The bond market is a financial market where participants buy and sell debt securities, usually in the form of bonds. Like emerging-market countries around the world, Bangladesh could benefit from having a local-currency, fixed-income securities market. At present, its main fixed-income financial products are bank deposits, bank loans, government savings certificates, term loans, treasury bills, and government bonds and corporate debt (syndicated loans, private placement, and debentures). But in general the corporate debt market is still very small compared with the equity market. Numerous factors in Bangladesh today suggest that Bangladesh will not be able to develop an active, local-currency fixed-income market. In this paper, we will discuss the current situation of our bond market, what the drawbacks are and what may be the remedy for overcoming these drawbacks.
Money Market is an integral part of the financial market of a country. It provides a medium for the redistribution of short term loan-able funds among financial institutions, which perform this function by selling these short term securities that usually are highly marketable. The money market in Bangladesh is in its transitional stage. The various constituent parts of it are in the process of formation, while continuous efforts are being made to develop appropriate and adequate instruments to be traded in the market. At present Money market instruments such as Government treasury bills of varying maturity, Bangladesh Bank Bills, Certificates of Deposits, Bankers Acceptance or L/C and Repo and Reverse etc in limited supply are available for trading in the market. However, the short-term credit market of the banking sector experienced a tremendous growth since in recent years, a total of about 6000 branches of the scheduled banks provided short-term credit throughout the country in the form of cash credit, overdraft and demand loan. The paper first analyzes the current situation of the bond markets in Bangladesh: The bond market has played a limited role in the Bangladesh economy. The Bangladesh bond market is also rather shallow compared to the neighboring countries.
Then, the paper analyzes the main impediments to the Bangladesh debt market include (I) the weak regulatory framework; (ii) supply-side constraints such as a lack of the benchmark bonds; (iii) demand-side constraints such as the limited investor base; (iv) a lack of intermediaries with expertise in debt products; (v) a lack of confidence in corporate borrowers; (vi) market distortions which are caused by the National Savings Scheme (NSS) offering above-market returns; and (vii) a lack of interest from private companies, including financial intermediaries and large business, in launching new debt products due to high fees.
Finally, the paper offers a roadmap for the development of the Bangladesh bond market.
Before independence, the use of bonds as a means of resource mobilization was virtually non-existent in Bangladesh. Immediately after liberation, the government of Bangladesh reissued long-term bonds accepting the liabilities of the Income Tax Bonds and the Defense Bonds of the Pakistan government held by Bangladeshi nationals and institutions. The government also issued a 5% non-negotiable bond to Bangladeshi shareholders of nationalized industries. In addition, savings bonds were also issued to pay for the value of demonetized 100-taka notes in 1974. Most of these bonds are held by Bangladesh bank.
The first effort to mobilize savings for use of development expenditure was the issue of Wage Earners Development Bonds in 1981 to be sold to Bangladeshi wage earners abroad. Later, a two-year special treasury bond was issued in January 1984 to be sold to individuals, public and private sector organizations including banks. In December 1985, another instrument, the National Bond, was issued to be sold to non-bank investors.
During the implementation period of the financial sector reform programmed that took effect from 1990, Nationalized commercial banks, specialized banks and development financial institutions had to make considerable provisions for huge classified loans. As a result, the capital base of those banks and financial institutions eroded severely and their viability was seriously threatened. In this situation, the government issued a series of bonds to restructure the capital base of these banks and financial institutions as well as to assume the liabilities of the bad loans made to a number of public sector organizations.
The government also issued some bonds for augmenting loan able funds for specialized banks and financial institutions. Moreover, some bonds were also issued to mobilize funds for a number of public sector organizations like the T&T Board, Bangladesh Biman etc. Following is the list of bonds issued by the government on various occasions: 15-year treasury bond (recapitalization and bad debt provisioning, issued 30.12.1990); 3-year Jatiya Biniyog Bond (national investment bond, issued 30.12. 1985); Interest-free treasury bond (issued 1988, withdrawn from 15.10.1993); treasury bond to specialized banks (issued 2.5.1993); 3-year T & T bond (for digital telephone installation, issued 29.12.1993); 3-year special treasury bond (for reimbursement of losses on A/C of working capital, issued 1.7.1993); 15-year treasury bond (capitalization, provisioning and agricultural loans write-off, issued 16.10.1993); 25-year treasury bond (jute sector liquidation, issued 1.11.1993); 3-year treasury bond (reconstitution of BSRS, issued 16.4.1994); interest free treasury bond (issued 30.6.1994) and 2-year treasury bond (issued 15.7.1995) for reimbursement of agricultural loan remission,); 3-year treasury bond (reimbursement of loss in jute sector, issued 1.7.1994); 3-year T&T bond (for digital telephone installation, issued 7.8.1994); 3-year treasury bond (reimbursement of loan loss in BADC, issued 29.6.1995); 3-year treasury bond (reimbursement of loan loss in BTMC, issued 29.6.1995); 3-year T & T bond (for digital telephone installation, issued 30.1.1995); 3-year jute treasury bond (for jute sector, issued 1.7.1995); 25-year treasury bond (jute sector liquidation, issued 30.6.1994); 5-year Biman treasury bond (to increase share capital of Biman, issued 29.6.1995); 3-year jute treasury bond (issued 1.7.1995); 25-year jute treasury bond (private banks jute loan liquidation, issued 1.7.1995); 15-year agriculture treasury bond (reimbursement of agricultural loan remission, issued 16.4.1996); 3-year T & T bond (for digital telephone installation, issued 30.11.1996); 3-year treasury bond (reconstitution of BSRS, issued 19.6.1997); 5-year Biman treasury bond (share capital, issued 1.4.1997); 3-year treasury bond (reimbursement of loan loss in BTMC, issued 26.5.1996); 3-year T & T bond (for digital telephone installation, issued 22.6.1999); 10-year jute treasury bond (for jute sector, issued 1.7.1995); 5-year Biman treasury bond (issued 25.5.1998); 5-year Biman treasury bond (issued 15.7.1998); 10-year BSC treasury bond (to meet the loss of BSC, issued 1.7.1998); 10-year jute treasury bond (for jute sector, issued 1.7.1995); 3-year T&T bond (issued 18.8.1999); and 3 year treasury bond (bad loan provisioning, issued 1.1.2000).
Marketability of bonds issued in the country is very limited. The bulk of these bonds are held by the nationalized commercial banks. The few specialized and some private banks hold a part of them. Individuals and non-bank financial institutions also hold some of these bonds. Therefore, the main market of these bonds so far is being provided by the banks which hold them due to the government allocation system, as well as to maintain statutory liquidity requirements (SLR). Many of these bonds are non-negotiable. As there is no secondary market in the country, the holders of these bonds have to wait till the date of maturity for their encashment.
Bond Market is a place or incidence of transaction in which any kind of bonds changes hands. References to the “bond market” usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.
Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger.
The Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets.
• Government & Agency
• Mortgage Backed, Asset Backed, and Collateralized Debt Obligation
Bond markets link issuers having long-term financing needs with investors willing to place funds in long-term, interest-bearing security. Bangladesh has both the issuers and the investors in place but it still has not been able to link them effectively through a bond market.
The positive effect of developing a domestic bond market on the economy is well-known. On the one hand, bond markets are essential for a country to enter a sustained phase of development driven by market-based capital allocation and increased avenues for raising debt capital. On the other hand, the central position occupied by domestic bond markets in markedly increasing the resilience of a country’s financial system and insulating it against external shocks, contagion and reduction of access to international capital markets is established.
Capital markets are essentially about matching the needs of investors with those that need capital for development. Bangladesh has no shortage of both such parties, a young and dynamic population that increasingly wants, and is able to, make provision for lifetime events, to save for children’s education, for the possibility of ill health and ultimately for old age and retirement. On the other side of the equation, Bangladesh has a pressing need for investment resources to bolster its stretched infrastructure resources, to build more power stations, bridges, ports and gas-pipelines to empower the people in the development of enterprise and the creation of jobs. Debt markets are an extremely effective mechanism for matching the long term needs of savers with those of entrepreneurs. Term capital is a precious commodity and it has been a frustration to see the process of long term savings, such as provident funds and life insurance contracts, being invested in short term instruments such as bank deposits, a process we call ‘reverse term transformation’ but we could equally call it “reverse alchemy” in which the gold of term capital is turned into the lead of short term liabilities.
As a development institution it is our goal to establish sustainable capacity. As Bangladesh has led the world in its development of the microfinance industry, we have impressed others with our ability to mobilize funds for productive purposes at the community level in the villages. What we need to see now is a similar degree of success at the institutional level in terms of mobilizing resources for infrastructure and other uses of long term funds. It is much more useful that Taka funds are mobilized to fund projects whose sole revenue source will be in Taka. Bangladesh should play a larger role in mobilizing its own capital resources and reducing the dependency upon donor institutions such as World Bank, IMF and ADB etc.
Bond markets in most countries are built on the same basic elements: a number of issuers with long-term financing needs, investors with a need to place savings or other liquid funds in interest-bearing securities, intermediaries that bring together investors and issuers, and an infrastructure that provides a conducive environment for securities transactions, ensures legal title to securities and settlement of transactions, and provides price discovery information. The regulatory regime provides the basic framework for bond markets and indeed, for capital markets in general. Efficient bond markets are characterized by a competitive market structure, low transaction costs, low levels of fragmentation, a robust and safe market infrastructure, and a high level of heterogeneity among market participants.
An important element of a domestic bond market is the government bond market. Development of a government bond market provides a number of important benefits if the pre-requisites to a sound development are in place. At the macroeconomic policy level, government securities market provides an avenue for domestic funding of budget deficits and avoids a build-up of foreign currency-denominated debt. A government securities market can also strengthen the transmission and implementation of monetary policy, including the achievement of monetary targets or inflation objectives, and can enable the use of market-based indirect monetary policy instruments. The existence of such a market not only can enable authorities to smooth consumption and investment expenditures in response to shocks, but if coupled with sound debt management, can also help governments reduce their exposure to interest rate risk – a situation that is looming large in the National Savings Certificates market, currency, and other financial risks. Finally, a shift toward market-oriented funding of government budget deficits will reduce debt-service costs over the medium to long term through development of a deep and liquid market for government securities.
The prerequisites for establishing an efficient government domestic currency securities market include a credible and stable government; sound fiscal and monetary policies; effective legal, tax, and regulatory infrastructure; smooth and secure settlement arrangements; and a liberalized financial system with competing intermediaries. Since pension and life insurance reform helps in the development of government securities market, starting the process of pension and insurance reform now might be prudent because of the time it takes to feel the positive impact of such reforms on the capital market.
The current emphasis on local-currency bond markets stems mainly
from their risk-management benefits, as highlighted by the Asia and
the Tequila crises. Issuing bonds can reduce the types of interest
rate, foreign exchange, and refunding exposures that created those
crises and can help ensure that emerging market borrowers have
more shock absorbers—more tools—to limit the impact of those
exposures. Foreign investment is clearly a plus for economic development but it does create certain risks. Since financial sector crises will never be eliminated, and, at least for many years to come, flows into emerging markets will be large in relation to the markets in which they are investing, any rapid outflow will create serious problems for the borrowing country. Emerging market countries must find ways to manage the risks, and hence benefit from international capital flows. They need to be able to reduce exposures to foreign-currency borrowing and also absorb the associated shocks and volatility, so that small problems will not escalate into broadly based social catastrophes, harming people who were in no way directly involved in the markets.
Local-currency bonds dampen the effect of crises created by international capital flows by locking in interest rates and local-currency funding. This allows borrowers to hold on to their funds and positions and work their way through a crisis. But, as happened in Asia, many borrowers want to rely on short-term, foreign-currency funding because when their economy and local currency is strong, such borrowing creates a double benefit to their net worth: the borrower’s liabilities fall while its assets and revenues rise. The flip side is that when times turn bad, borrowers get a double hit on their net worth: liabilities rise and assets fall, causing strains and in some cases defaults. The solution to this problem is to use funding structures that have a neutral effect on net worth, as in the case of bonds. The difficulty lies in convincing borrowers that good times may turn bad, and in getting them to incur the potential opportunity cost from locking in stable funds and rates.
Local bond markets also support major trends that stem from
economic and financial sector growth. For issuers, infrastructure
development is creating demands throughout Asia and other parts
of the world for large-scale, longer-term funds that banks cannot
often provide. Privatization, securitization (particularly for housing
finance), and decentralization of governments are all creating new
financing demands. On the investor side, many countries are now
rich enough for insurance and social security and are creating institutional investors that need long-term assets. They want to keep their interest rate (fixed), reinvestment (long term), and local-currency risks to manageable levels. With macroeconomic stability increasing in many countries, issuers and investors alike are more willing to lock in rates. Local bond markets also strengthen the financial sector by encouraging greater transparency, pushing companies to disclose in public markets and forcing them to better understand themselves and in turn improve their management (as is the case in equity markets, too). Bond markets create competition with the local banking sector, which can reduce lending rates.
Ideally, countries should try to build both primary and secondary
markets for bonds. Primary markets reduce the three risks noted;
secondary markets, by adding liquidity and broadening the investor
base, help reduce funding costs. Many countries will not be able to create secondary markets, and some will find it hard to develop public primary markets. Whatever the situation, reducing one or two of the three financing risks is worthwhile. Getting local-currency, fixed-rate, long-term funds in a private placement may cost more than a publicly traded issue but it might be all that a country can do, and will reduce the issuer’s risk.
Developing bond markets can be more complicated than developing equity markets. Bond markets need supporting pricing infrastructure. They operate best when they have money market and longer-term benchmarks. Most emerging markets lack these benchmarks. The issuer’s credit risk is another major concern. The issuer has to service and repay the bonds, whereas with equity the issuer can be “incubated” from payments as it grows.
Investors need to make sure issuers have the cash flow to make
interest payments and redeem principal. Bond markets simply cannot
grow as quickly as equity markets can. Furthermore, bond markets
need more sophisticated market participants. Issuers need to
be able to manage their cash flow to make repayments. Bond markets
typically need dealers and market makers, which means creating
a new class of intermediaries who can take positions and manage
The obstacles to bond market development can be divided into three
broad categories: those around and across the market, and those
inside the fixed-income markets.
Around and Across the Market
The obstacles in this group stem from the political situation, the
macroeconomic situation, and the broader financial system.
The Political Situation:
The People’s Republic of Bangladesh has
been a parliamentary democracy since September 1991. The present
government is headed by the Awami League which has an absolute
majority, but the opposition party has stepped up its nationwide
program of strikes, processions, and mass meetings. These activities
have weakened the government’s intentions to foster changes such
as the development of the financial market.
In addition, certain commercial and financial regulations are
outdated in that they tend to focus on institutions rather than functions.
Governance and accountability are lacking in certain areas,
and there are elements of inefficiency in the financial system, mainly
concerning the state-owned banking sector. Although the government
is aware of these problems, it has been slow to improve governance
and develop strong institutional capacity. The problems created
by these weak institutions are compounded by an increasingly confrontational political environment. At the same time, the government has committed itself to launching financial reforms that could help accelerate the country’s rate of growth. The main goal of these reforms is to reduce the direct controls on the financial system, and to deregulate and introduce a new set of market-oriented approaches to financial sector activity. The Bangladesh National Budget for 1999–2000, for example, earmarks funds for the creation of a central depository system (CDS) to help streamline trading at the stock exchanges and improve authentication.
Furthermore, a proposal is under scrutiny that would amend
the Trust Act to allow provident and pensions funds to invest in the
capital market. To achieve that goal, it will be essential to ease the
bad-loan situation, which is draining the country of its monetary
resources. But certain factions in Bangladesh oppose those aims and
commitments. Since no one has stepped forward to “champion reform,” the government appears unwilling and unable to undertake
the requisite changes in due time. Because the political environment
is so fragile, laws and regulations are not being fully enforced.
Bangladesh’s macroeconomy was fairly strong throughout the 1990s, with growth rates averaging a respectable 5%, and inflation averaging a modest 9%–10%. The primary fiscal deficit during the past five years has averaged about 5.5% of GDP, which has generally been within sustainable limits. (However, the consolidated public sector deficit, taking into account losses incurred by state-owned enterprises, is much higher and underscores the need for improved fiscal management, although foreign exchange reserves have become more stable recently owing to impressive export performance and reduced imports.) Heightened foreign investor interest in the country’s natural gas sector has opened up tremendous possibilities. But despite these positive elements there are some serious constraints on the development of active corporate bond markets in Bangladesh. First, Bangladesh is one of the poorest countries in the world, with approximately 125 million inhabitants, of which about 60 million live below the poverty line. Although its GNP growth rates—in the range of 4%–5% year—are attractive, they suggest that it will take Bangladesh 25 years to double its per capita income. In order to reduce the incidence of poverty to about 11%, as it hopes to do, Bangladesh will have to achieve economic growth rates of 7.5% or more a year. According to several studies (see, for example, World Bank, “Bangladesh, Key Challenges for the Next Millennium,” April
1999), economy has the capacity to move out of poverty with increasing speed, but that will require decisive policy actions in several areas, not least of which is the financial market. However, a sense of urgency is missing in policymaking, despite the growing imbalances in the economy and crowding out as Bangladesh continues to channel vast monetary resources into servicing bad loans. Given that macroeconomic changes can happen in short periods of time and that non-performing loans, which account for a third of the loan portfolio, can create financial sector vulnerability, the bad-loan situation could trigger a severe liquidity crisis nationwide. It can take decades to build a fixed-income market in the wake of such crises. This issue clearly needs immediate and focused attention.
If the country’s positive macroeconomic trends continue into the
future, the fiscal deficit and bad-loan situation will ease up and these
factors would pose less threat to the financial market.
Broader Laws and Regulations:
Certain omissions or drawbacks of the broader laws and regulations directly affect development of the fixed-income market. First, with regard to the ownership of land, the law provides for the registration of deeds rather than of ownership, which makes it impossible to take land as collateral for bond issuance. Second, the law makes arbitration a cumbersome and slow process; moreover, foreign arbitration awards are not enforceable in Bangladesh. Third, in terms of obtaining issuers, there is no privatization law to lend transparency and authority to the privatization process, although one is at present being drafted. Fourth, Bangladesh’s laws represent a mixture of codified British common law and legal principles from various religious heritages. Although
the court system derives from a common law tradition, Bangladesh
courts are limited in their ability to function effectively.
In view of these constraints, the legal system can move only so fast in amending the laws and enacting new ones, even though the
government acknowledges the need for such changes. Contract laws
and commercial codes seem to be fair, but ensuring that they are
observed is difficult because of a weak adjudication system.
Broader Financial System:
The broader financial system includes the banking sector, nonbanking sector, government securities market, and short-term money markets.
Banking sector. Bangladesh’s banking system, which is dominated by
state-owned NCBs, creates two serious problems for a local corporate
bond market.First, the system provides low-cost loans to stateowned
enterprises, which account for a large part of the corporate
sector. This undermines development of the corporate bond market
because other financial institutions are unable to compete with these
“underpriced loans.” Indeed, the state-owned enterprises constitute
a large part of the NCBs’ business. To complicate matters,development
financial institutions (DFIs) also provide low-cost loans, priced
at a small percentage over bank deposits for similar maturities.
Second, the banking sector is faced with a substantial number of
bad loans; nonperforming assets account for about 30% of total assets.
Although these nonperforming assets can be said to create a
need for an active bond market, to the extent that banks are constrained in new lending and thereby cannot meet the funding needs
of corporate borrowers, they also rob the bond market of needed
investors. Yet the state-owned banks just keep on making bad loans.
Nonbanking sector. The nonbanking portion of the financial sector consists of two small stock exchanges (Dhaka and Chittagong),2 both of which have still not recovered from the bull market problems of 1996, which left the public suspicious of corporate institutions because it is hard to get them to disclose their figures. At that time, the stock exchange experienced a hefty run-up in prices owing to a large inflow of funds from retail investors. This inflow, drawn by the prospect of easy money, was a new experience for the Bangladesh people, but it lasted only the second half of 1996. In those six months the index soared from 500 to 3500 and the market came crashing down to about
600. The stock market has not recovered yet: in May 1999 the index
hit a 63-month low, at about 465. The average daily turnover in the
spring of 1999 was about US$1 million to US$2 million. The weak
operating performance by listed companies and low confidence in
the market overall has made it difficult for the market to recover.
In sum, the nonbanking sector has not evolved in a way that
would allow it to play an active role in the financial system. Nor, as
discussed in the section on intermediaries, is it prepared to play an
active and skilled leadership role in developing and participating in
an active fixed income market.
Government securities market:
The government securities market in Bangladesh is small, does not provide much of a yield curve to support a corporate bond market, and does not provide intermediaries with skills and a profit base to support the corporate bond market.
At present, the government issues long-term savings certificates at
high interest rates and government bonds, and it only has market-oriented rates for T-bills.
At the shorter end of the market, T-bills are auctioned weekly
for 91 days and the Bangladesh Bank (BB) occasionally issues paper
for 180 days, 365 days, and 720 days. Commercial banks participate
in auctions weekly for 91-day T-bills, whereas the others are
issued occasionally. Accepted bids are noted in the newspapers. The
market is small, with outstandings of about US$800 million. There
is no secondary market and no market for repurchase agreements
(“repos”). T-bills are transferable, but settlement is manual and very
slow, done through BB. On the whole, T-bills are mainly used to
satisfy statutory liquidity requirements (SLRs). The past few years
have seen a clear bias for short-term borrowing.
Government bonds, with maturities ranging from 3 to 25 years,
are issued when needed; they do not create a yield curve as T-bonds
are nontransferable, mostly because they are issued to recapitalize
state-owned banks. Their notable feature is that they are guaranteed
by the government and are eligible for SLRs.
Government savings certificates (GSCs) range in maturity from
three to eight years. GSCs are offered to different types of investors
in the retail sector (but small corporate are allowed to invest). The
types of investors are mostly individuals and families but also include
charity and provident funds. GSCs are issued in series through
the year. The holder may redeem them at par at any time.
Finally, GSC issuances offer significantly higher rates than local
bank deposits, which create a relatively high rate for risk-free and
tax-free government securities. This establishes a high benchmark
rate for corporate fixed-income securities, creating a disincentive to
invest in corporate securities. GSC rates are 2%–3% higher after
tax compared with rates on other government paper. GSCs create a
high benchmark interest rate foundation for corporate securities.
That matters because it is very hard to compete with risk-free government debt.
At present, Bangladesh law and the government’s fiscal and monetary
policy combine to create a financial market monopoly for GSCs
and NCBs, which in turn keeps alternate financial intermediation
from emerging. Bangladesh needs a healthy nonbank financial institution (NBFI) sector to increase mobilization and make competitive
financing available in a fixed-income market. To achieve that end, it
must break the NCBs’ monopoly. Although the government is aware
of this problem and has put forward some relevant reforms, there
are no real incentives to speed up the process, maybe because of
Short-term money markets:
Money markets provide another foundation for bond markets. The money markets in Bangladesh are quite small. There is an interbank market, in which commercial banks borrow and lend to adjust their short positions (the size of this market is not publicly known). Normal maturities range from overnight to 30 days. Bangladesh also has a forward market for U.S. dollars against the taka, but only for short maturities. There is no commercial paper market.
Inside the Fixed-Income Markets
The important factors to consider inside the fixed-income markets
are regulators and regulations, central market infrastructure, and
Regulators and Regulations:
One impediment at the regulator and regulation level is the overlapping authority between the two financial market regulators, Bangladesh Bank and the Securities and Exchange Commission (SEC), and no clear jurisdiction over the fixed-income market. In general, BB regulates the commercial banks and their activities, while the SEC regulates the NBFIs, the two stock exchanges, and the capital market.
A second problem is that the SEC has no authority to issue rules
and regulations, and the procedure as a whole is long and drawn
out. As a result, the SEC has not proposed any regulations for the
issuance of bonds or debentures. All rule proposals must first be
submitted to the Minister of Finance for approval and then passed
on for approval from Ministry of Law. Furthermore, potential issuers
have to look at various sets of regulations and follow a long and
Third, although the SEC requires listed companies to meet international standards on accounting and auditing, accounting information appears to be of doubtful quality and reliability.
Fourth, the Securities and Exchange Act of 1993 confers vast
regulatory authority on the state, and is regarded as a constraint on
capital market development. There is a board of policymakers. Three
of its members are appointed by the state, another is from the Ministry of Finance and one from the central bank, and the chairman is
appointed by the government.
Fifth, in the present system, a company can float debentures up
to a maximum amount of its current asset value and has to register
its assets in the name of the Trustee as Security. Hence there is no
provision for floating unsecured debentures.
Central Market Infrastructure:
In the absence of a secondary market in fixed-income securities, no effort has been made to build up a central market infrastructure to support it. Bangladesh only has a telephone market for T-bill trading and central market infrastructure at the stock exchange for trading equities and debentures. In the T-bill market, the counterparts call each other and settle transactions without any transparency in real time for other participants in the market. At the stock exchange, the debenture market is fully automated. The debenture market has a somewhat more transparent order-matching system in that bids and offers are entered in the computer and then matched automatically.
Bangladesh has no central depository system, though one is expected
to start operating in 2000. Today, clearing and settlement are
done manually, which creates various risks to completing a transaction. Also lacking are a credit rating agency, research and information companies, and market information on screens; market
participants are referred to other media, such as the daily financial
newspaper, and thus experience a delay in obtaining essential eco-
nomic information. According to some participants, even that information is often unreliable.
Market participants can be divided into issuers, investors, and intermediaries.
The foremost impediment here is that Bangladesh lacks a
significant number of potential, good-quality issuers. Its economy
continues to be agriculturally based; agriculture accounts for nearly
30% of the country’s GNP, and more than 70% of the labor force is
engaged in agricultural activities. The industry and service sectors
contribute 20% and 50%, respectively, but compared with landholdings, the average size of industrial and commercial enterprises is rather modest.
Most private sector enterprises are small and owner-run, many
are of “cottage size” and most are in the garment industry, which to
date depends largely on short-term bank loans for financing. These
enterprises could benefit from longer-term funding but are neither
large enough nor well known enough to issue bonds. Most of the
large-scale industrial units and commercial enterprises are state
owned. Their shares are not listed, and they do not offer debentures
since their financing needs are met by the government or by the
state-owned NCBs. These state-owned firms generally stay outside
the capital market. The privatization program for state-owned companies works too slow to influence the market.
Second, although Bangladesh has a debenture market, to date
only a small number of well-known issuers have used the market
(see table 2). The liquidity in those debentures at the stock exchange
is insignificant because of the small number of investors and their
buy-and-hold mentality. The investor community does not seem to
find this market too attractive owing to weak disclosure by the issuers,
which in turn reduces credibility and investor confidence.
Third, companies find that issuing debt is costly, both in monetary
and nonmonetary terms. The interest rate distortion due to the
GSCs mentioned earlier raises the ongoing cost of borrowing, while
various up-front costs amount to about 7% of the value of the issue
(these include registration costs—that is, stamp duties—totaling about
2.5% of the issue value).
Fourth, it is difficult to persuade issuers to disclose sufficient
information about their companies (although prospectus requirements
for listed debentures do seem fair).
Yet another problem is that most potential issuers are unwilling
to take the opportunity cost involved in issuing a long-term bond. In
addition, the absence of a yield curve makes pricing difficult.
On the investor side, few investors are sophisticated enough
to think about investing in bonds. About 80% of the base here is
made up of retail investors, whose primary concerns include the equity
at the stock exchange or the government savings certificate.
Of the few institutional investors that could support a bond
market, most are either prevented from investing in corporate bonds
by restrictive guidelines or are not professionally managed. The major
institutional investors are the Investment Corporation of
Bangladesh—a government-owned financial institution—and the
insurance companies. The mutual fund industry in Bangladesh is
the exclusive domain of ICB. There are no private mutual funds to
mobilize savings toward the debt market, and the ICB’s monopoly
has prevented new investor companies, that is, mutual funds, from
developing in Bangladesh. There are provident and pension funds
(total assets managed amount to Tk 6.7 billion; see The Financial
Express), self-managed by public and private corporate entities, but
none are professionally managed. The pension obligations of the gov-
ernment are not funded. The Trust Act of 1882 prohibits those funds
from being invested in equities, corporate debentures, and private
money market instruments.
In addition, no protective laws are in effect to ensure that investors
will get their dividend and capital back. Missing are higher audit
standards together with SEC regulations on disclosure standards in
prospectus along with arbitrary institutions.
Furthermore, most investors lack a trading mentality and just
buy and hold because of SLR requirements or because they do not
know how to trade.
Few foreign investors are attracted to this, mainly because of
the weak disclosure by the borrowers. As for the general public, it
has little understanding of debt products, and the intermediaries are
not much help because few engage in research on markets, companies and industries to encourage investment.
Intermediaries in Bangladesh lack many of the skills
needed to foster an active local corporate bond market. As mentioned
earlier, commercial banks dominate the financial sector and
not enough intermediaries are skilled in securities. Few are able to
identify issuers and investors and bring them to the market. They
provide little or no research analysis on industries or companies to
encourage investment in the local debt market. Too few private
merchant banks are able to conduct financial advisory and trust services.
Nor do any feel motivated to become a market maker for an
issue. Hence the market is illiquid, with large spreads. At the same
time, the fee structure and pricing are high enough to allow intermediaries to make money, but because transactions are so limited, the intermediaries seldom make money. Even if they are able to participate, intermediaries are reluctant to take any risk in dealing.
Prospects of a bond market in Bangladesh:
Despite the earlier setbacks the bond markets in Bangladesh is ready
to take off. The need for a bond market in Bangladesh deserves
attention because of the following:
•Foreign aid flow is diminishing and the trend is expected to
•Specialized banks are not in a position to supply desired level of
long term fund.
•Commercial banks have strategically cut down their long term
•The concept of prudent asset mix is most likely to generate demand
for investment grade bonds.
•The Provident Funds and Insurance Companies Funds are not generally allowed to invest their funds in stock market instruments. There is a bright possibility that these funds may be permitted to invest a part of their funds in marketable instruments subject to prudential guidelines, which may necessitate supply of lucrative debt
•Reduction in the interest on Govt. savings instruments and
withdrawal of certain savings instruments is expected to boost
demand for debt instruments.
•The registration fee for trust deed has been reduced from 2.5% (on
the amount of debentures) to Tk. 2500.00 providing a very
• There are now credit rating agencies to provide rating prospective
•Any interest paid by investor on money borrowed for investment in
debentures is deducted from total income.
•Interest income not exceeding Tk. 20000 received by an individual
investor on debentures approved by SEC is excluded from total
•The interest on Zero coupon bond approved by SEC at the hand of the recipient is tax exempt upto Tk. 25000.00. Such interest exceeding
Tk. 25000.00 is subjected to tax @ 10% deducted at source. Banks and other financial institutions and insurance companies which are the
mainstay of demand for bonds will now pay 10% tax on interest on
such bonds instead of 45% tax payable on other income
Recent developments and events have already created an environment
conducive to fosterage of the debt market. A number of financial
institutions have sold bonds or debentures to institutions. Further,
an Islami Bank has decided to issue perpetual bond subject to
approval of relevant authorities. It is also expected that quite a
number of institutions will float bonds through securitisation in
the near further.
A sustainable bond market needs enabling policies. The following
actions and policy measures are seen important to promote a bond
market in Bangladesh.
•All issues of debentures be rated by independent rating agency
prior to issue. Companies issuing bonds/debentures to public may be
rated periodically to keep track of issuing company’s financial
•Public utilities and infrastructure projects be asked to raise a
part of debt through issue of marketable bonds.
•Industrial companies with good track record be advised to issue
marketable bonds instead of relying on bank financing.
•Existing public utilities and infrastructure projects be advised to
securitise debts by issuing marketable bonds.
•Existing industrial companies be encouraged to replace a portion of
bank/DFI loans with marketable bonds.
•To facilitate liquidity of marketable bonds, discounting facilities
may be provided by financial institutions.
• Systems of market makers (specialists) may be evolved to
facilitate market for marketable bonds.
•Bond maturities be diversified between one year and seven years as to give investors with different maturity profiles the option of
purchasing debentures with different maturities.
•The methods of revolving underwriting facility (RUF) may be
introduced so that companies can issue short-term debentures
whenever necessity arises. RUF is a system in which a consortium of
underwriters make commitment to the issuing company to purchase all
the unsold portions of the short-term debentures which may be issued
from time to time during a certain period (e.g. five years) up to
certain maximum amount.
•Coupon rates and all other issuing conditions of debentures be
determined by market forces.
• Coupon rates may differ according to the rating of the issuer
accorded by independent rating agency.
•In order to make long-term investment more attractive, issuers may find it useful to increase the coupon rate as years go by, e.g. 9
percent in the first year, 10 percent in the second year, 11 percent
in the third year and so on. Such increasing coupon rate methods
will be useful, especially if the investor is given the right to
call for redemption of the bonds at the end of each year so that he
may choose to hold them to enjoy a higher coupon rate.
•Interest received by individual investors on bonds/debentures
approved by SEC may be fully exempted from tax.
• Investment in bonds/debentures approved by SEC may be given
tax-exempt status up to a certain limit.
•The tax rates/relief available to investors on Zero coupon bonds
may be extended to all other bonds/debentures approved by SEC.
If all the above things can be done, then this could pave the path for a well-functioning bond market that can change the existing bank-oriented financial system to a multilayered system, where capital markets can complement bank financing.
Jeff Madhura. “Financial Markets and Institutions” (7th Edition). Thomson south-western
Scott Besley & Eugene F. Brigham. “Essentials of Managerial Finance”(13th Edition). Thomson south-western
Peter S. Rose & Sylvia C. Hudgins. “Bank Management & Financial Services” (7th Edition). McGraw-Hill International Edition
http://en.wikipedia.org/wiki/Bond_market (Retrieved on: 14.04.2008).
http://www.bangladesh-bank.org/seminar/iwdbmbd/seciia06.html (Retrieved on: 14.04.2008).
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGRAMS/EXTTRADERESEARCH/0,,contentMDK:20625246~menuPK:64001880~pagePK:210083~piPK:152538~theSitePK:544849,00.html (Retrieved on: 14.04.2008).
http://www.ifc.org/ifcext/publications.nsf/AttachmentsByTitle/Building_Local_Bonds_Chp.14/$FILE/Building_Local_Bonds_Chp.14.pdf (Retrieved on: 14.04.2008).