A comparative analysis of profitability of non-banking financial institutions in Bangladesh and investors’ investment decision making

Abstract

Non banking financial institutions, or NBFIs, are the financial institutions that provide financial services including banking but do not hold a banking license. NBFIs primarily emerged with the inception of Industrial Promotion and Development Company of Bangladesh Limited, presently known as IPDC Finance Limited, to mitigate the limitations that existed in the banking sector and has since been customizing financial innovations and have established a strong foothold in the competitive financial market for satisfying the changing demands of customers, thus adding differentiation to the financial sector of Bangladesh. As a consequence, NBFIs are nowadays being considered as an imperative part sector of the financial system, which has been expanding extensively and attaining importance on a continuous basis due to their ability to address the diverse financial requirements of business enterprises. One of the objectives of the study is to provide a comparative analysis and evaluation of the profitability of NBFIs enlisted in Dhaka Stock Exchange. The interpretation of the profitability measures used for this purpose reflects the financial institutions‟ effectiveness in decision-making, efficiency in their core activities and utilization of resources and their resilience to economic adversities which will assist the companies in identifying the areas that require attention and corrective measures for improving their financial performance. It has been found that due to high volatility and lack of stability in the economy and stock market, trends of profitability ratios did not demonstrate consistency according to theory in some cases. The study also focuses on the degree of dependency of net incomes of the selected NBFIs on the four influencing factors, namely, net interest margin, operating margin ratio and return on equity. Another objective of the study is to assess the investors‟ investment decisions by evaluating whether or not the returns being earned by them sufficiently compensate the risk they bear by investing in the equity shares of the selected NBFIs. Several recommendations based on the analysis have been provided some of which include implementation of financial innovations, increasing transparency in credit evaluation, interest income, loans and streamlining loan disbursement methods so that both the issuing NBFIs and investors are benefitted in the long term.