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Housing Finance Industry in Bangladesh

Industry Information: Identifying Environmental Factors: In analyzing the business environment of DB a clear distinction is made between internal and external environmental factors. Internal Environment: The internal environment of an organization consists of the conditions and forces that exist within the organization. Business can make changes in these factors according to the change in the functioning of enterprise.

It includes various internal factors such as resources, owners/shareholders, board of directors, employees and trade unions, good will and corporate cultures. Detailed internal environmental factors of DB are discussed below: Resources: DB has an authorized capital of TX 200 Scores and a paid up capital of TX 100. 9 Scores after the share value denomination in the year 2010. The company has six branches in Dacha, Chitchatting, and Sleet.

It has a strong employee base consisting of 149 skilled well trained employees in all the branches and it employs more than 500 deposit associates who work on commission basis. DB believes that its best investment is in the human resources, as the Company believes that human resource is the edifice on which the company’s performance and productivity are standing on. Shareholders: DB is a public limited company listed both in DES and CASE. It

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has both foreign and domestic institutional share holders.

The shareholding pattern is as follows: * Board of directors: As the company has institutional shareholders such as AFC, HEAD, Delta Life Insurance, Green Delta Insurance, and Brat; the board of directors include representatives from this institutions and al well as representatives from general shareholders and foreign investors. The board is responsible for top level strategy making and providing directions to the company. They oversee operations ND performance of the company and guide it on the right path for maximizing its profits. Organizational Culture: Organizational culture is viewed as the foundation of internal environment in an organization. Organizational culture influences the actions and behavior of the employees and the management. There is a strong organizational culture prevails in DB and it motivates its employees to work hard for achieving its goals. * Organizational Goodwill: DB has established itself as the pioneer in the housing finance industry in the country.

Goodwill of its institutional shareholders has also undistributed toward establishing such a favorable positioning in the market. Moreover, DB has earned highest credit rating AAA for last six consecutive years, Housing Finance Industry in Bangladesh By dumdum Those factors which are beyond the control of business enterprise are included in external environment. The external environmental factors reside outside the organization and it can lead to opportunities or threats.

Moreover external environment can be classified in two types: * General environment or remote environment (Macro environment) * Industry environment or immediate operating environment (Micro environment) Detailed external environment of DB is discussed below: General Environment: The general environment includes the distant factors in the external environment. The components of this environment are common in nature. Factors of general environment are political factors, economic factors, socio cultural factors, technological factors, legal factors, natural factors, and demographic factors. Political Factors: No matter how attractive the economic prospects of a particular country or region are, doing business there might prove to be financially disastrous if anticipated events in the political arena lead to the loss of income-generating assets. Though political instability creates problems in the path of business for DB, its direct effect on DB in real terms is somewhat insignificant. But the indirect effect is quite considerable as the overall economy is being affected by the political unrest. Legal Factors: Political changes are closely tied up with legal changes. In recent years in the Bangladesh there have been many significant legal changes that have affected firms’ behavior. Laws are continually being updated in a wide range of areas, . G. Consumer protection legislation, real estate legislation, mortgage and non banking financial institution legislations etc. Legal changes can affect a firm’s costs (e. G. If new systems and procedures have to be developed) and demand (e. G. If the law affects the likelihood of customers buying the good or using the service). Economic Factors: Economic environment refers to the aggregate of the nature of economic system of the country, the structural anatomy of the economy to economic policies of the government, the organization of the capital market, the nature of actor endowment, business cycles, the socio-economic infrastructure etc. All the business organizations has to visualize the external factors affecting the business, anticipating the prospective market situations and make suitable to get the maximum with minimize cost.

Overall economic development of the country contributes to the housing affordability of the people and which strengthen the overall housing finance market. * Coloratura Factors: The social dimension or environment of a nation determines the value system of the society which, in turn affects the functioning of he business. Sociological factors such as costs structure, customs and conventions, cultural heritage, view toward wealth and income and scientific methods, respect for seniority, mobility of labor etc. Eave far-reaching impact on the business. These factors determine the work culture and mobility of labor, work groups etc. For instance, the nature of products and services to be delivered depends upon the demand of the people which in turn is affected by their attitudes, customs, so as conduct the business should follow. * Technological Factors: The business in a entry is greatly influenced by the technological development. The technology adopted by the industries determines the type and quality of services to be delivered.

DB uses a unique system Jointly developed by world renowned database software provider Oracle and HEAD of India. This technological superiority obviously advances DB ahead of its competitors in the market place by allowing it to provide specialized service to its customers. * Industry Environment: The environment which is close to business and affects its capacity to work is known as immediate operating environment or industry environment. Every firm operates its business in an industry and therefore its activities are directly affected by any change in the industry environment.

It consists of suppliers, customers, market intermediaries, competitors, new entrants and substitute products. * Suppliers: The main sources of fund employed by DB as loans include deposits from general public, long term loans from financial and non financial organizations, and zero coupon bonds. Deposits alone accounts for more than 60% of the funds lent by DB. Db’s expert deposit associates collect deposits from general public for various time eroded and try to develop a long term relationship with these depositors in order to ensure a continuous flow of funds.

DB always offers higher interest rates than any other financial and non financial institutions do in the country to safeguard the supplier base of deposits. * Customers: DB operates in urban areas and provides loans to people for acquiring flats and lands, for construction, expansion, and renovation purposes. In most of the cases customers need urgent loans and they do not have much choice but DB as banks and other financial institutions are not specialized in this industry. As a specialized organization in housing finance DB can sanction and disburse a loan within 15 days of application. Competitors: Major players in the housing finance market at present are House Building Finance Corporation (HOFF), National Housing Finance, private and state owned commercial banks, IDLE, and DB. But at present DB has the most market share though it has less outstanding loans than banks do. In order to compete and survive in the industry DB always tries to provide loans at competitive interest rates and to provide customized services for building long term relationships with its customers. DB is also providing diversified products to gain a total control over the market. Substitute Products: substitute products for housing finance are loans and funds from personal sources, employee loans offered by various financial and non-banking financial institutions, loans offered by microcircuit organizations and cooperative societies. But each of these substitutes is limited in number and nature and is not sufficient to serve a huge housing finance market in the country. * New Entrants: As this competitive environment. Some of the new commercial banks are the new comers in this industry.

But, there is somewhat little possibility of a specialized housing finance organization like DB to enter in the market as non-banking financial institutions do not have access to low cost deposits like banks and most of all the real estate industry is at its peak in the urban areas at current time. Strategic Analysis: A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T).

Such an analysis of the strategic environment is referred to as a SOOT analysis. The SOOT analysis provides information that is helpful in matching the firm’s resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. SOOT analysis of DB is discussed below: Strengths: * Skilled Human Resources: It has a strong employee base consisting of 149 skilled well trained employees in all the branches and it employs more than 500 deposit which the company’s performance and productivity are standing on. * Strong

Marketing: DB has a strong marketing policy to promote itself as the best housing loan provider in the industry. Through mass advertising it is trying to position itself as the first choice for the customers. * Advanced Technology: DB uses a unique system Jointly developed by world renowned database software provider Oracle and HEAD of India. Technological support from HEAD Limited in product development and business process management also help DB to be ahead of its competitors. Strong Internal Control System: DB has a strong internal control system to monitor every activity of its employees and every work stations.

The internal control system is reviewed, evaluated and updated regularly. The operational risks and internal audit department of the Company conduct periodic audit to provide reasonable assurance that the established policies and procedures of the Company were consistently followed. * Strategic relationship: DB has built long term strategic relationship with the real estate developers. When customers go for purchasing flats developers suggest them to take loan from DB as DB pays developers the lent amount on behalf of the customers under the trio-partier agreement among developer, customer, and DB. *

Strong recovery system: DB provides loans after inspecting all the aspects of the customer in order to make sure the safety of the lent amount and it has a strong loan recovery system. DB has received highest credit rating AAA for the last six consecutive years and it has a non-performing loan of 0. 20% in the FYI 2011-12. * High Interest Rates Decline Profit: As a non banking financial institution DB does not have access to low cost funds like banks have. DB takes Deposits at higher interest rates than banks and other financial institutions and at the same time provide loans almost at the same rates as banks do.

This has resulted in a higher cost of funds and a lower profit rate to DB. * Keeping a loss occurring branch office: Among the six offices there is one branch office situated at Sleet. However the Sleet branch has proved to be a loss occurring issue for the company. This branch can’t even provide enough loans to cover up its own operating expenses. As a result average performance efficiency has lowered and the overall profit has declined. Opportunities: Inadequate financial intermediation: Financial intermediation in housing sector is not adequate because of high interest rates and limited sources of funding.

Moreover, DB has the experience and expertise needed to widen its existing customer base. Expanding Market: Real estate industry is expanding and so does the housing finance. DB as the market leader in the housing finance only needs to ensure a continuous flow of low cost funds to keep the housing finance industry totally under control. Failure of the giant: The state owned House Building Finance Corporation (HOFF) is burdened with bad loans, and loan disbursement is relatively low in recent years. HOFF does provide loan at lower interest rate but at present getting loans from

HOFF has become a matter of luck because of insufficient funds. This situation has led to a possibility of no strong competition for DB to handle in future. Shift in target group: Developers are sliding down the income range, targeting middle and lower income clients. And middle and lower income group in most of the time cannot finance the real estate property all by themselves, thus they need loans to settle terms with the developers. Threats: * Shortage of electricity, Gas, and water Supply: Shortage in electricity, water and gas connections has presented a great problem for the real estate industry.

Many people bought flats but cannot get into those because of no utility connection. This situation has slowed the pace of the real estate industry as well as the housing finance. * Growing Competition: Banks are the main competitors of DB and presenting a continuous threat with their accessibility into the low cost funds from the market. Market size is substantially increasing but the mark up is declining because of intense competitions. * Threats of new entrants: As it is a profitable industry, new entrants may enter the industry in future and create more competition.

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