Bangladesh's bond market one of the smallest in Asia. What will strengthen it?

Infograph: TBS

The bond market serves as a critical lifeline for developing countries worldwide, channelling funds to finance government expenditures and providing capital for businesses to flourish. However, in Bangladesh it lags far behind its Asian peers.

Bangladesh's bond market, encompassing both government securities and corporate bonds, constitutes only 11.63% of its GDP, with government securities making up 11.5%, which is 125% in Malaysia, 107% in China, 150% in South Korea.

Thailand, the Philippines and Singapore also remarkably developed their bond markets.

Bangladesh stands far behind with the private sector sharing a paltry 0.19% in bonds, while corporate bonds account for 25% of India's GDP. 

Bankers and economists point to the absence of specific policies, robust insurance companies, reliable asset managers, independent rating agencies, and concerted efforts to rebuild investor trust as key roadblocks to a thriving bond market in Bangladesh.

The experts also noted that a lack of substantial participation from corporate institutions hinders the bond market's development. This is primarily due to their heavy reliance on bank loans for capital. Introducing smaller, highly liquid bond units in the capital market could be a key driver of growth, attracting significant new investment, they felt. 

Many governments in developed economies issue bonds to finance major projects. However, in Bangladesh, both the government and industries rely heavily on bank loans. 

Birupaksha Paul, professor of economics at SUNY Cortland in the United States, told The Business Standard, "Our banking sector is characteristically defective. The banking system is not allowing the bond market to grow."

He said it is very difficult to default by taking money from the bond market because it must meet the financial requirements. Since it is easy to take money from banks and avoid paying them back, everyone turns to banks.

"Our corporates have very little exposure to the bond market," he added. "When there is uncertainty in the country's economy, people do not want to invest in the long term. Developing countries have economies with good governance and less uncertainty, so their bond markets are strong. If we also want to make it strong, we have to carry out reforms in those places."

"Some of our bank rules are not suitable," he said, adding that what was needed for the bond market was done for banks. The policies needed for long-term financing are being implemented in the short term. It is unethical to do so.

What is needed to strengthen the bond market?

Ershad Hossain, managing director of City Bank Capital Resources, said both the government and industries want to take loans from banks in the long term. Since about 75% of banks' deposits are short-term, they face various types of crises by making long-term investments, Ershad Hossain said.

"To strengthen our bond market, we have to create customer trust; insurance companies have to be more compliant, asset management companies have to be strengthened, and credit rating agencies have to bring more transparency," he told TBS.

Insurance companies generally collect premiums from policyholders for long-term periods, while asset management companies can invest for the long term because there is no pressure to pay their liabilities in a short period of time, Ershad Hossain said.

Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, told TBS that the governance of the capital market and banking sector should be further enhanced for the bond market to grow. Customers will be attracted if they are offered long-term investment benefits and assured about the return of their investment.

"We have massive non-performing loans in the banking sector, but it cannot be said customers will rush to the bond market. Financial sector management, good governance in the financial sector and stock market should be strengthened. If the bond market is strong, institutions and individuals will come forward. The bond market is a good way of moving from debt to equity," he added.

A Bangladesh Bank official said, "If we want to popularise the bond market, bond units should not be more than Tk5,000. And common people should be allowed to buy bonds."

A general investor cannot afford a Tk1 lakh bond. So, the face value should be reduced to make it popular among commoners, he added.

Bond market needs to be strengthened from the supply side as well with provision for investing provident fund assets and introducing fixed income mutual funds in this market, the central banker suggested.  

What BB did to strengthen bond market

In July 2023, an IMF delegation conducted a feasibility study on developing the country's bond market. During their visit, they held discussions with stakeholders involved in bond issuance and settlement to evaluate the potential for local currency bond market development.

In December 2019, the Bangladesh Bank and the Bangladesh Securities and Exchange Commission (BSEC) took initiatives to facilitate the trading of T-bonds on the Dhaka Stock Exchange (DSE) and Chattogram Stock Exchange (CSE) alongside the existing BB's Electronic System (MI Module).

In order to protect the interests of investors and the market as a whole and to harmonise the secondary market of G-sec, "Guidelines on the Secondary Trading of Government Securities" were issued in June 2023.

The central bank has also introduced the Islamic Bank Liquidity Facility for Sharia-based banking systems in Bangladesh. 

Considering the need for a credible benchmark and the trend in global reformation of benchmarks or reference rate, the Bangladesh Bank has taken the initiative to publish credible and robust money market reference rates (both interbank risk free reference rate and unsecured reference rate) in near future.

The total outstanding debt of the government against Treasury bills and bonds was Tk4.89 lakh crore at the end of June 2023. Of this, Treasury bonds account for Tk3.66 lakh crore and Islamic Sukuk bonds for Tk18,000 crore.

On 27 December, the 20-year Treasur y bond rate reached 11.20%.