Faculty of Business Administration

SOUTHERN UNIVERSITY BANGLADESH

REVIEW REPORT ON

DEBT FINANCING IN BANGLADESH

Course: AC220 Financial Accounting-2. Fall 2018

Date: 05-12-2018

Submitted to

MUHAMMAD ISTIAQUE HOSSAIN

Lecturer

Department of business administration

SOUTHERN UNIVERSITY BANGLADESH

Submitted by

Name ID
Md. Ajmain Mahatab 111-58-11 (Leader )
Jannatun Nayeem 111-58-65
Naisha Rahman Chowdhury 111-58-04
Jannatun Naeema 111-58-44
Sanjida Akther Shipa 111-58-23
 ABSTRACT

The purpose of this study is to review reports of debt financing in Bangladesh, problems and
recommendations. Debt financing is main source of financing. In Bangladesh debt financing is
increasing day by day. In this report we described the introduction of debt financing, types of
debt financing, advantage and disadvantages problems and recommendations. The deficit
between the budget and capital is increasing very fast in Bangladesh. For that a lot of money are
bringing from internal and external sources. Some authors prepared report on debt financing in
Bangladesh. Some of their information’s described in the background part. In Bangladesh debt
financing faces various problems like high rate of interest, increasing interest expense, lack of
money problem, lack of trusty, lack of information, lack of advices etc. Some recommendation
has given against the problems. This report is prepared by using analysis and research reports
of some authors. For that this is a review report of debt financing in Bangladesh.
 TABLE OF CONTENT

Introduction ……………………………………….1-3
Background ………………………………………. 4-6
Problems Identifications…………………..7-8
Recommendations ………………………………....9
Conclusions ………………………………………….10
Reference …………………………………………….11
 INTRODUCTION
Finance is the lifeblood of business concern, because it is interlinked with all activities
performed by the business concern. In a human body, if blood circulation is not proper, body
function will stop. Similarly, if the finance not being properly arranged, the business system will
stop. Arrangement of the required finance to each department of business concern is highly a
complex one and it needs careful decision. Quantum of finance may be depending upon the
nature and situation of the business concern. But, the requirement of the finance may be broadly
classified into two parts:
Long-term Financial Requirements or Fixed Capital Requirement
Financial requirement of the business differs from firm to firm and the nature of the requirements
on the basis of terms or period of financial requirement; it may be long term and short-term
financial requirements.
Long-term financial requirement means the finance needed to acquire land and building for
business concern, purchase of plant and machinery and other fixed expenditure. Long term
financial requirement is also called as fixed capital requirements. Fixed capital is the capital,
which is used to purchase the fixed assets of the firms such as land and building, furniture and
fittings, plant and machinery, etc. Hence, it is also called a capital expenditure.
Short-term Financial Requirements or Working Capital Requirement
Apart from the capital expenditure of the firms, the firms should need certain expenditure like
procurement of raw materials, payment of wages, day-to-day expenditures, etc. This kind of
expenditure is to meet with the help of short-term financial requirements which will meet the
operational expenditure of the firms. Short-term financial requirements are popularly known as
working capital. (C.Paramasivan, Financial Management) (Page-25)
http://vcmdrp.tums.ac.ir/files/financial/istgahe_mali/moton_english/financial_management_%5B
www.accfile.com%5D.pdf
LOAN FINANCING
Loan financing is the important mode of finance raised by the company. Loan finance maybe
divided into two types:
(a) Long-Term Sources
(b) Short-Term Sources
Loan finance can be raised through the following important institutions.
Commercial Banks Development Banks Specialist Institutions
Loan Financing
Institutions

Commercial Banks Development Banks Specialist Institutions

Short-term Long-term Direct Indirect Domestic Foreign

Advance Loans Finance Finance Finance Currency
Finance
1
Financial Institutions
With the effect of the industrial revaluation, the government established nationwide and state
wise financial industries to provide long-term financial assistance to industrial concerns in the
country. Financial institutions play a key role in the field of industrial development and they are
meeting the financial requirements of the business concern. DBBL, FSIB, CSE, DSE are the
famous financial institutions in the country. Bangladesh bank is the central bank in Bangladesh.
Commercial Banks
Commercial Banks normally provide short-term finance which is repayable within a year.
The major finance of commercial banks is as follows:
Short-term advance: Commercial banks provide advance to their customers with or without
securities. It is one of the most common and widely used short-term sources of finance, which
are needed to meet the working capital requirement of the company.
It is a cheap source of finance, which is in the form of pledge, mortgage, and hypothecation and
bills discounted and rediscounted.
Short-term Loans
Commercial banks also provide loans to the business concern to meet the short-term financial
requirements. When a bank makes an advance in lump sum against some security it is termed as
loan. Loan may be in the following form:
(a) Cash credit: A cash credit is an arrangement by which a bank allows his customer to borrow
money up to certain limit against the security of the commodity.
(b) Overdraft: Overdraft is an arrangement with a bank by which a current account holder is
allowed to withdraw more than the balance to his credit up to a certain limit without any
securities.
Development Banks
Development banks were established mainly for the purpose of promotion and development the
industrial sector in the country. Presently, large numbers of development banks are functioning
with multidimensional activities. Development banks are also called as financial institutions or
statutory financial institutions or statutory non-banking institutions.
Development banks provide two important types of finance:
(a) Direct Finance
(b) Indirect Finance/Refinance
Presently the commercial banks are providing all kinds of financial services including
development-banking services. And also nowadays development banks and specialized financial
institutions are providing all kinds of financial services including commercial banking services.
Diversified and global financial services are unavoidable to the present day economics. Hence,
we can classify the financial institutions only by the structure and set up and not by the services
provided by them. (C.Paramasivan, Financial Management) (Page 37-38)
http://vcmdrp.tums.ac.ir/files/financial/istgahe_mali/moton_english/financial_management_%5B
www.accfile.com%5D.pdf
Government debt in Bangladesh consists of domestic and external debt. External Debt is
directly linked to borrowing from bilateral and multilateral institutions for project funding
through the Annual Development Programmers (ADP) and budget support systems. Domestic
borrowing is generated for financing segments of the budget deficit in addition to intra-year cash
flow management. In general, external borrowing is applied to long term commitments while
domestic borrowing is required for short, medium and long term commitments.

2
The gap between the revenue and the expenditure is mostly financed through the borrowing.
Against the deficit of Tk. 86657 crore in budget for FY 2015-16, the targeted borrowing is 80857
crore. Against the deficit of Tk. 67552 crore in budget for FY 2014-15, the targeted borrowing
was Tk. 61346 crore. In FY 2013-14, the target of borrowing was Tk. 48362 crore where the
revised debt was Tk. 53595 crore. The amount of debt was Tk. 39005 crore, Tk. 41868 crore and
Tk. 33218 crore in FY 2012-13, FY 2011-12 and FY 2010-11 respectively. In the last five fiscal
years from FY 2010-11 to FY 2014-15, the borrowing has increased by 103.35 percent.
Financing of budget deficit in July-May period of FY 2014-15 stood higher at Tk. 33883.09
crore compared to Tk. 27379.43 crore during the corresponding period of FY 2014-14,
representing an increase of 23.8 percent. An obligation or liability to pay later arising from the
government borrowing in each year or budget financing is known as debt.

The domestic resources are always considered as key source of the government for deficit
financing. In recent times, the government finances the lion’s share of the deficit from the
domestic source especially from the banks. Total domestic financing has been showing an
increasing trend since FY 2009-10 because of increase in deficit. Domestic borrowing in FY
2009-10 was Tk.7880.14 crore and became Tk. 25597.86 crore in FY 2012-13 and Tk. 21979.52
crore in FY 2013-14 and 19409.26 crore in FY 2014-15 (July-May). The budgetary target set for
FY 2015-16 is Tk. 56523 crore. The government borrows from two domestic sources: banking
system and the non- banking system, while the borrowing from banking sector is decreasing in
recent times. Government borrowed Tk. 6627.80 in FY 2013-14 whereas the amount was Tk.
17873 crore and Tk. 18875 crore in FY 2012-13 and FY 2011-12 respectively. Government
borrowing from banking system has become negative (Tk. -11660.30 crore) in FY 2014-15
(July-May).

External assistance has played a vital role in the economic development of Bangladesh assisting
in bridging the internal gap (savings-investment gap) and external gap (export-import gap).
Borrowing from the foreign debt partner is much lower than the domestic one but the
dependency is high. In FY 2014-15 (July-May), net external financing has stood at Tk. 14473.84
crore. In FY 2013-14, the total external financing were Tk. 14224.04 crore where it was Tk.
15080 crore in FY 2012-13. Outstanding external debt stood at USD 27036 million in FY 2013-
14 which was 24907 million in FY 2012-13. From FY 2002-03 to FY 2006-07, the external debt
increased at an annual rate of 6.37 percent, then deceased to 2.93 percent for the period FY 2007-
08 and FY 2008-09 and again increased to 3.58 percent for the period from FY 2009-10 to FY
2013-14. The fluctuation in the rate of growth in external debt arouse from political unrest in
different time and also from the diplomatic tactics. (Ebney Ayaj Rana, 2015)
http://www.unnayan.org/reports/meu/MEU_September_2015/MEU_September_2015.pdf

Bibliography
C.Paramasivan, T. Financial Management. New age international publishers.

C.Paramasivan, T. Financial Management. new age international publishers.

Ebney Ayaj Rana, A. F. (2015). Bangladesh Economic Update Volume 6, No. 08, September 2015 (P 6-9).
UNNAYAN ONNESHAN.

3
 BACKGROUND
During recent decades, the provision of microfinance services to poor families and micro-
entrepreneurs has evolved to become a global industry. Until recently, donations and subsidies
have been the main source of funding for microfinance institutions (MFIs). Lately, however, the
growth of the industry and the pressure by donors toward financial sustainability has pushed
MFIs to turn to international capital markets. (Roy Mersland, 04 November 2017.)
https://www.researchgate.net/publication/264343098_International_Debt_Financing_and_Perfor
mance_of_Microfinance_Institutions
Advantages of Debt Financing
The first advantage is maintenance of complete control over the business. The lender charges a
company interest for the use of a loan, but the lender does not have the right to say how a
company should manage its business. The ownership of the business stays completely in the
hands of the corporate directors and shareholders. This also means that lenders will not be
entitled to any of the profits that companies make from the business; the borrowing company is
merely required to repay the loan within the fixed time period.
The second advantage of debt financing is related to loan repayment interest. Companies can
deduct their interest payments (but not the principal repayments) as a business expense. The
interest rate which a company pays is usually based on the prime interest rate, and the interest
that the company has to pay on a company loan is tax-deductible.
This means that debt financing covers up part of a company’s business income from taxes and
reduces the company’s tax liability.
The third advantage to debt financing is credit maintenance. Continuity of debt borrowing can
help to establish a company’s record of creditworthiness. This will prove beneficial in the future
when a company seeks to obtain bank loans and to achieve competitive company insurance rates
from banks.

Disadvantages of Debt Financing

The first major disadvantage of debt financing is that companies need to pay back not only the
principal of the loans, but also the interest, which may create a financial burden. This financial
obligation must be treated as a liability on a company’s statement of financial position. Since a
company will often choose to borrow funds to pay for its business operations,

The company may end up committing itself to large business expenses, thereby forcing it to
transfer its holding rights to another company. The company may also be under pressure to repay
its loans with cash that it badly needs for some other aspects of its business, and the company’s
business will suffer as a consequence.
The second disadvantage of company financing concerns the process of securing a loan. If
companies borrow from banks or other financial companies, they will often be required to pledge
company properties as collateral to secure the loan. This means that if a company does not repay
its loans, then the lender can take the properties and sell them on the market in order to recover
the value of the loan obligation. Thus, if a company pledges its business assets as collateral for
the loans, and it is unable to pay back its creditors, then the company may lose important
corporate assets. (Dr. Fong Chun Cheong)
http://www.hkiaat.org/e-newsletter/Apr-15/technical_article/PBEII.pdf

4
Bangladesh’s risks of external debt distress and overall debt distress continue to be assessed as
low. The FY17 fiscal deficit remains well below the 5 percent of GDP budget target. Spending
control and slower implementation of development projects more than compensated for revenue
underperformance. The issuance of National Savings Certificates (NSCs) remains high. Over the
medium term, debt ratios are projected to remain on a sustainable path, assuming continued
spending restraint, with the deficit used to finance productive investment. Boosting budget
revenue is the key to creating fiscal space for diversification and growth. The authorities are
delaying the implementation of the VAT reform further by two years. Any additional costs from
spending pressures ahead of the parliamentary elections and from the Rohingya refugees remain
key risks. According to (Fund, May 10, 2018)
https://www.imf.org/external/pubs/ft/dsa/pdf/2018/dsacr18158.pdf

Model Specification
Public Debt Model: Total debt of government = F (Consumption, Investment, Tax Revenue,
Subsidies, Net Export, Reserve, Manufacturing)
Econometric Expression:
𝑇𝐷= 𝛼0+𝛼1𝐶𝑜𝑛+𝛼2𝑀𝑎𝑛𝑓+ 𝛼3𝐼𝑛𝑣+ 𝛼4𝑇𝑅+ 𝛼5𝑆𝑢𝑏+𝛼6𝑁𝑒𝑥+𝛼7𝑆𝑡𝑜𝑐𝑘+𝜇
Where,
TD = Total Public Debt Burden
CON = Total Consumption
MANF = Manufacturing Sector Growth
INV = Investment
TR = Tax Revenue
SUB = Subsidies
NEX = Net export
STOCK = Stock of Government Reserve
All variables, both dependent and independent, are as percentage of GDP.
Growth Model:
GDP growth = F (Domestic debt as percentage of GDP, External Debt as percentage of GDP)
𝐺𝑅𝑂= 𝛼0+ 𝛼1𝐷𝐷+ 𝛼2 𝐸𝐷+ 𝜇
Where,
GRO = Growth rate of GDP in current price
DD = Domestic Debt as percentage of GDP in current price

5
ED = External Debt as percentage of GDP in current price
(Md. Hashibul Hassan, 26 November 2017)
https://www.researchgate.net/profile/Md_Hassan17/publication/255725380_Public_Debt_Burde
n_and_Economic_Growth_of_Bangladesh_A_VAR_Approach/links/5a1a39a90f7e9be37f9a5ecf
/Public-Debt-Burden-and-Economic-Growth-of-Bangladesh-A-VAR-
Approach.pdf?origin=publication_detail
Government debt in Bangladesh consists of domestic and external debt. External Debt is
directly linked to borrowing from bilateral and multilateral institutions for project funding
through the Annual Development Programmers (ADP) and budget support systems. Domestic
borrowing is generated for financing segments of the budget deficit in addition to intra-year cash
flow management. In general, external borrowing is applied to long term commitments while
domestic borrowing is required for short, medium and long term commitments. (Ebney Ayaj
Rana, 2015)
http://www.unnayan.org/reports/meu/MEU_September_2015/MEU_September_2015.pdf

Bibliography
Dr. Fong Chun Cheong, S. S. (n.d.). Equity Financing and Debt Financing (Relevant to PBE Paper II –
Management Accounting and Finance).

Ebney Ayaj Rana, A. F. (2015). Bangladesh Economic Update Volume 6, No. 08, September 2015 (P 6-9).
UNNAYAN ONNESHAN.

Fund, I. M. (May 10, 2018). BANGLADESH STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION DEBT
SUSTAINABILITY ANALYSIS May 10, 2018.

Md. Hashibul Hassan, T. A. (26 November 2017). Impact of Public Debt Burden on Economic Growth:
Evidence from Bangladesh. 26 November 2017.

Roy Mersland, L. U. (04 November 2017.). International Debt Financing and Performance of Microfi
nance Institutions1, 04 November 2017.

6
 Problems Identifications
Debt financing is the most important source of financing for government and other corporations.
A corporation needs a lot of money as capital to run their business. For that they take loans. In
Bangladesh debt financing faces a lot of problems. Some of the problems are described below:
High rate of interest: according to tradingeconomics.com the benchmark interest rate in
Bangladesh was last recorded at 6 percent. Interest Rate in Bangladesh averaged 7.09 percent
from 2008 until 2018, reaching an all time high of 8.75 percent in September of 2008 and a
record low of 4.50 percent in October of 2009.
https://tradingeconomics.com/bangladesh/interest-rate

Increasing Budget Deficit: The overall budget deficit has been estimated at Tk. 112,276 crore
in FY 2017-18. (Update, September 2017) The deficit of Tk. 86657 crore in budget for FY 2015-
16, the deficit of Tk. 67552 crore in budget for FY 2014-15, In FY 2013-14, the target of
borrowing was Tk. 48362 crore where the revised debt was Tk. 53595 crore. The amount of debt
was Tk. 39005 crore, Tk. 41868 crore and Tk. 33218 crore in FY 2012-13, FY 2011-12 and FY
2010-11 respectively. In the last five fiscal years from FY 2010-11 to FY 2014-15, the
borrowing has increased by 103.35 percent. Financing of budget deficit in July-May period of
FY 2014-15 stood higher at Tk. 33883.09 crore compared to Tk. 27379.43 crore during the
corresponding period of FY 2014-14, representing an increase of 23.8 percent. (Ebney Ayaj
Rana, 2015). For this budget deficit Bangladesh needs help from internal and external sources
and it’s hard to collect this huge amount of money for that is the major problem.
http://www.unnayan.org/reports/meu/MEU_September_2015/MEU_September_2015.pdf
Increasing interest expenses for government: In budget for FY 2015-16, the targeted
borrowing is 80857 crore. For FY 2014-15, the targeted borrowing was Tk. 61346 crore. In FY
2013-14, the target of borrowing was Tk. 48362 crore where the revised debt was Tk. 53595
crore. The amount of debt was Tk. 39005 crore, Tk. 41868 crore and Tk. 33218 crore in FY
2012-13, FY 2011-12 and FY 2010-11 respectively. (Ebney Ayaj Rana, 2015). For these huge
amounts of debt Bangladesh is paying a lot of money as interest and its increasing govt.
expenses.
http://www.unnayan.org/reports/meu/MEU_September_2015/MEU_September_2015.pdf
Lack of money in Banks: The banks of Bangladesh have a common problem and its liquidity
problem.

Expenses on external debt: Borrowing from the foreign debt partner is much lower than the
domestic one but the dependency is high. The outstanding external debt, which is currently 12
percent of GDP in the country, has exhibited a significant increase in the previous fiscal year.
Statistics from the Economic Relations Divisions of the Ministry of Finance demonstrate that
year-end outstanding external debt increased to USD 26305.71 million in FY 2015-16 from USD
23901 million in FY 2014-15. The interest on this increases expense on external debt. (Update,
September 2017)
https://www.unnayan.org/reports/meu/September_2017/Full%20Report_MEU_September_2017
_Debt.pdf

7
The above was given for the long term debt financing. As there are two types of debt financing
the problems of short term debt financing are given below.
For government: Government issues bonds for financing in low interest. For that some of
investors don’t want to invest in govt. bonds. That’s why government bonds face these kinds of
problems.
High interest rate: Public has to pay high interest on short term debt.
Liquidity problem: Sometimes banks can’t give money to the public for this liquidity problem.
Lack of trusty: Sometimes short term debt financing has no strong documents. For that the
investors don’t want to invest money.
Lack of information: Some persons take short term loans to fill their personal needs. For that
the invested money becomes unproductive.
Lack of advice: Some peoples don’t understand how to take debt finance. For that they don’t do
debt financing for lack of knowledge.
Financial Support of government: Banks need help of government in financing. In Bangladesh
government is not that much helpful for banks. For that most of the banks are suffering in need
of money.

Bibliography

Ebney Ayaj Rana, A. F. (2015). Bangladesh Economic Update Volume 6, No. 08, September 2015 (P 6-9).
UNNAYAN ONNESHAN.

https://tradingeconomics.com/bangladesh/external-debt. (2018). Bangladesh Outstanding External

Debt.

Update, B. E. ( September 2017). Debt and Deficit: Trends and Challenges Volume 8, No. 9, September
2017.

8
 RECOMMENDATION
If there is a problem it also has a solution. We have discussed the problem of debt financing in
Bangladesh. So the recommendations of the problems are given below.
1) Government has to maintain minimum rate of interest. So that public can pay the interest
without problems.
2) Government has to control deficit in budget. If government take steps against the
corruption, it will be easy for government to control the deficit in budget.
3) Bangladesh government has to maintain their money. Unnecessary expenses should be
avoided. The wasting of money through corrupted people should be controlled. By this
way Bangladesh don’t have to take huge loans and the interest expenses will be decrease.
4) Banks of Bangladesh must need to solve their liquidity problem. If it become easy to do
debt financing, public will willingly take loans and feel free to do their businesses.
5) Bangladesh is a small country for that its maximum loans are come from external
sources. For that Bangladesh is paying huge amount of money to foreign institutes as
interest. The government of Bangladesh has to try hard to not take much money from
foreign institutions. By this our countries money will stay in our country and extra
expenses will be decreased.
6) Bangladesh government bonds sale can be increased by giving more facilities. As it has
low interest rate public don’t want to buy it. If it gives more facilities than government
bond will be more attractive for publics.
7) Some institutions take more interest in short term loans. For that public faces various
problems. Government has to take step against this. So that the small entrepreneurs will
able to take help of short term debt financing and do their businesses.
8) Lack of trusty is another problem in debt financing. For this problem strong documents
should be prepaid so that investors can get privacy of their money.
9) Banks and other institutions should pay attention in collecting information. They have to
look for the uses of the money that they have given or going to give as loan.
10) Government has to control all banks and their interest rates. Needs of public should
notice first and give them more facilities in debt financing.
11) Providing early debt advice is most effective in today’s corporate world. It help to know
about the debt financing and gives various information.
12) Government should support banks with financial helps. Because banks are the main
source of financing for publics.

9
 CONCLUSION
Finance is related with selecting the source of money, collecting money and investing the money
for profit. In two types of financing debt financing is the source that means bringing money from
other institutions in two terms (short term and long term). In debt financing interest is the profit
of debt providers. Bangladesh is an industrial country. There are a lot of industries like
garments industries, telecom industries, ship industries etc. In this industries they needs huge
amount of money to maintain their business. For that they do debt financing. Bangladesh
government also does debt financing. Every year Bangladesh government makes a new budget
and according to budget the deficit stands more than government equity. For that government
takes loans from domestic and external sources and pay interests. Government also issue bonds
for financing. There are some methods to find the total debt of government. Debt financing has
some advantage and disadvantage. The biggest advantage is maintenance of complete control
over the business and one of the disadvantages is paying back the principal of the loans and also
the interest, which may create a financial burden. It also has some problems in debt financing
like high rate of interest, increasing interest expense, lack of money problem, lack of trusty, lack
of information, lack of advices etc. The recommendation stands against the problems. The
problems should be taken seriously and have to take steps to solve the problems.

10
 REFERENCES
http://vcmdrp.tums.ac.ir/files/financial/istgahe_mali/moton_english/financial_management_%5B
www.accfile.com%5D.pdf
http://www.unnayan.org/reports/meu/MEU_September_2015/MEU_September_2015.pdf
http://www.hkiaat.org/e-newsletter/Apr-15/technical_article/PBEII.pdf
https://www.imf.org/external/pubs/ft/dsa/pdf/2018/dsacr18158.pdf
https://www.researchgate.net/profile/Md_Hassan17/publication/255725380_Public_Debt_Burde
n_and_Economic_Growth_of_Bangladesh_A_VAR_Approach/links/5a1a39a90f7e9be37f9a5ecf
/Public-Debt-Burden-and-Economic-Growth-of-Bangladesh-A-VAR-
Approach.pdf?origin=publication_detail
https://www.unnayan.org/reports/meu/September_2017/Full%20Report_MEU_September_2017
_Debt.pdf

THANK YOU

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