In an interview with the Dhaka Tribune’s Niaz Mahmud, CEO of AFC Capital Limited Mahbub H Mazumdar discussed the current state of Bangladesh’s capital market and ways in which it may be strengthened. Mahbub is also an executive committee member of the Bangladesh Merchant Bankers Association (BMBA)
How do you evaluate the present state of the capital market in Bangladesh?
The current state of the capital market is not as good as it should be. It is not keeping up with the pace at which our economy and GDP is improving. Fortunately, the capital market seems to be in the process of coming out from the gloom. The government is playing a positive role in shaping the capital market, and so is the regulator (Bangladesh Securities and Exchange Commission). New rules and regulations have been introduced, and thought is being put into new products. Nonetheless, I feel that reforms are necessary for sustainable growth in the capital market. It is imperative to have a capital market which is disciplined.
Apart from equity, what products should be traded on the market?
Fixed income securities should be traded on the market. While our mutual fund is not popular among investors, we have doctors, engineers, and retired people who can benefit from fixed income securities, due to the low risk. Derivatives should also be available for trading on the market.
Do you think the market is mature enough for trading derivatives?
We have to start first. India already has a derivatives market. There is a notion that people will mess up derivatives trading, but I think people will get used to it and learn over time, even though there may be some hiccups in the beginning.
What are the irregularities affecting the financial sector?
We have seen in the media that loan defaults, a capital deficit at banks, and other irregularities are plaguing the financial sector. This has a psychological impact on our investors. Banks are facing numerous problems, including corruption, inefficiency of bank officials, and loan defaults. State owned banks are suffering the most. Every year, the government meets the capital deficit of these banks by increasing taxes on the hard earned money of taxpayers. Furthermore, the government meets budget deficits by selling saving certificates. The interest rate on saving certificates is over 11%, while it is lower at banks.
How can the situation be remedied?
First and foremost, the government should make the policy decision that the capital deficit of commercial banks will not be met with the taxpayers’ money. This may be acceptable for specialized banks, but a guideline is needed.
Second, we need to come out from the practice of going to banks for capital financing. Financing should come mainly from the capital market. Financing long-term capital with short-term loans from banks is very risky. When a company is financed by the capital market, the company has to meet rigorous compliance and accountability requirements. As such, there is pressure on entrepreneurs to use the money efficiently. On the other hand, the standards of compliance at the state owned banks is lower. Consequently, money is being looted from the banks.
What can we do to strengthen the capital market?
So far, the government has taken many initiatives to strengthen the capital market and many more will be taken up in the coming days. Bureaucracy and political interference still cause problems, as the capital market has to run smoothly. More initiatives to strengthen and increase manpower at the Bangladesh Securities and Exchange Commission (BSEC) need to be taken.
It is also important to protect the interests of investors, as they are the drivers of the market. In case of financial scams, the rule of law needs to be enforced to send the message that no one is beyond the law. Furthermore, a smooth IPO process needs to be put into effect.
In addition, it is high time that government-owned and multinational companies be listed in the capital market. The finance minister and other officials of the government are keen to get this done, but there are yet to be any developments. We need to look into the matter of why these companies cannot be listed seriously. It is not the government’s responsibility to conduct business, but it is their job to make policy for businesses.
Why are government companies not being listed?
I think bureaucracy is the main reason. Bureaucrats think that they will lose control if companies are listed in the capital market. When companies are listed, they come under monitoring by regulators and other stakeholders and this makes it difficult for the bureaucrats to do whatever they want. I think the government can make a commission to list government companies in the market within the next five years.
How can we secure loans?
In the context of Bangladesh, bank loans cannot be secured without collateral. However, other banks around the world now use alternative financing. BSEC has enacted a law on alternative financing, but this form of financing has not gained popularity in Bangladesh. Banks in our country are still using traditional banking practices, which is increasing the non-performance of loans and putting the banks at risk.
We are fortunate that we have been enjoying demographic dividend for the past 10-15 years, and this dividend may continue for 10-15 more years. In some other parts of the world, demographic dividend comes in about a hundred years. We have to capitalize on this demographic dividend and emphasize alternative financing.