Good governance drives growth of IDLC Finance

When the banking sector is facing slowdown amid crises such as loan scams and undue meddling of boards, IDLC Finance Ltd has kept up its strong growth on the back of good governance practices.

“IDLC outshined 45 banks in terms of profit and the magic behind the stellar performance is efficient and empowered management,” said Arif Khan, chief executive officer of the largest non-bank financial institution in Bangladesh.

“IDLC has become a model in the financial sector by practising good governance,” he told The Daily Star in an interview last week.

According to Khan, boards are the source of all troubles and many banks are in a tight corner because of such interference.

“At IDLC, all are empowered at their own desk and loan approving process is decentralised.”

Three in four loans are approved at assistant manager and senior manager levels. The credit committee approves loan proposals as per policies of the company. 

“Such practice is rare in the banking system in Bangladesh. This culture and governance practices are driving the growth of the company while keeping the non-performing loan at a very low level,” he said.

“The lack of governance is the main problem in the banking industry.”

IDLC's return on assets, a major performance indicator, was 2.7 percent in the first nine months of the calendar year, the highest among the top 10 banks. The return on equity was 22.9 percent.

IDLC recorded 35 percent year-on-year growth in profits in January-September.

Earnings from its capital market operations have played a major part in boosting its profits. IDLC has three subsidiaries in the capital market: IDLC Asset Management, IDLC Investment and IDLC Securities.

Higher transaction in the stock-market has boosted the income of the subsidiaries, Khan said. He gave credit for the continued success to the workforce of the company. 

“We hire quality people and give the staff higher salaries and other benefits,” he said, adding that promotion at IDLC is performance-driven.

The company has established a culture of professionalism and always tries to do things differently instead of following the tradition, said the top executive.

Deposit grew 25 percent year-on-year in the nine months of the year, which is higher than that of the top 10 large banks. Deposits account for 83 percent of the total funds of the company.

Its loan portfolio stood at Tk 7,000 crore as of September this year and the loan growth in the nine-month period was 13.4 percent, the fifth highest among the 10 large banks.

IDLC is one of the top 20 valuable companies in Bangladesh in terms of market capitalisation. Its market capital doubled to $400 million in 18 months.

Though IDLC started as a leasing company in 1985, it operates like a bank and only 5 percent of its balance sheet is for lease financing.

Home loans and SMEs are the key products of IDLC at the moment. The company has 36 branches across the country and SME financing accounts for 46 percent of its portfolio.

“We prefer lending depending on a client's personality and cash flow of business instead of collateral.”

As a result, the management has been successful in maintaining a low NPL rate, he said.

The average default loan in the industry is over 10 percent whereas it is below 3 percent at IDLC.

A former commissioner of the Bangladesh Securities and Exchange Commission, Khan is also upbeat about the stockmarket. The return from the stockmarket was 22 percent higher this year due to a positive movement in price indices.

Khan hopes the market would continue the momentum as money is flowing in to stocks because of low deposit rates in the banking sector.

IDLC Investments' “Easy Invest” product has made investment in the stockmarket simpler for retail investors, especially for those who do not want to take risks or have little understanding of the capital market.

The product allows people to invest a small amount of money. IDLC invests the fund in stocks and gives profit to the depositors at the end of the year.

The scheme is getting popularity among investors because the return is more than 15 percent whereas the deposit rate is less than 10 percent, said Khan. 

“IDLC makes stock investment following in-depth research on the listed companies. As a result, the company can manage steady return even when the market is down,” he said.

He said there is huge scope for investment in the stockmarket if efficient fund managers enter the market. 

Khan, who worked for IDLC for 15 years before serving the BSEC for five years, has more than 25 years of management experience in the financial service sector.

IDLC was awarded as the best governed company by the South Asian Federation of Accountants recently.

The firm has decided to make a major shift in corporate social responsibility activities in the next five years. To realise the goals, it will increase its CSR spending, said Khan.