Bangladesh's capital market and the future economy
This is the last part of a two-part series that discusses about how the capital market, despite recent setbacks, will take Bangladesh's economy forward
Md Sayadur Rahman
Publish : 04 Jan 2022, 08:12 PMUpdate : 04 Jan 2022, 10:48 PM
For the development of the market, it is observed that BSEC is working together with Bangladesh Bank, Ministry of Finance, Dhaka and Chittagong stock exchanges (DSE and CSE), NBR and other concerned stakeholders.
Executive bodies of BMBA and DBA are also committed to work relentlessly with different stakeholders for the betterment of the market.
IDRA has also taken a number of bold steps and regulatory reforms to remove the bottlenecks and support the growth of the insurance industry in Bangladesh.
At the beginning of 2020, when the stock market was experiencing a dearth of liquidity, Bangladesh Bank came forward and allowed banks to invest more in the stock market beyond their capital market exposure limit by forming special funds at low cost.
Besides, some other unprecedented policy support by the central bank to increase money flow in the economy during the time of pandemic and increased supervision in national savings certificate sales also contributed towards higher turnover in the capital market.
It was a great initiative and support for the capital market.
Meanwhile, the BSEC has already taken various initiatives and reforms for the development of the capital market.
BSEC has introduced SME markets, abolished OTC platforms, introduced digital booth services for stockbrokers etc.
The regulator has also increased supervision and compliances for market intermediaries and listed companies.
BSEC and DSE have also taken various steps to enlist MNCs, Profitable SoEs and large business groups of the country.
It is natural to remain in differing positions by different regulators and stakeholders on a number of unsettled issues.
Every statutory body has its own legal framework, views and opinions and conflicting situations will continue to evolve.
For example, some of the BB’s recent moves indicated that it actually wanted to protect the market from any undesired situation with some policy actions and increased supervision and monitoring of banks' investments in the market.
While, capital market regulator, BSEC remained active to rescue investors from any adverse situation.
Meanwhile, BB has to take some major policy decisions for its money market management.
However, all the major policy decisions do not always remain in favor of the capital market.
Re-fixing bank deposit rate at above inflation rate, limiting liquidity in the money market by selling bills, and selling dollars to maintain exchange rate stability are some of such decisions.
BSEC and Bangladesh Bank are yet to mutually decide on issues such as reporting of investment in bonds by banks in the capital market exposure ratio and loan to ICB by state-owned banks, decision on perpetual bond’s mandatory dividend payout etc.
Double taxation on income from dividends by NBR is also discouraging potential investors and businesses from the market.
As corporations pay corporate tax on earnings, there should be no further tax on the distribution of dividend after payment of corporate tax.
For the sake of stability in the market, all the regulators and stakeholders need to remain careful regarding any media release on unsettled issues to refrain from rumors and panic driven sale pressure in the market.
It should be noted that a regulator’s duty in the market is to ensure a good investment friendly environment, protect minority investors against any wrong-doing and fraudulent activities, ensure good governance and supervision with appropriate surveillance and monitoring mechanism, formulating policies, rules and regulation for the long term betterment of the market.
Market will perform naturally based on the overall economic landscape, supply and demand and business performance of the listed companies.
Dependency on banks for long term corporate financing
One major problem in our financial market comes from the inefficient use of financial resources and fund channeling from borrower to lenders, savers or investors to the users of funds, households to businesses.
Ideally, the capital market provides an avenue to raise capital directly from the savers and investors for long term equity financing needs of the industries.
The secondary market in turn provides a price-discovery mechanism and allows investors to transact directly with each other in a fair, efficient and transparent manner.
Banks should primarily engage themselves in the short and intermediate term lending.
However, the case in Bangladesh is very different. In Bangladesh, banks are engaged in long term lending with short term funds.
Meanwhile, for the greater interest of the business community and protecting depositors against inflation led value erosion, there is a strong political decision in place to keep the lending rate within 9% cap rate and 6% floor rate on deposits.
Banks have been witnessing some challenges in asset liability management in order to comply with various regulatory directives.
Listing of sound MNCs, profitable SoEs and large profitable business groups
Our regulator and policy markets are working actively for the development of the market and increase the market depth.
A good number of well governed and profitable multinational and local business groups such as Unilever Bangladesh Limited, Nestle, Chevron, SCB, HSBC, CitiBank NA, Sony, Coca-Cola, Abul Khair, MGH, PRAN-RFL, AKIJ, Bashundhara, Jamuna, City Group, Abdul Monem are still unlisted in the capital market.
Listing of such corporations will encourage more new investors to invest in the market.
The contribution of our capital market in the GDP of the country is still very low and listing of more good companies is necessary to take it to the desired level.
However, the government and the regulator may facilitate necessary policy support for bringing more good companies into the market.
Following initiatives can be considered for encouraging companies to become listed in the market:
· Requiring mandatory minimum share offload for multinational companies in stock market
· Reduction of corporate tax rate for the listed companies
· Withdrawal of dual taxation on dividend income
· Reduction of VAT for the listed companies
· Simplification of compliance procedure with increased digitalization
· Simplification of listing procedure with more online based documentation requirement
· Arranging road show with companies to highlight the benefits of listing in the market
Ready to deliver
Though the capital market plays a significant role in economic development by channeling long term funds from savers to promoters or users of funds, the capital market in Bangladesh is still lagging behind as compared to those of South Asian and Southeast Asian countries.
The future of the capital market in Bangladesh looks even brighter as the country aims to attain the status of developed country by 2041.
This remarkable economic progress is expected to be reflected in the capital market as well.
Fortunately, BSEC and all other stakeholders are working hand in hand to create a vibrant capital market which would support the growth of the economy of the country.
BSEC is working relentlessly to expand the market to its desired level.
It is working both in the demand side and supply side and increases the penetration of the market.
In order to reduce imbalance in the financial system, the regulator is now encouraging both small and large business communities to come to the market for their long term financing support.
Listing procedure has now made it easy to reduce the listing timeline.
Meanwhile, the successful inauguration of the SME market is a great milestone in the history of the Bangladesh capital market.
Now any SME company below Tk30 crore paid up can easily become listed in the capital market.
This will help SME companies grow without any interest payment in their early growing stage and can be transferred to the main market when they become larger.
This small platform bears huge potential for significant contribution to the economy by helping small and medium companies to have easy access to capital market funds, when they actually need them.
Besides, this SME platform also offers HNIs and institutional investors to diversify their investments with high risk, high growth investment options.
Besides, the regulator is working towards popularizing the bond market in Bangladesh and a number of bonds were approved in recent times by BSEC.
The regulator is also working towards bringing governance and expanding funds in the asset management industry.
Ground works are ongoing on the alternative investments, commodity market, option, future and forward market, ETFs etc.
This initiative will have a far reaching impact on the overall economy and specifically on the development of a vibrant capital market in Bangladesh.
The market can now focus on the long-term fundamentals of the economy of Bangladesh.
Short term market volatility should not be considered as an obstacle to the long term market potentials.
With ongoing reformation and combined actions from the regulator and other stakeholders, the market is getting ready to become one of the major contributors of the economy and passionate and prudent investors should look for the long term growth opportunity in the market.
Such growth stories are also expected to attract the attention of more and more investors from home and abroad alike.
The author is president of the Bangladesh Merchant Bankers Association (BMBA) and managing director of EBL Securities Ltd
Bangladesh's capital market and the future economy
For the development of the market, it is observed that BSEC is working together with Bangladesh Bank, Ministry of Finance, Dhaka and Chittagong stock exchanges (DSE and CSE), NBR and other concerned stakeholders.
Executive bodies of BMBA and DBA are also committed to work relentlessly with different stakeholders for the betterment of the market.
IDRA has also taken a number of bold steps and regulatory reforms to remove the bottlenecks and support the growth of the insurance industry in Bangladesh.
At the beginning of 2020, when the stock market was experiencing a dearth of liquidity, Bangladesh Bank came forward and allowed banks to invest more in the stock market beyond their capital market exposure limit by forming special funds at low cost.
Besides, some other unprecedented policy support by the central bank to increase money flow in the economy during the time of pandemic and increased supervision in national savings certificate sales also contributed towards higher turnover in the capital market.
Also Read - Bangladesh's capital market is ready to drive the future economy
It was a great initiative and support for the capital market.
Meanwhile, the BSEC has already taken various initiatives and reforms for the development of the capital market.
BSEC has introduced SME markets, abolished OTC platforms, introduced digital booth services for stockbrokers etc.
The regulator has also increased supervision and compliances for market intermediaries and listed companies.
BSEC and DSE have also taken various steps to enlist MNCs, Profitable SoEs and large business groups of the country.
It is natural to remain in differing positions by different regulators and stakeholders on a number of unsettled issues.
Every statutory body has its own legal framework, views and opinions and conflicting situations will continue to evolve.
For example, some of the BB’s recent moves indicated that it actually wanted to protect the market from any undesired situation with some policy actions and increased supervision and monitoring of banks' investments in the market.
While, capital market regulator, BSEC remained active to rescue investors from any adverse situation.
Meanwhile, BB has to take some major policy decisions for its money market management.
However, all the major policy decisions do not always remain in favor of the capital market.
Re-fixing bank deposit rate at above inflation rate, limiting liquidity in the money market by selling bills, and selling dollars to maintain exchange rate stability are some of such decisions.
BSEC and Bangladesh Bank are yet to mutually decide on issues such as reporting of investment in bonds by banks in the capital market exposure ratio and loan to ICB by state-owned banks, decision on perpetual bond’s mandatory dividend payout etc.
Double taxation on income from dividends by NBR is also discouraging potential investors and businesses from the market.
As corporations pay corporate tax on earnings, there should be no further tax on the distribution of dividend after payment of corporate tax.
For the sake of stability in the market, all the regulators and stakeholders need to remain careful regarding any media release on unsettled issues to refrain from rumors and panic driven sale pressure in the market.
It should be noted that a regulator’s duty in the market is to ensure a good investment friendly environment, protect minority investors against any wrong-doing and fraudulent activities, ensure good governance and supervision with appropriate surveillance and monitoring mechanism, formulating policies, rules and regulation for the long term betterment of the market.
Market will perform naturally based on the overall economic landscape, supply and demand and business performance of the listed companies.
Dependency on banks for long term corporate financing
One major problem in our financial market comes from the inefficient use of financial resources and fund channeling from borrower to lenders, savers or investors to the users of funds, households to businesses.
Ideally, the capital market provides an avenue to raise capital directly from the savers and investors for long term equity financing needs of the industries.
The secondary market in turn provides a price-discovery mechanism and allows investors to transact directly with each other in a fair, efficient and transparent manner.
Banks should primarily engage themselves in the short and intermediate term lending.
However, the case in Bangladesh is very different. In Bangladesh, banks are engaged in long term lending with short term funds.
Meanwhile, for the greater interest of the business community and protecting depositors against inflation led value erosion, there is a strong political decision in place to keep the lending rate within 9% cap rate and 6% floor rate on deposits.
Banks have been witnessing some challenges in asset liability management in order to comply with various regulatory directives.
Listing of sound MNCs, profitable SoEs and large profitable business groups
Our regulator and policy markets are working actively for the development of the market and increase the market depth.
A good number of well governed and profitable multinational and local business groups such as Unilever Bangladesh Limited, Nestle, Chevron, SCB, HSBC, CitiBank NA, Sony, Coca-Cola, Abul Khair, MGH, PRAN-RFL, AKIJ, Bashundhara, Jamuna, City Group, Abdul Monem are still unlisted in the capital market.
Listing of such corporations will encourage more new investors to invest in the market.
The contribution of our capital market in the GDP of the country is still very low and listing of more good companies is necessary to take it to the desired level.
However, the government and the regulator may facilitate necessary policy support for bringing more good companies into the market.
Following initiatives can be considered for encouraging companies to become listed in the market:
· Requiring mandatory minimum share offload for multinational companies in stock market
· Reduction of corporate tax rate for the listed companies
· Withdrawal of dual taxation on dividend income
· Reduction of VAT for the listed companies
· Simplification of compliance procedure with increased digitalization
· Simplification of listing procedure with more online based documentation requirement
· Arranging road show with companies to highlight the benefits of listing in the market
Ready to deliver
Though the capital market plays a significant role in economic development by channeling long term funds from savers to promoters or users of funds, the capital market in Bangladesh is still lagging behind as compared to those of South Asian and Southeast Asian countries.
The future of the capital market in Bangladesh looks even brighter as the country aims to attain the status of developed country by 2041.
This remarkable economic progress is expected to be reflected in the capital market as well.
Fortunately, BSEC and all other stakeholders are working hand in hand to create a vibrant capital market which would support the growth of the economy of the country.
BSEC is working relentlessly to expand the market to its desired level.
It is working both in the demand side and supply side and increases the penetration of the market.
In order to reduce imbalance in the financial system, the regulator is now encouraging both small and large business communities to come to the market for their long term financing support.
Listing procedure has now made it easy to reduce the listing timeline.
Meanwhile, the successful inauguration of the SME market is a great milestone in the history of the Bangladesh capital market.
Now any SME company below Tk30 crore paid up can easily become listed in the capital market.
This will help SME companies grow without any interest payment in their early growing stage and can be transferred to the main market when they become larger.
This small platform bears huge potential for significant contribution to the economy by helping small and medium companies to have easy access to capital market funds, when they actually need them.
Besides, this SME platform also offers HNIs and institutional investors to diversify their investments with high risk, high growth investment options.
Besides, the regulator is working towards popularizing the bond market in Bangladesh and a number of bonds were approved in recent times by BSEC.
The regulator is also working towards bringing governance and expanding funds in the asset management industry.
Ground works are ongoing on the alternative investments, commodity market, option, future and forward market, ETFs etc.
This initiative will have a far reaching impact on the overall economy and specifically on the development of a vibrant capital market in Bangladesh.
The market can now focus on the long-term fundamentals of the economy of Bangladesh.
Short term market volatility should not be considered as an obstacle to the long term market potentials.
With ongoing reformation and combined actions from the regulator and other stakeholders, the market is getting ready to become one of the major contributors of the economy and passionate and prudent investors should look for the long term growth opportunity in the market.
Such growth stories are also expected to attract the attention of more and more investors from home and abroad alike.
The author is president of the Bangladesh Merchant Bankers Association (BMBA) and managing director of EBL Securities Ltd