Bangladesh is a developing country of 3rd world. It has been developing gradually. After getting it’s independence in 1971, It has progressed in various sector. But some obstacles hampers it’s development. Banking sector is one of the most important sector. Since 1971 when Bangladesh Bank was established it has increased it’s banking activities. Some public Bank also run their activities. But it was not sufficient. There had a need of quick and smart Banking. From this respection different types of commercial Banks was established. Brac Bank is one of them. It was established as a commercial Bank. It started it’s operation July 4, 2001 pursuing the largely unexplored small and medium enterprise business segment in Bangladesh. The Bank is promoted by the Bangladesh Rural Advanced Committee (BRAC). A leading Non-Government Organization (NGO) in poverty alleviation and empowerment of poor, especially women in rural areas. The Bank has become one of the fasted growing Banks with a network 36 branches and 392 SME unit offices as at December 2007.
BRAC Bank started it’s operation through the acquisition of a operation of credit activities of BRAC. The Bank is backed up by BRAC’S vast experience. and track record of successful administration of small collateral free, supervised credit with a sound human and physical infrastructure supports towards the credit program.
While having a major concern in SME financing the Bank is also actively involved in retail Banking a board range of consumer loans in addition to a sound market share in the substantial worker remittance business, operating with a network of international money transfer agencies.
As a commercial Bank, BRAC Bank is doing a lot of job. It has a corporate vision. The corporate vision of BRAC Bank has been given in the below.
Corporate vision
Building profitable and socially responsible financial institution focused on Market and business with growth potential, thereby assisting BRAC and stakeholders to build a just, enlightened, healthy democratic and poverty free Bangladesh”.
Corporate Mission
Sustained growth in small & Medium Enterprise sector.
Continuous low-cost depsit growth with controlled growth in retail assets.
Corporate assets to be funded through self-liability mobilization. Growth in assets through syndication and investment in faster growing sector.
Continuous endeavor to increase non-funded income.
Keep our dept charges at 2% to maintain a steady profitable growth.
Achieve efficient synergies between the Banks branches, SME unit offices and BRAC field offices for delivery of remittance and Bank’s other products and services.
Manage various lines of business in a full controlled environment with no compromise on service quality
Keep a divers, far flung team fully controlled environment with no compromise on service quality
Keep a diverse, far flung team fully motivated and driven towards materializing the bank’s vision into reality
Core Values
Our strength emanates from our owner- BRAC. This means, we will hold the following values and will be guided by BRAC as we do our work.
Value the fact that one is a member of the BRAC family
Creating an honest, open and enabling environment
Have a strong customer focus and build relationships based on integrity, superior service and mutual benefit
Strive for profit & sound growth
Work as team to serve the best interest of our owners
Relentless in pursuit of business innovation and improvement
Value and respect people and make decisions based on merit
Base recognition and reward on performance
Responsible, trustworthy and law-abiding in all that we do.
BRAC Bank is one of fastest growing Bank’s in the country, recording strong growth with an ROAE in excess of 20% while maintaining a rapid growth loan, averaging at 64% over the past three years well above the industry average. The Bank also continues to drive sound earnings from non-interest income sources while scale benefits are helping the Bank lower its cost to income ratio. The aggressive penetration into the SME segment carries with it a risk of growing non-performing assets, however the current NPL ratio is still well within manageable levels.
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Despite sound success of its organic growth, it has expressed interest to diversify into other alternative income streams via acquisitions hoping to enter into different services including merchant banking, leasing and other financial services. It has announced its intention to acquire 51% of the post public issue paid up capital of GSP Finance Limited, a financial service provider company in Bangladesh, after getting necessary approvals from all concerned regulatory authorities.
An expected earnings growth of 59.7% and 76% in FY08 and FY09 correspond to PER of 16.2x respectively at a current market price of BDT 980. The counter trades at a 2.7% Premium to the sector and at 14.8% discount to the market. Considering the bank’s high loan growth and the market opportunities of the untapped SME sector along with strong support by its parent BRAC, it is our view that BRAC Bank ought to continue to trade at a premium to the sector.
BRAC Bank limited started its commercial banking operations in July 2001, and has become one the fastest growing banks in the country primarily focused on lending to the largely untapped small and medium enterprise segment. Having acquired a substantial market share of SME loan disbursement by private commercial banks, the bank is at present the market leader in the SME segment.
The bank registered a strong loan growth of 66% for FY07, driving interest income by 64%. BRAC Bank is expected to record loan growth of 60% in FY08 and 55% in FY09 while deposit growth is expected to remain stable at 50% in FY08 and in FY09 assisted by an additional 15-20 branches being opened each year.
The bank’s deposit mix is weighted toward term deposits, accounting for 74% of deposits while current deposits and savings deposits account for 15% and 10% of total deposit respectively and it is assumed that the deposit composition will remain intact over the next three years.
Net Interest Margins have increased from 5.77% in 2006 to 6.16% in 2007 and expected to continue to increase moderately over the next three years as the bank continues to focus it asset exposures on higher yielding SME and retail segment.
The bank’s cost to income ratio was high as 64% for 2007 and is expected to decline to approximately 63% and 57% over the next two years on scale benefits.
Non-interest income accounted for 42% of total operating income last year and has grown at a CAGR of 69.45% over the last five years. It is expected to increase further from growth in the same revenue streams over the next two years.
BRAC bank’s Gross Non Performing Loan (NPL) stood at 4.5% in 2007 up from 3.04% in 2006. Relatively high gross NPLs’ in the SME sector increased the overall gross NPL of the bank over the past years. We expect NPLs’ to expand marginally to 4.7% for the next two years.
The Bank exhibits prospect of strong loan growth in a largely untapped market segment with considerable operational support from its parent BRAC. An expected earning growth of 59.7% and 76% in FY08 and FY09 correspond to PER of 16.2x and 9.21x respectively at a current market price of BDT 980. The counter trades at a 2.7% Premium to the sector and at 14.8% discount to the market.
Market leadership
The bank possesses a loan book dominated by SME loans, accounting for 60% of its portfolio while retail, corporate and other leading accounts for 40% of its loan book. Having acquired a 12.14% market share of SME loan disbursement by all banks and financial institutions, within the first 7 years of operations, BRAC bank is the single largest SME Bank in the country. The bank aims to continue to focus its attention in this sector via aggressive expansion in its branch network leveraging on the expertise of its parent.
The bank offers a wode range of products tailored to the proprietors of SME’s developed with the expertise of its parent coupled with an extensive marketing drive which includes an aggressive country wide expansion of branches and SME unit offices. The relatively higher risk exposure undertaken in lending to the SME segment is also reflected in wider spreads
retained to compensate for its increased risk exposure. Competition in this segment is however increasing with the government encouraging more institutions to undertake financing of the SME sector. BRAC bank, the pioneer in SME lending in the country however continues to be regarded as the only dedicated lender to the SME segment largely due to its intrinsic expertise and tried and tested processes in dealing with small businesses.
FUNDING, CAPITAL AND LIQUIDITY
A 1 for 5 rights issue announced at Tk 500/- per share is expected to raise BDT 1.32 bn for the bank which will boost its’ Tier1 capital to 10% in the 1H FY08 from 8% recorded at the year-end FY07. Deposits accounted for 85% of liabilities in FY07, being the primary source of funding. The deposit mix is weighted toward term deposits, accounting for 74% of deposits while current deposits and savings deposits account 15% and 10% of total deposit respectively. Though the bank is planning to concentrate on low cost funding sources, we conservatively assume that the deposit composition will remain same for the next three years.
The bank continues to comply with both the 5% cash reserve ratio and the Statutory Liquidity Ratio (SLR) of 18%. The banks SLR as at December 2007 stood at 18.40%.
OPERATING EXPENSES
Over the years, bank’s cost to income ratio has declined steadily though the ratio is still relatively high compared to its peers. The ratio is expected to continue to record a modest decline as scale benefits begin to be realized assisted by a continued streamlining and automation of processes. The bank’s cost to income ratio was 64% for 2007 and expected to decline to approximately 63% and 57% over the next two years. Operating expenses are expected to grow at a CAGR of 47% over the next three years stemming from branch expansion.
Board of Directors
Brac Bank’s Board of Directors are as follows:
1. Chairman:Mr Mohammd A (Rumee) Ali.
2. Director:
i. Mr. Shib Narayan Kairy
ii. Md. Kazi Shariful Alam
iii. Md. Nihad Kabir
iv. Dr. Hafiz G.A Siddiqi.
v. Ms. Tamara Hasan Abed.
3. Managing Director and CEO : M. Syed Mahhubur Rahman.
Topic Analysis
Definition of SME:
The Small and Medium Enterprises worldwide are recognized as engines of economic growth. In recent days the Small and Medium Enterprise (SME) Financing has become an important area for Commercial Banks in Bangladesh. To align its corporate policy with the regulation of Central Bank, banks have become more concerned about SME and opened windows to conduct business in this particular area. According to the latest circular of Bangladesh Bank (Date – 26/05/2008), the definition of Small and Medium Enterprise sector is given below:
Small Enterprises:
Small enterprises refer to those enterprises which are not any Public Limited Companies and which fulfill the following criteria-
Service Concern:
-Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land & building and / or employing up to 25 workers.
Business Concern:
– Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land & building and / or employing up to 25 workers.
Manufacturing Concern:
Having an investment of Tk. 50,000 to Tk. 1, 50, 00,000 excluding land & building and / or employing up to 50 workers.
Medium Enterprises:
– Medium enterprises refer to those enterprises which are not any Public Limited Companies and which fulfill the following criteria:
Service Concern :
– Having an investment of Tk. 50, 00,000 to Tk. 10, 00, 00,000 excluding land & building and / or employing up to 50 workers.
Business Concern:
– Having an investment of Tk. 50, 00,000 to Tk. 10, 00, 00,000 excluding land & building and / or employing up to 50 workers.
Manufacturing Concern:
– Having an investment of Tk. 1, 50, 00,000 to Tk. 20, 00, 00,000 excluding land & building and / or employing up to 150 workers.
Definition by Ministry of Industries (MOI):
SMEs in Bangladesh are also defined for purposes of industrial policies by Ministry of Industries (MOI). Historically, this definition has been in terms of fixed investment brackets, and a dual mode definition is in place, separate for manufacturing establishments, and service establishments. According to the Industrial policy 2005, Small and medium enterprises shall be categorized using the following definitions:
Manufacturing enterprise:
Small enterprise
– An enterprise should be treated as small if, in current market prices, the replacement cost of plant, machinery and other parts / components, fixtures, support utility, and associated technical services by way of capitalized costs (of turn key consultancy services, for example), etc, excluding land and building, were to be up to tk. 15 million;
Medium enterprise –
-An enterprise would be treated as medium if, in current market prices, the replacement cost of plant, machinery and other parts / components, fixtures, support utility, and associated
Medium enterprise –
-An enterprise would be treated as medium if, in current market prices, the replacement cost of plant, machinery and other parts / components, fixtures, support utility, and associated
Small enterprise
– An enterprise should be treated as small if it has less than 25 workers, in full time equivalents;
Medium enterprise –
-An enterprise would be treated as medium if it has between 25 and 100 employees
Contribution of SMEs in the Economy:
There is a great interest in small and medium enterprises (SME) as a major plank of poverty reduction in Bangladesh In view of present economic development effort in Bangladesh the SME sector plays an important role. These are reflected in the following performance /activities of this sector:
During the Fourth Five year plan, a total of 0.35 million jobs were created against the target of 0.4 million.
SME sector employs 25% of the total labour force. As a result, this sector is the present available sector for creation jobs.
SME sector help alleviate poverty, increase income level of rural people and promote agro-industrial linkage in Bangladesh.
SME sector requires lower energy supply, lower infrastructure facilities and this sector imposes less environmental risk.
They contribute towards better utilization of local resources and skills that might otherwise remain unutilized.
Small industries being labour oriented are capable of generating more employment.
They are necessary to maintain and retain traditional skills and handicrafts.
They are the only medium for diversification of rural economy and for peaceful and concurrent socio-economic development of all classes of people.
From the above discussion, we can say that SMEs are playing an important role in our economy in various ways.
SME Financing by Banks in Bangladesh:
The National Commercial Banks (NCBs) are disbursing significant amount of credit under various programs like Small Enterprise Development Project, Self-help Credit Program, and Projects for Small Entrepreneurs, Special Investment Program and Agro-based Supervisory Industrial Credit etc. for the promotion and development of SMEs. The investment of private sector banks in financing SMEs remains insignificant in Bangladesh. Of all the private sector banks, BRAC Bank, AB Bank Limited.(ABBL) Eastern Bank Ltd. (EBL), Prime Bank Ltd, Dhaka Bank Ltd, Mercantile Bank Ltd, Dutch-Bangla Bank Ltd, Islami Bank Bangladesh Ltd, IFIC Bank Ltd. have the leading role in SME financing. Bank of Small Industries and Commerce Bangladesh Ltd. (BASIC) are entrusted with the responsibility of providing medium and long-term loans for promotion and development of small-scale industries. The memorandum and Articles of Association of the bank stipulates that 50% of loan able funds shall be used for financing small scale and cottage industries.
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SMEs – number and success
No one knows for sure how many SMEs there are in Bangladesh today. It was around 1978 that the BSCIC (Bangladesh Small and Cottage Industries Corporation), under the Ministry of Industries, conducted a survey to find out the number of cottage and small industries of the country. Inspite of the question about the validity and dependability of the survey, in absence of any other effort by the Bangladesh Bureau of Statistics (BBS) or any other agency, this initiative did provide a useful benchmark but it was never updated. The International Consultancy Group (ICG) of the UK, in collaboration with the Micro Industries Development Assistance and Services (MIDAS), conducted in 2003 the National Private
Sector Survey of Enterprises in Bangladesh with funding from the Department of International Development (DFID) of the UK Government, the United States Agency for International Development (USAID), the Swiss Agency for Development and Cooperation (SDC) and the Swedish International Development Cooperation Agency (SIDA). The survey results drew the conclusion that there were approximately 6 million micro, small and medium enterprises (MSMEs), which included enterprises with up to 100 workers
employing a total of 31 million people, equivalent to 40 per cent of the population of the country of age 15 years and above. About three quarters or more of the household income in both urban and rural areas is provided by the MSMEs
The high level of income contribution was attributed to the fact that the enterprises worked ten hours per day, 28 days per month for eleven months a year. The survey also found that the industrial structure of SMEs consisted of primarily wholesale and retail trade and repairs (40 per cent), production and sale of agricultural goods (22 percent), services (15 percent), and manufacturing only (14 per cent). Thus the survey brought out very prominently the fact that the large untapped potential for expansion in manufacture and production could be exploited (or contributing more significantly to the national economy. Another vital finding of the survey under discussion was that SMEs contributed BDT 741 ($ 12.5) billion or nearly 25 per cent of the GDP (BDT 2,996 billion) in 2003. Those who tend to look down on micro and small industries may be shocked to note that enterprises employing 2-5 workers are credited for having contributed 51 percent share of the total SME contribution to the economy, followed by 26 percent by those having only one worker and 10 per cent by those having 6-10 workers
Monitoring of SME Credit:
Like monitoring of agricultural credit, three tier monitoring systems (BB Head Office, BB Branch Offices
and Banks) will be established in case of SME credit.
Purpose of the Monitoring of SME Credit:
To achieve the overall target of SME loan disbursement;
To achieve sector wise industrialization; such as higher growth of industry and service sector, increasing the number of women entrepreneurs and their development, district wise employment generation and poverty reduction;
To provide required credit to the small entrepreneurs without any harassment;
Special monitoring of the banks performance in providing credit to the women entrepreneurs;
To ensure area approach and cluster-based credit disbursement.
To ensure satisfactory recovery of the disbursed credit in this sector to address any liquidity crisis;
And so on.
Financing SME Sector:
Access to finance is vital for SME sector development. In many instances, entrepreneurs raise complain regarding high rate of interest. Indeed, higher rate of interest is a major hindrance, but availability of adequate fund is very much important. That is why, Bangladesh Bank is committed to facilitate SME credit through refinance window. To develop SME sector, the fund of BB, IDA and ADB is being channelised through refinance scheme. So far a total of Tk.1,432 crore has been refinanced (up to December 2009) to 14,122 enterprises using the revolving fund (Tk.918 crore) of BB, IDA & ADB. Moreover, Bangladesh Bank is going to launch an extended refinance scheme of Tk. 660 crore very soon with the newly arranged ADB fund.
Action Plan to support the SME Centers, Women Entrepreneurship and one-stop facility :
Bangladesh Bank issued a circular in 2008 to bring uniformity in SME efinition, in consultation with National Board of Revenue (NBR), Board of Investment (BoI) & Ministry of Industries (MoI) (Circular attached).
Following funds are now in operation in Bangladesh governed by different entities like Bangladesh Bank, SME Foundation & Ministry of Finance (Banking & Financial Institutions Division):
Bangladesh Bank Fund;
EGBMP/IDA Fund;
ADB Fund and
SME Credit Wholesaling Foundation Fund.
– These funds have already been channelized through different Banks/NBFIs with a view to helping easy access to SME entrepreneurs.
The following circulars with necessary guidelines have already been issued through Bangladesh Bank:
BB’s ACSPD Circular No. 01 dated 02-05-04 has introduced a Refinance Scheme for Small Enterprise Sector to provide maximum 100% refinance facilities to support the development of the small enterprises.
BB’s ACSPD circular No-02 dated 19/07/2005 was issued to encourage & boost up the SME sector availing the ADB Fund.
BB’s SMESPD Circular issued on 19-07-10 has introduced a Refinance Scheme for SME Sector to provide refinance facilities to enterprises outside Dhaka & Chittagong metropolitan area.
BB’s SMESPD issued a circular on 15/02/2010 to reduce the lower loan limit of the entrepreneurs.
BB, ACSPD circular No. 05 dated 04/05/08 issued by Bangladesh Bank with following important terms & conditions:
The Banks & Financial Institutions should inform BB about the target of
their SME credit disbursement within the annually disbursed of total loanable fund.
40% of the total SME loan would be provided for Small Entrepreneurs & rest of the 60% for Medium Entrepreneurs.
Setting up dedicated desk for SME etc.
Conclusion
BRAC Bank has approached to maintain the gap of capital of small and medium enterprise. BRAC Bank the pioneer in SME leading in the country. However continues to be regarded as the only dedicated lender to the SME segment largely due to its intrinsic expertise and tried and tested process in dealing with small business. Most SMEs in Bangladesh today grew on their own initiative. Among them one highly successful sector did benefit from a relative freedom from overregulation and from assistance from government. Readymade garments (RMG) being the success story of Bangladesh enjoyed significant relaxation in government control, innovative assistance like provision for bonded warehouse facilities, transfer of many of the regulatory functions to the BGMEA and, to some extent, somewhat relaxed enforcement of the provisions of the Factories Act, Labour Laws, etc. But for a small number of brave and leading entrepreneurs of earlier days, most of the investors followed others more or less blindly and machinery procured for production has been mostly vendor driven. No special effort was made by them to impart technical training to the 1.8 million women workers with little education, and so their productivity has remained deplorably low. Initially the entrepreneurs had no skill of international marketing, when they were mostly dependent on Korean, Indian and Sri Lankan “buyers”, who were nothing but self-appointed agents of western importers. Value addition to the industry except for knitwear has been low for lack of indigenous backward linkages with suppliers of fabrics and accessories. Most significantly, the industry benefited from quotas for North American markets and GSP facilities in EU markets. The elaborate description, though well known to everybody in the industry, is narrated here to highlight the fact that, without the introduction of suitable machinery to ensure high quality, without the enhancement of productivity and skills of workers through training and retraining, without substantial improvement in finishing, packaging and transportation systems, and without learning to switch over to e-commerce, most RMG operators will start falling behind. This will affect their own income as well as the export earnings of the country, 80 per cent of which is contributed by the RMG sector. Besides job losses for a large proportion of the 1.8 million female workers and 2.0 million or so in the related services, there will be huge social impacts that need not be discussed here. Needless to say, diversification of the industrial production system will be needed not only to overcome the apprehended losses of jobs and incomes but also to enlarge the horizon, with the world as the market. SMEs can absorb an unlimited number of investors, each requiring relatively little capital to generate the maximum per unit production and employment, and thus hold the key to the future of the economy. Exports will help increase the purchasing power of the teeming millions of rural and urban poor, using goods from the SME sector. It is thus very clear why SME development should proceed hand in hand with micro enterprise development. It is interesting to observe that the conditions for small industry development that we find today, being at the threshold of total globalization, are very much the same as observed several-decades ago. Inspite of the criticism and neglect of the SME sector on the grounds of inefficiency and non-optimal use of productive factors compared to larger industries, SMEs are beginning to be extolled for their greater dependence on labour-intensive production techniques, lower requirements of imported inputs and better geographical dispersion. It is also being recognized that small drops make an ocean, so much hope is being pinned on micro and small enterprises for toning up the rural economy, without which the national economy cannot be sustained. Out of many empirical studies done in this area, the work of Professors Sadrel Reza, Momtazuddin Ahmed and Wahiduddin Mahmud of Dhaka University, published under the title Small and Medium Scale Enterprises in Industrial Development, The Bangladesh Experience (Academic Publishers, Dhaka, 1992) strongly corroborates the present experience and the future outlook. (Note: The summary of the findings and policy recommendations of the said publication could be made available from APCTT on request.) In the context of promotion, development and sustainability, among many other things, four issues were highlighted by the authors:
Financial support schemes;
Technology and training;
Marketing and infrastructure; and
Rule of external development institutions (meaning donors).
All the above issues are very much within the grasp of the government and easily soluble within a reasonable time frame, except perhaps for technology and training. The horizon for technological development and skill development remains hazy. International cooperation in this regard, through schemes like TCDC (Technical Cooperation Developing Countries), have been most frustrating. Import of technology has not been very cheap; in any case, foreign countries are not expected to be able to develop and supply ready-made technologies and machineries for Bangladesh’s needs, so there is no alternative to development of local R&D capabilities. SMEs cannot finance R&D costs and efforts and the only industrial research institution of the country in the public sector, BCSIR (Bangladesh Council of Scientific and Industrial Research) has been engaged in rather inconsequential pursuits.
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