There is no denying that Bangladesh needs a vibrant bond market to meet its huge financing requirement for infrastructure development and further industrialisation.
Between 2020 and 2040, Bangladesh needs $600 billion in investment to realise its dream of becoming a developed nation, according to a report. But the current trend indicates there will be a major shortfall of about $200 billion. The question is wherethe funds will come from. The onus should not entirely be on national savings certificates (NSCs) and banks.
Banks rely on short-term deposits to run operations, so when they provide long-term loans with short-term deposits it creates pressure on their liquidity management. On the other hand, the interest rate on the NSCs is too high.
As such, the government should explore other sources to mobilise funds. A vibrant stock and bond market should be the sustainable solution to the funding needs.
According to a report, there are government bonds worth about Tk 200,000 crore and private bonds worth Tk 24,000 crore. But they are not traded on the stock exchanges.
The Bangladesh Securities and Exchange Commission (BSEC) is working on stock market development so that private companies can raise funds from the market.
However, the truth is that the local bond market is still at a rudimentary level. For instance, private sector bonds (corporate bond) in Bangladesh are only 1.0 per cent of the country's gross domestic product, whereas it is 149 per cent in the US, 60 per cent in China, 16 per cent in India, 60 per cent in Malaysia and 59 per cent in Thailand.
As such, there is a huge opportunity to raise funds through the bond market.However, the government did not take any initiative in this regard. A lack of policy initiatives and awareness is the main reason behind the lacklustre growth of corporate bond issuance.
The country's investors lack financial knowledge, especially about the bond market. Another reason for the lacklustre bond market is the higher interest rate offered by the NSCs. This is creating distortion in the stock market, bond market and any other securities market.
People can buy bonds from the over-the-counter market but they should be tradable on the stock exchanges. Then it will be a versatile way to get funds from general investors and to raise money easily.
However, there are several impediments to trading bonds in the secondary market and one of them is advance income tax (AIT). As such, AIT should be withdrawn to attract investors to bonds.
Bond issuers also have to pay 2.0 per cent of the bond size to the National Board of Revenue as a trust deed registration fee, which fuels the bond issuance cost.
Apart from removing these impediments, a tax incentive is needed to boost the bond market. Primarily, tax rate can be reduced or a tax exemption can be provided to issuers and investors so that entrepreneurs and people get attracted.
To remove the obstacles caused by the AIT and promote incentives, coordination among all the regulators should be ensured and bureaucratic red tape should be cut.
To enhance public participation in the bond market, the credibility of the financial reports of bond issuers should be confirmed. Many foreigners want to invest in Bangladesh not in the form of foreign direct investment but through bonds, so the government should issue a sovereign bond.
A sovereign bond will help local businesses to issue private bonds in the offshore market. A country is benchmarked when it issues sovereign bond and without the benchmark corporate bond issuance at international level is quite tough.
Although stock market is gaining much popularity in Bangladesh, bond market remains conspicuously unattractive. Very recently, the Bangladesh Securities and Exchange Commission (BSEC) has sought a number of fiscal concessions in order to help develop the country's moribund bond market.
It has put forward, according to reports, a set of proposals, including tax waivers, to the National Board of Revenue (NBR) for consideration.
Currently, tax waiver facility is conditionally available in case of zero coupon bonds. Such facility needs to be made available for all types of corporate bonds and investors concerned. There is also a need for rationalising tax at source in case of the transaction of corporate bonds.
Presently, 0.10 per cent tax at source is applicable to a broker, depending on the transaction price. For all practical purposes, tax should be realised based on the number of transactions instead. Rationalisation of stamp duty on corporate bonds is also needed.
Currently, 2.0 per cent stamp duty is levied on the issuance of corporate bonds. Again, 3.0 per cent stamp duty is realised on 'value of consideration' of bonds. In fact, 'high' stamp duty is a barrier to the growth of bond market.
There is no denying that weak bond market is intensifying pressure on the country's banking sector. Banks cannot collect funds from any other sources, except deposits of clients, due to weak bond market. The situation makes the corporate sector completely dependent on the banking sector for funds.
As such, lots of new securities like zero coupon bond and fixed coupon bond need to be introduced in the bond market in the country to make it popular among investors. Development of bond market, in fact, becomes imperative for the country as both investors and the authority will be benefited from the bond market.
The bond market in the country still remains at a very primary stage. The central bank, BSEC and National Board of Revenue (NBR) will have to work together to expand and popularise the market. Bank officials will have to work carefully on the issue.
The presence of bond market in the country is very limited compared with that of other countries. The government should take initiatives to change the situation as the country needs long-term investment to achieve its development goals. Dependency only on the banking sector should be overcome for financing its investment needs.
On the other hand, the bond market should get importance for financing in order to achieve sustainable development goals. It will not be possible to achieve the development goals depending only on the bank financing. There should a reduction in tax rate for expansion of the bond market to reduce pressure on the banking sector..
The Bangladesh Bank (BB) had taken a move to make Islamic bonds popular by enhancing the volume of Islamic Bond Fund and creating scopes for the bonds' multiple uses. The committee had already finalised 13-point policy recommendation to bring dynamism in the country's Islamic bond market.
Indeed, a vibrant domestic bond market can reduce a country's dependency on short-term foreign currency borrowing and also help the country accelerate its economic activities.
All said and done, development of a domestic bond market should be the priority of the government and a proper localised bond market can speed up financial development of a country like Bangladesh.