The first impression you get from meeting the CEO and MD of Meridian Finance and Investment Ltd is not that he loves to talk a lot. Yet, you start to converse about NBFIs or the financial sector in general, Irteza Ahmed Khan will be all ears and equally willing to share his own experienced and meticulously informed views. There is no doubt that he is heavily invested in the subject.
Irteza Ahmed Khan sat down for an interview with Fintech at Meridian Finance’s office in Gulshan. He gave us interesting insight into the NBFI sector, talked about his company’s history, his own career and his opinion on a number of issues related to the banking and financial sector. All of it was worth capturing and so we did. Here is the exchange for our readers:
FINTECH: You have been in the financial sector for over 17 years now. Tell us about how and when you got started and your journey up to where you are now.
IAK: Basically, my educational background is in commerce. Initially I joined a CA firm after completing my graduation. I also enrolled for a chartered accountancy degree. So, my career started at a CA firm, when I was simultaneously pursuing the CA qualification. Afterwards, I stayed at ACNABIN, which was a representing firm for Arthur Andersen Worldwide at that time. It’s one of the big four chartered accountancy firm internationally. That was the beginning of my career. Our work there entailed carrying out audits in many banks, as well as other industries of course. But banks were predominantly our clients.
After completing my CA Articleship and the, I stayed there for about one and half years as a professional staff at ACNABIN. Then I got the opportunity to work for a financial institution, Delta Brac Housing Finance Corporation. It was in 1999.In fact, they had started their operation in 1998 and in August 1999 I joined as an MTO. That was a breakthrough in my career. I was there for about five years. I was the branch manager for Motijheel before leaving. After that I moved to IDLC Finance Ltd in 2004 as a senior manager and head of branch of Gulshan. At that point of time, as you know, IDLC was predominantly a multi-product finance institution. They started their retail function and after I joined we opened up new branches. I joined at the Gulshan branch and then we opened Uttara, Bogra and other areas which had been untapped. I was at IDLC for 11 years and I played vital role in many areas, not necessarily just as a branch manager. I was head of sales, head of sales and marketing, deputy head of consumer finance, then head of consumer finance. My final position was general manager and the head of consumer finance.
In 2015 Meridian Finance started. It emerged as a multi-product financial institution and I got the opportunity to build the company from the ground up. They were looking for someone who has a range of experiences of doing that. After I joined in September 2015, I started off the operation of Meridian Finance. When you have an organisation starting from scratch you have a series of work that has to be undertaken. We have faced a lot of challenges, but mashallah, with the help of almighty Allah we have reached many milestones. So, my background, as you can see, is predominantly in the NBFI sector. I was never very eager to work for banks. It doesn’t mean that I didn’t get the opportunity to work. But I chose to work in NBFIs in order to go through a faster career track.
FINTECH: Could you talk about the challenges of NBFIs in terms of its competition power against banks? What advantages banks have that you don’t have and how do you overcome them?
IAK: If you think about why NBFIs are there at all, even though there are banks, you will realise that NBFIs are financial intermediaries. There is a need for these intermediaries, otherwise they wouldn’t have come into existence. If you look at developed countries, there are specialized institution doing what the banks don’t do. They provide you the other way. I started off at Delta Brac. There main focus was home-loans and deposits. And still now they are considered the specialized home-loan company in Bangladesh. They are even far bigger than the House Building Finance Corporation, which is state owned. The state owned NBFI was there, but they were not able to meet the demands. And then there is bureaucracy, that stands in the way of people getting loans easily. So, there was always a demand for intermediaries. Although at that point in time, in 1999, there were many banks but they were not interested in home-loans. What were the options then? Only DBH and probably House Building Finance. There were only a handful of banks who would give you home-loans. Even if when they did have home-loans, their policy and procedure would be so rigid that you would end up not getting the loan. So, this is the example of DBH. And by that there are now 36 NBFIs coming up. They are competing with the banks, within the same ground, even though the banks are much more privileged, as they get much more facilities in terms of service products.
The major difference between banks and NBFIs is predominantly in three areas. We don’t have foreign exchange permission, which means you cannot have trade finance. Number two is that you cannot be a member of a clearing house. That means you cannot have checking accounts, savings accounts. But you can have TDRs. Term deposit is a time bound deposit. You cannot have cash transactions either, since you don’t have any checking account. These are the major differences between banks and NBFIs. And of course, since the range of products is narrower you can’t have many touchpoints, which is branches and other source of banking channels. These are the differences.
Basically, at an NBFI you have to always innovate to survive. For banks, I’m not saying it’s easy, but you have a bigger portfolio of business opportunities. So, over time you will be somewhere. But for NBFIs to survive you always have to consider banks to be your major competitor, threat. Because a major problem of an NBFI is always funding sources. As we don’t have checking accounts, saving accounts, current accounts, our sources of fund are extremely limited. Banks get major funding from the checking accounts and saving accounts. So, from the beginning, when an NBFI that starts operation, it has to figure out how they can manage cheaper sources of fund. And our source of fund is predominantly in deposits, term deposits. And of course, other sources are there; equity is there. But these are not regular and recurring. You get equity one time from your sponsor but it’s not recurring. So, in regular operation you have to have the source of fund, which is term deposits. So, what I’m saying is that at NBFIs you have to be innovative and you are always in a pressure of doing new things. Innovation and technology are always considered as focus areas. Whereas, banks are traditional. Although now, after the changes and disruptions in recent years they are more tech savvy. It’s not really like they have incorporated technology, rather technology compelled them to adapt to its disruptions. They would have been obsolete unless they adapted.
FINTECH: Do you think that we have gone through disruption and this is just going to evolve into something different, or do you think more disruption is coming?
IAK: I think we will probably see paradigm shifts happening. We have already seen them and there are going to be a lot more that we will see. So, in the foreseeable future mobile will take over. We will not be going to cash withdrawal machines, to an ATM. As long as I have a mobile payment system, I would want to use that.
This is among the technological challenges coming for the banks, as well as for NBFIs. But for NBFIs, since we don’t have any cash transaction issues, we cover a lot of challenges outside of our purview. But the issue is that banks and NBFIs have always been there simultaneously. And there have always been demands for NBFIs. As I have said, our product range is limited but we are focused. As long as you are focused, you have specialization. And once you have specialization, there will be customers who are not least bothered about the one percent higher rate compared to banks. They are much more interested in the services, when it’s being delivered. I’m talking about the service. Customers are even prepared to give one or one and half percent extra. But time is money. Hence, the NBFI sector.
Going back to my career, I was never very eager to move to banks. If you look at the careers of people who have made it – I’m sure you have covered a lot of people in senior management in you past issues – they have gone through a series of working experience, not necessarily in banks .
FINTECH: Quite a few MDs and CEOs in the banking sector came from your former organisation IDLC, which is an NBFI of course.
IAK: That’s right. They have already generated eight to nine MDs, not necessarily for NBFIs, but for banks as well. From that perspective, not to disrespect anyone involved in banking, but just as my opinion, I never felt any inspiration for working in banks. Because going to banks mean you will be cornered. What that means is that you cannot have a varied experience. Once you go to general banking, you’ll have to have a career in general banking. If you go to retail, you’ll have to be in retail and cannot go to corporate. It’s very segmented.
Since we are talking about IDLC, we had major technological breakthrough at IDLC. We installed UBS, a universal banking software by Oracle. We launched that. That was a major breakthrough and an uplifting moment. That growth momentum you see now is largely a contribution of the technological platform. Once you have that kind of technological platform you can have a faster growth.
FINTECH: When you came here and was entrusted with the huge responsibility of starting this company from scratch, what was your perspective then? Was there a sense of thrill at being able to build something from the ground up or a feeling of immense challenge? Which was at the front?
IAK: Thanks for asking that question. As I have mentioned, I was at IDLC for nearly 12 years. That is a long time to be working in one organisation. I witnessed a paradigm shift and was a part of that. That gave us huge confidence and strength to build up another company with the knowledge that we gathered over the years. Something new is always a challenge. I have always been a challenge taker. I never sunk into a comfort zone. When I took charge of the consumer finance division, it was in the year 2012 I think. Mr Selim joined IDLC in 2009, and I was entrusted with the head of consumer position in 2012. From 2012 to 2015 we had a paradigm shift in asset portfolio, taking it from 900 to 2200; and we took the deposit portfolio from 1200 to what was the highest in the industry: approximately 3500. That was the figure when I left IDLC. That was the transformation that we made. That was the best retail banking team available at that time.
FINTECH: Can you attribute that spike to any particular factor? Was it technology, was it leadership…
IAK: Of course technology, and you can’t have that without leadership. Another thing is that it was a team performance. I can’t say I did it. It is a cumulative performance. But the things that assisted us was that environment of empowerment in the management, whereby you are entrusted with a duty and you are given authority as well as responsibility. If you are given responsibility and not authority, if your hands are being tied, then you can’t do business. This is a mindset from the top team that ‘yes. We want to grow.’ Also if you can recall, that was not a great period for the economy. Capital market crashed significantly. I’m talking about December of 2010. 2011, 12 and 13 were very lean in the capital market and most of the banks were much more focused on going slow, since there was capital market crash in 2010, they thought that ‘we can’t take growth now.’
Mr Atiur Rahman (governor of Bangladesh Bank) declared restrictive monetary policy. Real estate was hit hard; home-loan was in a nose dive. Banks were given a bar on car-loans. A cap for car-loan was given, they couldn’t cross 30 lakh for car-loans. Not all NBFIs do car-loans and home-loans, only a few do. So, at that point of time we did best. Our car-loan had the highest portfolio among all banks and NBFIs, in the entire industry. During that three to four years we were number one in car-loans. We didn’t make it to the top in home-loans since DBH was in a much advantageous position, but we were number two. In the deposit portfolio, which is the major area for NBFIs, we were number one in the industry.
So, this was because of technology. In 2011 or 2012 we had installed UBS. You need a few things for good business. First, you need people. No matter how great the technology is, you can’t do without good people. Second, you need to have a technological platform. After that, it’s not enough to have the technological platform and not have your processes automated. Third is touchpoint, which we call another platform. You have to have outreach, you need branches. We had a major branch openings spree when market was in disarray. We opened in Bogra, in Comilla, in Maymensigh, Jessore, Kushtia, you name it. At this moment there are over 30 IDLC branches I think. All of those were initiated in that crisis period, from 2011 to 2015. When opened those branches, we made them retail focused, and SME focused, not corporate. Mr Arif mentioned 35 percent growth in a recent statement. It was mostly driven by SMEs. And after that 11 percent growth is in consumers. Consumer portfolio is very vast and the growth there will not go up to 30 percent.
You have to wonder why everyone is financing in the home-loan market. Because the market is liquid, there is not much opportunity to engage in other businesses, it’s secured financing and they are pumping their money. But they can’t bank it in the long term. Because this is not the product of bank. NBFIs do long term funding. Look at Delta Brac, Meridian, IDLC. Banks can do long term funding for a certain period, but not for a prolonged period. They always do trade finance. They would open LCs, for three, four or five years. After that it’s done. For 15-year, 25-year loans you need to specialize in that. So, they are financing because the market is liquid.
There was a news today about the BHBFC, that they will open 100 branches. That’s what they said. But what they didn’t say is that how they are going to manage them. How will the MD oversee 100 branches from here? He can’t, unless they have the right technology. The missing link is that they don’t have the technology.
So, I think not all NBFIs are going to do well. But those who will embrace technology, automate processes, who will have forward thinking, and if they give customer service the appropriate attention then they will go ahead of others. Ultimately, there aren’t much difference between me and 10 other NBFIs. The main difference is in service and in my approach. The difference is in how I will reach my clients and what kinds of flexibility customers will get from me. That’s where the difference is. Branding can only go to a certain limit. Without the service branding will fall on its face.
FINTECH: What are some of the regulatory challenges for NBFIs?
IAK: The biggest challenge is corporate governance. Corporate governance is of course transparency, good environment, accountability, regulatory compliance and everything really. The reason I mention this is because NBFIs, banks all are exposed to corporate governance. I’m not saying that this applies to NBFIs only. But you have to keep in mind that bank is heavily regulated. NBFIs can be relaxed and flexible to some extent as of yet. But it’s getting stronger.
If you sanction loans without due diligence or you exercise nepotism and give out bad loans then company cannot survive, which is ultimately bad for the industry. That is why you need corporate governance. This kind of favouritism and nepotism is the reason why government banks are in such bad shape. It has crept into the privatized commercial banks as well. I don’t have to mention anyone; you know the examples. Those who have done well have strong corporate governance. If you look into it, you will find that the top performing NBFIs don’t have referrals from the high levels, asking to approve their proposals. This is the biggest challenge, both for banks and NBFI.
If you have a good board everything else will fall into place. If the board thinks what is their benefit, ‘how can we get our loans approved’, then they will not be very inclined to allow you technological advancements. Because, you see, there is a problem with technology. It will figure out discrepancies. Without technology you can do a lot of things. Once you have the technology in place that means there will be an audit trail. Technology is a prerequisite in corporate governance. If you don’t have that then no matter how much you say you have effective corporate governance, you actually don’t have it.
FINTECH: Do banks and NBFIs have to compete necessarily?
IAK: No. We are not occupying the same space. Banks have many products. I cannot be good at everything; I don’t want to be good at everything. You don’t want that for your magazine. Fintech is focusing on financial technology, which covers corporates, banks, insurance companies. You are not going to RMGs, or you are not going to pharmaceuticals right now. You have chosen your niche. Similarly, we also chose our niche. We have many products, but we don’t want to do everything.
We prioritize SMEs. It’s not because Bangladesh Bank told us so. Before Bangladesh Bank directed it we were focusing on SMEs. Retail is another focus of ours. Why retail? If your purchasing power increases, then your living standard will go up. you will need a house, a car, you will need personal loans. You will also want to invest when you will have surplus money. So, you need to have a capital market operation. The capital market is predominantly NBFI controlled. Whether it’s merchant banks, brokerage houses, asset management companies, all are mostly NBFI. Now banks are slowly entering, but it was all NBFIs.
We do compete with banks. There are some common areas, like we are now doing home-loans, personal loans, car-loans. But after a period banks won’t be able to do, for example, car-loans. We can provide Tk 2 crores for car-loans, but banks can only do Tk 1 crore. Bangladesh Bank has also narrowed down few of these areas. We don’t do trade finance, so we will never compete there. However, ultimately this will be opened. In the developed markets the gap is narrower. I think if NBFIs perform well then Bangladesh Bank will broaden our scope. Bangladesh Bank is already helping us a lot to grow, to develop, for regulating, for better corporate governance, for better technologies and so on. They are encouraging a lot for doing e-tender, to link up e-procurement with it.
FINTECH: You just said that you prioritized SME. This is generally viewed as a risky segment. We don’t really have an adequate ecosystem to mitigate that risk? How do you approach this then?
IAK: The SME sector is risky, as you have correctly pointed out. Now it’s not just ‘small’, it starts from the ‘micro’ level. Basically if you want to engage the ‘micro’ then you will need touchpoints at the micro level. This means huge cost involvement. Mere platform or system isn’t enough here. If there is no income document record, how will you make the system work? You will have to depend on manpower, which is very risky.
What we want to do is that when we will operate at the micro level, we will need to bind the customer, in terms of managing the risk. Traditionally, in the banking sector you do not finance if a customer is risky. So, what banks end up doing is that they don’t expand exposure. You take a proven customer from another bank by offering slightly better benefit. The client did not enter into a new venture, he just received an immediate cash benefit. SMEs have significant opportunity for incremental growth. But what we need is abandoning the practice of securing what is already secure. You are in the business of managing risk. If you can’t take risk, then you shouldn’t do banking. Risk will always be there. You have to think of SMEs as your partner. You have to train your partner for mitigating risk. ‘Small’ is a risky place, but you will also have to consider that return on small is much higher than corporate.
FINTECH: Do you have any program to assist your SME clients?
IAK: Yes. What we started here is that, many customers don’t have websites. If you want to go international, you will need a website. We have a group of developers working with us, and we develop clients’ website for a cheap price. Second, we are insuring the client through our panel insurers for a highly discounted rate. This makes us both secured. Third, we give them a simple accounting software and train one of their workers on how to use it. We take them away from the ‘tally khata’ accounting and get them to use software. We advise them to transact through bank and avoid cash. We tell them that if at least 50 percent of sales is not reflected in banking transactions then no bank will finance them, neither will we. So, we pair them up with one of our partner banks.
Another thing we do is what we call ‘receivable financing’. Let’s say the customer supplies to Bata. He will invariably have a cash flow problem. He forwarded a payment to Bata which Bata will pay after three months or six months. If his payment is stuck for six months, then that means his working capital is stuck. So, we take an ‘assignment’ from Bata that I will pay my client immediately and then Bata will pay Meridian Finance according to their time.
Other than that we have some green financing. As you know, there is a push for auto brick. The Ministry of Environment has already barred traditional brick field licensing. The old brick fields are required to convert to auto/green brick. The material they use at traditional brick fields to burn bricks is extremely hazardous. Carbon emission is huge. The new technologies that are coming in facilitate minimal emission. These run on renewable energy as well, so that you don’t have to burn trees.
Bangladesh Bank has a guideline that your total annual financing has to have five percent green financing. It could be in auto brick, or in renewable energy and so on. But this is not being followed by many, unfortunately. We have started it. We are already financing an auto brick field in Sherpur. It’s a Tk 10 crores project. It’s a collaboration between us, LankaBangla and Basic Bank. All the machineries are here already and it’s in the erection stage. Other than that we are raising fund. It’s a project of Tk 42 corers and we are leading it. BIFFL, a government institution, is providing Tk 15 crores, we have already sanctioned Tk 15 crore from Meridian Finance, and the rest will be paid by the factory owners. This is located at the industrial zone in Mirsharai. It has a capacity of producing 120 thousand brick per day. There is another one, Asim Bricks in Gazipur, where we participated and BIFFL is the lead arranger. So, we have had an exposure to green financing from the very beginning and we want to follow Bangladesh Bank’s guideline on financing in green.
FINTECH: Spending on IT is often considered a cost, at least that’s what it used to be like. That view is obsolete now. Tell us about Meridian’s approach to IT. What core software you are using?
IAK: I think that mentality has changed in the banking sector. You can’t imagine a bank without CBS now. Many NBFIs are also getting it. We are less than two years old, but on the very first day I met with it the board I was asked what we need to make Meridian a successful. I said, ‘technology’. Alhamdulillah, our project is undergoing and we will go live from January 1. It’s Bankulator, core financial solution. This for NBFIs with full MIS ranges.
FINTECH: Where we are with Big Data in our local industry? The banks, and NBFIs too, have a huge amount of data in their disposal. Is the local industry ready to make use of that?
IAK: Actually, we are slightly behind of where the developed or more developed countries are. We may disagree how much, but it is a fact. However, we are now able to catch faster than how much we are behind, meaning if we are, let’s say, 30 years behind to India in technology it will not take another 30 years to catch up to that.
The next thing is whether we have that kind of market. Our economy is growing, with the latest growth being 6.6 to 7. If this continues to grow like that then I don’t see why we will not be able to incorporate those technologies and use big data. You have to have it. What you said is true. There is a lot of data out there and we are not working on it. If you do psychometric analysis, for example, you could dissect the data, get a lot of insight and you can have new clientele, but we are not working on it.
If you have ever been to Vietnam, you would know that they have huge amount of motorbikes in the country. They have a mechanism for sanctioning loans in five to ten minutes. If you ask to a good bank how many loans they sanction and disburse per day you will get a figure from one to four thousand. How’s this possible? In Africa they provide micro loans in 20 to 25 minutes. The background is that they have standardized the process.
Lot of e-commerce businesses are here already in Bangladesh. So, it’s now a matter of how financial institutions can get this working here. I believe banks have huge opportunities. Ultimately, it is about demand. If the banks can’t provide others will.
FINTECH: What is the future vision of Meridian Finance?
IAK: Our vision for the future is to have flexibility and innovation. These two are our key words. The mission is to increase the value of the stakeholders. It includes everyone, employees to shareholders to regulators to all the customers. How to do that? Out answer is by value adding services.
Becoming a flexible and innovative service provider is our objective. We design our products dynamically. When we give loans for SMEs we look at everything they need. May be at one point an SME client will require trade finance. I don’t have that, but we have something arranged for that too. I have a partner bank that will provide it. If you don’t have an all across attachment with your customers, you can’t retain your customers. There is no loyalty in our industry, because everyone was going on in a cut-throat approach. ‘I don’t want to know if your business has failed or not, I want my return or I will bring legal charges,’ that’s been the approach. Nowadays, you can’t have that approach. You have to have a personalized relationship with your customers.
FINTECH: Thanks very much for speaking to us.
IAK: You are welcome. ■