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Assignment Topic:

The Bond Market of


Bangladesh And It’s Prospects
Abstract
Bond market acts as a buffer for the equity market. This market in Bangladesh has been
found very inefficient with respect to the number of issues, the volume of trade, the number
of participants, the long-term yield curve, interest rate policy, etc. In view of this, the
present study has been undertaken aiming at identifying the problems that impede the
growth and development of the Bond Market in Bangladesh. Researchers have collected
secondary data and analyzed the same by employing descriptive measures as well as the
multivariate technique of Rotated Factor Analysis. The study has found that the size of the
debt market of Bangladesh is very low as compared to other SAARC Countries; has huge
growth potentiality; and identified important impediments to the growth and development of
the Bond Market in Bangladesh such as risk and return factors, liquidity and government
policy factor, issue management factor, investment policy factor, macro-economic and
regulatory factor, and market & issue related factor. The study has suggested some
important policy measures such as regulatory change, the establishment of a long-term yield
curve, offering fiscal benefits, encouraging companies to raise funds through corporate bond
issues, keeping treasury rates low, etc. for the development of the Bond Market in
Bangladesh.

The development of a Bond Market is a pre-requisite not only for the development of the
capital market but also for the development of the economy of any country. Unfortunately,
the size and maturity level of the bond market of Bangladesh is much debased compared to
other neighboring countries of South Asia. The objective of this study is to make
investigate of the challenges, opportunities, and related issues of the bond market in
Bangladesh and also make a critical analysis of policy initiatives of bond market
development. The study is based on secondary data obtained from various sources. The
study revealed that the corporate bond market of Bangladesh is still very small and the
dominating role of the banking sector in corporate finance is inevitable. Interest rates on
government bonds are repressed and the government yield curve is not able to highlight the
actual level of risk-free rates in the economy, inflation scenarios, and other macroeconomic
circumstances. It is also revealed that Islamic bonds are issued for shorter tenures to
promote domestic Islamic financial institutions. Bangladesh's government should initiate
necessary regulations so that foreign and domestic investors feel encouraged for more
investment in the bond market. Bangladesh banks should regularly publish the reports on
bond market including information on debt securities and the money market.
INTRODUCTION & LITERATURE REVIEW
Financial market is considering as symbol for supporting economic growth and
financial stability in a country. The financial market encourages people for saving and
optimal use of capital which ensures a successful flow of money in an economy. It provides
capital for government, private sector, and public sector. The capital market of a country
develops on the basis of its own characteristics, culture, history, and legal framework to
continue common economic growth (Hossain, 2012).

Every country is giving proper attention and providing necessary support to the
domestic financial market for ensuring financial stability and well-being. In this aspect, it is
important to understand the policy intervention of the local bond market and its impacts on
financial market structure. Hardie & Rethel (2019) addressed that three important
stakeholders namely the government, international investors, and domestic financial actors
are related to the development of bond market in a country. Government commitment to
the adequate movement of capital and acceptance level of foreign currency deposits is
helpful for developing a strong bond market. Again, the government invests in bonds to
control and ensure profitability in the capital market. International investors emphasize on
liquidity of government bonds for market development (Hardie & Rethel, 2019).

Big economy countries like China have highlighted the bond market to attract
international investors in recent years (Livingston et al., 2018). The price increment of
government bonds creates market balance and inherits a positive impact on undertaking
market development (Andritzky, 2012). Mu et al. (2013) addressed that the bond market
helps to finance in government deficits, maintain economic stability, and infrastructure
development, and provide capital for long-term growth. The domestic actors for influencing
the bond market are banks, pensions, mutual and hedge funds.

Bond market integration focuses on the co-movement aspects of bond returns.


Several researchers (For instance, Piljak, 2013; Bunda et al., 2009; Yang & Hamori, 2014)
have analyzed the co-movement dynamics of bond returns. Piljak (2013) pointed out that
macroeconomic features and monetary policy can have more influence rather than global
forces on the bond market of a country. Bunda et al. (2009) identified that external factors
are emerging into the bond market during the financial crisis period of a country. Moreover,
Yang & Hamori (2014) revealed that short-term interest rates are less capable of bond
market integration rather than long-term interest rates.

Lee (2020) addressed that investors in the capital market usually consider the factors
related to default risk and loss. Again, bond spreads are also influenced by default risk,
recovery value, and firm-level risk. Bhattacharyay (2013) addressed that the bond market
helps the economy of a country during a financial collapse situation and diversifies
financing at a corporate level. Moreover, the bond market increases the financial efficiency
of the country (Mihaljek et al., 2002), generates finance for the long term (Aman et al.,
2019), and enhances credit expansion and tend of exchange rates (Mu et al., 2013).
Furthermore, the bond market can attract foreign capital to reduce investment uncertainty
(Burger & Warnock, 2007), develop financial infrastructure for the country (Aman et al.,
2020), and convert the savings into investments to recover from the economic crisis
(Bhattacharyay, 2013).

The strong and effective bond market development in a country is based on some
factors such as stable government, effective fiscal and monetary policy, updated and
efficient regulatory procedures for tax and duties, and liberalized financial system (Hossain,
2012). Misir et al. (2010) addressed some prerequisite elements for bond market
development in a country. The prerequisites are- a well-functioning market, suitable
opportunities for investors, diversified intermediaries, market infrastructure, monetary
policies, a risk management system, and market participants.

Bond markets in most of Asian countries are weak due to a lack of proper
regulations, failure to develop long-term funds, and unpredictable demand (Aman et al.,
2020). In this circumstance, Burger & Warnock (2006) emphasized on government
legislation to protect investors’ rights and Fidora et al. (2007) pointed on stable inflation
rate for strong bond market development. Hossain (2012) identified that weak regulations
and market infrastructure, limited number of investors, capital gain, alternative sources of
debt financing, illiquid assets in the secondary market, underdeveloped tax system, high-
interest rates, cheap syndicated loans, default on interest payment, high inflation, and
limited private management of pension fund are significant barriers to develop bond market
in Bangladesh. Again, Mortaza & Shadat (2016) addressed that the obstacles for bond
market development in Bangladesh are- high issue costs, high cost of trading, high interest
rate in government borrowing, high-interest rate in saving, and absence of alternative
financial instruments. Akter et al. (2019) found that some important factors like risk and
return factor, government policy, liquidity, management factor, and investment policy are
related for the weak range of the bond market in Bangladesh.

The usefulness of the bond market is crucial for any country to understand the actual
return and potential portfolios of investors (Bektić & Regele, 2018). Some previous studies
(for instance, Misir et al., 2010; Jahur & Quadir, 2010; Hossain, 2012; Mortaza & Shadat,
2016; Akter et al., 2019) have addressed several aspects of the bond market in Bangladesh
from various viewpoints. Misir et al. (2010) and Hossain (2012) addressed some
prerequisites for bond market development in Bangladesh. Jahur & Quadir (2010) identified
the government's dominance for bond market development in Bangladesh. Moreover,
Mortaza & Shadat (2016) revealed the obstacles for the bond market and Akter et al. (2019)
pointed out the important factors for bond market development in Bangladesh. Therefore, it
is necessary to understand the challenges for bond market development in Bangladesh and
identify the requirements/suggestions for capacity building as well as formulating policy
initiatives.

The present study makes an investigates of the existing bond market scenario and
identifies the challenges, opportunities, and capacity-building issues of bond market
development in Bangladesh. Discussion has been made on the existing corporate bond
market, government bond market, and Islamic bonds. Capacity of the bond market in
Bangladesh has been compared to some selected neighboring countries of South Asia. Some
policy guidelines are given in the conclusion section.

METHODOLOGY
The study is a descriptive research initiative in nature. It uses empirical data and
existing literature based on extensive searches from various sources. Secondary data from
Bangladesh Bank and annual reports of various commercial banks and financial companies
in Bangladesh are also investigated. Relevant information available in research articles,
research reports, and working papers has been organized and consulted in this study.

DISCUSSION

Compared to the neighboring countries, the bond market in Bangladesh is smaller


and plays an inadequate role in the economy. The bond market development is still
remaining at an initial stage in the country. This market has not yet flourished due to fewer
participants, a limited base market, and non-diversified products. The types of bonds
depending on options, rates, provisions, conversion, etc. Most of the portions of the bond
market are dominated by government securities in Bangladesh. Approximately, 30 percent
of the domestic savings in the country go to treasury debt instruments which are dominated
by the government (Jahur & Quadir, 2010).

Asian Development Bank (ADB) and the Government of Bangladesh (GOB) have
been following two types of interventions- market stabilization and sustainable market
development to enhance the role of capital market in the economy. This initiative is pursued
under a program namely ‘Third Capital Market Development Program of the Asian
Development Bank’ to enhance the capacity of the capital market with a strong legal and
regulatory framework. ADB has been allocated USD of 250 million for this program with
26 policy actions under the four outputs- market stability, market facilitation, supply
measure, and demand measure (ADB, 2015).

By the year 2016, about 221 treasury bonds, eight debentures and three corporate
bonds (perpetual corporate bond by Islami Bank, 25% convertible bond of BRAC bank, and
ACI 20% convertible zero-coupon bond) have been traded in the country’s capital market.

Corporate Bond Market

The corporate bond market is very small in Bangladesh due to the dominating role of
the banking sector in corporate finance. There are shortcomings like diversifying debt
instruments and the absence of proper guidelines for bonds and debentures in Bangladesh.
These are creating obstacles for corporate bond market development.

Bangladesh Capital Market Development Master Plan identified that high level of
interest rates are consistent with the corporate bonds. The other constraints for corporate
bond market development in Bangladesh are changing circumstances of market conditions,
long delays in the registration process, high cost of issuance, and lack of market awareness
(SEC, 2012). Yoshitomi & Shirai (2001) revealed that the success of the corporate bond
market depends on the relationship between the corporate and banking sectors, the rules and
regulations of the financial market, and proper protection to investors. There are
mentionable advantages are remaining in an economy and financial system due to the
corporate bond market. These advantages are a source of capital, investment opportunities,
and lower cost of capital, reduce risks during the crisis period of the banking sector,
pressure to reduce bank interest rates, and encourage the companies for corporate
citizenship (Sharma, 2001; Yoshitomi & Shirai, 2001).

Table 1
BASIC INFORMATION OF MUDARABA
PERPETUAL BOND
Features Description
Name Islami Bank Bangladesh Limited
Issuing Year 2007
Issue Size: Private placement BDT. 1500 million
IPO (Initial Public Offerings) BDT. 1500 million
Total BDT. 3000 million
Face value/ Par value BDT. 1000
Term Perpetual
Maturity No maturity period
Cash Dividend 10.34% (Profit rate-2017)
Credit Rating MPB has been rated A+ Credit Rating Information and
Services Limited (CRISL)

Table 2
BASIC INFORMATION OF BRAC BANK CONVERTIBLE
BOND
Features Description
Name BRAC Bank Limited
Issue Size BDT 300 million
Issuing Year 2011
Face Value/ Par Value Tk. 1000
Paid-up Capital Tk. 2850.15 million
Market Lot 1
The interest Margin plus the Reference Rate will
Interest Floor be set at 12.50%
(The Interest Floor) at all times.
Latest Cash Dividend status (%) 3.09% (interest rate on 2017)

Table 3
BASIC INFORMATION OF ACI ZERO-COUPON BOND
Features Description
Name ACI Limited
Issuing Year 2010
Total Issue Size BDT. 1.34 million
Issue Price BDT. 3,743.00
Face value BDT.5,000.00
Market lot 5
Discount rate 10.5%
Mode of Issue 60% Private placement and 40% Public Offer
Maturity 5 years with yearly redemption

At present, there are only three corporate bonds operating in Bangladesh. These are-
the Mudaraba Perpetual Bond issued by Islami Bank Bangladesh Ltd. (IBBL), the BRAC
Bank Convertible Bond, and the ACI Zero-coupon Bond. Tables 1-3 represent the basic
information of issuing corporate bonds in Bangladesh.

Figure 1 shows the corporate bond market size (USD billion) and relative size (%) of
the corporate bond market for the five South Asian countries for the year 2016. The smallest
size of the corporate bond market is remaining in Bangladesh (7.34 USD billion) and the
relative size of this market is the least (Approximately 1% only) among the five countries
(Figure 1).
FIGURE 1

CORPORATE BOND MARKET SIZE IN SELECTED SOUTH ASIAN


COUNTRIES FOR THE YEAR 2016

Government Bond Market

Government of Bangladesh (GOB) issues Special Bonds, Treasury Bonds, and


Treasury Bills to cover in financing budget deficit for the government cash position
unaffected. Moreover, Bangladesh Bank, the central bank of the country maintains a pretty
cash account namely ‘Ways and Means Advance’ (WMA). The GOB borrows money first
from WMA and then from Treasury Bills (Hossain, 2012). Bangladesh Capital Market
Development Master Plan revealed that interest rates on government bonds are repressed
and the government yield curve is not able to highlight the actual level of risk-free rates in
the economy, inflation scenarios, and other macroeconomic circumstances. Financial
institutions are bound to purchase government bonds at a lower rate than market-determined
yield (SEC, 2012). Blommestein (2017) identified that some indicators are responsible for
liquidity problems in the government bond market. These indicators are increased market
volatility, lower turnover, trade size reduction, lower number of investors, higher yields,
trade fails, and price-gapping.

Table 4 reveals the monthly data on trading of government bonds for the period
July’2018 to June’2019. The monthly turnover amount is showing a fluctuating level of
amount. During the showing period, the highest amount of turnover is shown in the month
of December’2018.
Table 4
MONTHLY DATA ON TRADING OF GOVERNMENT BONDS
*
Sl. Month Turnover (Tk. In Million)
1. July, 2018 16,947.20
2 August, 2018 13,920.00
3 September, 2018 9,414.60
4 October, 2018 16,894.40
5 November, 2018 10,072.00
6 December, 2018 44,006.20
7 January, 2019 17,956.40
8 February, 2019 8,700.00
9 March, 2019 2,509.60
10 April, 2019 NA
11 May, 2019 1,478.00
12 June, 2019 41,199.80

Table 5 highlights the regional comparisons of government and corporate bond


markets in South Asia for the year 2016. The table shows the contribution of the bond
market in GDP for five countries of South Asia. It is revealed that Bangladesh is staying
behind among the selected countries considering the bond market contribution to GDP
whereas; Sri Lanka is staying at the top. In Bangladesh, government bonds (12%) are
contributing highly in GDP rather than corporate bonds (0.01%).

Table 5
REGIONAL COMPARISONS OF GOVERNMENT AND CORPORATE
BOND MARKETS IN SELECTED SOUTH ASIAN COUNTRIES FOR THE
YEAR 2016
Total Bond Government Corpora
Market Bond te Bond
Country (% of
(% of GDP) (% of GDP) GDP)
Bangladesh 12 approx. 12 0.01
India 17.65 15 2.65
Pakistan 36 34 2
Nepal 27.4 20 7.4
Sri Lanka 42 39 3
Islamic Bond Market
Islamic capital market becomes important in the global economy where ‘sukuk’
plays a significant part in this market. Sukuk means 100% tangible assets to deliver assets
fully backed to investors. The Islamic Fiqh Academy of the Organization of Islamic
Conference (OIC) defined sukuk as a combination of assets represented in written financial
instruments and sold at market price where a majority of tangible assets (Radzi, 2018).
Sukuk has unique features such as safe funds, less speculation, low trading turnover, and
less volatility (Qizam & Fong, 2019). The significant contributing countries for susuk
market according to market share are Malaysia (62.5%), Saudi Arabia (9.7%), UAE (7.3%),
Indonesia (6.4%), Bahrain (2.8%), Qatar (2.6%) and Turkey (2%) (IIFM, 2018). The growth
of Sukuk market has been operated by corporates, financial institutions, and sovereigns.
This market is considered as alternative form of financing for businesses, projects, banks,
and financial institutions as stable funding sources (Standard & Poor's Corporation, 2010).
Sukuk has been use as a tool in the Islamic money market which provides liquidity
management facilities to banks and other financial institutions. In Bangladesh, Sukuk issued
for shorter tenures to promote domestic Islamic finance institutions.

In 2004, Bangladesh introduced the Bangladesh Government Islamic Investment


Bond (BGIIB) with the objective to develop a sound foundation for the Islamic bond market
and also to convert excess liquidity into investment through Islamic bonds (Sarker et al.,
2019). According to the Bangladesh Bank Islamic Investment Bond Guidelines 2004
(Amended 2014), the maturity period of Islamic bonds is at 3 months and 6 months. The
Islamic bonds are issued based on the profit-sharing ratio through open auction. In order to
boost Islamic finance further, Bangladesh Bank (BB) launched a weekly sukuk program in
2015, thus providing local lenders with a new short-term liquidity management tool. As per
Bangladesh Bank data, currently, two Islamic bonds are available in operation such as a
three-month Bangladesh

Government Islamic Investment Bond (BGIIB) and six-month BGIIB. The


outstanding balance of these two bonds stood at more than Tk 12.3 million USD as on May
25, 2019 (Rahman, 2019).
Challenges for Bond Market Development in
Bangladesh
The bond market in Bangladesh is not playing an effective role for capital formation
in the financial market. Due to lacking of proper instruments, the absence of necessary
guidelines, and the dominance and acceptability of the banking sector are the main
challenges for bond market development in Bangladesh. The bond market in Bangladesh is
comparatively small rather than other countries in South Asia. The main challenges for
corporate bond development in Bangladesh are high-interest rates, lack of market
awareness, presence of a limited company, and changing market circumstances. On the
other hand, the government bond market is facing some challenges like interest rates,
inflation scenarios, and unfavorable turnover. Although Islamic banking is famous in
Bangladesh, but Islamic bond (susuk) has not yet developed in the country due to a lack of
awareness, shorter tenures, and the presence of limited companies.

Policy Initiatives
Both the Islamic bond (susuk) and conventional bonds (corporate bond and
government bond) can significantly contribute in the stock market of Bangladesh based on
their suitability. The study of Ariff et al. (2017) pointed out that both susuk and
conventional bonds are important for and country and are traded from the same stock
market for clearing processes.

Proper monetary and fiscal policies are necessary for effective bond market
development in Bangladesh. The GOB should formulate policy guidelines for the issuers
and customers to enhance the bond market in the country. Several studies (Laopodis, 2009;
Chatziantoniou et al., 2013) have emphasized on monetary and fiscal policies to analyze the
performance of the bond market in different economic conditions. Laopodis (2009)
addressed that the actions of fiscal policy can determine the behavior of different bonds in
the stock market. Moreover, Chatziantoniou et al. (2013) identified that both fiscal and
monetary policy have explained directly or indirectly the behavior of bonds in the stock
market.

Aman et al. (2020) identified that bond market development in a country depends on
several factors or conditions such as foreign direct investment, exports, size of the economy,
stage of economic development, interest rate, government spending, banking system,
current account balance, and stock market development. The above-mentioned factors are
also important in Bangladesh for strong bond market development. But in the country does
not consider the factors during the formulation of regulations for bond market development.
The main consideration for GOB is to give priority to the related factors that influence the
bond market of the country.

Ariff et al. (2017) addressed three characteristics for susuk bonds such as susuk
issuing companies registered under special requirements, all investors share profit and
losses, and issuing cost is higher than conventional bonds. Leverage is considering as most
influential factor for a positive effect on susuk rating in terms of asset ratio, income growth,
asset and depreciation growth, and operating income (Qizam & Fong, 2019). These
characteristics are applicable in Bangladesh. The country has special legal arrangements
Islamic banking system. So, susuk bond issuing system can take guidelines from the Islamic
banking system. Again, necessary guidelines should be taken by the Securities Exchange
Commission to reduce the issuing cost for susuk bonds.

Moreover, several factors and conditions are need to be considered for bond market
development in Bangladesh such as regulatory pressure, interest rate, capital structure,
macro-economic situation, and market volatility on bond yields. There are need of
regulatory pressure to deliver quality products and useful credit ratings for the bond market
(Livingston et al., 2018). Interest rate is one of the significant features to determine the
proper motion of the bond market (Wang et al., 2016). Mu et al. (2013) addressed some
perquisites for bond market development such as a well-capitalized banking system, stable
exchange rates, and capital control. Moreover, some explanatory factors like
macroeconomic stability, protection of investors, and privatization of pensions are also
important in this regard. Asgharian et al. (2016) identified that several macro-finance
features like interest and inflation rate, liquidity, market uncertainty, and state economy are
related to the bond market in a country. Jubinski & Lipton (2012) revealed the effect of
stock market volatility on bond yields. The study identified that increasing volatility in the
equity market will maintain high-quality bonds by investors.

Finally, some influencing policy initiatives based on some previous studies (for
instance, Bae, 2012; Mu et al., 2013; Smaoui & Khawaja, 2017) are presented in Table 6 for
bond market development in Bangladesh.

Table 6
INFLUENCING POLICY INITIATIVES FOR BOND MARKET
DEVELOPMENT
Types of Bond Policy Initiatives
Corporate bond market Domestic credit, credit share, investment profile, well-
established banking sector.
Government bond Domestic interest rate, capital control, public debt,
market composite risk, GDP per
capita, fiscal balance, macroeconomic condition, and
higher deficits.
Macroeconomic condition, portfolio diversification,
Islamic bond or Sukuk economic size, Muslim population,
investment profile, interest rate,

CONCLUSION
Bond market is not developed in Bangladesh as compared to other neighboring
countries of South Asia. The country is not able to build a risk-free sovereign yield curve to
provide guidance regarding the range of maturity. The borrowers and lenders are not getting
credit information easily due to a lack of credit information index and legal rights.
Bangladesh can take some reasonable and suitable steps for boosting the bond market in the
country.

Benchmarking helps to increase the maturity of bonds with proper pricing. Till date,
Bangladesh has not developed pricing-based benchmarking instruments for the bond
market. The government can issue diversified debt instruments in the bond market such as
different maturities treasury bills, and medium and long-term securities to attract customers
in the bond market.

Bond market is one of the best places for investment. Bangladesh's government
should adopt necessary regulations so that foreign and domestic investors get encouraged
and make more investments in the bond market. Bangladesh Bank should publish reports on
the bond market that include information on debt securities and the money market. A bond
index can compare the performance of the participants in the bond market through their
different classes of assets. Finally, the government should develop the qualitative strength
for a bond market in terms of the macro-economic situation, institutional capacity, equity
market, accountability in the financial sector, and corporate governance.
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