Revitalising Bangladesh’s bond market: A strategic roadmap
Bangladesh’s bond market is underdeveloped, with most debt financing coming from banks. A three-phase plan can expand the bond market
The bond market plays a crucial role in a country's economic development, offering long-term financing for both public and private sectors. It reduces reliance on the banking system. Unfortunately, Bangladesh has not fully tapped into this alternative funding source.
Currently, around 80% of debt financing comes from banks, and 70% of bank deposits mature within a year, creating a mismatch in maturity and frequent liquidity issues for the banking sector.
Bangladesh's bond market capitalisation lags significantly behind that of regional peers, with government securities (G-Secs) accounting for about 11.44% of GDP, whereas corporate bonds represent a mere 0.19%.
This imbalance is also visible on the Dhaka Stock Exchange (DSE), where 236 government bonds are listed compared to only 16 corporate bonds.
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Recent developments, however, suggest an encouraging shift in the market. Investors are increasingly prioritising the financial health of institutions over interest rates. A key regulatory change requires issuers to maintain a provision on unpaid interest or profit payments at the end of a financial year.
If payments remain unsettled for three consecutive years, a full 100% provision is required, enhancing investor protection and accountability. Additionally, defaults are reported to the Credit Information Bureau (CIB), promoting transparency.
Despite these advancements, challenges persist. Bangladesh Bank's current investment limits for banks, which are tied to the capital of both the issuing and investing bank, restricts bond investments. Bangladesh Bank could help by harmonising these guidelines to give banks greater flexibility in bond investment decisions.
Looking ahead, to elevate our bond market further, we may think about a three-phase framework.
Phase 1: Laying the foundations with bank bonds
To introduce bonds to the public market, the focus should first be on bank bonds. While banks regularly issue bonds to meet capital requirements, these are typically placed privately.
By making bank bonds publicly accessible, we can introduce a new asset class to institutional and high-net-worth investors. Banks can also target customers with surplus funds, encouraging long-term investment in bonds, which would help address their asset-liability mismatch and reduce the risks of liquidity crises.
To promote bank bonds, the issuance and listing process should be simplified, and issuance costs reduced to encourage participation. Offering tax incentives can attract new investors by making bonds more appealing.
Additionally, allowing bond credit ratings to influence coupon rates and determine investment risk weights under the BASEL-III guidelines would enhance transparency and better align risk with returns, fostering a more efficient bond market.
Phase 2: Reinforcing public confidence with guarantees
As the market grows, trust is crucial. Corporate bonds guaranteed by reputable banks can reassure investors about the security of their principal and timely repayments. This will be especially important in a market where scepticism remains high.
The Bangladesh Securities and Exchange Commission (BSEC) can play a pivotal role by rigorously reviewing the financial and business strength of potential corporate issuers, even those with bank guarantees, before approving bond offerings.
Phase 3: Promoting corporate bonds
Once the market reaches maturity, strong corporate issuers can be encouraged to issue bonds without needing credit enhancements, as long as they meet regulatory requirements and maintain solid financial health. This phase will create a more efficient and cost-effective market, where issuers can offer better returns by lowering the need for guarantees, while investors gain from a more liquid and transparent market.
However, implementing this framework alone will not suffice. We must address several critical areas in all these phases.
Promoting comprehensive wealth management: Encouraging banks to offer a range of financial products, including bonds, insurance, fixed deposits, equity, and mutual funds, through a comprehensive wealth management platform would allow investors to diversify their portfolios and optimise returns. UCB Investment, in partnership with United Commercial Bank (UCB), is already pioneering this approach, offering a broader selection of investment opportunities to clients.
Awareness - The game changer: Just as the government successfully promoted financial inclusion through programs like school banking, similar efforts should be made to educate the public about bond investments. Joint initiatives by Bangladesh Bank and BSEC could include training programs to educate investors and market representatives on bond returns, risks, and valuation.
Revamping tax incentives: Currently, tax benefits are limited to zero-coupon bonds and mostly benefit corporate and high-net-worth investors. Expanding these incentives to all fixed-income securities, including both listed and non-listed bonds, would stimulate wider participation. Reintroducing tax incentives for institutional investors, which were removed in 2008, could also revive market interest and activity.
Making bonds accessible: To make bonds more accessible, their face value should be reduced from the current range of Tk100 to Tk1 million per bond. A lower entry point would encourage participation from retail investors, increasing market liquidity.
Enhancing flexibility in bond pricing: Bangladesh Bank currently sets bond rates for banks in its No Objection Certificate (NOC), limiting flexibility. Bond rates should instead reflect the financial strength of the issuing bank and market conditions. Regulatory intervention should only occur when rates are unreasonable.
Vigilant oversight beyond bank guarantees: Vigilant oversight beyond bank guarantees is essential. The BSEC should regularly review the financial health and business prospects of issuers, ensuring bonds deliver on their promised returns. Ambiguous language in bond documents must be eliminated to protect investors from unscrupulous practices.
Creating fair transaction fees: The current flat transaction fee of BDT 50 per bond at the DSE disproportionately affects small investors. Introducing a hybrid model that combines a fixed fee with percentage-based commissions for smaller transactions would encourage more participation, especially from retail investors.
Liquidity option in initial days: Lack of liquidity is a significant concern in Bangladesh's nascent bond market. In the short term, banks could offer liquidity options for bonds similar to fixed deposit receipts (FDRs), with Bangladesh Bank playing a central role in establishing a more dynamic bond market.
To unlock the full potential of Bangladesh's bond market, a phased approach is necessary. Raising awareness, ensuring attractive returns, and implementing strong oversight are all vital elements of this strategy. By fostering trust, transparency, and flexibility, Bangladesh can build a robust bond market that supports long-term economic growth.
Tanzim Alamgir is the founding Managing Director and CEO of UCB Investment Limited.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
