Brokers seek 5-year extension for banks’ special capital market fund

Infographics: TBS

With the February deadline approaching, brokers have urged the Bangladesh Bank to extend the tenure of a special investment fund by commercial banks for capital market liquidity support by five years.  

The DSE Brokers Association (DBA) – representing Dhaka Stock Exchange brokerage firms – has also proposed increasing the fund size from Tk200 crore to Tk300 crore per bank.  

On Tuesday (28 January), the association submitted a proposal to Bangladesh Bank Governor Ahsan H Mansur, requesting an extension of the fund's tenure until December 2030.

To enhance liquidity and stabilise the capital market, the central bank allowed banks, financial institutions, and market intermediaries such as brokerage houses and merchant banks to establish a special fund for stock investment in 2020.

The tenure of the special fund is set to expire on 9 February 2025. Under this facility, many reputed banks have established special-purpose funds.

According to the Bangladesh Securities and Exchange Commission (BSEC), more than 20 banks had over Tk1,600 crore invested in the capital market under this special arrangement by mid-2024.

In a letter to the central bank, DBA President Saiful Islam said, amid the current market context, all portfolio investments are incurring losses ranging from 40% to 60%. 

"Closing such funds at this moment would result in substantial losses in portfolio accounts and lead to institutional sell-offs amounting to over Tk1,600 crore," he wrote.

"This could be detrimental to the capital market, especially considering the current extremely low confidence levels among investors and stakeholders," he added.

Saiful further said the capital market is navigating through a challenging period. "Since the last quarter of 2021, our retail-driven market has experienced a prolonged downturn, resulting in a significant decline in equity market capitalisation."

He said this downturn has impacted over two million investors, including institutional investors including banks, financial institutions, insurance companies, and mutual funds and market intermediaries such as stockbrokers and other stakeholders.

A 2020 circular from the central bank mandated that banks and their subsidiaries could only invest in stocks that have paid at least a 10% stock or cash dividend (or both) in the past three consecutive years and have at least 30% sponsor/director shareholding.

Hoping for the continuation of these guidelines, Saiful emphasised that such criteria ensure the flow of funds toward fundamentally strong companies, preventing the risk of market manipulation through investments in junk stocks.

"Improved liquidity in fundamentally strong companies boosts investor confidence in the overall governance of the market. Furthermore, we believe that the prices of fundamentally strong stocks will experience upward re-rating once interest rates reverse and economic growth accelerates," he said.

"We strongly believe that such an extension will provide quality liquidity to the capital market and enable stakeholders to devise sustainable strategic plans to recover from the current adverse scenario, thereby contributing to the long-term growth and stability of the capital market," he added.

In November last year, the BSEC also requested the Bangladesh Bank to extend the tenure of commercial banks' special Tk200 crore capital market investment fund for another five years, until February 2030.

Additionally, the BSEC requested an increase in the fund size to Tk300 crore for each scheduled bank.

BSEC Chairman Khondoker Rashed Maqsood made these requests during a meeting with Governor Mansur on 27 November.