Navigating the Turbulence: A decade and a half of the Bangladesh capital market

The Bangladesh capital market, a vital cog in the nation's economic machinery, has traversed a complex and often turbulent path from 2010 to the present day.

This period has been punctuated by dramatic crashes, tentative recoveries, and persistent challenges that continue to shape its landscape. Understanding this journey, replete with both setbacks and potential, is crucial for policymakers, investors, and the broader economic community. This analysis delves into the critical junctures, performance indicators, and underlying issues that have defined the Bangladesh capital market over the past decade and a half, offering insights into its current state and future prospects.

The Shadow of 2010: A Market in Crisis

The year 2010 stands as a watershed moment, indelibly etched in the memory of Bangladesh's capital market participants. What began as a period of exuberant growth, with the Dhaka Stock Exchange (DSE) emerging as one of Asia's top-performing bourses, abruptly spiralled into a devastating crash in December. This dramatic reversal exposed the market's inherent vulnerabilities, fuelled by speculative bubbles, rampant insider trading, and glaring regulatory deficiencies. The ensuing collapse not only wiped out significant investor wealth but also severely dented public trust in the market's integrity and stability. The aftermath of this crisis necessitated a period of introspection and reform, highlighting the urgent need for stronger regulatory oversight and enhanced investor protection mechanisms.

Navigating the Post-Crash Landscape (2011-2016): A Period of Volatility and Tentative Recovery

The years following the 2010 debacle were characterised by persistent volatility as the market grappled with the fallout of the crash and attempted to regain its footing. The total return of the market in 2011 painted a stark picture of the lingering impact. In response to the crisis, the government initiated investigations and formed committees to recommend remedial measures. The Bangladesh Securities and Exchange Commission (BSEC) embarked on implementing a series of reforms aimed at bolstering transparency and efficiency within the market. These measures included stricter disclosure requirements, efforts to curb manipulation, and initial steps towards demutualising the stock exchanges. However, the recovery process was often hampered by broader macroeconomic headwinds and periods of political instability, which continued to exert pressure on investor sentiment and market activity.

The Sideways Drift and Recurring Boom-Bust Cycles (2017-2024): A Test of Resilience

In contrast to the more directional movements of the preceding decade, the period from 2017 to 2024 witnessed a largely sideways market trajectory, punctuated by more frequent and often sharp boom-bust cycles. Peaks in market activity and valuation were observed around 2017 and again during the global liquidity surge that followed the initial phases of the COVID-19 pandemic in 2021. These periods of exuberance were often followed by significant market corrections, fueled by concerns over stretched valuations and speculative trading practices. This pattern underscored the market's continued susceptibility to speculative bubbles and the challenges in fostering a culture of long-term, value-based investing.

Key Performance Indicators: Growth Amidst Instability

Despite the inherent volatility, certain key performance indicators reveal a degree of long-term growth within the Bangladesh capital market. The overall market capitalisation of the DSE has generally trended upwards over the period, albeit with notable fluctuations corresponding to market cycles. For instance, the market capitalisation of the crucial banking sector reached a substantially by January 2025, indicating a significant expansion in the value of listed entities within this sector. However, when viewed as a percentage of the nation's Gross Domestic Product (GDP), market capitalisation has exhibited more variability, reflecting the dynamic interplay between market growth and overall economic expansion. Similarly, the daily turnover on the DSE has experienced considerable fluctuations, with peaks coinciding with periods of heightened speculative activity, such as in December 2010 and more recently, signalling varying levels of investor participation and market liquidity.

Regulatory Evolution: Strides Towards Maturity

The Bangladesh Securities and Exchange Commission (BSEC) has played an increasingly active role in shaping the regulatory landscape of the capital market. Several key regulatory developments and initiatives have been introduced with the aim of enhancing market integrity and investor protection. The demutualisation of the stock exchanges, a significant structural reform, aimed to separate ownership and trading rights, thereby mitigating potential conflicts of interest and promoting greater transparency in exchange operations. The mandatory adoption of International Financial Reporting Standards (IFRS) for listed companies represented a crucial step towards improving the quality and comparability of financial disclosures. The introduction of the book-building process for Initial Public Offerings (IPOs) sought to establish a more market-driven mechanism for price discovery, allowing institutional investors to play a greater role in determining fair value. Furthermore, the implementation of a Corporate Governance Code aimed to establish clear guidelines for corporate boards, promoting accountability and safeguarding the interests of minority shareholders.

Emerging Challenges in the Mid-2020s: A Renewed Focus on Fundamentals

Recent assessments of the Bangladesh capital market, particularly in 2024 and early 2025, paint a picture of renewed challenges and investor concerns. Surveys conducted during this period indicate a significant level of dissatisfaction with the market's performance. Several key factors have been identified as contributing to this sentiment: a prevailing liquidity crunch that has dampened trading activity; persistent issues of market manipulation that continue to erode investor confidence; scrutiny over the effectiveness and leadership of the regulatory authorities; the destabilising influence of political uncertainty, which acts as a deterrent to foreign investment; the adverse impact of currency depreciation on investment returns; the constraining effects of high inflation on investor sentiment and corporate profitability; the attractiveness of high interest rates offered on government bonds, drawing institutional investors towards safer alternatives; a perceived lack of "smart capital" from sophisticated domestic investors; and concerns regarding the high levels of non-performing loans within the banking sector, signalling broader financial system vulnerabilities.

A Critical Lens: Unpacking the Underlying Issues

A critical analysis of the Bangladesh capital market's journey since 2010 reveals several persistent underlying issues that require careful consideration. The pronounced volatility and instability that have characterised the market underscore fundamental weaknesses and a lack of consistent investor confidence, deterring long-term, risk-averse investors. While the BSEC has introduced numerous regulations, questions remain regarding their effective enforcement and the regulator's capacity to decisively address issues of market manipulation and ensure genuine transparency. The lingering impact of the 2010 crash on investor psychology is evident in the slow and often fragile recovery of confidence, with low participation rates and a scarcity of new, well-capitalised investors leaving the market vulnerable to speculative pressures. Studies suggesting informational inefficiency within the market raise concerns about price discovery mechanisms and the potential for speculative trading to overshadow fundamental analysis. Furthermore, persistent issues related to corporate governance, including inadequate transparency and instances of non-disclosure, continue to undermine investor trust and hinder the development of a mature and reliable market. The close interconnectedness between the capital market's performance and broader macroeconomic factors, such as inflation, currency fluctuations, and political stability, highlights the need for a stable and predictable economic environment to foster sustainable market growth. Finally, the underdeveloped state of the bond market in Bangladesh limits its ability to provide a crucial source of long-term capital and act as a stabilising force during periods of equity market turbulence.

Specific Actions: Taken by a Recent Interim Government 

The interim government in Bangladesh, even with its temporary mandate, specific actions taken by a recent Interim Government (Demonstrative) ?? observed with the interim government that assumed power on August 8, 2024, some initial steps were taken that align with these recommendations:

Reorganising Key Institutions: The reorganisation of the BSEC, Dhaka Stock Exchange, and Chittagong Stock Exchange signaled an intent to address structural issues within the market.

Reducing Capital Gains Tax: The reduction of capital gains tax was a move aimed at boosting investor confidence and encouraging market participation.

Forming Investigation Committees: The formation of committees to investigate market irregularities and the fall in share prices demonstrated a commitment to addressing past issues and restoring market integrity.

Task Force for Market Improvement: The creation of a task force to improve the market and recommend reforms indicated a forward-looking approach towards long-term stability.

Sovereign Guarantee for ICB Loans: Providing a sovereign guarantee for loans to the Investment Corporation of Bangladesh (ICB) was a measure to provide liquidity support to a key market player.

Limitations and Challenges: ?or an Interim Government

While an interim government can take significant steps, it operates under certain limitations:

Limited Mandate: An interim government typically has a limited tenure and a primary mandate to oversee the transition to an elected government. This might constrain its ability to implement far-reaching or politically sensitive reforms.

Lack of Long-Term Policy Framework: Developing and implementing a comprehensive long-term policy framework for the capital market might be challenging given the temporary nature of the government.

Potential for Policy Reversal: Policies enacted by an interim government could potentially be reversed by the subsequent elected government, creating uncertainty.

Despite these limitations, an interim government holds a crucial window of opportunity to implement measures that can significantly contribute to the stability of the Bangladesh capital market.

Looking Ahead: Prospects for Growth and Maturation

Despite the significant challenges that persist, the Bangladesh capital market possesses considerable potential for future growth and maturation. The nation's consistent economic growth trajectory provides a foundation for increased corporate earnings and investment opportunities. A burgeoning middle class offers the prospect of greater domestic participation in the capital market. Continued and effective implementation of regulatory reforms holds the key to enhancing transparency, strengthening investor protection, and ultimately boosting market confidence. Addressing concerns related to transparency and political stability can unlock the door to increased foreign investment inflows. Concerted efforts to develop a deeper and more liquid bond market can provide much-needed diversification and stability to the overall capital market ecosystem. Finally, embracing technological advancements can improve market efficiency, enhance accessibility for investors, and foster greater innovation within the financial sector.

Conclusion: Charting a Course Towards Stability and Growth

The Bangladesh capital market's journey since 2010 has been a complex narrative of significant volatility, punctuated by a major crisis, subsequent recovery efforts, and the emergence of persistent challenges related to regulation, investor sentiment, and macroeconomic influences. While the regulatory advancements and the nation's underlying economic growth offer encouraging signs, addressing the deep-rooted issues of market manipulation, weak corporate governance, and systemic instability remains paramount for fostering a mature, stable, and attractive capital market. The prevailing sentiment in early 2025 underscores the urgent need for comprehensive reforms and a renewed commitment to ethical market practices to restore investor trust and pave the way for sustainable and inclusive growth in Bangladesh's capital market, enabling it to effectively contribute to the nation's long-term economic prosperity.

?? ???? ???? is the company secretary at ???? ???? ???