The country needs a vibrant bond market  

Shahiduzzaman Khan   | Published: December 26, 2018 22:08:18 | Updated: December 27, 2018 21:15:52

The energy adviser to the Prime Minister launched the country's first ever Tk 5.0 billion non-convertible bond this week. The coupon-bearing bond, which is fully redeemable, will be used for financing 400-megawatt (MW) Ashuganj combined cycle power plant and Kolapara 1320MW coal-based power plant, according to a FE report.

As of now, only public treasury bonds are currently allowed under the statutory liquidity ratio (SLR) in the country. However, in case Bangladesh allows such power-sector bonds under the SLR, it would be beneficial to the growth of bond market in the country.

Reports say Bangladesh Infrastructure Finance Fund Ltd and Agrani Bank will provide Tk 1.0 billion each, and Rupali Bank will channel Tk 750 million and Sonali Bank Tk 500 million for the bond. Many other state-owned entities are likely to provide Tk 200 million each. Officials are hoping to raise an additional Tk 1.15 billion of the bond by next March.

The absence of a vibrant bond market is, in fact, putting pressure on the country's financial sector as the business community largely depends on banks to get their requisite financing. The weak bond market has also affected the banks' financial operations as it means heavy dependence on common depositors for funds.

Asian financial sectors including Bangladesh's are heavily dominated by banks. As a result, these are not well suited to finance long-term investments on a large-scale as the tenure of bank deposits is usually short.

The existence of a robust bond market mitigates the potential maturity mismatch of bank dominated  financial sector, reduces  financial sector  fragility and provides long-term  capital for  investment at a lower rate.

The bond market in Bangladesh is still in its infancy with only a primary government debt market, which is characterised by a small number of participants as primary dealers, especially the dominant commercial banks.

A rudimentary secondary market does exist in the country with only two corporate bonds. After realising the issues, the government with support from the Asian Development Bank (ADB) is now amending several corporate bond issuance regulations to enhance the supply of bonds.

Many diversified securities, analysts say, should be launched to make the bond market vibrant. The investors will show keen interest in the bond market if the products like fixed coupon and Sukuk bond are introduced.

According to a study, the country's bond market is one of the smallest in Asia as its size is only 8.06 per cent of the Gross Domestic Product (GDP). Of this, the share of corporate bond market is only 0.2 per cent compared with that of government bonds accounting for 7.86 per cent.

Bangladesh is on the lower trajectory compared with its trade competitors like India and Vietnam. Indian bond market size is 18.74 per cent of GDP while that of Vietnam is 22.98 per cent.

Since 2008, the government has been working to develop the bond market, which has not been made effective yet. The lack of corporate governance and doubtful transactions of the banks are the key reasons for the poor state of bond market.

However, the authorities now claim that all the regulators of the government are working together to improve the country's bond market. It can issue a number of bonds for mobilising the local resources. The matching fund from the internal resources against the foreign-aided project is required in the country's development work. 

Bangladesh needs to develop a coordinated national roadmap for creating a vibrant bond market given the growing potential of bond financing to fund various mega development projects. A well-structured bond market is vital for infrastructure development and double-digit growth of the economy.

There is the need for establishing a central authority under the Ministry of Finance for steering bond market development in the country. All stakeholders have to realise the potentials of bond financing in stimulating infrastructure development and economic growth. Many have identified high cost of funds as well as various hidden costs involved with bond financing as major hindrances in the development of local bond market.

There should also be tax incentives for specific type of bonds, like -- infrastructure bonds and securitised bonds. Bond financing can be an important instrument for the substantial volume of fund that the country requires for infrastructural development.

A developed bond market helps avoid excessive dependence on banks and facilitates to diversify corporate risks beyond the banking system. Coordination among the policymaking agencies is vital to extend the bond market.

As has been said, a developed bond market helps avoid excessive dependence on banks and facilitates diversification of corporate risks beyond the banking system. No liquidity crisis in the financial sector will remain if a strong coordination among bond market, banking sector and capital market could be effectively established.

Share if you like