Bangladesh's Brac Bank returns to its roots

By Elliot Wilson

When Selim Hussain became CEO and managing director of Brac Bank in November 2015, what he found there surprised him. 

“There was no commonality of purpose,” he tells Asiamoney. “Everyone worked in silos. No one knew what they were doing, and no one talked to anyone outside their department. My chairman said to me: ‘Look, we have a world-class NGO and a great mobile banking service called bKash. Your job now is to turn us into a first-class lender. How much time do you need?’ I told him it would take five years, plucking the number out of thin air, and we went from there.”

Hussain’s appointment came as a surprise to many in the Bangladesh establishment, but was flagged by analysts who liked what he had done at IDLC Finance, a well-run non-bank finance provider. There, he had garnered a reputation over the previous six years as a straight-talker who was willing to tell truth to power – an unusual attribute in Dhaka’s consensus-seeking finance circles.

Brac Bank – founded in 2001 as the financial arm of Brac, the world’s largest non-governmental organization – was less of a power-player than its private sector peers Eastern Bank and The City Bank, and smaller than the country’s bad-loan-loaded state lenders. 

Investors had long been aware of the bank’s manifest potential. Unlike most local lenders, it was overseen by a proper board of directors, each from a different walk of Bangladeshi life. Its current board includes a Supreme Court advocate, a former bank executive, educationists, and a former chairman of leading industrial groups. But the bank had underperformed for years. 

That all changed after Hussain’s appointment. Between his arrival and early March this year, the bank’s Dhaka-listed shares rose 49%; in the first 10 weeks of 2017 alone, they ticked up 10.8%. The new CEO was fortunate, in that he joined a financial institution already benefiting from a host of positive external factors, some of which – notably falling interest rates and a resurgent economy helped by relative political stability – pre-dated his arrival. 

But the eagle-eyed noticed an important shift. Investors would meet Hussain, then either add Brac Bank to their portfolio or raise their existing stakes. 

The incoming CEO hired virtually a whole new management team. Abdul Joaddar came in as deputy managing director and chief financial officer, having previously occupied senior positions at Standard Chartered in Singapore and Dubai. Tareq Khan, a former head of corporate banking at Eastern Bank, became head of credit risk management. Nazmur Rahim and Bilquis Jahan joined as the heads of retail banking and human resources respectively. 

“These were really solid hires, the kind that really pay off,” says Asif Khan, a Dhaka-based research analyst at frontier market investment specialist Exotix Partners.

Hussain defends his decision to take an axe to the bank’s management roster, then bring in the talent he needed. “I’ve recruited close to 1,400 people, while more than 750 people have left,” he says. “I brought in a lot of new thinking, talent that was trained up at HSBC, Citi, Standard Chartered.” 

A senior figure in Bangladesh’s banking community adds: “It’s hard to fire people in Bangladesh. Dhaka is a small world and it’s easy to make enemies. But he cleared out a lot of dead wood and didn’t flinch, and he was right to do so.” 

The new CEO was also willing to hand higher salaries to the personnel he wanted, an approach once considered anathema, given the lender’s roots in a socially conscious NGO. 

“He saw that Brac Bank was one of the worst payers in the banking sector,” Khan at Exotix says. “They had high turnover and the highest national levels of customer complaints. So he raised salaries to ensure they paid market rates, implemented performance benchmarks and got rid of under performers.” 

Thousands of redundant or loss-making deposit accounts were closed, and an additional $20 million was spent on upgrading the bank’s technology, investing in new credit card-processing and cash management systems. 

Some of the key changes made by the new CEO were those he never expected to have to make. Hussain confesses to being astonished to find that just 35% of all outstanding loans by volume were disbursed to SMEs, with large corporates making up 52% of the loan book. Likewise, Brac Bank controlled less than 5% of the local SME lending market in 2015, against 15% 10 years earlier. 

“When I joined, I knew relatively little about Brac Bank other than it was an underperforming institution,” he says. “The one thing I thought I knew was that it was primarily an SME bank. I was very surprised to find that was definitely not the case.” 

A concerted effort was made to locate and finance worthy young firms; the bank’s outstanding SME portfolio expanded on an annualized basis by 28%, or Tk13.8 billion ($172 million), in the calendar year 2016. Home loans rose 164% year on year in 2016, with auto loans up 255% and car loans rising 98%. Total lending to large corporates made up 41% of the bank’s loan book at the end of 2016, against 51% a year earlier, with SME lending at 39%, up 5 percentage points in 12 months. Hussain says he wants that share to pass 50% by 2020.

Both the government and central bank want banks to lend more to the SME sector. Bangladesh Bank, the country’s central bank, increased its SME loan disbursement target for 2016 to Tk1.135 trillion, up nearly 10% from the previous year’s target. With a total SME portfolio of Tk60 billion in December 2016, Brac Bank accounts for just over 5% of the central bank’s 2016 target.

Brac Bank’s new chief also worked hard to hone and refine the bank’s internal culture: “I told my chairman from the start that I wanted to run a bank with solid foundations of governance, compliance, ethics and transparency. We don’t do business with tobacco growers or with ship-breakers, or with industries connected to environmental degradation or child labour.” 

These are remarkably forceful words from a senior banking executive. But perhaps they should be expected, given that Brac is all but a holy word in Bangladesh, redolent of an institution that, more than perhaps any other, has defined this country’s progress over the past half-decade, from blood-soaked basket case to frontier market superstar. 

Founded a few months after Bangladesh declared independence in 1972, Brac – from its origins as the Bangladesh Rehabilitation Assistance Committee – grew from a tiny social enterprise into the world’s largest NGO. Self-governed and self-funded, it employs 120,000 people at home and is present in 13 countries across Asia and Africa, where it spearheaded the global push into microfinance.

Its formal lending outfit, Brac Bank, first opened its doors in 2001. One of the so-called third generation of private lenders, after batches of fresh operating licences were handed to new lenders in the early and late 1980s, it set its stall out from the start. It would, its founder and chairman Sir Fazle Hasan Abed declared, finance young, small and medium-sized enterprises. Over the next 14 years, it stayed true to its word, opening 448 special SME-servicing branches and disbursing Tk300 billion to thriving young Bangladeshi firms.

But by 2015, there was a growing sense within the bank that something wasn’t quite right. Brac Bank had survived the political turmoil of the 2000s, which dented income and earnings across the banking spectrum. Profits were rising nicely, up 15% year on year in the 12 months to the end of March 2015, on an 11% increase in net interest income. 

Other metrics weren’t as strong. Earnings per share were lower in 2015 than they had been five years earlier. Returns on the bank’s equity had slipped to 13.32% in 2015, from 18.95% in 2010. The bank’s Dhaka-listed shares were, in the third quarter of 2015, trading in the high-40s – exactly where they were five years earlier. 

This was no longer the lending division of a powerful NGO, dominated by its founder-chairman. Abed still controlled 42% of the bank, but 45% of the lender was owned by a host of big-ticket global shareholders, from the International Finance Corporation to Morgan Stanley, to emerging market-focused investor Consilium. 

Change, the board decided, had to start at the top. Out went Syed Mahbubar Rahman and in came Hussain. 

Whatever Hussain is doing, it’s working. Deposits rose 9% year on year in the six months to the end of June 2016, and by 7.2% on an annualized basis in the third quarter. (The bank hadn’t published its full financial report for 2016 as Asiamoney went to press). Non-performing loans as a share of total lending fell to 4% in December 2016, against 7% a year before, with the ratio of NPLs in its SME division falling to 3.7% in December 2016, against 7.6% the previous year. 

New and existing customers were kept abreast of any changes regarding their loans or accounts. “If I am going to charge someone 25% interest on a loan, I’ll tell them,” Hussain says. “A lot of our customers are poor, so you can cheat them pretty easily. Too many banks increase rates or fees without telling the customer. I don’t do that.” 

More compelling figures emerge elsewhere. Net interest income was up 37% year on year in the first half of 2016; pre-tax profit was 53% higher. Return on investment was 8.63%, against 6.13% the previous year; return on assets was 1.75% at the end of June 2016, against 1.13% the previous year. And perhaps most surprising of all, the return on equity improved from 13.3% at the end of June 2015, to 20.02% 12 months later. 

The final sets of data cause Hussain to smile. “My board found it hard to believe,” he admits. “They asked me if I’d fudged the accounts. But why did this happen? It was because the potential was always here, it just needed to be realized. The problem before was Brac Bank’s poor management. What has surprised me is that so much of what we did came good in just one year.”

He’s honest enough to admit that the lender still has much to do, including improving its digital banking operations, but he is undeniably proud of what the bank has achieved on his watch. 

“We are in year two of a five-year journey,” he says. “Before, Brac Bank was a vehicle that was parked, unmoving. I expect us to hit fifth gear somewhere around 2020, by which time we expect to be the best bank in the country. We are the best retail bank and the best SME bank in Bangladesh, but we have a long way to go to be the best corporate bank and all-round lender. Those positions are currently held by The City Bank and Eastern Bank.”

Exotix Partners’ Khan believes Brac Bank has the potential to become a game-changer for Bangladesh, so long as it sticks to its core business and focuses primarily on SME lending. 

“Very few banks do SME lending really well,” says Khan. “I can think of Bank Rakyat in Indonesia, ICICI Bank in India and Wells Fargo in the US. Those are great role models, and Brac Bank could reach that level. It may take them five years to get there, but they are on the right path now. Brac Bank always had tremendous potential, but under their current CEO, they are finally realizing it.”