How Bangladesh can turn its capital market into an engine of growth

Bangladesh stands at a defining crossroads in its economic journey. For decades, the country's businesses have relied almost entirely on commercial banks for long-term financing. This structural imbalance has placed unsustainable pressure on bank balance sheets, resulting in a persistent mismatch between short-term deposits and long-term industrial loans. 

The Honorable Finance Minister in a recent event urged local businesses to raise their capital through securities and bonds rather than relying heavily on high-interest bank loans. He firmly stated that the government would stop using taxpayers' money to bail out or finance state enterprises.

As Bangladesh prepares to graduate from Least Developed Country (LDC) status and aims towards a trillion-dollar economy, sustaining national development requires a genuine alternative: a modern, transparent, and vibrant capital market capable of channeling domestic and foreign savings into long-term enterprise.

Yet, for many domestic and international investors, Bangladesh's capital market has historically presented challenges in terms of predictability, liquidity, corporate governance, market infrastructure and ease of entry and exit. Attractive valuations by themselves cannot generate sustainable investment. Long-term capital comes when investors believe that the rules are clear, prices are credible, information is reliable, assets are protected and exit is possible.

The task before us, therefore, is not simply to increase the stock-market index. It is to rebuild the institutional foundations of trust. To draw the kind of long-term investment Bangladesh needs, we must first be honest about why investor confidence was shaken and outline a clear, practical path forward.

Why trust was shaken

Capital goes where it is welcomed, but it stays where it is protected. Several structural issues have weakened investor confidence and hindered the development of Bangladesh's capital market. The prolonged use of artificial floor prices undermined the core function of an exchange: price discovery. 

By preventing prices from reflecting actual supply and demand, these restrictions reduced trading volumes, weakened liquidity and left foreign investors struggling to exit. The newly formed commission's withdrawal of floor prices is a welcome step, but the market must learn from this experience and ensure that stability does not come at the expense of fair pricing.

Foreign investors also need certainty when converting and repatriating legitimate dividends and capital gains. Uncertainty surrounding currency conversion, documentation and repatriation can deter investment even when market valuations are attractive. Weak corporate financial reporting, compromised audit credibility and delayed action against insider trading have further undermined confidence, leaving both domestic and foreign investors exposed to unreliable information and unfair practices.

The market's narrow structure has compounded these challenges. Its disproportionate reliance on short-term retail trading, combined with a weak corporate bond market, limited investment products and an inconsistent pipeline of high-quality company listings, has restricted opportunities for long-term investment. 

Bangladesh also needs deeper institutional participation. Pension, provident, insurance and mutual funds can bring greater stability, stronger research capabilities and professional investment discipline, reducing dependence on short-term retail sentiment and strengthening the foundation for long-term capital formation.

Recognising these challenges should not cause pessimism. Instead, it should provide a clear, actionable blueprint for reform.

A step-by-step blueprint for reform

Global fund managers evaluate markets against three non-negotiable principles. Prices must be fair, determined by free buying and selling rather than arbitrary restrictions. 

Client assets held by brokerage firms must be strictly protected from misuse. Capital must also move freely, allowing investors to deploy their money, collect returns and withdraw their investments without administrative bottlenecks.

Fixing the capital market does not require reinventing the wheel. It requires executing well-established best practices across three clear phases.

Phase 1: Restore integrity and core safety

The market should continue using standard international circuit breakers that briefly halt trading during extreme market shocks without freezing the entire exchange. Client funds and shares must be strictly separated from brokerage operational accounts, supported by automated daily reconciliation and an upgraded Investor Protection Fund to protect investors from broker defaults.

Modern data analytics and artificial intelligence should be gradually deployed to detect insider trading, circular trades and pump-and-dump schemes, with swift penalties for manipulation. Digital onboarding and foreign-exchange procedures should also be streamlined to ensure international institutions can enter and exit the market smoothly. 

Listed companies and independent auditors must be held to rigorous international standards, particularly for related-party transactions, accurate asset valuations and timely disclosures.

Phase 2: Deepen market liquidity and investment choices

A stock exchange cannot rely solely on equities. Bangladesh must develop corporate bonds, green bonds, Islamic Sukuk, and infrastructure and municipal bonds to finance ports, roads, power and urban utilities without placing additional burdens on the national budget.

Modern investment tools, including Exchange-Traded Funds (ETFs) for low-cost, diversified investing and Real Estate Investment Trusts (REITs) to monetise commercial properties, should be introduced. Formal market makers should also be established to ensure that buyers and sellers can access two-way prices. 

At the same time, long-term savings held in pension, provident and insurance funds should be channelled through professional asset managers and mutual funds, strengthening domestic institutional investment and reducing dependence on speculative retail sentiment.

Phase 3: Prepare for emerging-market status

Bangladesh should establish a fast-track, predictable regulatory process to encourage leading domestic corporate groups and profitable multinational subsidiaries to list on the stock exchange. Clearing and settlement systems should be modernised towards faster settlement cycles, such as T+1, supported by seamless digital processing across banks, depositories and regulators.

Regulatory oversight, Environmental, Social and Governance (ESG) disclosures and market access rules should be aligned with the standards required to progress from frontier-market to emerging-market index status. Finally, the next generation of capital-market infrastructure should enable secure, efficient data sharing among the stock exchanges, Central Depository Bangladesh Limited (CDBL), banks, regulators and other relevant institutions.

An economic imperative

A well-functioning stock market is not a playground for speculators; it is critical national infrastructure. It pools the collective savings of citizens and institutions, directing that capital directly into job-creating enterprises, clean energy, industrial plants, and modern transport networks.

Bangladesh's underlying economic story remains compelling: a young, ambitious workforce, a rapidly rising consumer class, and strategic integration into global trade. What our financial sector needs now is a capital-market framework that translates those macro fundamentals into credible, investable opportunities.

By taking coordinated steps across the government, the Bangladesh Securities and Exchange Commission, Bangladesh Bank, the Stock Exchanges, and the private sector, we can restore genuine market trust. When investors know their capital is protected, prices are honest, and exit is unhindered, both local savings and global funds will flow into building Bangladesh's economic future.

Snehasish Barua is the Managing Director at SMAC Advisory Services Ltd. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of The Business Standard.