The central bank has cut the ‘risk weight’ for banks to invest in ‘alternative’ investments. An alternative investment is an investment in any asset class, excluding stocks, bonds, and cash. The risk weight for maintaining balance sheets of banks was slashed by 50 per cent to 100 per cent.
The Bangladesh Bank said the reduction is intended to expand alternative investments in the country, it said in a notice on Tuesday. Higher risk weight usually discourages banks from investing in alternative investment.
Some financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, exchange funds, carbon credits, venture capital, financial derivatives are to be contrasted with traditional investments.
This new order will encourage banks to form funds for alternative investments-private equity, impact investment and venture capital and so on. This means the banks will now have to provision 100 per cent of their investments in such types of vehicles instead of 150 per cent.
The Banking Regulation and Policy Department of the BB issued the notice that is an amendment to its earlier circular on the guidelines for risk-based capital adequacy (revised regulatory capital framework for banks in line with Basel III). The order will come into force immediately.
When contacted, Shakawat Hossain, founding managing director at the BD Venture Capital, told the FE, “This order will give a signal to the banks to make such investments.” Banks and other fund providing organisations, lenders or individuals form fund to invest in alternative investments.
They usually invest in startups and tech-based industries. Bangladesh has licence of 17 for venture capital firms, while three each are for impact investment firms and private equity lenders.