The Bangladesh Bank on Sunday relaxed its guidelines on risk-based capital adequacy for the banks’ investments in venture capital fund, lowering the risk weight against such investment tool to encourage banks’ exposure to alternative investment tools and to help grow startups.
The BB issued a circular in this regard setting the validity of the relaxation to September of the year 2022 starting from this September.
Alternative investments fund are considered as major supportive instrument for the startup businesses, prompting the central bank to come up with the policy relaxation following request from the parties concerned.
The BB said that the relaxation was introduced with a view to supporting flourishing of the market of alternative investments fund including private equity and impact fund.
Under the earlier instruction issued by the central bank, the banks were instructed to calculate 150 per cent risk weight against their investments in venture capital funds.
Under the latest amendment in the rules, banks were allowed to lower the risk weight against investments in venture capital funds to 100 per cent.
The BB in its circular asked all the scheduled banks to consider risk weights as per the revised instruction while calculating their capital adequacy report to the Bangladesh Bank.
An official of the BB said that the high risk weights determined by the BB usually works as a discouraging factor for the banks to invest in a particular sector.
The policy relaxation would help banks invest higher amount to the alternative investment tools while it will work as encouragement for them as well, the official said.
The government is encouraging venture capital as an alternative investment fund to finance technology-based startup entrepreneurs in the country.
In line with the move, the Internal Resources Division of the finance ministry cut the stamp duty on registration of trust deed of alternative investments fund, including venture capital fund, to 0.1 per cent from previous 2 per cent.
It also set the maximum stamp duty at Tk 10 lakh and the minimum duty at Tk 5,000 on the total value of deed, bringing a great relief to the issue mangers and promoters of venture capital funds.
According to the Bangladesh Securities and Exchange Commission, alternative investment fund refers to any fund established or constituted in Bangladesh in the form of a trust which is a private equity fund, a venture capital fund, an impact fund or any other type of fund as declared by the commission.
According to Investopedia, an alternative investment is a financial asset that does not fall into one of the conventional investment categories, including stocks, bonds and cash. Private equity, venture capital, hedge funds, real property, commodities and tangible assets are all examples of alternative investments. The most alternative investment assets are held by institutional investors, or accredited, high-net-worth individuals.
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