Capital market in Bangladesh: Progress and Prospects

Introduction:

The Bangladesh economy is within the mainstream of the continuously changing global financial system. Domestic as well as international trade also characterizes Bangladesh economy. Hence a financial system has developed here consisting mainly of the capital and the money market. For any underdevelopment country the existence of a well-functioning money market is of paramount importance. The money market currently existing has also developed due to certain needs. In general, these needs can be termed as need for short term liquidity within our financial system, to carry out the day to day economic activities and obviously to meet and match need for short term lending and borrowing of the participants within the financial system. T-bill market is by far the largest component of the money market in Bangladesh.

Capital markets are essentially about matching the needs of investors with those that need capital for development. Bangladesh has no shortage of both such parties, a young and dynamic population that increasingly wants, and is able to, make provision for lifetime events, to save for children’s education, for the possibility of ill health and ultimately for old age and retirement. On the other side of the equation, Bangladesh has a pressing need for investment resources to bolster its stretched infrastructure resources, to build more power stations, bridges, ports and gas-pipelines to empower the people in the development of enterprise and the creation of jobs.

Debt markets are an extremely effective mechanism for matching the long term needs of savers with those of entrepreneurs. Like emerging-market countries around the world, Bangladesh could benefit from having a local-currency, fixed-income securities market. At present, its main fixed income financial products are bank deposits, bank loans, government savings certificates, term loans, treasury bills, and government bonds and corporate debt (syndicated loans, private placement, and debentures). But in general the corporate debt market is still very small compared with the equity market.

Capital market:

It can be termed as the engine of raising capital, which accelerates industrialization and the process of privatization. In other words, capital market means the share and stock markets of the country. It is a market for long term fund. With the emergence of the need for infrastructural development projects, for setting up of new industries for entrepreneurial attempts-now there are more frequent needs of funds.

Participants in the capital markets are many. They include the commercial banks, saving and loan associations, credit unions, mutual saving banks, finance houses, finance companies, merchant bankers, discount houses, venture capital companies, leasing companies, investment banks & companies, investment clubs, pension funds, stock ex-changes, security companies, underwriters, portfolio-managers, and insurance companies.

Functions: 

The functioning of an efficient capital market may ensure smooth floatation of funds from the savers to the investors. When banking system cannot meet up the total need for funds to the economy the capital market stands up for a supplement. To put it in a single sentence, we can therefore say that the increased need for funds in the business sector has created an immense need for an effective and efficient capital market. It facilitates an efficient transfer of resources from savers to investors and becomes conduits for channeling investment funds from investors to borrowers. The capital market is required to meet at least two basic requirements:

(a) It should support industrialization through savings mobilization, investment fund allocation and maturity transformation and

(b) It must be safe and efficient in discharging the aforesaid function. It has two segments, namely, securities segments and non-securities segments.

Classification of companies

The SEC classified firms in terms of A, B, G, N and Z categories that had not only guided retail investors to know weak shares but also helped reducing netting and gambling done by a few hidden consortia.

■ “A” Category Companies: Companies which are regular in holding the Annual General Meetings (AGM) and have declared dividend at the rate of 10 percent or more in a calendar year. (Mutual fund, debentures and bonds are being traded in this category). 

■ “B” Category Companies: Companies which are regular in holding the AGM but have failed to declare dividend at least at the rate of 10 percent in a calendar year. 

■ “G’ Category Companies: Greenfield companies. 

■ “N’ Category Companies: All newly listed companies except Greenfield companies will be placed in this category and their settlement system would be like B-Category companies. 

■ “Z’ Category Companies: Companies which have failed to hold the AGM or failed to declare any dividend or which are not in operation continuously for more than six months or whose accumulated loss after adjustment of revenue reserve, if any is negative and exceeded its paid up capital.

Importance of Capital Market in the economy

The capital market is the market for long-term loans and equity capital. Developing countries in fact, view capital market as the engine for future growth through mobilizing of surplus fund to the deficit group. An efficient capital market may perform as an alternative to many other financing sources as being the least cost capital source. Especially in a country like ours, where savings is minimal, and capital market can no wonder be a lucrative source of finance.

The securities market provides a linkage between the savings and the preferred in-vestment across the business entities and other economic units, specially the general households that in aggregate form the surplus savings units. It offers alternative in-vestment windows to the surplus savings units by mobilizing their savings and channelizes them through securities into optimal destinations. The stock market enables all individuals, irrespective of their means, to share the increased wealth provided by competitive enterprises. Moreover, the stock market also provides a market system for purchase and sale of listed securities and thereby ensures liquidity (transferability of securities), which is the basis for the joint stock enterprise system. (The existence of the stock market makes it possible to satisfy simultaneously the needs of the firms for capital and of investors for liquidity.) Especially at times when the banking sector of the country is facing the challenge of bringing down the advance-deposit ratio to sustainable level, the economy of the country is unfolding newer horizon of opportunities. Due to over-exposure level of the financial system the securities market could play a very positive role, had there been no market debacle. Due to the last market crash and follow through events, it will be difficult to utilize the primary market to raise significant volume of funds. Thus the greatest economic importance of securities market at this point can be understood from the opportunities being lost. Bangladesh having its target to become a middle income country must have significant level of rise in investment, which at the present state of banking system cannot be met. The securities market could play the key role in meeting these huge investment demands if the secondary market would remain stable. The capital market also helps increase savings and investment, which are essential for economic development. An equity market, by allowing diversification across a variety of assets, helps reduce the risk the investors must bear, thus reducing the cost of capital, which in turn spurs investment and economic growth. However, volatility and market efficiency are two important features which will ultimately determine the effectiveness of the stock market in economic development. If a stock market is inefficient due to insufficient informational supply, investors face difficulty in choosing the optimal investment as information on corporate performance is slow or less available. The resulting uncertainty may induce investors either to withdraw from the market until this uncertainty is resolved or discourage them to invest funds for long term. Moreover, if investors are not rewarded for taking on higher risk by investing in the stock market, or if excess volatility weakens investor’s confidence, they will not invest their savings in the stock market, and hence deter economic growth. The emerging stock markets offer an opportunity to examine the evolution of stock return distributions and stochastic processes in response to economic and political changes in these emerging economies.

Read Part 2: Capital Market in Bangladesh
Read Part 3: Capital Market in Bangladesh: The Dhaka Stock Exchange (DSE)