Business

BB warns financial institutions against unauthorised investments


The central bank yesterday warned financial institutions (FIs) that set up subsidiaries against the law and instructed them to withdraw investments from those companies by September 30.

“It is observed that some financial institutions are investing beyond the law by forming subsidiaries,” Bangladesh Bank said in a statement. “So, investment risks are growing.”

Some FIs formed subsidiaries even in real estate, a practice that goes against the Financial Institution Act 1993, a senior BB official said, justifying the central bank's latest move.

Four to five financial institutions have set up such subsidiaries and a few others are in the pipeline, the official said.

The notice attracted mixed reactions from the chief executives of the institutions.

“The central bank has opened many windows for finance companies. It is unnecessary to form subsidiaries in the first place,” said Shamsul Arefin, managing director of Uttara Finance.

“It also involves huge costs.”

Selim RF Hussain, managing director of IDLC Finance, said the financial institutions should concentrate on areas that support their core areas.

But Asad Khan, managing director of Prime Finance, said FIs might need such subsidiaries because of the nature of business.

“We own properties because of the nature of our business, but we don't have the expertise in selling properties,” said Khan, also the president of Bangladesh Leasing and Finance Companies Association.

He said the financial institutions have to deal with a lot of mortgage, especially with lands, and officials face trouble in finding buyers.

However, Khan said the institutions would follow the BB's instruction.

Financial institutions, also known as non-bank financial institutions, are regulated by the central bank.

Thirty-one FIs operate in Bangladesh: two government-owned, one is the subsidiary of a state-owned bank, 13 are owned by local private investors and 15 are joint ventures.

The major sources of funds of the FIs are term deposits (at least six-month tenure), credit facility from banks and other FIs, call money as well as bonds and securitisation.

The major difference between banks and FIs is that FIs cannot issue cheques, pay-orders or demand drafts and cannot receive demand deposits. In addition, FIs cannot be involved in foreign exchange financing.
                                                                                                                                        Sajjadur Rahman
                                                                                                                                      from the daily star