Opinions
6 years ago

OPINION

Developing a vibrant bond market

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Bond market in Bangladesh remains largely underdeveloped.  Dominated by the government debt securities in the primary market, the secondary market is largely absent. The lack of an active bond market is badly affecting the country's financial sector as the businesses largely depend on banks to get their required financing. The weak bond market has also affected the local banks' financial operations as it means heavy dependence on funds put together by common depositors.

Reports say that the government is at present in the process of amending several corporate bond issuance regulations to enhance the supply of bonds in the market. It is a welcome initiative that the government is seeking support in this regard from the Asian Development Bank (ADB). Last year the International Monetary Fund (IMF) also prescribed that Bangladesh made the bond market vibrant. The IMF found that the government was taking costly loans through the savings instruments to finance the budget deficit. The higher profit rates of the national savings certificates than the rates of bank deposits create huge interest burden on the government. This also prevents expansion of the securities market.

A vibrant bond market helps avoid excessive dependence on banks and facilitates diversification of corporate risks beyond the banking system. Bangladesh's capital market is fully equity-based and dominated by securities or stocks as is evidenced by the fact that there is only one corporate bond called IBBL Mudaraba Perpetual Bond, a total of 221 government treasury bonds, and eight debentures (already redeemed) compared to a much higher figure of listed issues with the country's bourses. The transaction of the t-bonds in the stock market is nil.

The factors that impede the development of a secondary bond market here include lack of congenial regulatory environment and awareness among investors and other market participants. The poor demand for bonds is exacerbated by inadequate fiscal measures and higher yield rates of the government's savings tools. Then there are factors like low yields of the government securities and higher tax on investors' returns.

The Bangladesh Bank at times blames the financial institutions serving as the Primary Dealers (PDs) for the under-performing bond market. But the dealers blame the existing fiscal policies that are dubbed 'not conducive' to the growth of bond market. Rather, such policies are found discouraging on the part of the investors.

Bangladesh has the smallest bond market in the South Asian region. To make the bond market vibrant, a number of diversified securities can be launched. If products like fixed coupon and sukuk bond are introduced in the local market, there is every possibility that the investors may turn up with increased interest in the bond market. To develop or extend such a market, coordination among policymaking agencies is pretty crucial. It is highly important that the market gets operated by skilled manpower. Also, the government, rather than providing financial assistance to state-owned enterprises (SOEs), should encourage them to raise funds by issuing corporate bonds from the market.

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