Faculty of Business Administration and Management

Patuakhali Science and Technology University

Term Paper Submission Report

Level :3

Semester :I

Course code : MST 315

Course Title : Company Laws and Secretarial Practices in Bangladesh

Report Title : The Evolution of Corporate Governance Practices in Bangladeshi

Non- banking with the implementation of the CCG

Date of submission : 05/06/2015

Group Members Details

Exam
Registration Name Signature
Roll

011 03556 Sharmin Sultana Rozy

012 03557 Sanquri Rani

013 03558 Afrin Sultana

014 03559 Israt Jahan Munni

015 03560 Mossammad Jakia

016 03561 Halima

018 03563 Rabin Saha

019 03564 Rubel Gazi

Attendance Report
Level :3

Semester :I

Course code : MST 315

1
 Course title : Company Laws and Secretarial Practices in Bangladesh

Date of Presentation : 06/06/2015

Evaluation Details

Signature

Preparation (5)

Obtained (out of
QA (5)Examination
Exam Roll

Registration

(10)Presentation
Name

20) Total Marks

1 2 3 4 5 6 7 8

011 Sharmin Sultana Rozy 03556

012 Sanquri Rani 03557

013 Afrin Sultana 03558

014 Israt Jahan Munni 03559

015 Mossammad Jakia 03560

016 Halima 03561

018 Rabin Saha 03563

019 Rubel Gazi 03564

Evaluated by

Acknowledgement
At first we desire to express our deepest sense of gratitude of almighty Allah.

With profound regard we gratefully acknowledge our respected course teacher,Md. Shakhawat
Hossain ,Assistant Professor, Department of Management Studies, for his generous help and day
to day suggestion during the survey.

2
We like to give thanks especially to our friends and many individuals, for their enthusiastic
encouragements and helps during the preparation of this report us by sharing ideas regarding this
subject and for their assistance in typing and proof reading this manuscript

Letter of Transmittal
Date: 06/06/2015

TO,

Md. Shakhawat Hossain

Assitant Professor
Department of Management Studies
Faculty of Business Administration and Management.

3
Subject: Submission Report on The Evolution of Corporate Governance Practices in
Bangladeshi Non- banking with the implementation of the CCG

Dear Sir,

Here we are submitting our report on The Evolution of Corporate Governance Practices in
Bangladeshi Non- banking with the implementation of the CCG. Prescribed by you in your
course Company Laws and Secretarial Practices in Bangladesh For this Purpose, we have
collect data from the Secondary Sources.

We, therefore, would like to request you to accept our report. And at last, thank you for assigning
us the report. We sincerely hope this report will live up to your expectation.

Yours truly,

Rabin Saha (Group Leader)

Group: Warrior
Level-3, Semester-I
Faculty of Business Administration and Management
Patuakhali Science and Technology University

Table of
Contains
Content Page no:

1.0 Introduction 01

2.0 A Brief Overview of Non-banking financial

02

4
 3.0 Literature Review
03

4.0 Data and Method 04-

08

5.0 Result 09-10

6.0 Conclusion 11

7.0 References 12

5
 1. Introduction
The Global Financial Crisis has brought into focus the need for better supervision and
Governance in non-banking financial institutions internationally. Non-banking financial
institutions are corporations and their firm value depends on good governance as any other firms.
Corporate governance in non-banking financial institutions is also of interest to businesses that
are dependent on non-banking financial institution finance. The cost of funds in efficiently
governed non-banking financial institutions is found to be lower. From policy perspective non-
banking financial institution regulators (reserve non-banking financial institution or central non-
banking financial institution) would have interest in sound corporate governance mechanism in
non-banking financial institutions from financial system stability perspective. Non-banking
financial institution corporate governance is particularly important in less developed countries
like Bangladesh because economic development and growth is dependent to a large extent on
well functioning, stable and soundly managed non-banking financial institution system. For this
reason, in 2012, Securities and Exchange Ordinance, 1969 (XVII of 1969) published the Code of
Corporate Governance (CCG) for Bangladesh that is suited for, among others, non-banking
financial institutions. The obvious function of a CCG for Bangladesh is to improve the general
quality of corporate governance practices in Bangladesh. The Code does this by defining best
practices of corporate governance and specific steps that organizations can take to improve
corporate governance. In addition, the Code provides a standard that can be used to measure
firms progress towards the goal of best practices. However, a problem, which is how the CCG
can be fully implemented, needs to be considered. Full implementation of the Code in all non-
banking financial institutions of Bangladesh would undoubtedly take a number of years and
would require the cooperation of a vast number of relevant stakeholders (SECURITIES AND
EXCHANGE ORDINANCE, 1969). The purpose of this study is to assess whether the corporate
governance practices in Bangladesh non-banking financial institutions have undergone
significant improvement after introduction of the Code. To achieve the objectives of the study,
we do content analysis of the annual reports of non-banking financial institutions in Bangladesh
before and after the introduction of the Code in 2012 and score the various elements of corporate
governance. Thereafter use a non-parametric difference test to answer the research question
whether the introduction of the Code has led to significant improvement in corporate governance
practices of non-banking financial institutions in Bangladesh. The study is important for several
reasons. First, we contribute to the existing literature on corporate governance in non-banking
financial institutions by providing evidence from a hitherto unexplored country like Bangladesh.
As already indicated above, some existing literature supports that improved corporate
governance practice in non-banking financial institutions leads to better allocation of resources
within an economy and contributes to growth. Second, the findings from the assessment of the
compliance with the Code of corporate governance would help the Securities and Investment
Commission in Bangladesh as well at the Non-banking financial institution of Bangladesh to
take suitable policy measures to further strengthen the corporate governance of non-banking

6
financial institutions in Bangladesh. These positive findings are also expected to help the non-
banking financial institution industry in Bangladesh to further strengthen the corporate
governance practices so as to achieve worlds best practice. This paper is organized as follows.
Section 2 presents a brief of overview of the non-banking financial institution industry in
Bangladesh. Section 3 describes previous literature. Section 4 presents data and method used in
this study. Finally the results are then shown in Section 5 and conclusions are addressed in final
Section.

2. A Brief Overview of Non-banking financial institution

Industry in Bangladesh:
The Bangladesh Bank (BB), as the regulator of NBFI operations in the country, has been
pursuing policies and taking measures to ensure healthy and efficient expansion of NBFI
activities in the country. In order to bring the NBFIs under an effective risk management
system, BB identified four core risk areas in September 2005 covering credit risk
management (CRM), asset and liability management (ALM), internal control and
compliance (ICC), and information and communication technology (ICT). The BB also
provided guidelines for the NBFIs to develop structures and undertake measures to improve
their institutional risk management system in core risk areas.

In line with core risks management guidelines, BB also introduced risk based audit system
generally known as 'system audit' for the NBFIs. For the purpose, the Department of Financial
Institutions and Market (DFIM) conducted a special inspection on the basis of these core risk
areas in IDLC and Union Leasing Company Limited in July 2007.

After modifications of the audit process based on the findings of this first phase
inspection, the second phase inspection has started in January 2009 in IPDC and Prime Finance
Limited. The remaining NBFIs would be brought under the audit system in phases. BB also
plans to rank the NBFIs on the basis of their compliance status of core risk management
guidelines. Against the backdrop of the global financial crisis, NBFIs have been asked to be
cautious in their financial management. As a part of better management, BB has instructed the
NBFIs whose classified loan to total outstanding loan ratios has risen sharply to take
adequate steps to realize the default loans. The BB has asked the NBFIs to take measures to
rationalize investment portfolios and overcome other adverse trends such as provision
shortfalls. The NBFIs have been instructed to comply with the Anti-Money Laundering
Ordinance 2008 and inform the Anti- Money Laundering Department of BB of any suspicious
transactions. The BB has also taken initiatives for ensuring better corporate governance of
the NBFIs through streamlining the managing boards for enhancing efficiency and
accountability. The NBFIs on their part need to diversify in financial instruments and
commercial papers to raise adequate funds from the market so that they can minimize their
dependence on borrowing from the inter -bank money market at higher interest rates in times
7
of need. In this respect, assistance needs to be provided to the NBFIs for securitizing and
selling quality financial assets. Since the NBFIs serve as important complements to the
banking sector in meeting the financing needs that are not well suited to the banks, the
development of the NBFIs is crucial to ensuring a sound financial system in the country.
It is important to view the NBFIs as a catalyst to economic growth and provide necessary
support and guidance for their development within a longer term framework which would
improve financial intermediation and enable the NBFIs to play their due role in overall
development of the country Bangladesh Bank is the central bank of the country therefore, is
responsible for regulating and supervising the bank-based system.

At the same time, as a supreme authority of the indirect form of financial intermediation,
Bangladesh Bank is also responsible for controlling the activities of all NBFIs. On the other
hand, the stock exchanges are operated under the guidance and monitoring of Securities and
Exchange Commission (SEC), Bangladesh.

Although the major business of most of the NBFIs is lease financing, still a handful number of
NBFIs involves in different financing activities, namely, term lending, house financing,
merchant banking, equity financing, venture capital financing, project financing, financing to
pilgrimage, etc. NBFIs also extend services to various sectors like textile, agriculture, small
and cottage, chemicals, trading, pharmaceuticals, transport, food and beverage, leather
products, and construction and engineering.

3. Literature Review
From the very beginning of bank financial institutions plays very significant role in economic
and infrastructure development of Bangladesh. The history of NBFIs is not as old as BFIs but
with the passage of time NBFIs become an integral part of the financial system of Bangladesh.

Goldsmith (1969) opinion that NBFIs alongside the banking sector contributing prominently in
influencing and mobilizing saving for investment.

Beck and Rahman(2006) has shown the robust relationship between the development of financial
intermediaries and economic growth. They also added that financial intermediaries not only
contribute to the economic growth but also control the reverse causation of economic growth.

Islam & Osman (2011) examined the long-run relationship between per capital real GDP and the
NBFIs based on Malaysian market. They revealed that there is a long run stable relationship
between per capita real employment. From their empirical result they showed that NBFIs is a
vital component of the financial sector through which flow of financial resource effectively
channelized from the surplus units to the deficit units and promote long-run sustainable
economic growth.

8
Pirtea, Iovu & Milos (2008) expressed that with the development NBFIs financial system and
domestic capital market also develop that in term contribute to the overall economic
development of the country. Thus sustainable economic growth largely depends on the
development of efficient financial intermediation.

Vittas (1997) opinion that creating new marketable securities in the area of leasing, factoring
and venture capital NBFIs creates long-term financial resources and provide a strong stimulus to
the development of capital market.

With regard to the literature concerning the nonbanking sector, limited number of studies has
been conducted so far in Bangladesh. Hossain and Shahiduzzaman (2002)focused on the
importance of non-banking sector as a vehicle for the economic development of the country and
identifies the underlying problems existed within the sector. Sufian (2007) opine that BFIs and
NBFIs enhance the overall growth of the economy with the support of efficient money and
capital market and NBFIs plays important role in providing complementary facilities offered by
the commercial banks. Sufian(2007) also opine that with the development of health of NBFIs,
health of capital market is also increase. He also added that as the key player in the development
of capital market efficient and Global Journal of Management and Business Research Growth of
Non Bank Financial Institution over Times and Contribution to Economy:

Although the major business of most of the NBFIs is lease financing, still a handful number of
NBFIs involves in different financing activities, namely, term lending, house financing, merchant
banking, equity financing, venture capital financing, project financing, financing to pilgrimage,
etc. NBFIs also extend services to various sectors like textile, agriculture, small and cottage,
chemicals, trading, pharmaceuticals, transport, food and beverage, leather products, and
construction and engineering.

4. Data and Method

The data required for the study was collected from the annual reports of top ten non-banking
financial institution in Bangladesh available at the website of the DSE, the reports appear to
reflect these non-banking financial institutions complying with the CCG. We did a content
analysis of the latest annual reports of non-banking financial institutions for the year prior to
2012 and after year 2012 when the CCG was introduced. As the Code was introduced in the year
2012 we examined the annual reports for the year 2011 and where this was not available then for
the latest year prior to 2012 for which it was available. Similarly we examined the annual reports
for the year 2012 and thereafter for the year 2013 or the latest year for which these were
available.

9
Compliance of Non-banking financial institutions to each of the Elements of
the Code of Corporate Governance:
In the first place, under the CCGs first section entitled Board of Director, many detailed
Statements about non-banking financial institutions board of directors had to be reviewed. The
section Board of Director includes 5 items which encourage boards to become more proactive
and effective by training directors in corporate governance and their responsibilities. First, in
terms of items 1.5 Director Report to shareholder 1.4 Chairman of the Board and chief Executive
officer, this study found that most of these 10 non-banking financial institutions have these 2
items mostly observed in their annual reports in the 1 years. In other words, the positions of
chairman of the board and CEO are given to different individuals since they have independent
functions and the size of the boards are large enough to ensure a well-functioning and involved
board in most non-banking financial institutions of Bangladesh in all 1 years.

Second, the items 1.1 Board Size; 1.2 Independent Director; 1.3 Qualification of the independent
director; few component are not or barely observed in most non-banking financial institutions
annual reports in the year (2012) before issuing the CCG, but these items were partly, mostly or
even completely observed in non-banking financial institutions annual reports in the year (2012)
when the CCG was issued and the year (2013) after issuing the Code. That means most non-
banking financial institutions in Bangladesh did not pay much attention to the mission of the
board of directors, the duties of board, training of individual directors, establishing appropriate
committees, making adequate annual directors reports, employing qualified secretary or other
qualified compliance officer, accessing to senior management outside and professional advice
and expanding the annual report to cover adequate disclosures. However, in the year (2012) of
issuing the CCG, the annual reports of most non-banking financial institutions indicate that most
non-banking financial institutions began applying these provisions of the Code.

In the second place, The provisions of this section Chief Financial Officer(CFO) ,Head of
Internal Audit and Company Secratary(CS) for non-banking financial institutions has been
reviewed. which includes 2 items, First, this study found that item 2.2 Requirement to attend the
board meeting cannot or hardly be observed in most non-banking financial institutions annual
reports. Although most non-banking financial institutions in Bangladesh do educating and
informing CFO and company secretary in different methods, Second, the information relevant to
the items 2.1 Appointment mostly observed in most non-banking financial institutions annual
report before the emerging of the Code. After the emerging of the Code, nevertheless, there is an
improvement in informing CFO and Company Secretary regarding the attending meetings.

In the third place, the CCGs third section is entitled Audit Committe, which includes 5 items.
The focus of this section is on financial reporting, auditing and non-financial disclosures
providing the tools by which stakeholders can monitor and evaluate an organizations corporate

10
governance practices. First, most of these 10 non-banking financial institutions have item 3.1
Constitution of audit committee be mostly or even completely observed in their annual reports in
the 1 years. Thus, accounts of most non-banking financial institutions in Bangladesh conform to
all Bangladesh Accounting Standards (BAS) as adopted by the Institute of Chartered
Accountants of Bangladesh (ICAB) not only in the year after issuing the Code but also in the
year before issuing the Code. Second, the items 3.2 Chairman of the Audit Committee , 3.4
Reporting the audit committee and 3.5 reporting to shareholder and general investor minimum
observed in most non-banking financial institutions annual reports in the year before issuance of
the Code. In contrast, these items can be partly, mostly or even completely observed in non-
banking financial institutions annual reports in the year when the CCG was issued and especially
in the year after issuing the Code. Third, the item 3.3 Role of audit committee can be more
observed in most non-banking financial institutions annual reports as the time goes from the
year before issuing the Code to the year after issuing the Code.

In the fourth place, the External/ Statutory Auditors section of the CCG, which has 8 items,
Here Appraisal or valuation services or fairness opinions, Broker-dealer services, Actuarial
services, No partner or employees of the external audit firms shall possess any share of the
company they audit at least during the tenure of their audit assignment of that company. This
provision items partly on barely used before issuing the code, but after issuing the code this
provision items partly use the 10 non-banking financial institution.

In the Fifth place the provision Subsidiary company section of the CCG , which has 5 items,
items are (i) Provisions relating to the composition of the Board of Directors of the holding
company shall be made applicable to the composition of the Board of Directors of the subsidiary
company, (ii)At least 1 (one) independent director on the Board of Directors of the holding , (iii)
The minutes of the Board meeting of the subsidiary company shall be placed for review at the
following Board meeting of the holding company. (iv) The minutes of the respective Board
meeting of the holding company shall state that they have reviewed the affairs of the subsidiary
company also, (v) The Audit Committee of the holding company shall also review the financial
statements, in particular the investments made by the subsidiary company. This provision items
partly on barely used before issuing the code, but after issuing the code this provision items
partly use the 10 non-banking financial institution.

In the Sixth Place , the provision DUTIES OF CHIEF EXECUTIVE OFFICER (CEO) AND
CHIEF FINANCIAL OFFICER (CFO) This provision items barely used before issuing the
code, but after issuing the code this provision items partly use the 10 non-banking financial
institution.

In the Seven place , the provision REPORTING AND COMPLIANCE OF CORPORATE

GOVERNANCE. Which has 2 items, items are (i) The company shall obtain a certificate from a
practicing Professional Accountant/Secretary (Chartered Accountant/Cost and Management
Accountant/Chartered Secretary) regarding compliance of conditions of Corporate Governance
11
Guidelines of the Commission and shall send the same to the shareholders along with the Annual
Report on a yearly basis. (ii) The directors of the company shall state, in accordance with the
Annexure attached, in the directors' report whether the company has complied with these
conditions. This provision items mostly used before and after issuing the code

The compliance by a non-banking financial institution with each of the elements of corporate
governance was scored on a two-point scale. The contents of the annual reports were assessed to
examine the level of compliance to the particular element. Where the non-banking financial
institution has fully complied with a particular element, it was scored 2; partially complying was
scored 1; barely complying was scored 1; not complying was scored 0. Scores of each of the
non-banking financial institutions against each of the elements of corporate governance was
determined and thereafter added up to arrive at total score. The total scores of each of the ten
non-banking financial institution non-banking financial institutions towards compliance with the
CCG before and after issuance of the Code are listed as follows:

12
Table 1 : Scores of Non-bank Financial Compliance With the CCG
Serial Name of the Non-bank Before 2012 After 2012
Number Financial Institution

1 ICB 124 180

2 LANKA BANGLA 135 166

3 Uttara Finance 132 172

4 IDLC 120 154

5 DBH 114 146

6 PHONIXFIN 110 138

7 Prime Finance and Inv. 158 160

8 United Finance 162 160

9 Peoples Leasing and Fin. 88 80

10 NHFIL 102 154

5. Result
The result of the Wilcoxon signed ranks test and the sign test are shown in the tables as follows:

Table 2 : Wilcoxon Signed Ranks Test Statistics

13
 Ranks

N Mean Rank Sum of Ranks

After - Before Negative Ranks 2a 2.25 4.50

Positive Ranks 8b 6.31 50.50

Ties 0c

Total 10

a. Compliance with the CCG After Issuing the Code < Compliance with the CCG Before Issuing
the Code

b. Compliance with the CCG After Issuing the Code > Compliance with the CCG Before Issuing
the Code

c. Compliance with the CCG After Issuing the Code = Compliance with the CCG Before Issuing
the Code

Table 3: Wilcoxon Signed Ranks Test Statistics

Test Statisticsb

After - Before

Z -2.346a

Asymp. Sig. (2-tailed) .019

a. Based on negative ranks.

Table 4 : Frequencies of sign test

14
 Frequencies

After - Before Negative Differencesa 2

Positive Differencesb 8

Tiesc 0

Total 10

a. After < Before

b. After > Before
c. After = Before

Table 5 : Sign test Statistics

Test Statisticsb

After - Before

Exact Sig. (2-tailed) .109a

a. Binomial distribution used.

b. Sign Test

The result of the above tests confirms that there is significant improvement in the corporate
governance practices of banks in Bangladesh after introduction of the code.

15
 6. Conclusion :
The study examined whether the corporate governance practices of non-banking financial
institutions in Bangladesh have significantly improved after introduction of the Code of
Corporate Governance for non-banking financial institutions in Bangladesh. The Code is
voluntary. Content analysis was used to assess the compliance to various elements of the Code.
We propose to study two more aspects in future work: what has been the impact on performance
of the non-banking financial institutions before and after introduction of the Code and through
structured interviews of non-banking financial institutions executives assess their perceptions
about the Code and impediments to full compliance with the Code if any.

16
 7. References
Securities and Exchange Ordinance, 1969 (XVII of 1969), However, that these conditions are
imposed on 'comply' basis. The companies listed with any stock exchange in Bangladesh shall
comply with these conditions in accordance with the condition No. 7.

Bangladesh Bank (2009), Bank and Financial Institutions, available at:

http://www.bangladesh-bank.org/ (accessed 30 October 2009).

Goldsmith (1969) opinion that NBFIs alongside the banking sector contributing prominently in
influencing and mobilizing saving for investment.

Beck and Rahman(2006) has shown the Robust relationship between the development of
financial intermediaries and economic growth.

Islam & Osman (2011) examined the long-run relationship between per capital real GDP and
the NBFIs based on Malaysian market

Pirtea, Iovu & Milos (2008) expressed that With the development NBFIs financial system and
domestic capital market also develop that in term contribute to the overall economic
development of the country.

Hossain and Shahiduzzaman (2002)focused on the Importance of non-banking sector as a

vehicle for the economic development of the country and identifies the underlying problems
existed within the sector.

Macey, J.R. and O'Hara, M. (2003), The Corporate Governance of Banks, Economic Policy ,
Review, Vol. 9 No. 1, pp. 91-107.

Levine, R. (2004), The Corporate Governance of Banks A Concise Discussion of Concepts

and Issues, World Bank Policy Research Working Paper 3404, Global Corporate

Governance Forum, Washington, D.C., 30 Nov.

Levine, R. (1997), Financial Development and Economic Growth views and agenda,

Journal of Economic Literature, Vol. 35 No. 2, pp. 688-726.

Williamson, O. (1985), The Economic Institutions of Capitalism firms, markets, relationship

contracting, Free Press, New York, NY.

17