Activating the country's bond market

Asjadul Kibria   | Published: May 09, 2019 20:47:02 | Updated: May 15, 2019 21:16:47

For the last couple of months, a move is on to activate the country's bond market. As part of this move, two separate committees have already been formed and assigned to outline measures to activate bond market. Bond market is now entirely dominated by the short-term and long-term tradable fixed income securities of the government with a limited secondary market transaction facility.

Senior officials of two regulators of the financial market, Bangladesh Bank (BB) and Bangladesh Securities and Exchange Commission (BSEC), and a representative from a Primary Dealer (PD) bank constitute a tripartite committee to examine the situation. Another high-powered committee, headed by Md Ashadul Islam, senior secretary, Financial Institutions Division of the Ministry of Finance, is also working for long-term finance and bond market development. Media reports suggest that the two committees have already identified a number of impediments to develop a vibrant bond market. They will also suggest steps to overcome the barriers.

Though the development is welcome, the barriers are generally well known to all. During the last two decades, a number of initiatives were taken to create a full-fledged bond market. As bond is a debt instrument, its market is also known as debt market. It is one component of the capital market, and equity or stock market constitutes another.  In Bangladesh, equity or stock market is generally termed capital market due to misunderstanding about the overall financial market. Bond and equity markets form the capital market which is again a part of the financial market. The other part of the financial market is the money market.

Private and public sectors issue bond with different maturities to collect loan from the market. Investors or purchasers of the bonds are entitled to receive yields at fixed or pre-determined rates. So, it is also known as fixed income securities. Like shares or equities, bonds are also tradable in the secondary market.  Without a secondary transaction window, a bond market cannot be vibrant. It will not attract investors.

In Bangladesh, there is no secondary market activity of the bonds and it makes the bond market almost non-functional. Moreover, there is a distortion in the market which is dominated by the treasury bills and treasury bonds.  Primary dealer banks are allowed to purchase and transact these bills and bonds but in a limited way. These banks can't perform full-fledged secondary transactions. Individuals and other institutions are allowed to invest in these securities through the primary dealers. Lower yield rates also failed to attract investors who prefer less-risky investment.

The non-marketable fixed-income government securities, the savings certificates to be precise, are probably the major distorting elements of the capital market. These securities are not tradable in the market. Mostly individuals, and in some cases institutions, invest in these securities at a higher rate of return. The yield rates of savings certificates are much higher than treasury bills and bonds. Average yield rate of savings certificate is 10 per cent when it is around 7.50 per cent for t-bonds. Interest rates offered by banks and financial institutions are also lower than the rates of savings certificates.

Currently, government borrowing through the savings certificates is much higher than treasury bills and bonds. As a secure investment with hefty return, people from different income group purchase the savings certificates. As a result, it is gradually increasing the domestic debt liability of the government with higher interest payment. It is also diverting funds from tradable securities. Savings certificate is considered as a very good safeguard against inflation to limited and lower income people. In reality, higher income people are investing more in these instruments.  Many of them are even investing in the name of other people when their maximum investment limit gets  exhausted.

In fact, a number of irregularities are already there and now the government is trying to fix it. Digital database of investors to track their actual level of investment is now at the development stage. It is long overdue. All transactions are now online and linked with the bank accounts of the clients. Tax Identification Number (TIN) has been made mandatory to contain shady investments.

There is no doubt that these steps will bring a discipline in the transaction process of the savings certificates. But these have little to do with addressing the barriers to bond market development. It is the yield rate that needs to be adjusted in line with tradable instruments like t-bond. A strong political will is essential in this regard. The yield rates of the existing four types of savings certificates vary between 9.35 per cent (minimum one year) and 11.76 per cent (maximum five years). At the same time, yield rates of different t-bonds range between 5.0 per cent (minimum two year) and 9.0 per cent (maximum 20 years). 

The Seventh Five-Year Plan (7FYP) significantly stressed on the government's effort to develop long-term domestic bond market by issuing longer maturity treasury bonds and bills. It also stressed on reducing the government's dependence on borrowing through the National Savings Schemes. "Debt management reforms will be undertaken to make public borrowing cheaper and also help develop domestic bond market," said the 7FYP document. Besides revising the yield rates of savings certificates, the government may also think to make these instruments tradable in the secondary market. For this, right policy, regulations and infrastructure are essential. All these are also linked with the development of the bond market.

Another major shortcoming of the bond market is the absence of corporate bond.  Without adequate corporate bonds, there will be no vibrant bond market. In its last meeting, the tripartite committee decided to encourage corporate entities to issue bonds to collect fund or capital from the market. So far, corporate entities are less interested to issue bonds due to complex procedures, higher fees and ambiguous tax structure.   

Moreover, businessmen and investors are generally comfortable with loan-financing from banks and non-bank financial institutions. Those who have political backing are also taking undue advantage of loans by not repaying in time. As a result, default loan is growing. The government has taken a stance, albeit a soft one, on default loan. According to experts, this soft stance of relaxing repayment procedure and reducing due interest rates will distort the financial market further.



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