Non-bank Financial Institutions financial intermediaries that accumulate funds by borrowing from the general public and lend

the same to meet specialised financing needs, but are prohibited to accept such deposits payable either on demand or by cheque, draft, etc, and operate checking accounts for which their liabilities are not a part of the money supply. The first non-bank financial institution (NBFI) was a fire insurance company established in 1680 in London. Although all financial institutions have a common basis for their operations and some role with respect to lender-borrower relationships, there are some fundamental differences between the banks and NBFIs. The liabilities created by the banks are unique in that these liabilities are themselves 'spendable' i.e., the deposits in banks are used as money by the holders of the deposits whereas the liabilities of a NBFI, such as a building society cannot be used in this way. Banks can actually increase the total volume of spending in the economy by their capacity to add to the stock of credit in existence. But the non-bank financial institutions do not have that capacity and they are merely 'honest brokers' and transmitting funds, which have been created elsewhere, eg, by the BANKING SYSTEM. Banks now have less savings deposits and more demand deposits. The NBFI, such as a leasing company, receives additional funds and is capable of adding to its mortgage lending by withdrawing from its larger demand deposits kept with the deposit money bank. The leasing company thus adds to the volume of credit and enables additional spending (on house purchase) to take place. The combination of financial assets created by the banks and NBFIs for ultimate lender varies depending on the origin of the asset. The operations of NBFIs in Bangladesh are regulated by the BANGLADESH BANK. The grant of authority to engage in borrowing from the general public is normally based on such factors as minimum capital requirement, quality of management, compliance with the concerned laws, rules, and regulations, and stability of financial standing. NBFIs may grant loans to their members and the general public up to a certain amount and may also engage in trust functions with prior permission of the central bank. They are not allowed to engage in foreign exchange transactions. NBFIs are specialists of the intermediation process and their origins can be traced to the development of specialised financial institutions. Some survived centuries of changing economic and financial developments. Others appeared in response to special opportunities or needs and have disappeared just as quickly. Their survival and existence depend upon their ability to (a) offer contracts that serve the needs of specialised customers, (b) maintain a spread between the rate they pay for funds and the rate they receive that will support their costs, and (c) meet commitment to suppliers of funds. The non-bank financial sector has a wide diversity of institutions. Despite their importance as alternative sources of finance to the commercial banks, their liabilities may nevertheless be regarded as 'near money'. The most important NBFIs, among others, are the building societies, hire purchase companies, leasing companies, mortgage companies, insurance companies, saving banks, pension funds, investment companies, investment trusts, security dealer/brokers, pawn shops, central provident fund (CPF), post office saving banks, discount houses, securities companies, fund managers, venture capital companies, stock exchanges, and factoring companies.

The non-bank financial institutions operating in East Pakistan were the Industrial Development Bank of Pakistan, Equity Participation Fund, Pakistan Industrial Credit and Investment Trust Corporation, Investment Corporation of Pakistan, National Investment Trust and insurance companies. Such institutions established in Bangladesh in the 1970s include the House Building Finance Corporation (1973) and the Investment Corporation of Bangladesh (1976). Other NBFIs established in the country up to 31 August 2000 are United Leasing Co., Industrial Development and Leasing Company, Industrial Promotion and Development Company, Saudi-Bangladesh Industrial and Agricultural Investment Company, Phoenix Leasing Company, Union Capital, Uttara Finance and Investment, UAE-Bangladesh Investment Company, International Leasing and Financial Services, Prime Finance and Investment, Bahrain Bangladesh Finance and Investment Company, Bay Leasing and Investment, Delta-BRAC Housing Finance Corporation, Vanik Bangladesh, Peoples Leasing and Financial Services, Infrastructural Development Company, Bangladesh Industrial Finance Company, National Housing Finance and Investment, MIDAS Financing, First Lease International and Bangladesh Finance and Investment. These institutions extended their business in industrial, commercial and housing financing, and in the stock market activities. They are also granted permission by the Bangladesh Bank to participate in the inter-bank money market transactions. As on 31 December 1999, the total paid up capital and reserves of these NBFIs in Bangladesh stood at Tk 5.885 billion and their investment in different sectors totaled to Tk 12.087 billion. Bangladesh Bank is empowered to oversee and regulate the affairs of the NBFIs under the provisions of the Financial Institutions Act 1993 and the Financial Institutions Rules 1994. To improve the quality of financial intermediation and meet up the growing needs of funds for financing investments in different sectors of the economy, the government intends to intensify the financial market by granting permission to establish private NBFIs in conjunction with the private commercial banks. At present, non-bank financial sector of the country comprises investment and finance companies, merchant bankers, leasing companies, mortgage banks, insurance companies, and the CAPITAL MARKET. Although small, the NBFI sector in Bangladesh is a growing component of the entire financial sector and NBFIs as a group create an opportunity to improve financial intermediation for the economy. NBFIs account for only 4% of the assets of the financial sector, compared to 70% accruing to the nationalised commercial banks (NCB) and 25% to the local private banks. NBFIs, however, account for 25% of the term financing (FY 1998-99) through leasing, project finance and merchant banking activities. The volume of term finance they provided in the last four years increased at the rate of 41% per annum, while that of the NCB decreased by 40% between 1997 and 1999.