Bangladesh Ltd. (Joint                   BDT283M                     2009
manager)
RAK Ceramics Bangladesh                  BDT 1200M (tentative)         2010 (expected)
Ltd. (Lead issue manager)
Vantage Electrical &                           BDT 100M                2010 (expected)
Electronics Ltd.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                 16
LR Global Bangladesh Asset                    BDT 3,000 M            2010 (expected)
Management Co. Mutual Fund
1
BRAC Bank Limited (Issuance                   BDT 3,000 M            2010 (expected)
of Subordinated Convertible
Bonds)


Under writing:

       Review valuation of the company to justify issue price
       Review previous audited and current management accounts
       Company's business appraisal and due diligence visits
       Meeting with top management of the Company
       Analyzing Financial Ratios and other indicators




2005                                   Nature of Underwriting         Tk In Million
Premier Leasing                                    IPO                   2.775
Pragati Life Insurance                             IPO                     1
Jamuna Bank                                        IPO                    10.8
Berger Paints                                      IPO                   36.15
Eastland Insurance                               Rights                    12
Dhaka Bank                                       Rights                   47.5
                                                                        110.225




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh               17
2006                                   Nature of Underwriting        Tk In Million
BRAC Bank                                          IPO                    42.5
LankaBangla Finance                                IPO                    2.5
S. Alam Cold Rolled Steels                         IPO                     5
InTech Online                                    Rights                   5.0
Southeast Bank                                   Rights                   250
Uttara Finance & Invesment                       Rights                   22.5
Ltd.
                                                                         327.5



2007                                   Nature of Underwriting        Tk In Million
Phoenix Finance &                                 IPO                     3
Investment
Paramount Insurance                               IPO                     9
Islami Bank Bangladesh                            RPO                     50
Limited Mudaraba Perpetual
Bond
                                                                          62



2008                                   Nature of Underwriting        Tk In Million
Summit Alliance Port                              IPO                     15
Limited
Dacca Dyeing &                                    IPO                     10
Manufacturing Company
Limited
                                                                          25




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh               18
2009                                  Nature of Underwriting         Tk In Million
Marico Bangladesh Limited                        IPO                      44
Grameenphone Limited                             IPO                     224
Golden Son Limited                               RPO                      25
Crystal Insurance Company                        IPO                      5
Limited
Beacon Pharmaceuticals                           IPO                      20
Limited
RAK Ceramics Bangladesh                          IPO                      75
Ltd.
Vantage Electrical &                             IPO                      15
Electronics Ltd
                                                                         408



IDLC works as an underwriter from 2005 and they had gathered enough experience to
perform underwriting activities.


Advisory service:


IDLC offers a range of advisory services to corporate clients to meet their specific
requirements. Their Fund Raising and Advisory Services can also complement each other in
satisfying the unique needs of clients. The Advisory Services are:


      Merger and acquisition
      Joint venture match making
      Feasibility Study




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh               19
Syndicate and Fund Raising:

They also make a syndicate for fund raising as per client need. They offer it service in
various models. The models are:

      Loan Syndication
      Private Placement of Equity
      Project Finance
      Foreign-Currency Loan and Special Funds

Under its broader merchant banking functions, IDLC also operates Trusteeship manager,
bridge financer and investor in the placement of shares and stocks.


Few ratios are given below to evaluate the current performance of the IDLC finance ltd.




                          Ratios                                2008         2009
Return on Assets                                                     1.51%    2.40%
Return on Equity                                                 17.96%      27.28%
Rate Paid on Funds                                               10.18%       7.63%
Net Interest Margin                                              13.48%      12.83%
Reserve as a percentage of loans                                     4.10%    3.23%
Charge offs as percentage of loans                               10.50%      13.51%
Long Term Debt to Total Liabilities and Equity                   19.64%      16.45%
Loans to Assets                                                  24.51%      27.89%
Equity to Assets                                                     8.39%    8.79%
Capital Adequacy Ratio                                               3.52%    4.45%




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                     20
      Return on assets and equity has increased significantly, it indicates that firm
       efficiently use their resources and get maximum output from it. Net Interest Margin
       is decreasing from previous year. But it still satisfactory.
      Reserve as a percentage of loans has decreased. It indicates that company efficiently
       collects the loan and default risk is minimized for the firm.
      According to Banking Regulation & Policy Department of Bangladesh Bank, IDLC
       finance is unable to maintain standard CAR which is 9%.




LankaBangla




Merchant Banking Services

LankaBangla Finance Limited provides merchant banking services in the following areas:
Issue-Management LankaBangla provides such services to an issuer company which
includes inter alias regulatory compliance, placement arrangement, underwriting
arrangement, post issue service, distribution, etc.

Underwriting

LankaBangla is providing underwriting service offers comfort to the issuing company.
Apart from acting as underwriter to public issue also act as the Arranger of Underwriting.

Merger, Amalgamation and Private Placement

Merger of two companies may represent the culmination of years of effort by their owners
and management. Shareholders and management teams through the merger and
acquisition process to maximize value and minimize disruption to the business.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                  21
Portfolio-Management

LankaBangla Portfolio Management service is designed to provide personalized, secure and
simple financial solutions for a wide variety of investors who wish to enhance their
opportunities while minimizing their administrative burden.




Business Overview and Profit Growth
Bangladesh stock market has performed very well throughout the year 2008 promising
encouraging future ahead. Bull beating bear for excess demand over shortage of supply of
good securities was observed in the market. Market capitalization at the end of December
2008 was BDT 10 billion which is 15.88 percent of GDP while it was 7.59 percent in 2007.
In 2008 Company registered a tremendous business growth with leading market share in
terms of turnover in both the bourses. The operating results and the performance graph
are shown below:




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                 22
                 Market Share of Lanka Bangla Securities in DSE & CSE




Few ratios are given below to evaluate the current performance of the LankaBangla finance
ltd.
                                  Ratios                        2008     2009
              Return on Assets                                   1.82%   1.47%
              Return on Equity                                 22.02% 18.69%
              Rate Paid on Funds                               88.01% 24.91%
              Net Interest Margin                              17.59% 12.02%
              Reserve as a percentage of loans                   2.24%   2.97%
              Charge offs as percentage of loans                 4.11%   1.64%
              Loans to Assets                                  43.32% 41.80%
              Equity to Assets                                   8.25%   7.86%
              Capital Adequacy Ratio                             8.02%   8.06%




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                23
      Return on Asset and Return Equity is decreasing from last financial year. Net
       Interest Margin also decreasing. It indicates that firm managements did not
       efficiently use their current resources.
      On the other side Reserve as a percentage of loans is increasing from the last
       financial year. It predicts that a firm has more risky loans investment compare to
       last year.
       Firm is trying to maintain CAR in a standard point. But it still below standard 9%, so
       they have to improve it from 8.06% to at least 9%.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                      24
Listed on both the Dhaka and Chittagong Stock Exchange, Prime Finance is an integrated
financial services provider offering a comprehensive range of products and services in the
local markets. Prime Finance is one of the largest NBFIs in Bangladesh by market
capitalization. Market capitalization as on the last day of 2009 was Tk. 11,992 million.
Prime Finance’s core competencies cover lease finance, term finance, real estate finance,
SME finance, public issue of shares, portfolio management, margin loan, share trading and
many                                                                            more.




Public Issue of shares:
Prime Finance assist corporate clients in meeting their financial needs and advising them
on the most advantageous means of raising capital. It manages or co-manages public
offerings of shares or arrange private placement of shares with institutional or individual
investors. In addition, it provide consulting services, including mergers and acquisitions
and advising clients with respect to financing plans and related matters.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                 25
Underwriting:
Underwriting services is another product of Merchant Banking Operation. During 2009,
Prime Finance entered into agreements with 12 companies for underwriting of their shares
for total amount of Tk. 385.02 million. Participation in underwriting can expose to financial
risk since the possibility exists that the securities it has committed to take up may not be
fully subscribed at the initial public offerings.


Private placement:
Prime Finance & Investment Limited arranges private placement of debt and equity
securities for the companies seeking a broad range of corporate finance alternatives.
Through its relationship with institutional and private investors, Prime Finance has
developed an outstanding private placement track record to help its clients expand their
existing projects or set up new projects. With a reputation for superior service and results
in private capital rising, Prime Finance & Investment Limited has broad experience in
placement of:
      Debt instrument
      Convertible and
      equity-linked securities Private equity




Portfolio management:
      Own portfolio: Our investment in capital market performed well. In the second half
       of the year, the stock Exchange went up significantly. This rise was due to a number
       of factors. In 2009 total income from investment in capital market was Tk. 480.15
       million made up as under: Capital gain from sale of share: Tk. 465.88 million
       Dividend income: Tk. 14.27 million


      Investors' portfolio: Prime Finance manages investors' portfolio of its 706 clients
       worth Tk. 4.11 billion. Prime Finance provides margin loan to its clients as per
       policy and within the framework of regulatory authority, the Securities and



Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                   26
       Exchange Commission. During the year 2009 Prime Finance earned a total Tk.
       196.98 million as interest on margin loan and a Tk 34.19 million as fee from
       managing investors' portfolio.


      Margin loan: Prime Finance provides margin loan to its portfolio investors for
       investment in the listed securities against their equity. The Company's revenues
       from portfolio clients include interest on margin loan, portfolio management fees
       and annual charges.


      Corporate financial services: Prime Finance offers an extensive range of professional
       corporate financial services. We specialize in tailor-made, value-added solutions,
       which are particularly suited to small and midsized companies. We serve our clients
       in their best interest, creating value for them and compliment their business
       expertise with our own, to maximize their opportunities for growth.




Advisory services:
Corporate counseling services are provided in the form of customized solutions for better
corporate performance in terms of prolonged existence and steady growth. Project
counseling services include systematic development of an idea into a plan, development of
a financial structure and preparing project feasibility report.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                  27
Few ratios are given below to evaluate the current performance of the Prime finance ltd.



                                Ratios                                2008            2009

    Return on Assets                                                      5.71%            8.89%

    Return on Equity                                                    36.75%             49.72%

    Rate Paid on Funds                                                    8.86%            7.17%

    Net Interest Margin                                                   3.40%            1.70%

    Reserve as a percentage of loans                                      5.47%            2.97%

    Charge offs as percentage of loans                                    0.00%            0.00%

    Long Term Debt to Total Liabilities and Equity                      49.73%             28.45%

    Loans to Assets                                                     30.36%             26.29%

    Equity to Assets                                                    17.61%             16.39%

    Capital Adequacy Ratio                                              17.75%             16.47%




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                                  28
      In 2009, compare to 2008 return on assets and equity has increased significantly (3.18% &
       12.97% increase respectively), it indicates that firm efficiently uses their resources and gets
       maximum output from it.
      Net Interest Margin is decreasing from previous year which indicates the fall of income from
       interest. Expenses for paying interest have gone up in 2009.
      Reserve as a percentage of loans has decreased. It indicates that company efficiently collects the
       loan and default risk is minimized for the firm.
      According to Banking Regulation & Policy Department of Bangladesh Bank, Prime Finance is able
       to maintain standard CAR which is 9%.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                              29
\


ICB Capital management Limited: ICB Capital Management Ltd. has been created as a
subsidiary of ICB to carry out merchant banking activities including issue management,
underwriting and portfolio management. The company was incorporated under the
Companies Act, 1994 on 5 December 2000 and registration from the Securities & Exchange
Commission was obtained on 16 October, 2001. The company started its' operation from
01 July, 2002 upon issuance of gazette notification by the government.

Functions:

       Underwriting of initial public offering of shares and debentures
       Underwriting of right issue of shares
       Issue management
       Managing Investors' Account

       Providing investment counsel to issuers and investors' including financial
        engineering and corporate advisory services
       Purchase of shares and debentures including placement and equity participation
       To provide consultancy services for disinvestments program of the Government
       To provide financial consultancy services to different companies in respect of Equity
        & Entrepreneurship Fund of Bangladesh Bank and others
       Dealing in other matters related to capital market operation.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                   30
              ADVANTAGES OF MERCHANT BANKING IN BANGLADESH


Effects on Capital market

A well organized and efficient capital market is the essence of a market based financial
system. The stock market is the first and foremost forum in which individuals can trade
risk and return, llamas can raise capital and stockholders can maximize the value of their
shares. In many countries of the world especially the countries of the continental Europe
and Japan have started their reforms based on bank-dominated system first. So a full
pledged reform program of financial sector includes the development of both bank and
non-bank financial institutions in the financial system so that the overall savings and
investment activities improve significantly. Merchant banking activities involves activities
like a manager of the issue, underwriter and portfolio manager etc. Merchant bankers can
venture in such types of risky businesses because of their particular types of sources of
fund, which facilitate them to provide institutional support to the capital market. On the
other hand, bank's money is the depositors’ money a nd so they go for less risky short term
financing. For this reason banks are subject to h ig h regulations and merchant bankers are
little or no regulations around the world and thereby can go easily for risky investment
such     as     merchant     banking,      venture     capital    etc.     Their   funding    is
not covered by the government protection. The merchant banks accelerate the capital
market which can expedite the economic growth of the country. More and more investors
would be interested in buying securities as they have the necessary fund. Citigroup can
contribute     to    bringing     good     products,     bonds       and    corporate   entities
in t h e stock market. They will help in bringing companies including foreign ones in the
stock ma rket and all this will increase the supply side in the market.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                      31
Effects on the Investors

General investors as well as corporate investors will now focus more on investing in shares
and coming into the market as Citi Bank, a reputable and trustworthy firm will be leading
them fund which they lacked before. Now foreign investors have an opportunity to contribute
to the stock market of Bangladesh. Through corporate advising, the merchant bank helps the
issue analyze its financing needs and suggest various ways to raise needed funds.




Effects on the Economy

Merchant banking causes a great impact on the economy of Bangladesh Bank. It contributes
to the National GDP as well as to contribute to the growth of national economy. Due to the
merchant banking, people will be more encouraged to use their unutilized money in the
investment of different stocks and securities which are expected to grow. As a result the
unutilized portion which was not counted earlier in GDP in included now. The investment area
w i l l be more safe and predictive. As due to the merchant banking more and more investors
will invest in the market, the market will be spread and as market will spread, there will be
less risk to be default.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                   32
                Problems and Restrictions of Merchant Bankers


Unscrupulous and frequent policy changes by SEC:
The Security and Exchange Commission of Bangladesh tends to change the policy
frequently which sometimes drastically affects the market situation. To temporarily control
the market they take at times take measures that affect the market negatively in the long
term. Consequently, it compels some investors to leave the market and merchant banks are
affected. In the year 2010 SEC has revised the margin lone ratio four times in last eleven
months.


Reduced Margin ratio:
According to the new SEC guideline, the margin ration for disbursing loan has been
reduced to 1:1 (14.12.10) which was previously calculated on Net Asset Value (NAV) basis.
So the amount of loan given by the merchant banks have been reduced which ultimately
affect their profit margin.


Ceiling for margin loan
The Securities and Exchange Commission set new ceiling for margin loan for merchant
banks and brokerage houses. Under the new directive, merchant banks and brokerage
houses are allowed to lend up to Tk 10 crore as margin loans to their clients, an official
said. Margin loans, meant for share trading purposes, are disbursed against the shares an
individual investor has in his or her possession. The impact of this decision sent a
shockwave through the market and on the following day, DSE general index fell by over
200 points.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                 33
                 Challenges of Merchant Banking In Bangladesh


High government borrowing at high interest rates
The government has traditionally been the major borrower through the various ‘national
savings schemes’ and that too at the highest interest rate bracket and in unlimited (not
predetermined) amounts. The government instruments were crowding out corporate
borrowers and bank deposits in comparable tenures. Thankfully, the scenario is shifting
lately as the government has discontinued some high interest paying instruments and
restricted investments on others, accompanied with rate cuts. This has been attributed to
the recent surge in stock prices.
Lack of transparency in public sector borrowing
Public sector borrowing has been riddled with lack of transparency that failed to
eventually proffer any reliable demand-supply scenario in which an efficient debt market
can function. Because of the frequent shifts and ad hoc culture and volatility of demand,
many of the debt instruments could not be designed to be publicly traded that could fuel a
vibrant market. Efforts are now on to issue tradable instruments and bring fiscal discipline.
Supply of Funds:
Although share capital is perspective source of fund for merchant banks, many companies
have not utilized the opportunity fully. As most of the merchant banks are incorporated as
public limited companies, it could be as better alternative for them to raise fund through
initial public offerings in order to finance the expanding horizon of activities. It can be
noticed that the dominance of bank loan in the total fund is decreasing while the
importance deposit base is gaining momentum. Financial institutions have to raise capital
reserve of at least BDT 250 million, a portion of which must be collected through the
issuance of IPO. This arrangement will make their operations more transparent, bring
accountability to the shareholders and reduce dependence on credit lines. Though all
merchant banks were required to raise the minimum capital requirement through IPOs by
September 2006 (extended from June 2006,) eight (8) companies’ share yet to float their
shares in the market. Four of these have already submitted necessary documents to SEC for
review while four others are still in the process of doing so.



Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                    34
Lack of Human Resource
Skilled and trained human resource is considered as an important component for the
development of any institution. Due to the recent growth of Merchant Banks, availability of
experienced manpower is a challenge for this industry. The supply shortage of efficient
resource personnel has been leading to a significant increase in the compensation package,
which is also a cause of concern for Merchant Banks. The industry experts believe that
although there exists enormous growth opportunity the market is still quite small and
scope of work for skilled personnel is very limited compared to that of banks. This makes
the competent personnel to switch from Merchant Banks to other institutions after a
certain period implying low retention rate of skilled human resource.


Weak Legal System
Although the default culture has not yet infected Merchant Banks to any major extent, they
face difficulties in recovering the leased assets in case of a default. Moreover delays in court
procedures create another cause of concern. The situation cannot be improved only by
making the legal system stronger through enactment of new laws rather ensuring proper
implementation existing ones is more of concern.


Cost of Fund:
Merchant Banks face comparative disadvantage in collecting funds compared to the banks
because Merchant Banks cannot collect short term (less than one year) deposits from
individuals due to the central bank’s restriction, and again deposits in Merchant Banks are
perceived to be less safe to the public. Due to the liquidity crisis, when interest rate goes up,
the average rate of interest on bank credit lines and deposit rate also increases, which
causes significant rise in the cost of fund for Merchant Banks. The high cost of fund for
Merchant Banks compels them to operate on a relatively low profit margin.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                       35
Asset-Liability Mismatch
Asset-liability mismatch is another cause of concern for Merchant Banks. Demand for funds
to meet the increasing lending requirements has increased many times. But the availability
of funds has become inadequate. The average weighted life of its deposits and borrowing in
its operating guidelines for a leasing company. Therefore, Merchant Banks have to explore
alternative ways for raising funds.




Investment in High Risk Portfolio
It is already mentioned that cost of funds for Merchant Banks are higher than that of banks.
In order to sustain the high cost of borrowing, Merchant Banks may be inclined to invest in
the high return segments, which can expose them to commensurately higher risks.
Moreover, fierce competition among competitors may also force many Merchant Banks to
reduce the margin at the expense of quality of the asset portfolio. This strategy may
eventually create the possibility of an increase in the non-performing accounts. Unless
adequate risk management capabilities are developed, the growth prospects of Merchant
Banks would not only be hindered but it might also be misapprehended.


Product Diversification
Merchant Banks emerged primarily to fill in the gaps in the supply of financial services
which were not generally provided by the banking sector, and also to complement the
banking sector in meeting the financing requirements of the evolving economy. the new
customer base has not been created and the growth of industrial entrepreneurship could
not be facilitated through Merchant Banks financing packages. Diversifying the product
range is a strategic challenge for Merchant Banks in order to become competitive in the
rapidly growing market.


Competition with Banks
With the advent of new Merchant Banks, the market share is being spread over the
competing firms and the demand facing each firm is becoming more elastic. Active
participation of commercial banks in the non-bank financing activities has further


Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                  36
increased the level of competition in the industry. For commercial banks, public deposit is
one major source of funds which they can collect with relatively lower cost. Thus the
business environment for Merchant Banks has become more challenging as they have to
face uneven competition with banks in terms of collecting funds.


Comparison between Bangladeshi Merchant Bank services and Global services:


Merchant Banks in Bangladesh mainly offer services like issue management, underwriting
options, advisory service, portfolio management, Trusteeship management, bridge
financing. But internationally banks provide a wind range of service which has not yet been
introduced in our country due to small and weak capital market, government regulation
and lack of expertise. So, Bangladesh is far behind from the international market in spite of
great potential here.


International merchant bank are large enough to provide services through the world. They
have international client’s data base and serve beyond their market. They mainly provide
advisory and syndication services to their clients about how to approach the international
business and become a multinational service. On the contrary, Bangladeshi merchant bank
are not capable to provide those services due to lack of resources.


Many firms have the potential to do a profitable service by addressing its population’s
varying needs. International merchant banks offer advices to their clients regarding
differentiated needs by suggesting them realistic business ideas. Bangladeshi merchant
banks have to take it into account.


Merchant bank educate their clients about their services and notify about the future
potential opportunities to their clients. But in Bangladesh it’s merely applied by the
merchant bank.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                   37
                                    Recommendation


Enhancing Capital Market Activities
Merchant Banks around the world carry out a significant role in the development of the
capital market. Strong institutional support is necessary for a vibrant capital market which
is the core of economic development in any market based economic system. Merchant
Banks through their merchant banking wing can act in this regard. A total of 30 companies
are now listed as merchant banks in Bangladesh, of which 23 are full-fledged, 6 are issue
managers, and only one is a portfolio manager. Only nine Merchant Banks have registered
with SEC for performing merchant banking activities. But their activities in the capital
market are rather limited (Financial Sector Review, Bangladesh Bank, 2006). Active
participation of merchant banks is essential to accelerate the capital market activities
which can expedite the economic growth of the country. The success of merchant banking
operations is largely linked to the development of the security market. So Merchant Banks
should concentrate more on their opportunities in the capital market.


Alternative Sources of Funds
The finance and leasing companies across the world are using different sources for
collecting funds. Merchant Banks in Bangladesh may also explore the possibilities of
gaining access to new sources of funds like issuance of commercial paper and discounting
or sale of lease receivables. However, in releasing such new products, some regulatory
changes have to be made. Another innovative and promising source of funds may be the
securitization of assets.


Market Segmentation
It has been discussed earlier that though banks and Merchant Banks compete with each
other they can also perform complementary functions. To function as complementary
institutions both banks and Merchant Banks should follow some ethical and technical
norms. 15 Banks wishing to enter in the leasing business, which is essentially a core
operation of Merchant Banks, should do so through opening subsidiaries so that a level



Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                  38
playing field for Merchant Banks can be maintained. This is needed as banks have access to
lower cost funds compared to Merchant Banks, which puts the former in an advantageous
position. Alternatively, banks can go for joint financing under syndication arrangements
with leasing companies on any project proposal. Again, banks can concentrate on working
capital finance and foreign exchange operations, which matches more with their asset-
liability management.



Competition and Product Diversification
Merchant Banks in Bangladesh are operating in a highly competitive environment. The
competition for Merchant Banks is even more challenging as they have to compete with
banks. Given the changes in the business environment, the need for product diversification
is very important. At present, lease financing constitutes 55 percent of the total long term
assets of Merchant Banks. The remaining part concentrates mainly on term financing and
housing finance. Some of Merchant Banks are primarily engaged in leasing, some are also
diversifying into other lines of business like merchant banking, equity financing etc.
Currently, 22 Merchant Banks (out of 29) specialize in lease financing. Merchant Banks are
permitted to undertake a wide array of activities and therefore should not confine
themselves to one or two types of product only. Leasing, no doubt, presents a good
alternative form of term financing but Merchant Banks should also venture into diversified
use of their funds such as merchant banking, venture capital financing, factoring, etc. for a
healthy growth of the capital market.



Issues of Taxation
The financing mode of lending and leasing are totally different from one another. The
concept and procedure particularly the accounting and taxation system are also quite
different. So it is advisable not to mix up the two different operations, otherwise it might
distort the basic financial norms. As the tax treatment is totally different in leasing
business, mixing up of lending and leasing in the same business portfolio might create the
possibility of tax fudging.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                   39
Conclusion
Merchant bank plays an important role to smooth follow of fund from surplus unit to
deposit unit of the society. Merchant bank has wide range of activities such as advisory
function, underwriter function, investment banker, transaction broker and so on which
also ensure the expansion and improvement of the capital market and economic growth.
Although 37 merchant banks are operating, officials said only a few are active while the
performance of the rest is far from being satisfactory. The merchant banks should focus on
forming their own portfolios in making the market sustainable. They should diversify their
functions other than lending. In order to maintain sustainability they should diversify their
activities because underwriting, advisory and syndication are not large enough in our weak
and small economy. Merchant bank is highly necessary to raise fund for the public and
private sector from the capital market in order to expansion and improvement of the
corporation, take new project, diversify their products or services and so on. Merchant
bank is making capital market more strong and powerful.




Performance Evaluation of Non-Banking Merchant Banks In Bangladesh                   40

				
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