Bangladesh urgently needs bonds, not bank loans

When Finance Minister Amir Khosru Mahmud Chowdhury told parliament that Bangladesh's external debt stood at $78.22 billion, the most important issue was not the debt size or the fact that 62% still came through cheap, concessional loans. It was what this pattern reveals. 

For 50 years, Bangladesh financed development largely through low-cost loans from official lenders, and therefore did not build markets capable of pricing its own borrowing. 

That window is closing as access to concessional finance narrows with Bangladesh poised to graduate from the least-developed-country status in November. Bangladesh will need a substitute. 

But the country currently lacks a functioning bond market. The key difference between a bank loan and a bond is that a bond can be bought and resold by other investors, creating a secondary market that converts savings into long-term finance. 

Bangladesh's bond market remains small. At last count, the entire capital market was about 6.6% of GDP. The corporate bond segment was almost nonexistent, at around 0.06% of GDP, and much of it consisted of debt issued by banks to meet regulatory requirements. 

As a result, most financing still comes from bank loans. Banks are then expected to provide 30-year financing to corporations while their depositors can withdraw funds immediately. This maturity mismatch is one reason the banking sector continues to face recurring stress.

So, why has Bangladesh failed to build a meaningful bond market? 

Three foundations are missing or weak: reliable pricing references, an active trading platform, and a fast, predictable issuance process. 

Let's start with pricing reference. The government issues Treasury bills and bonds with maturities ranging from three months to 20 years and publishes a yield curve showing the cost of government borrowing at different maturities. 

But the government's yield curve is more a posted curve than a traded one. Commercial banks buy these securities mainly to satisfy regulatory obligations and then hold them to maturity. They rarely trade them among themselves. A benchmark that is not actively traded cannot reliably reveal value. Without such pricing, banks, companies, pension funds, and infrastructure investors cannot accurately price corporate bonds, project debt, or long-term investment products.

The second missing foundation is an active exchange for buying and selling bonds. Government bonds may trade occasionally within the central bank's internal framework, but these trades remain largely separate from the equity exchanges where broader investor participation occurs. Corporate bond trading is even rarer. 

A bond that cannot be easily sold is unlikely to attract many buyers. Without buyers, issuers hesitate. Without issuers, the market remains illiquid. This is the gridlock that has kept Bangladesh's bond market small.

The third obstacle is the approval process. In Bangladesh, obtaining permission to issue a corporate bond can take 18 to 24 months, while a bank loan may be approved in three to four months. By the time a bond is approved, the quoted interest rate may be obsolete, and the commercial logic of the transaction may have changed. A rational finance executive will therefore choose the bank loan, not because it is always better, but because it is faster.

None of this is unique to Bangladesh. Every country with a strong bond market has built it deliberately, creating the infrastructure first: settlement systems, risk-management tools, regular benchmark issuance, market makers, clear disclosure rules, and rapid approvals. Bangladesh has often tried to build infrastructure while expecting the market to emerge. That sequence has not worked.

Four practical steps can correct this. First, make the government yield curve a real indicator of trading activity by moving government bonds onto equity exchanges and allowing institutions such as the Investment Corporation of Bangladesh to act as market makers with standing positions. Second, shorten approval times; a bond that takes longer to approve than the business decision it is meant to finance will not succeed. 

Third, establish a Bond Guarantee Fund that provides partial protection in the event of an issuer default. This would encourage new issuers and investors more than policy statements. Fourth, treat bond-market development as a core national financial objective, with predictable issuance calendars rather than isolated transactions.

Bangladesh also has another engine it can run alongside the conventional bond market: its Sukuk programme. Since the first sovereign Sukuk was issued in December 2020, Bangladesh's Islamic bonds have repeatedly been oversubscribed, often at yields below those of comparable conventional government bonds. 

This shows that a large pool of savers wants Shariah-compliant investment products, but supply remains limited. Islamic banks account for roughly one-quarter of banking assets, leaving substantial funds for interest-free government instruments. Demand exists; the constraint is supply and structure.

The current Sukuk model relies mainly on sale-and-leaseback transactions. The government sells an existing public asset to a special entity, leases it back, and later buys it back. Although the structure is presented as Islamic, it often functions economically like a conventional bond and recycles existing assets. Such Sukuk cannot be issued frequently or in large volumes. They therefore serve mainly as budgetary instruments, not as a durable source of development finance.

My own research highlights this structural problem. The real distinction between Sukuk and conventional bonds should be based on substance rather than cosmetic form. Sukuk linked to new infrastructure and productive assets can have a much greater economic impact than Sukuk that merely repackage existing assets. Bangladesh should therefore create a permanent issuer, a Sovereign Finance Corporation, backed by asset-generating projects and a continuous pipeline of development investments. 

Through such an institution, the government could use standard Islamic finance contracts to fund viable infrastructure and issue Sukuk regularly with short-, medium- and long-term maturities. A regular issuance calendar would create a benchmark Sukuk curve, just as conventional government bonds create a benchmark yield curve. Similar models can be conceptually linked to the experience of the UK Debt Management Office, while related frameworks have been examined for Egypt and Jordan.

These two engines are complementary, not competitive. An actively traded benchmark curve for both conventional bonds and Sukuk would give banks, companies, pension funds and investors a clearer sense of the cost of capital. That may be the single largest missing foundation in Bangladesh's financial system. 

Building it will take time and will not attract the same public attention as budget announcements or headline projects. But without it, Bangladesh will continue to depend too heavily on banks and external lenders. With it, the country can finance long-term development through its own markets, its own savers, and a more resilient financial architecture.

Sketch: TBS

M Kabir Hassan is Professor of Finance and the Moffett Chair at the University of New Orleans. He is the 2016 IsDB Prize winner in Islamic Banking and Finance, a member of the AAOIFI Ethics and Governance Board, and Chairman of its Education Board.

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