We need to adopt new measures to promote Bangladesh’s capital market
We heard very little about our bourses in 2018, which is obviously good news to some extent. However, the performance of the capital market last year somehow could not match the level of expectations of potential investors and stakeholders.
Even though the government strived to create a laundry list and made progress in implementing surveillance in the market in previous years, through their pro-active interference and by tweaking the corporate governance guidelines, the capital market is still short of notable performance.
The IPOs, offered in the capital market during 2018, were not from reputed organizations or blue-chip companies. Instead, most of the IPOs offered reflected a low-market capitalization. Hence, people did not have much interest to drive these shares’ floatation and capital market launching in Bangladesh. On top of that, the exchange rate, as well as interest rate volatility of theBangladeshi taka, created confusions and uncertainties among the investors. This resulted in an outflow of money from the country, putting further pressure on the banks’ deposit base.
Eventually, banks were forced to raise the deposit rate in order to improve the liquidity situation within the banks. As a result, the capital market suffered. Investors were more interested in converting their low earning equity-stakes into cash and depositing the money into the banks with the hope of earning higher returns with higher deposit rate. The increase in the dollar rate and fluctuations in the exchange rate influenced institutional investors to remit their profit to their own coffers. Overall, these activities led to few sell-offs by foreign investors and the liquidity crisis of the market prevented the buyers to invest further.
Last year, when the index plunged from ±6500 to ±5500 points, there wasn’t much high interest from foreign institutional investors. Earlier, companies like Islami Bank, South East Bank, Summit, Beximco, and Renata used to attract a large amount of foreign portfolio investments into the country. However, the recent predicament of the banking sector has put a dent on the foreign institutional investor’s interest. In spite of our regulators trying to come up with surveillance expertise and corporate governance guidelines, not much has been done regarding the maneuvering and manipulation in the capital market.
Another challenge for our market is that it is driven by small investors. Bangladesh has not yet been able to develop a capital market, which can be driven by the large portfolio investors or large-cap stocks. Despite the frequent initiatives of the Capital Market Training Institute, as well as the Finance Ministry and BSEC, to provide proper knowledge to the investors, we still notice small investors jumping into the market without basic investing know-hows or carrying out any background research.
Additionally, market participation of institutional investors and asset management companies were relatively low last year. As a result, the market still remains broker-driven and rumour-driven, with investors lacking an adequate level of market knowledge. There were certain vested-interest groups who seemed to be manoeuvering the market, causing investors to worry about their investments continuously.
Over the years, we have witnessed demutualization, issuance of the corporate governance guideline, the announcement regarding watchdog agencies’ surveillance capacity -- but none of these moves placed Bangladesh in the favourites list of foreign institutional investors.
When it comes to the capital market, our country is yet to become Vietnam, or Sri Lanka, or even Pakistan. Even though some institutional investors are interested in participating in our growth trajectory, but the concern regarding the policy regime, foreign exchange regime, investment capital, withholding tax, tax on dividend and several other issues, are acting as a major impediment in their way. The situation gets more complicated as the number of available blue chip companies in the Bangladesh capital market is very limited.
BSEC is quite jittery about the small investors. However, nothing significant has been done in bringing large operators into the capital market. There have not been any constructive steps taken by the regulators or concerned ministries to attract large-cap investments into the market. It is evident from the fact that the large telecom, pharmaceuticals, and other local corporates are shying away from the bourses.
Large local corporates and commodity trading companies are keener to invest in asset management companies, banks, and insurance companies while they are hesitant in listing themselves in the capital market. The reason might be that they do not want to share their profit with the public or they find it easier to raise debt than equity.
Bangladesh’s growth is still predominantly driven by debts and it makes me sceptical regarding our journey towards a trillion-dollar economy. There is not a single economy in the world which has been able to graduate from being a billion-dollar economy into the trillion-dollar ones without the presence of a thriving capital market with large market capitalized companies.
In order for Bangladesh to evolve from a $250bn economy into a trillion-dollar economy, it is crucial for us to have a vibrant capital market and active participation of large companies.
The newly elected government has pledged to improve governance and declared that they will have zero tolerance towards corruption in the upcoming years. Hopefully, in the next five years, the government will focus on disciplining the financial sector, which includes the capital market.
Focus needs to be put on the valuation process of the companies, which want an exit from Bangladesh.
Even though the present government has been mandated with the absolute majority, there are lots of “ifs” and “buts” put up by a certain quarter regarding the process through which it has been done. If we really feel that politics has a direct impact on the economic growth and capital market, then we have to be vigilant regarding how we can reform our policy regime and how we can update the archaic laws and regulations of the country, mostly in relation to-inward-outward remittance, valuation, and capital issuance.
Mamun Rashid is a leading economic analyst.