Arif Khan brings more than 27 years of management experience to IDLC having served in various prestigious local, multinational and government organizations in the financial service sectors.
Before taking up the role of CEO and MD of IDLC Finance, Mr. Khan served as a Commissioner of Bangladesh Securities and Exchange Commission (BSEC) in a 5 year stint and has been widely acclaimed for his role in the development of the capital market of Bangladesh. Prior to this, he served IDLC Finance for 15 years before leaving as the Deputy Managing Director. In this role he played a key role in the growth of the company as well as development of several business wings.
He began his career in 1991 as a Probationary Officer in AB Bank Limited. Mr. Khan is a Fellow Member (FCMA) of the Institute of Cost and Management Accountants of Bangladesh (ICMAB), where he occupied the role of the president until recently. He also holds the Chartered Financial Analyst (CFA) Charter and is member of the CFA Institute, USA. He was the Founding President of Bangladesh CFA Society and Bangladesh Merchant Bankers’ Association (BMBA).
Mr. Khan holds a Master of Business Administration (MBA) degree from the Institute of Business Administration (IBA) of Dhaka University. He also obtained a Master of Commerce degree in Finance and Banking from Dhaka University.
If IDLC Finance-unarguably the best non-bank financial institutions (NBFI) of the country-is perceived as a welloiled machine, Arif Khan, its CEO and MD can be well perceived as the ‘workaholic engineer’ who knows about all of its cogs like no one else.
Even though in his illustrious career, he held important position like Commissioner of the Security Exchange Commission (SEC) and worked for some of the milestone regulatory measures, Arif Khan somehow becomes synonymous with IDLC Finance.
This is because, in his first 15 years period with the IDLC Finance, he has worked mostly as the ‘behind the scene’ kind of a person, leading projects after projects, orchestrating the meteoric rise of the organization which has had a sleepy presence for long.
In his ‘second innings’ with IDLC Finance, which he started as its CEO and MD, Arif Khan now focuses on making the IDLC simply the ‘best financial institution of the country’ rather than just the ‘best NBFI’.
As a result and outcome oriented man, Arif Khan however barely talks in future tense, rather he talks in numbers that are already being attained.
Fintech recently sat with this brilliant financial mind and talked about his professional life, a lion share of which he has spent with the IDLC Finance.
FINTECH: You have started your professional career at the AB Bank in Bangladesh. Can you give us a brief description of the journey of your career from there?
A Khan: After finishing my Masters degree from Dhaka University (DU), I started my career at the AB Bank as a probationary officer in 1990. Prior to that, I also had enrolled in the ICMAB to pursue a CMA certification, a professional accounting degree. So, both my masters and CMA were basically going on simultaneously and I finished both in 1989. I had a two year stint at the AB bank.
From the AB Bank, for a very brief period, I moved to British American Tobacco (BAT). I was posted in Sylhet and was looking after the sales operation. Meanwhile, I got admitted in IBA for pursuing an MBA degree. While I asked for a transfer to Dhaka from Sylhet to carry on my MBA program, BAT refused. So, I was left to choose between my job and study and I opted for the latter. After few months, while studying in the IBA, I got a job at Beximco. I worked there for two years and then I moved to IDLC an Assistant Manager in 1996. I worked there for the next fifteen years and held positions like the Chief Financial Officer (CFO) and Deputy Managing Director (DMD).
I left IDLC in 2010. I then joined Security Exchange Commission (SEC) as its commissioner. After working there for five years, I came back to join IDLC Finance as its CEO and MD. So, in my 27 years of professional career, I have spent more than 17 years here in IDLC Finance.
FINTECH: So you have known this organization from the core. What do you think are the main elements behind the success of IDLC Finance?
A Khan: IDLC Finance is operating for 32 years in the Bangladeshi market. It started as a small lease financing company. It used to finance some machineries and vehicles for industries. The portfolio size of the company was also very small. However, in the last 32 years, it has been able to create an unmatched reputation in the market irrespective of local or multinational financial institutions. It has become one of the most respected financial organizations of the country.
This is because IDLC has one of the best corporate governance. The board here never dictates on its operation. This is purely a management driven company. We have given the power of making different types of authoritative decisions at all levels.
Even an assistant manager of our company has the capacity to approve loans of certain amount. There are still many banks in the country where no one but the MD can approve a loan, no matter what the amount is. But here in IDLC we have a proper established a loan sanctioning guideline, like how much loan an assistant manager can disburse or how much an AGM head can. This makes the loan disbursement process faster. If a bank takes two months to process a loan, we take only a week to do the same. So even we are in a disadvantageous position in terms of cost of fund, we are ahead of the commercial banks in taking less processing time.
Our NPL alone tells you that the organization has never subjected to prescribed loans from board. The average Non Performing Loan (NPL) in the market is 10% but the actual NPL is higher than this because some of the bad loans are rescheduled and restructured. So, the real NPL which is termed as extended NPL is 17%-18% in the market.
But our NPL is less than 2.8%. Interestingly, IDLC has been able to maintain its NPL in the same range for the last 32 years. I believe it is an unrivaled achievement by any financial organizations in the country. Because it shows that we have always been channelizing the depositors’ money in proper places.
We also have created a harmonious working environment in the office. I believe, that is another major reason behind our success. A total of 1300 people are now working in our organization and if you conduct a survey on them, you will find that 99% of them are happy professional. All of them are KPI oriented and they all have targets of their own. This is because we have established a culture of reviewing their performance on a regular basis. A part of their salary is fixed and the other part varies on their performance so every employee here feels motivated to perform better for their own sake and for the sake of company as well.
The working environment is also very open here. Even a junior officer here can challenge the CEO anytime if there is a valid reason. The corporate culture here is being established basing on mutual respect for each other. We have received an award from South Asian Federation for Accountants (SAFA) for having best corporate governance in the whole region. It demonstrated that a financial company from Bangladesh can get an award for having best corporate governance.
The quality of leadership is nurtured here. There is a saying in the market that IDLC also creates future leaders. Eight of our former employees have become the CEO and MD of financial institutions including the commercial banks and NBFIs. I can say that the people at the top and mid management that I have in IDLC now, no less than 10 new CEOs will be made from them in the next 10 years. I think that’s a huge contribution from IDLC to the whole banking and financial sector. Besides, the reputation of an IDLC employee in the market is very good. They are known for their integrity- a trait which is valued by the financial organization.
I think because of these reasons, IDLC has been able to attain its success. Many of the commercial banks are making way less profit than us. IDLC made a profit of Tk 178 crore after tax in last year. In the first quarter of this year, IDLC made a profit of Tk 60 crore which is higher than at least 80% commercial banks of the country.
We also try to solve problems persisting in the society. IDLC is not all about doing business and making profits rather it’s a society and people centric organization. We want to build our IDLC branch as a lighthouse for that area. It will take active participations in solving the problem in that area. Making money is secondary. IDLC tries to solve the problem of people and profit comes as a logical by product in that process.
FINTECH: What is the size of the SME loan portfolio of IDLC Finance now? Why IDLC is heavily focused on SME?
A Khan: The size of our loan book is about Tk 7,000 crore now. About 46% of this loan is concentrated in the SME sector. So, we have almost half of our loans in the SME sector and we have a plan to disburse more loans in the SME sectors.
There are obvious advantages of SME loan. There is a common notion among the people of our country that large corporate loans are less problematic than the unstructured SME loans. But, in our experiences, we find that the loss in corporate lending here is more than the loss in the SME lending. In the SME sector, our NPL is less than 2% and the actual loss is 0.5%.
IDLC prefers SME financing not just because of making profit, rather through SME financing, a lot of employment is generated and thus the benefit goes to a larger population. If you disburse Tk 100 crore to a large corporation, say to a group for constructing a five star hotel, it will generate employment for 1,000 people. But if you distribute Tk 100 crore to 1,000 small scale entrepreneurs, they will be able to create job opportunities for another 10,000 people. So I believe the SMEs contribution to the national economy is higher.
Besides, doing SME business is not easy for all the commercial banks. Disbursing proper SME loans requires a mechanism and you need to create proper people and proper system and organizational culture to do that. In that area, we have a strong advantage because we have built our teams with certain focus in mind.
FINTECH: Is it possible for the NBFIs of the country to compete with the commercial banks? What will be the strategy in doing so?
A Khan: I can give you the answer from IDLC’s perspective. Since we are a NBFI, we are in a slightly weaker position than the bank in terms of cost of fund. This is because, in the bank, people deposit money in the current accounts and savings account. Current account is without interest and savings account has low interest rates and banks collect a large part of their fund through those deposits. As an NBFI, we don’t have that advantage. So if the cost of fund of the Bank is, say 5%, our cost of fund is 6 to 6.5%. So we are always 1%-1.5% behind the commercial banks. Because of this, NBFIs always need to find strategy or to concentrate on the market where commercial banks don’t. We need to operate with blue-ocean strategy.
It means we don’t operate in the area where everyone else is operating, so we always try to come up with innovative financing and unchartered areas which have potentials but haven’t been explored by many.
In IDLC, when we found out that the corporate lending area has become too crowded, we shifted our focus towards SME. When we started giving small and medium size loans to businessmen of different districts outside of capital Dhaka, very few other organizations including the commercial banks couldn’t even think of venturing those avenues. Now all of the banks and NBFIs are doing SME.
We also focused a lot on home loans because none were focusing here. Our home loan now comprised 40% of our loan portfolio. We process home loan faster than any other financial organizations in the market. We have one of the largest home loan portfolio in the market. As of now, we have disbursed over Tk 10,000 crore worth of home loan. This is even higher than the amount disbursed by the House Building Finance Corporation (HBFC).
At one point, we also thought of increasing our fund through depositor’s money. None of the NBFIs used to take deposit from the customers. We used to take money from the banks and then disburse those as loans to our clients. We didn’t have any direct customers. IDLC was like a boutique financing company at that time. But as per the regulation, we didn’t have any problem of reaching out to the customers, we thought of reaching out to the customers.
So, we went to the board and sought permission of taking deposits from the customers like banks. They have approved. At that time, many other industry players couldn’t believe that we would be able to operate like a bank. But 20 years from then, now, we have proven to be right. IDLC has become so big now because, we have been able to take decisions like those ahead of time and others. We now have a client deposit of about Tk 7,000 crore and it’s growing every year.
We also thought of diversifying our income from banking and lending. Then we started the journey of IDLC Security and IDLC investment banking divisions. Within three years of starting those organizations, we became the top performer in the market.
Now, we are thinking of starting IDLC Mutual Fund operation. We have a plan to make IDLC Mutual Fund a success like IDLC Finance in the next five years. We also have a plan to launch IDLC Venture Capital firm. We are actively working for it. In our next board meeting, there will be some proposals regarding this.
So, basically in every two years, we try to come with new initiatives. We always think about ‘what next’
FINTECH: You have recently taken some measures to finance IT startups?
A Khan: We did that in last year in partnership with BASIS. We financed a lot of IT companies. We are also planning of developing a venture financing fund within the next year. We will finance the startups companies from that fund. I can tell you in next 20 years these IT startups will define the face of development of Bangladesh.
If we take a look at the big IT names across the world, we would see that none of them are financed by the banks. Because banks want security and they just can’t invest on ideas without having any collateral. When I was in SEC, I was also in the project in-charge of formulating guidelines for alternative financing in 2015. I, along with my team formulated the guideline by analyzing the guidelines for alternative funds for a number of countries. I was also the project in charge of demutualization of stock exchange.
These IT startups are getting huge support in our neighboring India. The Modi government, in the last budget has created a fund of Rs 10,000 crore for the startups. He has also exempted tax for the next three years for these IT startups. They have taken these initiatives because they realize that these startup companies will have the ability to change their future.
I lauded the government initiative of removing the tax on fund for the VC firms. But there is still lot to be done for the sectors to flourish. Building a startup ecosystem is also very important. We need to train and help the startups to build a startup culture. There is a research that VC backed startups create more jobs in the economy. If we create a startups ecosystem by aligning all the regulators, then the startup culture will flourish in Bangladesh.
FINTECH: Is IDLC ready for the looming technological disruption in the financial sector?
A Khan: I believe we are ready for it. Technological disruption is imminent. We are going to make heavy investment in technologies this year. We will upgrade our whole system and cyber security measure.
FINTECH: If we look at the western world, especially the US, we would see that the largest financial organizations there are investment bank like Goldman Sachs and Morgan Stanly and others. But in Bangladesh, the culture of having large scale investment bank hasn’t been established. What are the reasons behind this?
A Khan: Bangladesh is mainly commercial bank dominated economy. It is more of an interest based economy than equity based economy. If you look at the USA, you will see that their economy is heavily based on equity. Their banking system and the bond market is also very big. If you look at Dow Jones of Wall Street, you will see that their size is bigger than the commercial banking system.
I would say about 90% of Bangladesh’s economy and financial systems are dependent on commercial banks and interest. You have to understand when investment banking is conducted. It is usually conducted in an environment where there are merger and acquisition, or you want to take a company to IPO. So when there are needs for this, the culture of investment banking is grown.
In Bangladesh, if you want loan for starting a business, you usually go to the bank and take loan against collateral. Also there is a prevailing culture of prescribed loans which usually turn out to be bad loans. Also for equity and investment banking, you need to open your book and many organizations are not interested in doing so. Investment banking will not take place in one day. When you see the economy moving upward, you might find its emergence in Bangladesh.
FINTECH: For having investment banking culture, an economy needs to have large conglomerates. Don’t you think that Bangladesh have crossed that stage of having a number of large conglomerates?
A Khan: I think, we have reached to a level now from where we can see the possible emergence of large investment banks. Investment banking is more about providing advisory services so that the large corporations could be made more efficient, or devising ways for a large company to take over a small company, or chalking out strategy for merger between two companies and
formulating strategy for offering IPOs of a company. Retail persons only come to investment bank to keep their money
with a fund manager who would manage their fund and invest that in capital market. At the end of the year, the retail depositors get the dividend against the investment.
FINTECH: Do you think the declining bank interest rates would open up the scope of more alternative investments? Does the government want people to move from keeping idle money at the bank and channel it to other places?
A Khan: The declining interest rate has very little to do with government’s intention of keeping people away from keeping money in the commercial banks. The truth is that the government has very little control over fixing the interest rate for the commercial banks. Interest rate is intricately related with inflation rate. If the inflation rate is 12% then you cannot have a bank interest rate of 6%. Two to three years ago, the inflation rate of our country was 11.5%, and then the interest rate against the FDR was 13%. Now the interest rate against FDR is reduced down to 5.5% and at the same time the interest rate has come down to 5.5%.
So interest rate has intricate relationship with inflation rate. It is also related with the overall credit demand of the financial market. In many other countries, especially in the developed countries the interest rates of the commercial banks are way lower than the one that we have. In Bangladesh, it would have been lower too if there weren’t any saving certificates. The saving certificates issued by the government have high interest rates of 10%-11%.
The scopes of alternative investments usually open with the growth of the economy and the growth of the middle class. Bangladesh’s economy is growing at a steady pace and by the rules of the market; scopes of alternative investments for the people will emerge.