An International Finance Corporation (IFC) diagnostic mission has recently found the Bangladesh capital market environment not conducive to the issuance of debt instruments or mobilisation of debt to help local businesses with long-term finance.
The mission that visited the country in December last said long-term debt issuance is subject to higher issuance cost and rigorous regulatory due diligence.
"(The) inadequacy of the accumulated equity capital and very constrained space for long-term debts outside the banking network are huge impediments to growth in private as well as public sector investments in key sectors including infrastructure, industrial manufacturing and housing," the IFC said.
It reiterated that it will work on issuing offshore Taka bond and green bonds to help Bangladeshi businesses get long-term finance outside the banking sector.
"…the IFC will make efforts to execute demonstration transactions to lead the way for other market participants to do similar transactions in the areas including offshore taka bond issuance, investment in market infrastructure, green bonds and green finance, securitisations," it said in an aide-memoir on capital market development in January.
Earlier in April 2015, the IFC proposed to help Bangladesh in floating US$1.0 billion worth taka bond. But later in October 2016, it retreated from the proposal for 'failing to raise funds'.
The IFC came up with the proposal as Bangladeshi businesses lack long-term debt in absence of a 'vibrant stock market' in the country.
It identified poor governance in both public and private sector commercial banks, rising non-performing loans and other structural constraints which also limit banking sector's capacity to remove the long-term finance bottlenecks.
The IFC, the private-sector arm of the World Bank Group, said the long-term financing could have been less difficult to mobilise had there been a deep and vibrant capital markets 'with lead-ins for intermediation of long-term debts'.
Presently, over 80 per cent of debt financing comes from the banking sector, in particular commercial banks. "Dominance of commercial banks also indicates prevalence of short and medium-term lending and limit on the capacity of long-term financing."
The IFC identified three reasons behind long-term lending limitations of domestic banks. It said the banks have no easy access to foreign exchange resources thus cannot lend in foreign currency, they are short on long-term taka resources resulting in failing to lend in takas beyond five to six years of maturity, which is significantly shorter than the economic life of most long-term investment projects.
Another reason, the IFC found, is that the banks rely on variable-rate resources (deposits) thus cannot provide fixed rate loans although this will be the best practice for projects creating long-term assets.
It termed Bangladesh's two stock markets relatively small and heavily equity-driven. "The two stock exchanges have a market capitalisation to GDP ratio of 22 per cent while the ratio is 80 per cent in India, 96 per cent in Thailand, 55 per cent in Vietnam, and 159 per cent in EU for debt market (and 60 per cent for equity/stock market)."
The team opined that the Bangladesh Securities and Exchange Commission (BSEC) needs to step up its role in deepening and diversifying the market. "BSEC's leadership is important in promoting intermediation of long-term debt outside the banking network."
The IFC in the aide-memoir said it would be a key to executing demonstration transaction in the market with a view to raising the profile of capital markets and finding market solutions to long-term finance.
It will work on holding a national long-term finance conference in the first half of this year with participation of key stakeholders to raise the profile of capital markets, field a mission to identify areas for partnership with BSEC and other stakeholders on capital market development, and will take a multi-year capital market development programme with components for capacity building of the key market regulators.
Besides, the IFC will make efforts to execute demonstration transactions that can potentially lead the way for other market players to do similar transactions in the capital markets space.
The transactions include issuance of an offshore taka bond, investment in market infrastructure, exploring opportunities for green bond or green finance, and potential securitisations like asset or mortgage based securitisations.
A senior official at the ministry of finance said they had been scrutinising the aide-memoir forwarded by the IFC.
He said the Asian Development Bank (ADB) has been working on development of Bangladesh's capital market for a couple of years.
"The World Bank's efforts will help further remove the bottlenecks and make the capital markets vibrant," he noted.