Asset Backed Securitization in Bangladesh:

Prospects and Hindrances

Muhammad Saifuddin Khan1
Md. Hashibul Hassan2
Farhana Islam3

Abstract
Structured finance covers all advanced financial arrangements that serve to refinance and
hedge any profitable asset efficiently beyond the scope of conventional forms of on-balance
sheet securities to lower cost of capital, to mitigate agency costs of market impediments on
liquidity and to bypass regulatory requirement. Asset Backed securities (ABS), leading
form of structured finance, is growing rapidly in developed country as well as developing
country. In Bangladesh, it is first issued privately by Industrial Promotion and Development
Company (IPDC) in November, 2004. But so far the development of this potential sector is
impeded. Basic reasons for the impediment are unsophisticated debt market for government
and corporate bond, lack of legislation, capacity lacking of related parties. Some other
problems like tax incentive, tax neutrality among all fixed income securities etc. are not
very profound. Furnishing dynamic securitization act, mobilizing the formal debt market,
market, strengthen the primary dealer network, acting market maker role by government
etc. can pull up the ABS market with wide variety of prospects.
Keywords: Asset Backed Securities, Securitization, Special Purpose Entity, Pass Through
Securitization, Originator

Introduction
Securitization is an innovative form of capital market-based risk transfer mechanism by
which the cash flows of one or more assets or claims are bundled and conveyed to a SPE
(Special Purpose Entity) that in turn issues securities that represent claims on those
underlying assets or the cash flows. It substitutes lending and deposit-taking activities of
banks and financial institutions by sponsoring financial relationships in capital market. The
generation of securitized cash flows from a diversified asset portfolio represents an effective
method of redistributing asset risks to a different group of investors and broader capital
markets. As opposed to ordinary debt, a securitized contingent claim on a promised portfolio
performance affords investors at low transaction costs to quickly adjust their investment
holdings due to changes in personal risk sensitivity, market sentiment and/or consumption
preferences. The paper aims to illustrate the structure and scope of asset securitization
practices as well as the state, prospects and hindrances in Bangladesh.
1

Muhammad Saifuddin Khan, Lecturer, Department of Finance, University of Dhaka, Dhaka, Bangladesh.
Md. Hashibul Hassan, Lecturer, Shanto-Mariam University of Creative Technology, Uttara, Dhaka, Bangladesh.
3
Farhana Islam, Lecturer, School of Business, Southeast University, Banani, Dhaka, Bangladesh.
2

1
Electronic copy available at: http://ssrn.com/abstract=1517219

The study is followed by several sections. In section two the brief history of asset
securitization is explored, and then a hypothetical scenario is presented in order to simplify
the securitization process in section three. The basic structure of asset backed securitization,
effectiveness of asset backed securitization, practices of asset backed securitization in
Bangladesh, prospects of asset backed securitization in Bangladesh, hindrances of asset

securitization in Bangladesh and conclusion are presented respectively is section four, five,
six, seven, eight and nine.

Brief History of Asset Securitization

Asset securitization, in developed economy, began with the structured financing of mortgage
pools in the 1970s. For decades before that, banks were essentially portfolio lenders; they
held loans until they matured or were paid off. These loans were funded principally by
deposits, and sometimes by debt, which was a direct obligation of the bank. (Investopedia)
But after World War II, depository institutions simply could not keep pace with the rising
demand for housing credit. Banks, as well as other financial intermediaries sensing a market
opportunity, sought ways of increasing the sources of mortgage funding. To attract investors,
investment bankers eventually developed an investment vehicle that defines the mortgage
pools, segments the credit risk and structures the cash flows from the underlying loans.
Although it took several years to develop efficient mortgage securitization structures, loan
originators quickly realized the process was readily transferable to other types of loans as
well. (Asset Securitization, Comptrollers Handbook, November, 1997)
Since the mid 1980s, better technology and more sophisticated investors have combined to
make asset securitization one of the fastest growing activities in the capital markets. The
growth rate of nearly every type of securitized asset has been remarkable with estimated, total
amount outstanding at the end of 2004 at $1.8 trillion only in the United States. This growth
continues untill 2008. In year 2008 as the result of the credit crunch precipitated by the
subprime mortgage crisis the market for bonds backed by securitized loans was very weak
unless the bonds were guaranteed by a federally backed agency. (Asset Securitization,
Comptrollers Handbook, November,1997)

2
Electronic copy available at: http://ssrn.com/abstract=1517219

In Asian economies like Japan, Hong Kong, China and Thailand, securitization gained
recognition during the 1990s. More recently Asian companies have begun to securitize future
cash flows from exports, toll roads and international credit card settlements.
The idea of asset securitization in Bangladesh originated in 1999. The issuance of first-ever
asset backed securities took place on November 08, 2004. Industrial Promotion and
Development Company (IPDC) of Bangladesh issued asset-backed securitized zero-coupon
bond against debt receivable. Later February 09, 2005, Industrial Development Leasing
Company (IDLC) of Bangladesh Ltd., a leading joint-venture multi-product financial
institution, formally launched Asset Backed Securitized Zero Coupon Bonds. At present total
amount of asset-backed securities (ABS) issued in Bangladesh is about BDT 1,500 million
and all issues are privately placed among some Participating Financial Institution (PFI).

Global financial crisis of 2008 and Asset Backed Securities

The world economy entered a major downturn in 2008. The first major financial crisis of the
21st century involves esoteric instruments, unaware regulators and skittish investors. Global
growth is slowing markedly, following more than four years of strong expansion, while
inflation has risen to rates not seen in a decade, especially in emerging economies. The
financial sector was affected immediately because banks had packaged their claims from
mortgage lending together with other debt instruments into new products and sold them on in
the form of so called ABSs (mainly Sub-Prime Mortgage Backed Securities) or CDOs
(Collateralized Debt Obligations), traded globally and therefore internationalizing credit risk.
That is the cause of the potentially high contagion of recent turbulence. But the main theme
of securitization is not proves wrong. This crisis occures basically uwarrented nature of
securities and greedy attitude of the investor. If securitization designed carefully and less
aggressively the benefits can be extracted effectively.

A Hypothetical Scenario of Asset Backed Securitization

We can perhaps best explain the use of the technique of securitization by means of an
example. We start with a hypothetical Bank, Structured Finance Bank Ltd (SFBL). The bank
has 150,000 customer holding credit cards with outstanding receivable of BDT 300 million.
While the receivables have a reliable payment history, the growth of SFBLs business means
that it has strained the limits of its leverage to dangerous levels. Equity capital is scarce, and
3

the owners are not willing to relinquish control by issuing public stock. Issuing a corporate
bond would be difficult and costly, particularly since SFBLs financial ratios would not
produce a top credit rating.
In short, this company is ripe for asset securitization. The assets themselves are sufficiently
strong to support a high credit rating without the backing of the originating lender. While
many investors may not have the means to scrutinize and evaluate the assets, one or more
rating agencies will do so, as will a specialized, highly rated, financial institution which will
provide its own guarantee. After working with its bankers, the financial guarantee company,
the regulatory and rating agencies and the lawyers to structure the deal, SFBL establishes the
new trust, called SFBL 2009-A, to buy its credit cards receivables and to issue asset-backed
securities. This new trust has no other purpose and will be dissolved when the securities
become matured and for that reason it is named as special-purpose entity (SPE). The process
is illustrated in exhibit 1.
The specially formed entity purchases the assets of BDT 300 million from SFBL and sells
notes or certificates to investors. The investors stake is secured by the assets in the trust,
which are held on behalf of investors and are no longer controlled by the originator or its
creditors. The investors, however, are getting more than secured claims. They are receiving
predictable cash flows from a selected pool of assets that has been screened by the originator,
by the rating agency, and in many cases by an independent guarantee company. The latter not
only guarantees timely payment of principal and interest, but also offers expertise in ensuring
that the security is of very low risk. After all, the financial guarantee company stands to lose
the most if something goes wrong, and it will do all it can to avoid losses.
SF Banks
Customers
Credit card
Agreement

SF Bank Ltd
(Seller)

Rating Agency
Servicing Agreement
Sale of assets
Proceeds

SFBL 2009-A
(Special Purpose entity)

Asset Backed
Securities
Proceeds

Investors

Financial Guarantee
Provider- Generally an
Insurance Co.

Trustee
Exhibit 1: The securitization process

Soon after the initial transfers (transformation of asset backed securities from general assets)
have been affected, revenues received from underlying assets will be channeled to the
investors. Exhibit 1 illustrates the ongoing flow of cash payments. Installment payments are
made to the finance company, which continues its role as servicer and continues to derive
income from this activity. These payments are transferred, less servicing and other fees, to
the SPE, which passes them on to investors. The installment payments include both interest
and principal. Any prepayments of principal are also passed through to the investors. The
excess of revenues over costs, if any, is often returned to the seller under an agreement that
gives the seller/servicer an incentive to keep costs and risks low. Eventually, on or before the
final maturity date, the investors get back the full principal they invested. Accumulated
income is returned to the seller/servicer.

Basic Structure of Asset Backed Securitization

The structure of an asset-backed security determines how cash flows are allocated to different
investors, the servicer, and the seller, what protects promised cash flows to investors, and the
responsibilities of the seller and servicer of the collateral. There are many structures
commonly used in the asset-backed securities market depending on the type of
securitization1. But following three general features are common among the alternative
structures pooling and transferring receivables; structuring and issuing securities; servicing,
allocating payments, and monitoring (Savarwal, 2005).

There are three principal types of securitization: true sale, synthetic and whole business (the latter primarily
used in the United Kingdom and, to a lesser extent, continental Europe). In a true sale securitization, a company
sells assets to a special purpose vehicle/company (the SPE) which funds the purchase by issuing bonds to the
capital markets. In a synthetic securitization, the company does not sell any assets, but transfers the risk of loss
associated with certain of its assets to an SPE or a bank against payment by such company of a premium or fee
to the SPE. Whole business securitization is essentially a secured loan granted by an SPE to the relevant
company. To grant the loan, the SPE uses proceeds of bonds issued into the capital markets whereby the
company grants security over most of its assets in favor of the bondholders.- Securitization: Key Legal and
Regulatory Issues, IFC.

Pooling and transferring receivables: A lender pools together and transfers loans (or, other
receivables) to a special purpose Entity (SPE). Standard accounting rules1 govern when such
a transfer is a sale, a financing, a partial sale, or a part sale and part financing. These
distinctions are important, because a transferor can take the transferred assets off its balance
sheet in a sale, but it cannot do so in a financing. To the extent that transferors retain
servicing rights, or some security interest, or securitize only a fraction of the transferred
assets, an asset backed transaction is closer to a partial sale. In a partial sale, a transferor can
take the sold assets off its balance sheet, but continues to account for retained interests on its
balance sheet. The transfer of assets to an SPE as a sale should be legally clear enough so that
these assets are separate from the transferor even in the event of the transferors bankruptcy.
Such a transfer is sometimes called a bankruptcy-remote transfer, and a SPE is thought of as
a bankruptcy-remote entity.
Structuring and issuing securities: The SPE issues several securities backed by the
receivables on these loans. Securities issued by an SPE can be rated differently, depending on
the credit risk associated with them. Credit risk in asset backed securities depends on the
performance of the underlying collateral pool of receivables and on credit enhancements.
Important factors affecting collateral credit quality are a lenders underwriting criteria such as
borrower credit score, credit history, loan-to-value ratio, and debt-service coverage ratio,
economic variables such as unemployment and bankruptcies, and payment patterns over the
age (or, seasoning) of the loans. Credit enhancements affect credit risk by providing more or
less protection to promised cash flows for a security. Common credit enhancements are a
senior/subordinated security structure, a reserve or spread account (in such an account,
funds remaining after expenses such as principal and interest payments, charge-offs, and
other fees have been paid-off are accumulated, and these can be used when SPE expenses are
greater than its income), third party insurance or guarantee of principal and interest
payments on the securities, and over-collateralization (usually created by using finance
income to pay off principal on some securities before principal on the corresponding share of
collateral is collected). Other credit enhancements include cash funding or a cash collateral
account (which usually consists of short-term, highly rated investments purchased either from
the sellers own funds, or from funds borrowed from third parties that can be used to make up
1

Financial Accounting Standards Board (FASB) Statement No. 140: Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities a replacement of FASB Statement No. 125,
(September, 2005).

shortfalls in promised cash flows), a third party letter of credit, a corporate guarantee, a
back-up servicer for the loans, discounted receivables for the pool, or other related measures.
Servicing, allocating payments, and monitoring: The servicer (usually the same as the
seller) collects proceeds (cash flows) on the loans, and these are allocated to the investors, the
seller, and the servicer according to the structure of the particular transaction. A servicer can
significantly affect cash flows available to an asset-backed transaction, because it controls the
collection policy, which influences proceeds collected, charge-offs, and recoveries on the
loans. Any income remaining after expenses such as investor and seller payments, chargeoffs, and servicing fees are paid off is usually accumulated to some extent in a reserve or
spread account, and any further excess is returned to the seller. In monitoring issue, periodic
reports on the performance of the collateral pool are filed with the Securities and Exchange
Commission for public securities. Moreover, bond rating agencies publish ratings of assetbacked securities, and update these ratings based on their monitoring of performance of
collateral pool, credit enhancements, and probability of default.

Securitization Structures on the basis of cash flow

There are three most common forms of securitizations from the perspective of cash flow:
Collateralized Debt, Pass-Through and Pay-Trough structures.
Collateralized debt is the form most similar to traditional asset-based borrowing. The owner
of assets borrows money and pledges assets to secure repayment. The assets pledged may be
measured according to their market value upon sale or their ability to generate a cash flow
stream. The debt instrument need not match the cash flow configuration of any of the assets
pledged.
Pass through securitization is the simplest way to securitizes assets with a regular cash
flow. A pass-through certificate represents an ownership interest in the underlying assets and
thus in the resulting cash flow. Principal and interest collected on the assets are passed
through to the security holders; the seller acts primarily as a servicer.
A pay-through debt instrument is a borrowing instrument, not participation. Under the paythrough structure, the assets are typically held by a limited purpose vehicle that issues debt
collateralized by the assets. Like a pass-through, the debt service is met by cash flow paid
7

through to investors out of the pledged collateral. Investors in a pay-through bond are not
direct owners of the underlying assets; they have simply invested in a bond backed by some
assets. Therefore, the issuing entity can manipulate the cash flows, into separate payment
streams.

Basic Elements and Parties of Asset securitization

The securitization (security issuance) process redistributes risk (of the Assets) by breaking up
the traditional role of a bank (intermediation) into a number of specialized roles: originator,
servicer, credit enhancer, underwriter, trustee, and investor. Banks and financial institutions
may be involved in several of the roles and often specialize in a particular role or roles to take
advantage of expertise or economies of scale. Following diagram attach all the parties and
elements involve in securitization process.
Borrower
Originator/
Servicer
Special Purpose
Entity/ Trustee

Rating Agencies

The Asset

Credit Enhancer

The Securities
Underwriter
Elements of Securitization

Investor

Parties of Securitization

Exhibit 2: Elements and Parties of Asset Backed Securitization.

Borrower: The borrower is responsible for payment on the underlying loans and therefore
the ultimate performance of the asset-backed security. Because borrowers often do not realize
that their loans have been sold, the originating bank is often able to maintain the customer
relationship. Securitization has made popular the practice of grouping borrowers on the basis
of creditworthiness.
Originator: Originator is an entity that underwrites and makes loans; the obligations arising
with respect to such loans are originally owned to this entity before the transfer to the SPE.

The Assets: While residential mortgage loans provide the core of the global asset-backed
securities market, a wide range of other financial claims can and have been securitized.
Indeed virtually any income-producing asset with an adequate performance record and some
diversification of credit risk can be securitized. Consumer finance receivables -- in particular
car loans and credit card receivables -- constitute the most important segments of the nonmortgage ABS market. According to the section 2 (1)(ka ka) of SEC (Asset Backed
Securities) Rules, 20041 asset for Asset Backed Securities includes- Credit Card Receivables,
Lease Rental, Franchise, License, Healthcare Receivables, Cash Flows from different sources
and any other assets selected by the SEC.
Servicer: The originator/lender of a pool of securitized assets usually continues to service the
securitized portfolio. (The only assets with an active secondary market for servicing contracts
are mortgages.) Servicing includes customer service and payment processing for the
borrowers in the securitized pool and collection actions in accordance with the pooling and
servicing agreement. Servicing can also include default management and collateral
liquidation. The servicer is typically compensated with a fixed normal servicing fee.
Trustee: A third party, often a specialist trust corporation or part of a bank or FI, appointed
to act on behalf of investors. In the case of a securitization, the trustee is entrusted with
responsibility for reaching certain key decisions that may arise during the life of the
transaction. The role of the trustee may also include holding security over the securitized
assets and control over cash flows. Listing of ABS in the exchange requires the appointment
of an independent trustee. Trustees receive regular reports on the performance of the
underlying assets in order to check whether, for instance, cash flow procedures are being
followed.
Credit Enhancer: Credit enhancement is a method of protecting investors in the event that
cash flows from the underlying assets are insufficient to pay the interest and principal due for
the security in a timely manner. Credit enhancement is used to improve the credit rating, and
therefore the pricing and marketability of the security.
Rating Agencies: The rating agencies perform a critical role in structured finance
evaluating the credit quality of the transactions. Such agencies are considered credible
because they possess the expertise to evaluate various underlying asset types, and because
they do not have a financial interest in a securitys cost or yield. Ratings are important
1

Published in 16 October, 2004 under the power of section 24(1) SEC Rules, 1993.

because investors generally accept ratings by the major public rating agencies in lieu of
conducting a due diligence investigation of the underlying assets and the servicer. The rating
agencies review four major areas:

Quality of the assets being sold,

Abilities and strength of the originator/servicer of the assets,

Soundness of the transactions overall structure, and

Quality of the credit support.

The Securities: Asset-backed instruments may take a wide range of forms. They may pay
interest at fixed or floating rates; they may be short or long in term; they may have a fixed
maturity or be pre-payable or callable under a variety of conditions. Some are publicly issued
and others privately placed; some denominated in local currency and others in foreign
currency. In general, the securities represent an accommodation between the originators
needs, the payment characteristics of the assets, and investors preferences and constraints.
Illiquid
Non-tradable
Private
placement

Highly Liquid
Tradable
Private
placement

Commercial
Paper

Public
Issue

Actively
traded Bond

Exhibit 3: Categorization of Securities in terms of liquidity

Underwriter: The underwriter of ABS is responsible for advising the seller on how to
structure the security, and for pricing and marketing it to investors. Underwriters are often
selected because of their relationships with institutional investors and for their advice on the
terms and pricing required by the market. They are also generally familiar with the legal and
structural requirements of regulated institutional investors.
Investors: The great majority of ABS are held by institutional investors, such as insurance
companies, unit trusts (mutual funds), money managers, banks, pension funds etc. In the
United States, however, many individual investors hold mortgage- backed securities. In Asia,
commercial banks own a major share of ABS, but pension funds and insurance companies are
increasingly interested in these instruments. In Bangladesh, commercial banks and insurance
companies are the main investor of ABS though the market is very shallow.

10

Asset Backed Securitization: Why it is necessary?

Motives of Securitization-Issuer
Banks began to securitize a large volume of their loan portfolios in response to changing
regulations and market forces during the 1980s. Starting with the International Banking Act
of 1978, and partially in response to debt problems of the less-developed countries during the
early 1980s, regulators around the world enlarge the capital requirements1. However, raising
capital is costly for the bank owners. For example, regulators may force the bank to raise
equity when stock market conditions are not favorable for a new stock issue, or the bank may
have to retain its earnings instead of distributing them to shareholders as dividends. But there
is a way to circumvent capital requirements, and it hinges on the fact that the bank does not
have to hold capital against the loans it originates, only those it actually carries on its balance
sheet. So, there is no capital requirement if the bank originates loans and transfers their
ownership to a special-purpose entity, effectively removing them from its balance sheet.
Unless there is an arrangement in the securitization deal whereby investors can demand
compensation from the bank for loan defaults in the securitized asset pool (recourse),
regulators allow banks to keep these loans off the balance sheet, reducing the need for
additional capital and improve balance sheet efficiency.
Moreover ABS helps entities by improving asset liability management, lowering financing
cost, enhancing revenue through servicing right, retaining of competitive advantage by not
selling business franchise.

Motives of Securitization-Investor
In general, investors do not like to put all their eggs in the same basket so that something
awful happens to that basket and they lose all their eggs. Therefore, they diversify their
holdings among a number of unrelated baskets that are not all likely to get knocked down at
the same time. Now, suppose an investor wishes to invest some money in a banks credit card
business for diversification purposes. In the absence of asset-backed securities, the easiest
thing to do it is to buy the banks stock. But the return on the stock will depend not only on
the success of the credit card business, but also on other activities. If the investor is only
interested in the credit card business, he can create a homemade credit card portfolio; that
1

Ergungor, O.E., 2003, Securitization, Federal Reserve Bank of Cleveland , August

11

is, he needs to find a way of undoing the effect of the banks other activities on the stock
price. But this is not an easy task. Investor may be unable to find a security or a combination
of securities that will undo the effect of other banking activities. Consequently, the investor
may never be able to build an exact replica of the banks credit card business. Even if we
assume that the homemade portfolio is good enough, there are transaction costs associated
with buying and selling multiple securities.
So, the presence of a security that represents an ownership claim on a certain class of the
bank or financial institutions assets is advantageous to the investor because it is exactly what
investor wants. That means ABS enhances the investment horizon for the investors by an
enormous way. Moreover, investor gets some other benefit over homemade any asset
portfolio by investing in ABS, such as, greater liquidity; superior return; mitigation of event
risk etc.

More Than an Ownership Claim

Asset securitization differs from traditional asset-based lending in that the assets are legally
segregated from the originators credit condition and marketable securities are created out of
the assets cash flows. Furthermore, in order to assure that these securities will be liquid, the
asset pool is commonly credit enhanced by including excess collateral or cash reserves and/or
by securing a third-party guarantee for the financing. Following example will clarify this idea
of how ABS serves as more than an ownership claim.
Ownership of credit card receivable entitles two types of risk. First, it bears the default risk;
every uncollectible credit card debt is money out of owners pocket. Second, it assumes the
prepayment risk; when interest rates go down, consumers prepay their credit card bills by
switching to a lower-interest credit card. So, an income-generating credit card receipt
converts into cash, which the investor must reinvest may be at lower rate and thereby incur
additional transaction costs.
An asset-backed security lessens the impact of these two risks. As a protection against default
risk, banks issue securities against only a fraction of the asset pool. The rest of the pool is
used to absorb any loan defaults. For example, the bank (originator) may put BDT 300
million (the asset) worth of credit card receipts in the SPE (trustee) and sell securities against
BDT 260 million. The remaining BDT 40 million is excess collateral that loan defaults are
12

deducted from, while the investors claim remains intact. At maturity, whatever is left from
the excess collateral goes back to the bank. This kind of over collateralization protects the
investor from the occasional loan default, although the investor still has an exposure to the
large, industry wide fluctuations in the credit card business.
As a protection against prepayment risk, the bank replenishes the asset pool with new credit
card receipts whenever a payment occurs. Again, as with default insurance, the protection
from prepayments is limitedusually to a pre specified percentage of the asset pool. In other
words, the goal is to protect the investor from the occasional prepayment and not to
completely eliminate his exposure to the industry.
Practices of Asset Backed Securitization in Bangladesh

Securitization has played an exclusive function in all developed and developing capital
markets. Even in our very neighboring country India, during financial year 2007, Indian
Structured Finance market grew by 44% over the previous year amounting to Rs. 370 billion.
Securitization of single corporate loans climbed up the stairs and amounted for one-third of
the total issuances. In 2008 structured finance market faces negative growth for world
financial crisis. Bangladesh is quite late in these advance financial instruments. The first ever
asset securitization in the country has been launched by Industrial Promotion and
Development Company (IPDC) of Bangladesh on November 08, 2004. But the idea of
introducing asset securitization in the country developed back in 1999 when the World Bank
Group was working on the problems of non-bank financial institutions (NBFIs) in mobilizing
funds from the market. Then the World Bank team, along with the Government of
Bangladesh (GOB) designed the Financial Institutions Development Project (FIDP), which
floated the idea that NBFIs might issue asset-backed securities. With the help and
cooperation from different national and international bodies, the first issue of ABS in
Bangladesh took place after four stagnant years in 2004. But after the first issuance, no
significant development took place in this market though very good prospect exists.
Industrial Promotion and Development Company (IPDC) of Bangladesh launched
Bangladeshs first asset-backed securitized bond on November 08, 2004, opening a new era
of fund mobilization especially for the NBFIs (IPDC, 2005). The move will obviate the
dependency of IPDC on costly bank funds and provide it funds at low cost. Investment

13

Corporation of Bangladesh (ICB) has been made trustee for the special purpose entity (SPE)
which issued BDT 35.9 crore worth zero coupon bonds against debt receivables of IPDC.
ICB being the trustee will be handling the transaction by receiving the payments and
forwarding these to IPDC as per agreements after certain time period. Dhaka Bank, Jamuna
Bank, Mutual Trust Bank, Southeast Bank and International Leasing and Financial Services
Ltd. have already invested in the BDT 35.9 crore IPDC asset-backed securitized bonds in
private placement arrangement. As the instrument is floated through private placement
arrangement and credit rating is not mandatory for private placement, there is no credit rating
agency involved in the process. This is true for both the issue (IPDC as well as IDLC)
because only the institutional investors can participate in these issues. IPDC is also planning
to introduce similar instruments through initial public offering (IPO) to be traded in
secondary market.
IDLC of Bangladesh Limited (IDLC), a leading joint-venture multi-product financial
institution formally launched Asset Backed Securitized Zero Coupon Bonds with an issue
value of BDT 190 million on February 9, 2005 (IDLC, 2005). This marks a significant
achievement in the companys quest to mobilize funds, at lower cost, as part of its continuing
commitment to assist in the industrial development of Bangladesh. The FIDP of Bangladesh
Bank initiated the debt instrument to enable financial institutions to mobilize funds against
credit receivables, with World Bank support.
The Investment Corporation of Bangladesh (ICB) is nominated as the trustee of the issue and
IDLC Securitization Trust 2005 is formed to serve as the Special Purpose Entity (SPE),
which will issue Zero Coupon Bonds against lease receivables of IDLC. ICB, being the
trustee will handle the transaction by receiving the subscription payments and forwarding
these to IDLC as per agreements. Commercial Bank of Ceylon Limited, BRAC Bank
Limited, The City Bank Limited, Green Delta Insurance Company Limited and Reliance
Insurance Limited have subscribed to the issue under private placement.
There are a number of reasons why the issuers were not interested in public placement.
Administering cost is one of them. For a large number of investors (in case of IPO), definitely
this cost will be much higher. Apart from this, compliance requirement is huge, as the issuers
need to comply with various regulatory authorities, such as SEC, Bangladesh Bank, or
National Board of Revenue (NBR). Moreover, it is expected that general investors may lack
14

knowledge of a complicated instrument like ABS, although this problem can be easily solved
by investment bankers of the country.

Prospects of Asset Backed Securitization in Bangladesh

The generic benefits of securitization for Originators and investors have been discussed
above. In the Bangladesh context, securitization is the only ray of hope for funding resource
starved infrastructure sectors like Power, Public Transport. Public Private Partnership (PPP)
is very much talked issue now a days. The basic idea behind this PPP is simply creating
opportunity for the private investor to participate in public sector. When any private entity
wants to invest in public sector then this entity will be provided the right of that public
property for a certain time to make pay off. This idea is quite new in Bangladesh. To make
PPP fruitful GOB need to build huge capacity in terms of rules, regulation, monitoring etc.
Moreover pricing conflict between public and private entity, protecting competition of market
economy, private sector incentive issues are very much complex to deal. Asset Securitization
can be implemented more easily. Unlike equity transfer in PPP, ABS issue debt securities
backed by future revenue flow. And ABS is more efficient in respect to time, flexibility, fund
generation etc.
Bangladesh economy currently faces a substantial fund shortage in the housing sector. Total
housing loans from banks and financial institutions as of end June 2008 amounted to Taka
142.5 billion which was 7.5 percent of total credit to the private sector1. Taka 50.8 billion has
been provided by PCBs and Taka 33.6 billion has been provided by SCBs. The state-owned
House Building Finance Corporation (HBFC) had the third largest share of Taka 24.4 billion
in outstanding housing loans as of end June 2008.The sources of HBFC's fund are paid-up
capital by the government and the proceeds as received by selling government guaranteed
interest bearing debentures to different organizations. Except HBFC all other institutions
mainly depend on deposit beside paid up capital. But currently government guaranteed
interest bearing debentures are unavailable. In the past, the HBFC funded its housing loans by
issuing low interest debentures bought by the SCBs and the Bangladesh Bank. Now this non
competitive source of finance is not available. In FY04, the Corporation got approval from
the government to sell debenture amounting Taka 1.0 billion, it could not sell them till end of
1

Chapter-6, Annual Report 2007-2008, Bangladesh Bank.

15

FY 2008. Banks and financial institutions can securitize a pool of housing loans to raise fund
at cheaper cost and make their balance sheets free. Moreover housing companies can directly
make securitization to achieve disintermediation. This also helps FIs to invest individual
deposit more efficiently.
The banking sector of the country experienced a total of Taka 226.2 billion non-performing
loan (NPL). Securitization can play a critical role to mitigate the burden of NPL largely.
Banks and FIs can sell their non-performing loans to the SPE; the SPE would then pool the
loans and issue asset-backed securities. For example, the book value of a particular banks
NPL is Taka 50 billion; and the probability of recovering the loans is very low. The collateral
has a market value about Taka 15 billion. The bank can sell this NPL portfolio of Taka 50
billion to a SPE and remove it from the balance sheet. It is superior way to give healthy look
to the balance sheet than NPL rescheduling. In case of securitizing the NPLs the issuance of
zero coupon bonds are usually favored on the ground that the estimated amount loans to be
sold to the SPE and the size of the ABS program may not be economical to have monoline
insurers insure the interest payments. The use of zero-coupon bonds would compensate for
the questionable timing of the cash flow obtained from the sale of the properties. Moreover
the government could support the ABS program through providing insurance to the ABS
program as a contingent credit enhancement.
Hindrances of Asset Securitization in Bangladesh
Lack of active debt market: Lack of a sophisticated debt market is always a drawback for
securitization due to the absence of benchmark yield curve for pricing. ABS is a complex
secondary market based debt instrument and it is very tough to introduce it in a completely
new channel. The bond market has played a limited role in the Bangladesh economy in
compared to the neighboring countries. In Bangladesh the outstanding bond volume over
GDP was only 1.4%, compared with India (34.8%), Pakistan (30.9%), Sri Lanka (53.6%),
and Nepal (9.8%) in the year 2005. The share of the Bangladesh bond market in South Asia
(0.2%) is also the smallest among the five countries1. The main impediments to the
Bangladesh debt market are the weak regulatory framework, supply-side constraints such as a
lack of the benchmark bonds, demand-side constraints such as the limited investor base, a
lack of intermediaries with expertise in debt products, a lack of confidence in corporate
borrowers, market distortions which are caused by the National Savings Scheme (NSS)
1

South Asia Bond Markets: Bangladesh, Yibin Mu, Version April 2007, World Bank.

16

offering above-market returns and a lack of interest from private companies, including
financial intermediaries and large business, in launching new debt products due to high fees.
The development of the debt market would naturally increase the securitization activity in
Bangladesh.
Inadequate Strength of credit rating industry: In Bangladesh legislation was established
in 1996 to provide a framework for credit ratings, as well as there are two domestic credit
rating agencies capable of rating securitized products. They are:

CRISL, created in 1995. Its shareholders include RA Malaysia Berhard, JCR-VIS

Credit Rating Co of Pakistan, Prime Commercial Bank of Pakistan and the Investment
Corporation of Bangladesh (ICB). It is a founding member of the ACRAA, or
Association of Credit Rating Agencies in Asia (sponsored by the ADB).

Credit Rating Agency of Bangladesh (CRAB), established recently.

The capabilities of the domestic credit rating agencies are questioned by those familiar with
international rating agencies. This is partly due to compensation arrangement. On the one
hand, rating fees approximate $3,623 and annual fees come in at about $1,4501. Low fees, by
international standards, contribute to making ratings affordable for Bangladesh companies
and increasing usage. On the other hand, lower revenues translate into lower pay for
employees and less investment in software and systems for analysis. But securitization
market needs highly qualified and credible credit rating to motivate investors and
mobilization of participants.
Lack of appropriate legislation: There are no laws specially governing securitization
transactions in Bangladesh. The idea of introducing asset securitization in the country
originated in 1999. Since then Bangladesh Bank as a regulator has not provided any guideline
regarding asset securitization. But Bangladesh Bank issued only a tentative guideline on
mortgage-backed securitization which is insufficient to promote the securitization. Moreover,
the Asset Backed Securities Issue Rules, 2004 under Securities and Exchange Commission
Act, 1993 is unable to depict the trading guideline. Besides the two regulators Government of
Bangladesh also failed to support the securitization process such as Government had the
scope to securitize their receivables from infrastructure and housing sector. No bill has been

South Asia Bond Markets Bangladesh, Yibin Mu, Version April 2007, World Bank.

17

tabled in the parliament of Bangladesh yet to transform an act for securitization. The
following are the key areas where legislators should focus:
1. True Sale (Isolation from bankruptcy of the originator): The central idea of a
securitization transaction is to isolate the assets of the originator from originators
balance sheet and seek a higher credit rating than the originators own rating. A key
requirement for that is to achieve a true sale of the assets to the Special Purpose
Entity.
2. Transfer of collateral: Financial Institution cannot transfer the underlying collateral
securities of immovable property attached with the receivables though they are allowed to
sell or transfer the cash flows associated with the receivables to other interested investors.
This lapse of in the law should be eradicated.

3. Bankruptcy remote SPE: The special purpose entity that buys assets from the
originator should be a bankruptcy remote agent for distributing the income from the
assets to the investors. No clear vehicle has emerged for performing bankruptcy
remote securitization. This should be addressed by the securitization act.
4. Stamp Duties: Stamp Duties on transfer of assets in securitization can often make a
transaction unviable. Article 40 of the First Schedule of the Stamp Act of 1899, states
that the stamp duty is not required in case of a new mortgage but is silent about any
modification of mortgages which is essential in case of ABS.
5. Taxation & Accounting: At present there are no special laws governing recognition of
income of various entities in a securitization transaction. Furthermore tax disparity
between zero coupon bonds and other fixed income securities lessens the competitive
advantage of ABS. Accounting rules and standards practiced in Bangladesh is also
lacked in ABS issue. Bangladesh is yet to introduce Financial Accounting Standards
Board (FASB) Statement No. 140: Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities a replacement of FASB
Statement No. 125, (September, 2005) & IAS 39: Financial Instruments:
Recognition and Measurement (IAS, 2005).
Lack of Investor Appetite: Investor awareness and understanding of securitization is very
low. Most of our investors are not sufficiently sound in understanding company
fundamentals. Knowledge of the investors about structured finance and derivative is close to
18

zero. SEC, Dhaka Stock Exchange and Chittagong Stock Exchange often arrange investor
awareness programs, but those are not sufficient to build up economy wide awareness and
knowledge of numerous investors.

Conclusion and Policy Implications

Asset securitization is the separation of good assets from a company or financial institution
and the use of these assets as backing for high-quality securities that appeal to investors. This
process involves some features such as bringing out the target assets to a pool, designing the
structure of securities, adding some parties to enhance the quality of securities, eliminating
some steps of intermediation to reduce the cost, bringing the securities to the market for
liquidity. The end result of securitization is investor get access to some portfolios those can
not be replicated by any other means. On the other hand issuers can mobilize their funds and
get benefit from off balance sheet activities.
Around the world, asset-backed securities markets have also been growing rapidly. A dozen
or more countries in Asia, including Japan, Hong Kong, Thailand, Indonesia, India and the
Philippines have all seen the introduction of asset-backed securities. Though Bangladesh has
launched some ABS in different time, it is not very well known mode of financing. Moreover
market mechanism is not shaped yet. ABS can facilitate Bangladesh in various sectors like
Infrastructure finance, Housing finance, FIs fund mobilization and reducing capital
requirement, capital market development.
The main reason that hinders the growth of ABS is lack of capacity. Related parties of ABS
market are not trained or structured yet to flourish this sector of economy. Besides lack of
capacity some other problems exist like imperfect legislative framework, inactive debt
market, incentive problem in tax structure, investor knowledge, absence of market maker etc.
It is not the high time to issue ABS in different sectors of Bangladesh rapidly despite if
Bangladesh wants to capture the benefits it is right time to reshuffle all related issues. Some
major issues are such as creating a dynamic debt market. To develop the debt market
regulators should strengthen the government securities market by (i) improving the efficiency
and transparency of the primary market in government securities, (ii) gradually increasing the

19

volume of the marketable government securities and reducing the volume of the nonmarketable securities, and (iii) strengthening the liquidity of the secondary market in
government securities. Government should promote the corporate bond market development
by (i) developing a comprehensive set of guidelines on issuing bonds and debentures under
the direction of the SEC, (ii) further reducing issuing costs. The investor base should be
broadened by (i) promoting the pension sector reform, (ii) strengthening the insurance sector
development, and (iii) adopting reforms to attract foreign investors.
Moreover, a joint cell should be setup taking representative from Ministry of Finance,
Securities and Exchange Commission (SEC), Bangladesh Bank (BB) and National Board of
Revenue (NBR) to make an act on securitization. A comprehensive securitization Act can
give a much-needed thrust to securitization activity in Bangladesh. Besides this government
should engage in market making to give confidence to the investors about liquidity of their
investment.

20

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