Giving licence to the institution has been a political decision amid a struggling non-bank financial sector
The Bangladesh Bank board is likely to issue a letter of intent to the new financial institution Strategic Finance and Investment with a condition to bring 50 percent of its paid-up capital from foreign institutional investors.
The proposed financial institution's letter of intent, which got the primary approval at a previous board meeting last month, is likely to get the final nod today.
Strategic Finance and Investment Limited applied to the central bank for licence under Section 4 of the Financial Institutions Act 1993 on November 14 last year.
The central bank has decided to award the licence at a time when most of 34 non-bank financial institutes have been struggling for survival.
A senior central bank official told The Business Standard: "It's true that giving licence to the institution has been a political decision. But the proposed financial institution has a good proposal of bringing capital from foreign investors. Also, it promises to bring in low-cost funds from international lenders."
Padma Bank Chairman Chowdhury Nafeez Sarafat's wife Anjuman Ara Shahid is the founder chairman of the Strategic Finance and Investments, reads the financial institution's application.
Muhammad Ali Zaryab, now serving as a deputy managing director of Padma Bank, is the proposed managing director of the new company.
Both Nafeez and Muhammad Ali could not be reached for comments.
Dr Zahid Hussain, former lead economist of the World Bank in Dhaka said, "The sector is in a crisis. Many weak financial institutions are still alive because they are not allowed to die. So, the central bank has to think before giving licence to a new institution, especially the one which depends on others' funds. It will also have to evaluate what kind of new service is the new institution is offering."
Currently, 33 non-bank financial institutions are operating in the market. Of which, only four have remained in the green zone, says the Bangladesh Bank's stress test, indicating that only 11 percent are low-risk companies for depositors.
"This sector has a surplus of institutions. The week ones need to be either merged or liquidated," said Dr Zahid.
In July 2019, the Bangladesh Bank began liquidating People's Leasing and Financial Services as it failed to repay depositors' money despite the maturity of funds.
The central bank officials also said that another five to six financial institutions have been failing to give the depositors' money back.
Ten to twelve companies continuously stayed in the red zone because of their worsened financial health, says the stress test.
The total default loan in the non-bank financial institution sector was Tk7,320 crore or 11 percent of the total loan as of June last year, says the Bangladesh Bank data.
"How can we trust the corporate governance of the upcoming institution? Do they have any commitment to bring better management or better technology? Only bringing foreign investment is not enough. If it becomes another bankrupt institution, there will be more troubles with paying with foreign currency," said Dr Zahid.