1. Introduction
Non-Bank Financial Institutions (NBFIs) 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. 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.
In relatively advanced economies there are different types of non-bank financial institutions namely
insurance companies, finance companies, investment banks and those dealing with pension and
mutual funds, though financial innovation is blurring the distinction between different institutions. In
some countries financial institutions have adopted 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 stock 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 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 describes the performance of NBFIs measured
by different financial indicators, along with the effects of banks’ entry into the non-bank financing
area. Special emphasis has been given to identify the challenges faced by NBFIs in Bangladesh.
Finally, development of NBFIs as well as their role in strengthening the financial system has been
discussed. The analyses have been conducted on the basis of the secondary data obtained from
different sources like NBFIs, Bangladesh Bank, Leasing Year Book etc.
Non-Bank Financial Institutions (NBFIs) 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. 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.
In relatively advanced economies there are different types of non-bank financial institutions namely
insurance companies, finance companies, investment banks and those dealing with pension and
mutual funds, though financial innovation is blurring the distinction between different institutions. In
some countries financial institutions have adopted 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 stock 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 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 describes the performance of NBFIs measured
by different financial indicators, along with the effects of banks’ entry into the non-bank financing
area. Special emphasis has been given to identify the challenges faced by NBFIs in Bangladesh.
Finally, development of NBFIs as well as their role in strengthening the financial system has been
discussed. The analyses have been conducted on the basis of the secondary data obtained from
different sources like NBFIs, Bangladesh Bank, Leasing Year Book etc.