DHAKA:  Bangladesh Bank issued a circular Sunday asking all non-banking financial institutions to withdraw from the capital market their investments exceeding 25 percent of their paid-up capital and reserves by December.

Article 16 of the Financial Institutions Act 1993 prohibits investment of over 25 percent by non-banking financial institutions. However, the financial institutions were turning a blind eye to the law, which prompted the central bank to come up with the ultimatum.

According to the circular, if any non-banking financial institution wants to keep investments over 25 percent of their paid-up capital and reserves, they will have to seek permission from Bangladesh Bank. “But it must not be over 50 percent,” it said.

Justifying such a circular, the Bangladesh Bank authorities said some unscrupulous non-banking financial institutions were investing in the stock market violating the rules. This has increased their dependence on call-money market besides the risk factor.

The central bank had earlier cautioned the commercial banks as regards their investment in the stock market.

It also served show-cause notice to seven banks for making investment defying rules. The banks could not give any satisfactory reply to the notice, sources said.

The Bangladesh Bank held separate meetings with those banks.

As per Bank Company Act, a bank cannot invest more than 10 percent of its savings in the stock market.

When contacted, Dhaka Stock Exchange’s former CEO Prof Salahuddin Ahmed appreciated Bangladesh Bank’s role, saying, “It’s positive for the market.”

“It will create opportunity for small investors to buy more shares while curtail the number of institutional shareholders,” he said.

BDST 2110 HRS, AUGUST 22, 2010.