TURMOIL IN THE FINANCIAL INSTITUTIONS OF BANGLADESH: A STUDY

IDENTIFYING CORE PROBLEMS

A dissertation

Submitted to Faculty of Business Studies (FBS)/ Department of BBA General, Bangladesh

University of Professionals in Partial fulfillment of the Requirements for the Degree of
Bachelor of Business Administration

Under the Supervision of

Mr. Mohammad Rajib Uddin

Associate Profession, Department of BBA General
Bangladesh University of Professionals

Submitted by

Nabeel Saad Fahim

Roll No: B 1506089
Registration No: 100101150089
Session: 2014-15

April 13, 2019

 I recommend that this report has been prepared under my supervision by

Nabeel Saad Fahim

Student ID: B 1506089
Registration No: 100101150089
Session: 2014-15

Titled

TURMOIL IN THE FINANCIAL INSTITUTIONS OF BANGLADESH: A STUDY

IDENTIFYING CORE PROBLEMS

be accepted in partial fulfillment of the requirements for the degree of Bachelor of Business
Administration under the Faculty of Business Studies, Bangladesh University of
Professionals

…………………………………….
Supervisor
Mohammad Rajib Uddin
MEng Mgmt (Aus), BEng (Computer) (Aus), Assistant Professor
Program Co-Ordinator, MBA (Professional)
Department of Business Administration- General
Faculty of Business Studies
Bangladesh University of Professionals

II
 DECLARATION OF AUTHORSHIP

I hereby declare that except where specific reference is made to the work of others, the contents
of this dissertation are original and have not been submitted in whole or in part for
consideration for any other degree or qualification in this, or any other University. This
dissertation is the result of my own work and includes nothing which is the outcome of work
done in collaboration, except where specifically indicated in the text.

Nabeel Saad Fahim

April 13, 2019

III
 LETTER OF TRANSMITTAL

April 13, 2019

Mohammad Rajib Uddin
Assistant Professor, Department of BBA (General)
Faculty of Business Studies (FBS)
Bangladesh University of Professionals (BUP)
Mirpur Cantonment, Dhaka 1216

Subject: Submission of the Internship Report.

Dear Sir,
With due respect, I want to submit the report that has been assigned to me as a requirement of
internship program for completing my undergraduate degree from Faculty of Business Studies
(FBS), Bangladesh University of Professionals (BUP). I have prepared my internship report
on “Turmoil in the Financial Institutions of Bangladesh: A Study Identifying Core
Problems” which is being submitted along with this letter.

I would like to thank you for your valuable guidance and support while preparing this report.
I hope with great anticipation that you would be kind enough to accord your approval to this
report.

Sincerely yours,

Nabeel Saad Fahim

ID: 1506089
Batch: BBA-2015
Major in Finance
Department of Business Administration (General)
Faculty of Business Studies (FBS)
Bangladesh University of Professionals (BUP)

IV
 ACKNOWLEDGEMENT

First of all, I would like to express my gratitude to the Most Gracious, Almighty Allah for
giving me enough capabilities and sound health to finish this daunting task in time.

I must express my thank to Mr. Mohammad Rajib Uddin, my supervisor. Without his guidance
and support, I couldn’t have finished this dissertation. I am grateful for his wonderful support
throughout my internship, his encouragement & intensive scrutiny to make my dissertation
presentable.

I have had wonderful support from Union Capital Limited. During the two months I interned
in the company, under the care of my mentor Mr. Emran Hossain Talukder, I learned several
aspects of Corporate Finance Department. It’s thanks to his constant guidance that I could
gather both knowledge and hands-on experience that proved crucial for writing the report. He
was very meticulous and patient in explaining different systems & processes that comes up
while dealing with clients and Loan proposals. I am thankful for all the pains he took to support
my growth.

I am also very grateful to Mr. Chowdhury Manzoor Liaqat, MD and CEO (CC) of Union
Capital Limited who not only gave me a chance to intern at Union Capital Limited but also
helped me grow leadership skills. He encouraged me and provided me with vital resources.
His business ethics and moral approach towards solving problems were big inspirations behind
the undertaking of this dissertation.

Thanks also to my colleagues in Union Capital Limited and my classmates who always came
forward with open arms to provide any support they could whenever I asked of them. They
made the whole journey easier and comfortable.

And finally, I would like to thank my family who always had unconditional love and support
for me. I received tremendous amount of mental support from my family specially during the
last few days.

This report thus, is a work & contribution by all of my benefactors.

V
 EXECUTIVE SUMMARY

Non-performing loans (NPLs) is a worldwide issue which affects financial markets stability in
general and financial Institutions industry viability in particular. This study examines the
factors influencing non-performing loans in non-bank financial institutions (NBFIs) in
Bangladesh. Based on gaps in extant literature, four (4) independent variables comprising
standard of living, GDP growth rate of the country, Inflation rate and bank interest rates
(lending rate) are hypothesized to exert statistically significant influences on the dependent
variable, NPLs. A quantitative research approach comprising both descriptive and inferential
statistics was employed in this research. 80 respondents were sampled for this study employing
random sampling technique. Employing multivariate regression analysis using Microsoft
Excel software, the findings showed that out of the four (4) hypothesized relationships of the
research, two (3) were supported whilst the other two were not. In particular, it was shown that
GDP growth rate of the country and bank interest rates statistically influence non-performing
loans in NBFIs of Bangladesh. However, there was no enough evidence to support the claim
that standard of living and inflation rate can statistically influence non-performing loans in
commercial banks in Selangor. Several implications from the research were further discussed.

Keywords: non-performing loans, non-bank financial institutions

VI
 TABLE OF CONTENTS

Chapter 1: INTRODUCTION 1
1.1 Background of the study: 2
1.2 Problem Statement: 3
1.3 Research Objective: 4
1.4 Research Questions: 5
1.5 Rationale of the Study: 5
1.6 Proposed Framework: 6
1.7 Hypothesis of the Study: 6
1.8 Limitations of the Study: 7
1.9 Operational Definitions & Theoretical Discussions: 7
1.10 Report Preview: 11
Chapter 2: ORGANIZATION REVIEW 12
2.1 Historical Background of the company: 13
2.2 Management Team: 13
2.3 Legal Structure and Ownership: 14
2.4 Product and Services of the Company: 14
2.4.1 Financing and Investment Products: 15
2.4.2 Deposit Products: 15
2.4.3 Capital Market Services: 15
2.5 Mission Statement: 15
Chapter 3: LITERATURE REVIEW 18
3.1 Literature Review based on Thematic Aspect of Research: 19
3.2 Literature Review based on Chronological Development
of Research: 20
3.3 Literature Review based on Methodological Aspects: 21
3.4 Summary of the Findings of Literature Review: 23
3.5 Research Gap based on Literature Review: 24
Chapter 4: METHODOLOGY 25
4.1 Study Area & Target Population: 26
4.2 Data & List of Variable: 26
4.2.1 Data 26
4.2.2 List of variables 26
4.3 Questionnaire Design: 27
4.4 Research Design: 27
4.5 Sample size Determination: 28
4.6 Analytical Framework: 28

VII
 4.7 Research Method: 29
4.8 Demography of Respondents: 29
Chapter 5: DATA ANALYSIS 30
5.1 Descriptive Analysis: 31
5.1.1 NPL Outlook of NBFIs 31
5.1.2 Variables 34
5.2 Inferential Analysis: 36
5.2.1 Correlation Analysis 36
5.2.1 Multivariate Linear Regression Analysis 37
5.3 Summary of Result: 39
Chapter 6: DISCUSSIONS & SUMMARY OF FINDINGS 40
6.1 Result of the Correlation and Multiple Regression
Analysis 41
6.2 Implication of the study 41
Chapter 7: CONCLUSION & POLICY IMPLICATIONS 43
7.1 Conclusion: 44
7.2 Policy Implications: 44
7.3 Future Research Direction: 45

VIII
 LIST OF TABLES

Table 2. 1: Management Team of Union Capital Limited 14

Table 2.4. 1: Financing and Investment Products 15
Table 2.4. 2: Deposit Products 15
Table 2.4. 3: Capital Market Services 15
Table 3. 1: Literature Review Findings Summary 22
Table 4. 1: Adaption of Scale 26
Table 4. 2: Survey Questionnaire 26
Table 5. 1: Correlation Measures of Variables 35
Table 5. 2: Regression Model Summary 36
Table 5. 3: ANOVA coefficient Summary 36
Table 5. 4: Significance Level of the independent variables 37
Table 5. 5: Hypothesis Testing and Result 38

LIST OF CHARTS

Chart 5. 1: NBFI Market Expansion 30

Chart 5. 2: Branch Expansion of NBFIs in Bangladesh 31
Chart 5. 3: NBFI Investment PIE 31
Chart 5. 4: NPL Movement in regard to NBFI 32
Chart 5. 5: Comparative Position of NBFIs taken as sample 32
Chart 5. 6: Decreasing Measures of LSM 33
Chart 5. 7: Increasing Measures of LSM 33
Chart 5. 8: GDP Growth Rate of Bangladesh 34
Chart 5. 9: Bank Lending Rate (Average and Base rate as suggested by
Bangladesh Bank) 34
Chart 5. 10: Inflation of consumer goods 35

IX
 LIST OF FIGURES
Figure 1. 1: Framework of the research 6
Figure 4. 1: Analytical Framework 27
Figure 4. 2: Demography of Respondents 28

LIST OF ABBREVIATION

CEO Chief Executive Officer

CRO Chief Relationship Officer
CS Company Secretary
CIB Credit Information Bureau
EVP Executive Vice President
FI Financial Institution
GDP Gross Domestic Product
IPO Initial Public Offering
ICC Internal Credit Control
LSM Living Standard Measures
MD Managing Director
MSS Monthly Saving Scheme
NCB Nationalized Commercial Banks
NBFI Non-Bank Financial Institutions
NL Non-performing Loan
PCB Private Commercial Bank
SME Small & Medium Enterprise
SBC Soft Budget Constraints
SMA Special Mention Account
SOB State Owned Banks
SOE State Owned Enterprise
SS Sub-Standard
UCL Union Capital Limited
US United States

X
Chapter 1 : INTRODUCTION

1|Page
1.1 Background of the study:

Bangladesh is a developing country. Banking sector of the country plays the pivotal role in the
economic development and can well be said to be a barometer of its economic prosperity. Well-
developed banking system is indispensable for modern trade and commerce. Now-a-days,
banks not only act as custodian of public money but also are indispensable as vital agent for
maintenance of sound financial position of a country.

Nationalized Commercial Banks (NCBs) were established in Bangladesh in 1972 through

amalgamation of twelve commercial banks that were operating in pre-independent Bangladesh
allowing the poor to access fund, reducing capital flight to foreign countries, and increasing
domestic investment were some of the basic objective of this nationalization. That means a
society with wealth distributed as equitably as possible. But with time difference those banks
changed their policies and strategies, which were not fulfilling the class banking policies of
the government. On an evaluation of the activities of commercial banks, it has been observed
that the progress made by the banking industry since nationalization was not impressive. The
nationalized banks could not play the due role in the implementation of government programs
and policies. Hence, a trend of de-nationalization of banks started from mid-80’s.

In the meantime, the policy of the government towards banking industry regarding economic
management has changed since 1976. That year private sector had been entrusted to play a
bigger role in the economy than before. Accordingly, in order to provide more credit to local
investors the private sector banking had been introduced. Government decided to allow setting
up of local Private Commercial Banks (PCB) in addition to Nationalized Commercial Banks
(NCB) operating in the country. At present there are almost 59 banks and 33 Non-bank
Financial Institutions (NBFIs) operating in the countries with branches spread country wide.

However, the banking sectors in the country is not doing well. According to recent
Bangladesh Bank data, the amount of NPLs stood at Tk 99,370 crore, or 11.45% of
disbursed loans as of September, 2018. Continuation of such poor performance is a
threat to the economy where businesses still rely on money market for funds and banks
are deemed the safest place to keep individual’s savings. This report will focus on
identifying the factors that are responsible for performance declination in the banking
2|Page
sectors of Bangladesh and will forward the discussion towards consequences of such
prolonged trend and also how the suggestions from expert might have clues towards the
way out.

1.2 Problem Statement:

Banking sectors till now is the most known and proven means of financial inclusion. The
impact of banking activities is significant in driving a country’s economic growth. Banks
circulate money in the economy by providing fund to businesses and enhancing deposits made
by individuals. With advent of rural banking the scope of financial inclusion has reached new
heights as more and more people are coming under the banking systems. Over the years banks
with micro credit features have provided means to enable women entrepreneurs in the rural
household and thereby boosting economic and social progression.

Banking system is very crucial for any country as ineffective banking systems fails to provide
support to a growing economy. And it may as well hinder the growth. Historically speaking,
for banking systems to flourish, the citizens should have a strong base of trust on the banking
systems of the country. In regard to Bangladesh, with growing spending and consumption
among the population, the demand and dependence on banks are rising. Thus, giving
opportunities for banks to flourish and encompass more people in its radar. In contrast however,
lies the reality that still 70% of the people in the country are outside banking facilities. This
come with no surprise given the past performance of some banks including some state-owned
involved in Large-loan scandals. These default loan incidents have increased distrust even
more leading fewer deposits kept in the Banks. The impact is more severe for Non-bank
financial Institutions in the country who are operating in relatively smaller scale. The problem
poses a threat to the entire economy as businesses can’t flourish without improved banking
system and without industrialization the economy will remain dependent on garments export
leading to the continuation of poor quality of life.

Economists and bankers assume the major reason behind default loan is the distribution of
credit on political consideration, which made it quite difficult to recover the credits. Besides
3|Page
political affiliation, experts also blamed the culture of impunity, abuse of power in loan
disbursement, weakness of existing laws and lack of technical expertise that help defaulters
swindle money from banks. Management is also a crucial factor as it’s found that in most cases
of default loan, there is some trace of power abuse by chairman, Managing director or CEO of
the banks. As the director of a private bank cannot take loan from his bank, he sets up a
syndicate with directors from another bank and they grant each other big amounts of loan
through their banks. Rules and regulations are flouted and they take the loans to be defaulters.
They also siphon off the money, according to bankers. Corruption in approving loans is another
factor. However, it may as will be that behind the behavioral tendency lies dormant the fact,
with high interest rate, the payment amount accumulates too much burden on the customer
making him/her unable or unwilling to repay the money.

Industry Experts and Bankers express their concern about the financial health of the banks &
while they indicate possible factors responsible for such case, there lacks significant research
work linking these factors to the percentage of non-performing loan or default loan nature of
the banks. Thus, lacks the credibility of such opinion being actually reason behind the problem.
This study aims to explore this gap. By identifying financial records of seven Non-Bank
Financial Institutions (NBFI) of Bangladesh for previous 5 years and their NPL values and
comparing them against factors linked macro variables this paper will identify the actual
factors and whether interest rate truly invites defaulting behavior

1.3 Research Objective:

Broad Objective: The objectives of this paper is to identify and review the economic factors
that contribute to non-performing loan, to expound the impact of nonperforming loan on the
performance of financial institutions.

Specific Objective:

• To identify the problems based on hypothesis testing.

• To measure impact of inflation on NPL.

4|Page
 • To suggest improvement steps based on expert recommendation & examples of related
studies

1.4 Research Questions:

This report will focus on answering questions that would help develop an understanding of
economic factors that contribute to the highest portion of non-performing loan (NPL) and also
their impacts on financial performance of financial institutions in Bangladesh.

Thus, the questions that requires answers are:

• what is the relationship between bank customers’ standard of living and non-
performing loan in Bangladesh context?
• what is the relationship between bank lending rate and non-performing loan in the
Bangladesh context?
• what is the relationship between the Bangladesh GDP growth rate and non-performing
loan in the Bangladesh context? and
• what is the relationship between inflation rate and non-performing loan in the
Bangladesh context?

1.5 Rationale of the Study:

Default loans was the most talked-about issue in the country’s banking sector in 2018. It is
slated to reach new heights as default loans are nearly hitting Tk 100,000 crore for the first
time in the country’s 48-year history. The non-performing loans (NPLs) in the sector had
witnessed a whopping 300% rise by September 2018. According to recent Bangladesh Bank
data, the amount of NPLs stood at Tk 99,370 crore, or 11.45% of disbursed loans as of
September, 2018. The amount of bad loans has been increasing every year. In 2010, it
increased to Tk 22,563 crore, which was 7.27% of the total disbursed loans. In 2011,
bad loans increased to Tk 25,073 crore, and stood at Tk 42,725 crore in 2012, dropping

5|Page
slightly to Tk 40,583 crore in 2013, but continued to grow again until 2014. In 2014,
the default loan amount increased to Tk 57,290 crore, or 11.60% of the total disbursed
loans. In 2015, bad loans again dropped slightly to Tk 54,708crore, but increased to Tk
65,731 crore in 2016, grew rapidly to Tk 80,307.21crore in 2017, and finally, reached
Tk 99,370.92 crore in 2018. Andrew Crockett (2003) argues that initially non-
performing loans (NPL) may not seem to have a serious negative effect. Banks remain
liquid, and depositors retain their confidence in the system. Over time, however, the
size of the problem is growing, especially if banks are allowed to accrue interest on
their non-performing loan (NPL).

1.6 Proposed Framework:

Customer’s Standard of Living

H1
GDP growth rate of the H2 Non-performing Loan
country to the NBFIs in
H3 Bangladesh
Bank Interest Rate H4
Inflation
Figure 1. 1: Framework of the research

1.7 Hypothesis of the Study:

This paper shows standards deviation of NPL as a function of Customer’s Standard of Living,
GDP growth rate of the country, Bank Lending Rate & Inflation. Symbolically it can be
expressed as:
NPL = f (GDP growth rate, Bank Lending rate, Standard of Living, Inflation Rate)
As this paper uses multiple linear regression there will be 4 independent variables. As
regression statistics will also use intercept for testing statistical significance so total four
coefficients will be tested for hypothesis. So, the four null hypotheses are:
6|Page
H1: Customer’s standard of living will have a direct significant influence on non-performing
loans to NBFIs in Bangladesh

H2: Bank lending rate will have a direct significant influence on non-performing loans to
NBFIs in Bangladesh

H3: GDP growth rate of the country will have a direct significant influence on non-performing
loans to NBFIs in Bangladesh

H4: Inflation rate will have a direct significant influence on non-performing loans to NBFIs in
Bangladesh

1.8 Limitations of the Study:

The study has been conducted on a very small sample comprising random seven NBFIs of
the country. And thus, the results are not 100 percent representative rather the confidence
level is around 27% so the implications of the result and survey is not very accurate. The
other shortcomings were there like:

• Limited skill and knowledge about statistical Analysis of the researcher

• Limited amount of Literature Review in the research
• Small Survey respondent
• Negligence of other micro variable, firm specific variables and management factors in
the research

1.9 Operational Definitions & Theoretical Discussions:

1.6.1 Non-performing Loan: Non-performing loans (NPLs) have been widely used as a
measure of the asset quality among lending institutions and are often associated with failures
and financial crises in both the developed and developing world. All banks need a loan
classification or grading system to facilitate the monitoring and management of credit risk in
7|Page
their loan portfolios. A bank’s loan portfolio can be classified into five major categories namely,
in order of deteriorating status, pass, special mention, substandard, doubtful and loss. Empirical
studies have identified a mixture of macro-economic and institutional factors that affect NPLs.
GDP growth, inflation and interest rates are common macro-economic factors, while size and
lending policy are micro-economic variables (Greenidge and Grosvenor, 2010).

1.6.2 Categories of Loans and Advances and Objective Criteria:

1) Past Due/Over Due:

• Any Continuous Loan if not repaid/renewed within the fixed expiry date for repayment
or after the demand by the bank will be treated as past due/overdue from the following
day of the expiry date.
• Any Demand Loan if not repaid within the fixed expiry date for repayment or after the
demand by the bank will be treated as past due/overdue from the following day of the
expiry date.
• In case of any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid
within the fixed expiry date, the amount of unpaid installment(s) will be treated as past
due/overdue from the following day of the expiry date.
• The Short-term Agricultural and Micro-Credit if not repaid within the fixed expiry date
for repayment will be considered past due/overdue after 6 months of the expiry date.

2) All unclassified loans other than Special Mention Account (SMA) will be treated as
Standard.

3) A Continuous loan, Demand loan or a Term Loan which will remain overdue for a period
of 02 (two) months or more, will be put into the "Special Mention Account (SMA)". Loans in
the "Special Mention Account (SMA)" will have to be reported to the Credit Information
Bureau (CIB) of Bangladesh Bank.

4) Loans except Short-term Agricultural & Micro-Credit in the "Special Mention Account"
and “Sub-Standard” will not be treated as defaulted loan for the purpose of section 27KaKa(3)
[read with section 5(GaGa)] of the Banking Companies Act, 1991.

8|Page
5) Any continuous loan will be classified as:

• ‘Sub-standard’ if it is past due/overdue for 03 (three) months or beyond but less than
06 (six) months.
• ‘Doubtful’ if it is past due/overdue for 06 (six) months or beyond but less than 09(nine)
months
• ‘Bad/Loss’ if it is past due/overdue for 09 (nine) months or beyond.

6) Any Demand Loan will be classified as:

• ‘Sub-standard’ if it remains past due/overdue for 03 (three) months or beyond but not
over 06 (six) months from the date of expiry or claim by the bank or from the date of
creation of forced loan.
• ‘Doubtful’ if it remains past due/overdue for 06 (six) months or beyond but not over
09 (nine) months from the date of expiry or claim by the bank or from the date of
creation of forced loan.
• ‘Bad/Loss’ if it remains past due/overdue for 09 (nine) months or beyond from the date
of expiry or claim by the bank or from the date of creation of forced loan.

7) In case of any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid
within the due date, the amount of unpaid installment(s) will be termed as ‘past due or overdue
installment’ (Islam and Moral, 1999). In case of Fixed Term Loans: -

• If the amount of past due installment is equal to or more than the amount of
installment(s) due within 03 (three) months, the entire loan will be classified as ''Sub-
standard''.
• If the amount of past due installment is equal to or more than the amount of
installment(s) due within 06 (six) months, the entire loan will be classified as
‘Doubtful".
• If the amount of 'past due installment is equal to or more than the amount of
installment(s) due within 09 (nine) months, the entire loan will be classified as
''Bad/Loss''.

9|Page
8) The Short-term Agricultural and Micro-Credit will be considered irregular if not repaid
within the due date as stipulated in the loan agreement. If the said irregular status continues,
the credit will be classified as 'Substandard ' after a period of 12 months, as 'Doubtful' after a
period of 36 months and as 'Bad/Loss' after a period of 60 months from the stipulated due date
as per the loan agreement.

If any loan or part of it or accrued interest thereon to any person/organization of his/its own or
related concern remains ''Overdue'' for more than 06(six) months, the borrower availing of such
loan facility will be treated as Defaulted Borrower as per Section 5(GaGa) of the Banking
Companies Act, 1991.

1.6.3 Standard of Living: Based on gaps in literature, the research has hypothesized four (4)
variables that seem to influence non-performing loans. The first element is customer’s standard
of living. The standard of living has a direct effect to non-performing loan (NPL). The reason
underlays this argument is that nowadays, products such as electronic goods like Smartphones
– Samsung products such as Samsung Galaxy series, Note series, and Apple products like – I
Phone, I Pad, etc – are rampantly available and highly used in daily life. This phenomenon has
set off a continual upgrading of the function, usage, design of the products by the producers on
an annual basis to be launched in the following year as brand-new versions. As the result,
customers will keep purchasing the newest version of smartphones available in the market
every year.

This, the same time, will affect the customer’s financial management. This will also cause the
people to be unable to pay off loan interest to the FIs if they apply for a loan from the FIs to
do the purchase (Aro & Wilska, 2014).

1.6.4 Bank Interest Rate: Bank Interest rate can generally be defined as the profit of the bank
earned from the customers by borrowing the customers’ money. For instance, if ABC Bank
lend Sadik one lac taka with twenty percent interest. It means that Sadik has to return one lac

10 | P a g e
and twenty thousand takas to the bank. The twenty percent imposed on the loan principal is
called Bank interest rate.

Apart from the simple bank interest rate, there is also compound interest imposed by the bank
to the customers. Normally, compound interest rate is subject to customer who borrow a large
sum of money from the bank and the loan is over a long time period. For example, car loan
and housing loan. Furthermore, Bank interest rate can also be applied in the saving and
certificates of deposit. It is like when people put their money into saving accounts or certificate
of deposit, the bank will use the money to do investment to earn profit in the sense that the
bank is actually borrowing money from the customers to generate profit through investment.
Which is why the bank is giving some amount of interest to the accounts.

In addition, Bank interest rate can also be applied in the loans, mortgage and credit cards issued
by commercial bank. Usually, pressure on businessmen and households – comes from the
interest rate accruing in their loans, mortgage and credit cards. Looking into the commercial
loan itself, it is a common platform for a small company to pump in capital into their business
in order to generate profit and to spur company improvement and growth. For a household or
a consumer, it is very common to apply for car loans, credit cards and mortgage from
commercial banks – as this is the legal way for them to borrow money. Theoretically, if the
interest rates have decreased, the consumers will refinance their house to get a lower interest
rate on their mortgage loan, for more affordable housing payment (Feigenbaum, 2012).

1.10 Report Preview:

In the next chapter the research will delve into organizational review and literature review.
Next the methodology of the research will be explained followed by Data Analyses and
discussion of findings

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Chapter 2 : ORGANIZATION REVIEW

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2.1 Historical Background of the company:

UCL and its subsidiaries constitute one of the largest financial groups, which began its
activities more than 19 years ago. UCL’s predecessor, Peregrine Capital Limited was
established in 1988 based in Hong Kong. UCL is involved in a variety of financial and
nonbanking activities in Bangladesh. UCL operates through its 8 branch offices located in
Dhaka, Chittagong, Sylhet, Gazipur, Narsingdi and Bogra along with its subsidiaries namely
UniCap Securities Ltd. and UniCap Investments Ltd.

UCL’s policy is to provide its customers with comprehensive financial solutions, high-level
professional services, and a wide variety of products adapted to each customer’s needs. To
implement its strategy, UCL operates through different business lines, with each business line
providing financial services to a particular customer segment: Corporate Financial Services
including leasing and term finance to SMEs and large enterprises of different sectors, Capital
Market Services include issue management, share trading and portfolio management through
its subsidiaries and Retail Customer Services include deposit schemes and personal lending.
UCL is a publicly traded company listed on both the Dhaka and Chittagong Stock Exchange.
UCL is a highly focused business with strong management and a clearly defined business plan
creating value and delivering shareholder return from core operating business. UCL is a
diversified company that creates value and delivers shareholder returns from core operating
business. The focus, core competency and competitive advantage is driven by the team’s depth
of knowledge, experience and hands-on expertise.

2.2 Management Team:

Name Age With UCL Present Position

Chowdhury Manzoor Liaquat 51 Feb-18 Managing Director & CEO
Tauhidul Ashraf FCS 39 Aug-13 EVP, Head of Marketing & CS
Abdul Bareque 64 Nov-13 Head of ICC & CRO
A. N. M. Golam Shabbir 47 Dec-98 Senior Vice President
Fazle Karim Murad 44 Jun-00 Senior Vice President
Selim Khan Hindol 44 Jul-16 Vice President
Shaheen Mohammad Qumrul Hasan 44 Apr-17 Vice President
Tareq Ahmed Salah Uddin Khan 42 May-17 Vice President

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 Md. Mahfuzur Rahman 31 Oct-17 Vice President
Humayun Rashid 43 Jan-15 Assistant Vice President
Name Age With UCL Present Position
Shah Muhammad Azizul Haque 36 May-15 Assistant Vice President
Muhammad Shohidur Rahman 40 Mar-16 Assistant Vice President
Mahbub Alam 40 Oct-16 Assistant Vice President
Muhammad Salah Uddin 38 Aug-16 Assistant Vice President
Khandaker Muhammad Forhad Abedin 39 Aug-16 Assistant Vice President
Afrida Ahsan 35 Feb-16 Assistant Vice President
Md. Rakibul Islam 55 Aug-10 Senior Manager
Md. Moinul Islam Bhuiyan 37 Nov-06 Senior Manager
Mohammad Balayet Hossain 36 May-10 Senior Manager
Md. Sayful Islam 41 Jan-14 Senior Manager
Asif Raihan Chowdhury 32 Jan-14 Senior Manager
Md. Shariful Alam 33 Mar-16 Senior Manager
Deenesh Kumar Raha 35 Dec-13 Senior Manager
Mohammed Zakir Hossain 39 Nov-02 Senior Manager
Sk. Md. Rezwanul Haque 33 Aug-13 Manager
Mohammad Jahangir Alam Khan 40 Mar-11 Manager
Md. Abdul Bashed 41 Mar-11 Manager
S. M. Mehedi Hasan 30 Feb-10 Manager
A. B. M. Qamrul Hasan 39 May-17 Manager
Table 2. 1: Management Team of Union Capital Limited

2.3 Legal Structure and Ownership:

UCL is a financial services group operating in Bangladesh. UCL Group has two principal
subsidiaries: UniCap Securities Limited and UniCap Investments Limited. Both the
subsidiaries are providing capital market services while UCL is a non-banking financial
institution that provides comprehensive financial services. UCL’s ordinary shares are traded
on both the Dhaka and Chittagong Stock Exchange since 2007.

2.4 Product and Services of the Company:

Across the business group, it offers a complete range of financial services to help clients
achieve their goals. It provides strategic advice, lend money, raise capital, help manage funds
and extend supports, and hold leadership positions in all of the major business areas. As a full-
service financial institution, UCL Group offers tailored products and services to meet
appropriate and diverse needs of the customers, which include:
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2.4.1 Financing and Investment Products:

• Lease Finance • Corporate Finance • Student Finance

• Term Finance • Syndication Finance • Professionals Loan
• SME Finance • Apartment Finance • Venture Capital
• Project Finance • Bridge Finance • Real Estate Finance
• New Entrepreneur Finance • Car Finance • Unsecured Personal Loan
• Women Entrepreneur Finance • Construction & Renovation Finance
Table 2.4. 1: Financing and Investment Products

2.4.2 Deposit Products:

• Fixed Term Deposit • Millionaire Plus (MPlus) • Home Planning Deposit

• Monthly Income Deposit • Marriage Deposit • Education Deposit
• Periodic Income Deposit • Monthly Saving Scheme (MSS) • Triple Money Deposit
• Double Money Deposit • Cumulative Income Deposit • Profit First Deposit
• Widow / Senior Citizen Deposit • Women Entrepreneur Deposit
Table 2.4. 2: Deposit Products

2.4.3 Capital Market Services:

• IPO Management • Margin Loan • Corporate Restructuring

• Rights Issue Management • Pre-IPO Placement • Corporate Advisory Services
• Underwriting • Share Trading • Equity Investment
• Portfolio Management • Investment Management • Fund Raising
Table 2.4. 3: Capital Market Services

2.5 Mission Statement:

“To be the best run, customer-focused and integrated financial institution with a unique and
inclusive employee culture”

The mission of UCL is supported by two fundamental principles that provide the foundation
for all of its activities: Ethical principles and Core Values. Attaining the mission requires

15 | P a g e
superior and continually improving performance in every area and at every level of the Group.
The performance is be guided by clear and concise strategic objectives for each business unit.

UCL Group is a fast-growing financial institution. The mission is to be the best run, customer
focused, integrated financial institution with a unique and inclusive employee culture. UCL is
committed to returning superior value to its stakeholders. It aims to achieve this through
leadership in innovation, an absolute focus on customers and operational excellence.

Towards the shareholders the responsibility is to effectively manage the physical, financial and
human resources to increase shareholders’ value through employee commitment to excellence.

Towards the customers UCL is dedicated to serve the customers and believe that their first
responsibility is to the customers. It strives to meet the customers’ need by providing high
quality product and services of superior value. It believes that customers’ success determines
success of its very own.

Towards the employees it provides responsible leadership and a clear vision of the future to
all. It expects the people to maximize their potential, to consistently achieve a high level of
performance. With assurance to providing a safe, productive work environment in which each
employee will be treated as an individual with fairness, dignity and respect, it recognizes and
rewards creativity, individual initiative and superior achievement.

Towards the community it provides quality products and services to meet the needs of the
society. Maintain high ethical standards, obey all laws, and respect local customs – are the very
nature of UCL

UCL also works together with all stakeholders to reduce environmental impact by embedding
the environment into the business and by involving all employees, customer & community

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Chapter 3 : LITERATURE REVIEW

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3.1 Literature Review based on Thematic Aspect of Research:

Nonperforming loans (“NPLs”) refers to those financial assets from which banks no longer
receive interest and/or installment payments as scheduled. They are known as non-performing
because the loan ceases to “perform” or generate income for the bank. Choudhury and
Adhikary (2002) stated that the nonperforming loan is not a “uniclass” but rather a “multiclass”
concept, which means that NPLs can be classified into different varieties usually based on the
“length of overdue” of the said loans. The most common international recognized definition of
non-performing loan, known as NPL was actually developed by the IMF in the framework of
the Financial Soundness Indicators (FSIs) endorsed by the IMF Executive Board. On March
2006, the Financial Compilation Indicators stated that loan would fall under the non-
performing loan when the payment of its principal and interest had passed the due date by the
period of 3 months or 90 days or more. In different countries regulations are different for
classifying loan as non-performing. In most of cases, a loan is considered to be non-performing
if that loan remains in arrear for at least 90 days. Hennie (2003) defined Non-Performing Loans
as those loans which were no longer generating income. It was further supported by Fofack
(2005) who defined NPL as those loans for which the principal and/or interest had been left
unpaid for at least ninety days.

NPLs are viewed as a typical byproduct of financial crisis: they are not a main product of the
lending function but rather an accidental occurrence of the lending process, one that has
enormous potential to deepen the severity and duration of financial crisis and to complicate
macroeconomic management (Podderand Al Mamun, 2004). This is because NPLs can bring
down investors’ confidence in the banking system, piling up unproductive economic resources
even though depreciations are taken care of, and impeding the resource allocation process.

In addition, NPLs, if created by the borrowers willingly and left unresolved, might act as a
contagious financial malaise by driving good borrowers out of the financial market. Reddy
(2004) argues that a bank with high level of NPLs is forced to incur carrying costs on non-
income yielding assets that not only strike at portability but also at the capital adequacy of a
bank, and in consequence, the bank faces difficulties in augmenting capital resources. Mohanty
(2006) also state that the probability of banking crises increases if financial risk is not
19 | P a g e
eliminated quickly. Such crises not only lower living standards but can also eliminate many of
the achievements of economic reform overnight.

Desai and Farmer (2001) argued that the expansion of credit policy during the early stage of
liberation, which was directed to disbursement of credit on relatively easier terms, did actually
expand credit in the economy on nominal terms. However, it also generated a large number of
willful defaulters in the background who, later on, diminished the financial health of banks
through the “sick industry syndrome”. In the 1990s, however, a broad-based financial measure
was undertaken enlisting the help of World Bank to restore financial discipline to the country.
Since then, the banking sector has adopted “prudential norms” for loan classification and
provisioning (Bangladesh Bank, 2014). Other laws, regulations and instruments such as loan
ledger account, lending risk analysis manual, performance planning system, interest rate
deregulation, the Money Loan Court Act 1990 has also been enacted to promote sound, robust
and resilient banking practice. Surprisingly, even after so many measures, the banking system
of Bangladesh is yet to free itself from the grip of the NPL debacle.

The question thus arises, what are the reasons behind such a large proportion of nonperforming
loans in the economy of Bangladesh? Is it because of “flexibility in defining NPLs” or lack of
effective “recovery strategies” on the part of the banks? Alternatively, is it due to poor
enforcement status of laws related to nonperforming loans? The present study has concentrated
on the above issues mainly with a view to assisting policymakers to formulate concrete
measures regarding sound management of NPLs in Bangladesh (Boi.gov.bd, 2015).

3.2 Literature Review based on Chronological Development of Research:

Helge and Padhye, (2003) took an empirical approach to the analysis of commercial banks'
nonperforming loans (NPLs) in the Indian context. The empirical analysis evaluates as to how
banks’ non-performing loans are influenced by three major sets of economic and financial
factors, i.e., terms of credit, bank size induced risk preferences and macroeconomic shocks.

Huaqiang (2004) took a different approach as he probes into the mechanism and institutional
arrangement that are crucial for the formation and the dynamic accumulation of NPLs of SOB
20 | P a g e
by using the analytical framework of dual soft budget constraints (SBC), which is the SBC of
state - owned – enterprises (SOEs) and that of state - owned – banks (SOBs) . The paper reveals
the endogenous nature of the NFL problem of the SOBs and stresses the importance of
hardening dual SBC, especially that of SOBs for banking reform in China.

Sound household financial conditions are relevant for both financial and monetary stability.
Therefore, by analyzing household financial fragility in a sample of euro area countries with
the aim to shed some light on the nature of the large debt increase accumulated in recent years,
it was found that the financial conditions of households might become more vulnerable to
adverse shocks in their income and wealth. (Rinaldi and Sanchis-Arellano, 2006)

Bofondi and Ropele (2011) analyzed the quality of loans to households and firms separately
on the grounds that macroeconomic variables may affect these two classes of borrowers
differently. According to their estimated models: i) the quality of lending to households and
firms can be explained by a small number of macroeconomic variables mainly relating to the
general state of the economy, the cost of borrowing and the burden of debt; ii) changes in
macroeconomic conditions generally affect loan quality with a lag; and iii) the out-of-sample
prediction accuracy of the models is quite satisfactory and proved to be robust to the recent
financial crisis.

3.3 Literature Review based on Methodological Aspects:

Non-performing loan has always been an important issue for researchers. Most studies have
been made based on commercials banks of different countries. To determine the root cause of
NPL, researchers considered different classes of variables. Among those class macroeconomic
variables, bank specific variables and regulatory framework have been vastly analyzed.

The analysis of non-performing loan through econometric modeling is also not a new invention.
Many researchers have used different econometric methods of explaining the variation on NPL.
For example, Harvir Kalirai and Martin Scheicher used the simple linear regression model to
explain the variation of the NPL in Austria for the period 1990 to 2001. The independent
variables used in this model were the interest rate for the loans, the inflation and the GDP.
21 | P a g e
They performed stress tests into this model in order to test the durability of the NPL in an
extreme macroeconomic environment.

Olena Havrylchyk explained the variation of NPL in South Africa using a linear regression
model with factors such as GDP, inflation and interest rate as independent variables. According
to this author who also performed a stress test after building the model, the economy of South
Africa is capable to absorb macroeconomic shocks in a way that this shock could not affect the
NPL.

Using dynamic panel data for 75 countries, Beck, Jakubik and Piloiu (2012) showed that, real
GDP growth, share prices, exchange rate, and lending interest rate significantly affected NPL
ratio. GDP was found to be most influential to NPL. NPL ratio found to be inversely related to
stock returns especially for countries with large stock market relative to GDP. Saba, Kauser
and Azeem (2012) used the data of US banking sector from 1985 to 2010. Employing
correlation and regression tests, they showed that real GDP per capita, inflation and total loan
had significant impact on Non-performing loan ratio.

Jimenez and Saurina (2005) analyzed the Spanish banking sector from 1984 to 2003. They
found significant impact of GDP growth, high real interest rate and lenient credit term on NPL.
Louzis, Vouldis and Metaxas (2010) used dynamic panel data method to examine the
determinants of non-performing loans in the Greek banking sector, separately for consumer
loans, business loans and mortgage loans. The study showed that NPL in the Greek banking
system could be explained mainly through macroeconomic variables. Gertjan Vlieghe in his
study analyzed the credit risk for England using a autoregressive model. This author comes to
the conclusion that the prices of the integrable assets play a major role in the default of
businesses, because these assets act as collateral for loans.

Baholli, Dika and Xhabija used a simple linear regression model to explain the variation of the
non-preforming loans in Italy and Albania. Their model studied the relationship between the
macroeconomic factors (as independent variables) and the non-preforming loan (as dependent
variable). In this literature review there were many articles that used this model as well.

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3.4 Summary of the Findings of Literature Review:

Researcher Year of Determinants of NPL Assumed Result

Publication
Kalirai and 2001 Interest rate for the loans, the Extremely
Scheicher inflation and the GDP Significant
Helge and 2003 terms of credit, bank size induced Significant Impact
Padhye, risk preferences and macroeconomic Exists
shocks
Huaqiang 2004 Soft Budget Constraints of State- Hardening of SBC
owned enterprises and SBC was recommended
Rinaldi and 2006 Household financial and monetary Significant Impact
Sanchis- Stability Exists
Arellano,
Olena 2010 Interest rate for the loans, the Insignificant
Havrylchyk inflation and the GDP (With Stress
Test)
Bofondi and 2011 General state of the economy, the Significant Impact
Ropele cost of borrowing and the burden of Exists, but results
debt show in lag
Jakubik and 2012 Real GDP growth, share prices, Highly Significant
Piloiu exchange rate, and lending interest
rate
Saba, Kauser 2012 Real GDP per capita, inflation and Significant Impact
and Azeem total loan Exists
Rifat 2017 GDP growth rate, inflation rate, Significant Impact
broad money in GDP, loan growth, Exists, Firm
loan to asset ratio, return on asset specific factors
and relative size of firm have more impact
Table 3. 1: Literature Review Findings Summary

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3.5 Research Gap based on Literature Review:

There has been but very few independent research works conducted in this field. Most works
center around either private commercial Banks or SBCs of Bangladesh. While there has been
very specific research work done on NBFI, the research focuses on firm specific variable along
with some macroeconomic variables and works around secondary panel data on NBFI based
on convenient sampling.

Given the availability of ample of similar works done on foreign country context, there exists
significant evidence that household standard of living and quality of life of bank clients can
also be major driver of Non-performing Loan. Thus, this paper aims to work on the specific
field to highlight the impact of household living standard along with Macro variables.

24 | P a g e
Chapter 4 : METHODOLOGY

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4.1 Study Area & Target Population:

The study area for this paper is Bangladesh. And because the subject focuses solely on the
Non-Bank Financial Institutions of the country, the target population are naturally the NBFIs.
Thus, the population size is 34

4.2 Data & List of Variable:

4.2.1 Data: This study was based on both primary & secondary data from different sources. A
panel data-set from ten NBFIs of Bangladesh for the period 2007 to 2017 was used in this
study. For this study standard of living measures were derived from survey questionnaire and
from credible indices.

The period used for this study was subject to data availability. Earlier data about non-
performing loan were available up to 2003. However, living standard information arrear to
2007 couldn’t be collected. As data were not available for previous years, data-set could not
be any larger.

4.2.2 List of variables: The study included NBFIs which were selected based on data
availability, size and relative performance. As all data related to consumer were collected from
survey reports & standard of living indices Cronbach’s Alpha test was done to ensure
consistency in data. Non-performing loan to total loan ratio for selected NBFIs was used as
dependent variable. As independent variables, both macroeconomic and standard of living
variable were used. The following macroeconomic variables were used:

• GDP growth rate;

• Inflation rate;
• Bank interest rate.

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4.3 Questionnaire Design:
The adapted survey questionnaire employed in this study is divided into two sections;
demography and scales of one underlying factor of the research instrument, capturing one (1)
independent variables. A 5-point Likert scale was used showing (1) “strongly disagree”, (2)
“disagree”, (3) “slightly agree”, (4) “agree”, (5) “strongly agree”. The Cronbach alphas of all
80 items in the scale shows 0.779, above and over 0.7 cut off threshold (Sekaran & Bougie)
which suggest that the reliability of the scales for measuring standard of living are considered
acceptable (Sekaran & Bougie, 2010). Table 4.1 below captures the details of the adapted
scales employed in this research.

Variable Sources
1 Customer’s Living Standard (Aro & Wilska, 2014)
2 GDP Growth Rate Bangladesh Bank & World Bank
3 Inflation Bangladesh Bank & World Bank
4 Bank Interest Rate Bangladesh Bank & World Bank
Table 4. 1: Adaption of Scale

The questionnaire developed:

Standard of Living Measures 1= Not useful, 2= Useful but not necessity, 3= Necessity but can do without,
4= Useful and is necessary, 5= Absolute necessity
Mobile
Internet connection
Home computer
Car
Daily newspaper
Television
Digital Camera
Cultural Services
Holiday trip every 6 months
Restaurants Regularly
Table 4. 2: Survey Questionnaire

4.4 Research Design:

This paper will adopt descriptive and correlational design of research based on secondary and
primary sources of data also will take a quantitative approach. This is so selected as after
reviewing several literatures most of which evidently supports this approach to be more

27 | P a g e
accurate. To explain the impact of the factors so chosen on the NPL ratio of NBFIs, a
multivariate linear regression analysis will be done as well

4.5 Sample size Determination:

The sample size was chosen conveniently considering data availability of NBFI client and
NBFIs themselves. 7 NBFIs were chosen randomly through assigning random order number
and top 10 NBFIs were chosen for Data Analysis.

The sample size however represents greater than 25% confidence interval which limits the
implications of results of this research. However, given the random selection, the result will
hopefully reflect the scenario of whole.

4.6 Analytical Framework:

Figure 4. 1: Analytical Framework

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4.7 Research Method:

The research will be conducted through descriptive and inferential analysis. The descriptive
analysis through charts and diagrams will portray the NPL scenario of the NBFIs over the past
5 years, the growth and change in the factors over time, the composition of attributes of the
respondent etc. to better understand the NPL case. Inferential Statistics through correlation
analysis & multivariate linear regression will analyze the relationship of the dependent variable
and independent variables.

4.8 Demography of Respondents:

In order to determine the Living Standard Measures, a survey was performed and 80 responses
were collected based on which the scale value for a period of five years were determined.

Types Categories Frequency %

Gender Male 49 61%
Other 0 0%
Female 31 39%
Age 19 & below 5 6%
20~35 54 68%
36~50 16 20%
51 & above 5 6%
Marital Status Single 41 51%
Married 35 44%
Other 4 5%
Education Level HSC 10 13%
Diploma 0 0%
Undergraduate 46 58%
Post graduate 19 24%
Doctoral 5 6%
Figure 4. 2: Demography of Respondents

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Chapter 5 : DATA ANALYSIS

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The outcome of the analysis done will be shown in descriptive manner to understand the
various implications of the subject matter and in the next phase result of inferential statistics
will be presented drawing the relationship among the variables.

5.1 Descriptive Analysis:

5.1.1 NPL Outlook of NBFIs: NBFIs in Bangladesh provides additional financial services and
support that traditional banks cannot offer by means of multifaceted products and services. It’s
due to such conveniences that the number of NBFIs in the country has seen steady growth.

NBFI Market Expansion

40

35

30

25

20

15

10

0
2011 2012 2013 2014 2015 2016 2017

State Owned Joint Venture Private

Chart 5. 1: NBFI Market Expansion

And the growth was by no mean only through addition of new companies but with expansion
of branches of existing ones as well as can be seen below:

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 NBFI Total Branches
300
250
200
150
100
50
0
2011 2012 2013 2014 2015 2016 2017

Total Branches Linear (Total Branches) Linear (Total Branches)

Chart 5. 2: Branch Expansion of NBFIs in Bangladesh

The investment pie of NBFIs are quite different from that of Banks and in 2017 the majority
of the portfolios were invested in industry as evident from the pie chart below:

NBFI Investment Pattern 2017

2.70% 4.20%
12.50%

16.70%

2.30%

44.20%
17.50%

Agriculture Merchant Banking Trade & Commerce Margin Loan

Chart 5. 3: NBFI Investment PIE

However, the NPL scenario of NBFIs is of real concern. The NPL ratio has grown significantly
over the past few years:
32 | P a g e
 NPL Movement of NBFIs of Bangladesh
10
9
8
7
6
5
4
3
2
1
0
2013 2014 2015 2016 2017

Industry Sample Average

Chart 5. 4: NPL Movement in regard to NBFI

The comparative picture depicts that except for few NBFIs which can be counted to single
digit, the majority is suffering from classified loan burden:

Comparative Position of NBFIs taken as sample

Industry

Union Capital Limited

FAS Finance & Investment Limited

Prime Finance & Investment Ltd.

IDLC Finance Ltd.

LankaBangla Finance Ltd.

Islamic Finance & Investment Ltd

United Finance

0 2 4 6 8 10 12 14 16 18

2013 2014 2015 2016 2017

Chart 5. 5: Comparative Position of NBFIs taken as sample

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5.1.2 Variables: The living standard measure reveals mixed result as significant decrease is
noticed in need of cellular devices, internet and other goods and services:

Decreasing Measures of LSM

5

4.5

3.5

2.5

2
2013 2015 2017

Mobile Internet Computer TV Dine out regularly Average

Chart 5. 6: Decreasing Measures of LSM

However, increase in need was noticed in other variables like News reading behavior and
engagement in cultural activity etc.

Improving Measures of LSM

4.5

3.5

2.5

2
2013 2015 2017

Car Newspaper Cultural Activities Trip

Chart 5. 7: Increasing Measures of LSM

34 | P a g e
The GDP growth rate shows a steady curve while both Bank lending rate and inflation rate has
gone through steady decrease. GDP has reached an all-time record growth bearing good news
for the economy as a whole

GDP Growth Rate

8

0
2013 2014 2015 2016 2017

Chart 5. 8: GDP Growth Rate of Bangladesh

With government’s and central bank’s efforts to bring down lending rate to single digit, 2017
has seen a significant decrease in the lending rates:

Bank Lending Rate

16

14

12

10

0
2013 2014 2015 2016 2017

Chart 5. 9: Bank Lending Rate (Average and Base rate as suggested by Bangladesh Bank)

35 | P a g e
Inflation rate in consumer basket has also shown steady decrease

Inflation Rate in Consumer Items

8

0
2013 2014 2015 2016 2017

Chart 5. 10: Inflation of consumer goods

5.2 Inferential Analysis:

5.2.1 Correlation Analysis: From correlation matrix, we can find the relationship between
variables used in this study:

Living
NPL Standard Interest GDP Inflation
NPL 1
-
Living Standard 0.18857 1
-
Interest 0.70253 0.256813094 1
GDP 0.6496 -0.270806963 -0.985157752 1
- -
Inflation 0.61532 0.249396757 0.951405627 0.936645496 1
Table 5. 1: Correlation Measures of Variables

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From Table 5.1, it is seen that the relationship between two variables. In the NPL aspect, it
displays the correlation of the relationship between NPL and standard of living is 0.113971.

Secondly, under the relationship between NPL and Bank Lending Rate, based from the result,
it shows that NPL has a high correlated relationship with the consumer income. In other words,
it can be considered that both of the variables are relative to each other.

Thirdly, under the relationship between NPL and GDP growth rate of the country result shows
that NPL is high correlated with the GDP growth rate of the country. In other words, it can be
considered as both of the variables are quite relative to each other.

Finally, under the relationship between NPL and the inflation rate based from the result it is
seen that NPL has a high correlated relationship with the bank interest rate. It means both
variables are relative connected to each other.

5.2.1 Multivariate Linear Regression Analysis: The model summary indicates Durbin-Watson
of value 0.8857 indicating that the independent error terms are not correlated.

Model R R Square Adjusted R square Std. Error of the Estimate Durbin-Watson

1 0.766 0.587 0.539 0.478 0.8857

a. Predictors: (Constant), Bank Lending Rate, GDP growth rate of Country, Standard of Living,
Inflation rate

b. Dependent Variable: Non-performing loan.

Table 5. 2: Regression Model Summary

Based from the above table, it shows that the R square is 0.587 or 58.7%. It indicates that
58.7% of the total variance in the dependent variable (non -performing loan) is explained by
the independent variables (standard of living, Inflation Rate, GDP growth rate of the country,
and the bank lending rate). Hence, the remaining 42.3% is unaccounted for, which could be
due to other variables which are not involved in this research study.

ANOVA
Df SS MS F Significance F
Regression 4 11.38197764 2.845494 12.44170837 0.0000021
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 Residual 35 8.004712971 0.228706
Total 39 19.38669061
Table 5. 3: ANOVA coefficient Summary

ANOVA Table 5.3 shows a significant value (p-value < 0.05) which implies the entire model
has acceptable goodness-of-fit. It also indicates that at least one of the independent variables
(standard of living, GDP growth rate, Inflation rate, and bank lending rate) is able to
significantly influence the dependent variable (non-performing loan). The coefficient table
provides the details of significance levels of each variables.

Coefficients Standard Error t Stat P-value

Intercept 31.22036351 9.205052942 3.391655 0.001737117
Standard of Living -0.056647593 0.159995038 -0.35406 0.725419259
Interest -1.239350636 0.331835372 -3.73484 0.000667274
GDP -2.028852831 0.872996399 -2.32401 0.026054899
Inflation 0.51902248 0.320242864 1.620715 0.11405484
Table 5. 4: Significance Level of the independent variables

The “P-value” column labels that whether the variables are important or not. Also, the
significance value should be less than 0.05. According from the Table 5.4, it shows that there
are two variables not significant because the p-value is larger than 0.05. These variables are
standard of living with p -value of 0.725 and Inflation rate with p -value 0.114. But other
variables are significant whereby the p-value is less than 0.05; these variables are bank lending
rate with the value of 0.00066, and GDP growth rate with value 0.026.

Based on the Table 5.4, the following equation is generated:

Non- performing loan = 31.22+ -0.056(standard of living) + -1.239(Bank lending rate) + -

2.028(GDP growth rate of the country) + 0.519 (Inflation rate)

This regression equation expresses that the unit decrease in standard of living increase non-
performing loan. However, it also shows that the unit increase in bank lending rate decrease
non- performing loan by -1.239, a unit increase in GDP growth rate of the country decrease
non-performing loan by -2.028 and a unit increase in inflation rate increase non-performing
loan by 0.519.
38 | P a g e
5.3 Summary of Result:

The inferential statistics show that based on the calculation we can reject the null hypothesis
that there exists no relationship between the independent variables with dependent variable. It
also implies that we fail to reject null hypothesis 1 and hypothesis 4.

Gradient
Hypothesis Sig Result (Beta, β)
The customer’s standard of living and the non-preforming 0.725 -0.056
H11 loan reflect a direct significance and correlation. Not supported

The bank lending rate and the non-performing loan reflect 0.000 -1.239
H12 a direct significance and correlation. 66 supported
The GDP growth rate of the country and non-performing 0.026 -2.028
H13 loan reflects a direct significance and correlation. Supported
The inflation rate and non-performing loan reflect a direct 0.114 0.519
H14 significance and correlation. Not Supported
Table 5. 5: Hypothesis Testing and Result

Thus, it can be said that only GDP growth rate and bank lending rate or base rate has major
impact on the NPL performance of the NBFIs and Customer’s living standard and consumer
price inflation has no credible influence.

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Chapter 6 : DISCUSSIONS & SUMMARY OF
FINDINGS

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In this research, there were 80 respondents who took survey questionnaire and based on their
responses LSM was calculated. Most of the respondents are from the age range of 20-35 years
old, single status, Education level undergraduate. Under the pilot study test, the reliability test
result is 0.737 which means it shows ideal.

6.1 Result of the Correlation and Multiple Regression Analysis:

These results came from 80 respondents and analyzed by Microsoft Excel. In the Pearson
correlation test, the correlations of non-performing loan with other independent variables were
measured. Non-performing loan has a weak relationship with the standard of living; however,
it has a moderate to high relationship between the bank lending rate, inflation rate and GDP
growth rate of the country.

In the multiple regression analysis, the model summary, ANOVA and coefficient table.
Durbin- Watson is 0.8857 in the model summary; it means the value is considered as an ideal
value. R square in the model summary is 55.5%, it means 55.5% of the independent variables
will affect the dependent variable. The significant value for ANOVA is 0.0000074713, so it is
considered good enough value because the result is well below 0.05, once it’s beyond the
amount, it is not accepted. GDP growth rate of the country & bank lending rate will be accepted
because the results are less than 0.05. Therefore, the null hypothesis of these variables is failed
to be rejected

6.2 Implication of the study:

This research study is to study about the factors of non-performing loan in the NBFIs of
Bangladesh. And the findings will have different implications for all the stakeholders.

For the NBFIs, they will receive important information from this research study. The FIs will
find that the bank interest rate affects the rate of non-performing loan increase.

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For the future researchers, this research will benefit them as well, if they are doing their
researches which are related to this topic. They can gather everything they want easily and find
important insights. Besides that, it will benefit the researcher who is going to this research
study in Bangladesh. This is because the information in Bangladesh is limited.

Lastly are the borrowers from the bank. In this research, the borrowers can get information of
non-performing loan in the NBFIs. They will understand how their standard of living, GDP
growth rate, inflation rate and bank interest rate will affect in managing their debts.

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Chapter 7 : CONCLUSION & POLICY
IMPLICATIONS

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7.1 Conclusion:

This study attempted to ascertain the determinants of NPL in the NBFI sector of Bangladesh
using a panel dataset and a multivariate regression model. The empirical results supported the
view that non-performing loan can be explained by macroeconomic variables. It found
evidence of a significant direct relationship between GDP growth rate to non-performing loans
and inverse relationship between bank interest rate and non-performing loans. This means that
lending rate of banks although decreased over the year but had inverse result in lower non-
performing loans. It also means that, with GDP growth rate increase although people are
becoming financially more capable the defaulting behavior has rather increased. The empirical
results, however, revealed that living standard measures and inflation were not important
determinant of NPLs in the Bangladesh financial system. Overall, the research has discussed
about the findings of the analysis that was conducted using Microsoft Excel. Descriptive
approach, correlation and multiple regression analysis had been shown during the analysis.
The descriptive approach displayed direct results while the correlation displayed the
relationship between the dependent variable (non-performing loan) and the independent
variables. The research had also discussed about the implication and limitations of this study.
Lastly, the research has provided some recommendations for future researchers who will do
research of similar topics.

7.2 Policy Implications:

The results shown in this research work are contradictory to earlier research conducted on the
NPL determinants of NBFIs. However, it reveals that perhaps for case of Bangladesh unlike
worldwide scenario where macro variables are core determinants of NPL in NBFIs, political
and management issues have broader consequences on NPL performance and reviewing the
interview with several industry professionals following measures in improving policy can have
positive result on NPL performance of the NBFIs in Bangladesh:

• No compromise with due diligence in the sanctioning process keeping in mind that
"prevention is better than cure."
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 • Legal hassles in loan recovery should be reduced. In Bangladesh, loan recovery process
is civil in nature and administered by the Financial Loan Court Act 2003. But the act
only offers the right to the banks/financial institutions to sue the borrowers and the
borrowers are left with no redress, which results in the violation of the rule of law.
Moreover, the Financial Loan Court Act has no provision of counter claims or set-off,
which is only guaranteed in Order VII Rule 6 of the Code of Civil Procedure 1908.
• Policy should be introduced limiting board of directors influencing management of the
NBFIs. Although BOD comprises of about only 5~10 share ownership, their
interference and corruption in forcing to sanction loan orders create NPL that are put
burden to the general shareholders.

7.3 Future Research Direction:

There are several limitations of this study. While, these limitations limit the interpretation of
the findings, they also show us major area of improvement.

Initially, the research sample size calculated was 32. However, due to inadequate information
availability the sample size was reduced to 7 only. Also, random sampling technique was used
to reduce sample size reduction impact to some extent.

Secondly, the independent variables chosen in the research are mostly macro-economic
variables. As far as originality is concerned, this model of NPL factor determination has been
widely used and thus this work can only be said new in Bangladesh context. However, sector
professionals and industry experts opine that political and mismanagement factors influence
NPL performance more for NBFIs in Bangladesh. The opinion should be taken into account
as the independent variables in this research can explain only 55.5% of the changes in NPL. It
may as well be, that the mismanagement issue and abuse of power by board of directors feeds
the growth of NPL.

Thirdly, the data panel consists of information about NPL of NBFIs not spanning more than 5
years. However, to better predict and analyze the optimum size should be larger.

Taken from these limitations new research should look for:

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• Considering other variable types as shown in the Analytical framework.
• Conducting stress test to identify the NBFIs adaptability in harsh environment to
stabilize NPL ratio.
• Focusing on qualitative aspect of the study as well.
• Studying impact of NPL on NBFIs of Bangladesh. There have been very few
researches done on the topic.

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APPENDIX
Multivariate Regression Analysis

Regression Statistics
Multiple R 0.766226246
R Square 0.587102661
Adjusted R
Square 0.539914393
Standard Error 0.47823225 Durbin watson 0.885756
Observations 40

ANOVA
Significance
df SS MS F F
Regression 4 11.38197764 2.845494 12.44170837 0.0000021
Residual 35 8.004712971 0.228706
Total 39 19.38669061

Coefficients Standard Error t Stat P-value Lower 95%

Intercept 31.22036351 9.205052942 3.391655 0.001737117 12.53311255
- -
Living Standard 0.056647593 0.159995038 -0.35406 0.725419259 0.381454789
- -
Interest 1.239350636 0.331835372 -3.73484 0.000667274 1.913012256
- -
GDP 2.028852831 0.872996399 -2.32401 0.026054899 3.801129742
-
Inflation 0.51902248 0.320242864 1.620715 0.11405484 0.131105097

Online Access: Click to go

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Survey Questionnaire to Measure LSM

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