Bangladesh Bank coaxes banks to invest in shares through low-cost funds

Aiming to bring an end to the bearish trend in the stock market, Bangladesh Bank will provide banks with low-cost funds to encourage them to invest in shares.

The minimum interest rate for the funds will start at six percent.

This decision is intended to temporarily increase the supply of liquidity in the capital market, for six months, according to a circular issued by the central bank on Sunday.

In the immediate aftermath of this, DSEX, the broad-based index of the Dhaka Stock Exchange (DSE), gained 64.98 points – reaching 4,920 points at the end of session.

Previously on September 11, the DSEX had dipped below 5,000 points, amid a liquidity crisis in the banking system, and has remained below it since then.

The central bank will provide the low cost fund through repo – a form of short-term borrowing, mainly in government securities – against the excess liquidity that banks currently have invested in government securities.

Excess liquidity stood at Tk90,000 crore as of August this year, according to Bangladesh Bank data.

Banks will now be able to borrow money at low costs from the central bank, against bills and bonds, where the excess liquidity remains invested.

Banks which have enough ceiling to invest can take this fund.

Currently, stock market exposure of all banks remains below the authorized limit of 25 percent of their capital, according to the Bangladesh Bank.

Banks will have to invest this low cost fund only in their own portfolios, or give loans to their subsidiaries, like merchant banks and brokerage houses, reads the circular.

They will have to open a separate BO (Beneficiary Owners) account to invest this fund in their portfolios.

Initially, the tenure of repo will be 28 days. However, if banks perform well in terms of fund utilisation, they will be allowed to revolve the funds until six months.

Banks will have to apply for repo to the central bank within three months of issuing the circular.

A welcome move

"It is a good move, but only liquidity cannot encourage banks to invest in stocks," said Syed Mahbubur Rahman, managing director of Dhaka Bank.

Governance in stock market regulator is another important factor that should be addressed for increasing investment, he opined.

He opined that most of the banks are suffering losses in their portfolios, so it depends on their intention to enhance stock investment because of the many risk factors involved.

"We welcome the move by the central bank, as it is enabling banks to invest more into undervalued shares with good fundamentals," said Khairul Bashar Abu Taher Mohammad, the secretary general of Bangladesh Merchant Bankers Association.

Now it is important to notice how banks' investment committees respond to the opportunity for more investment amid the ongoing market downturn, added Bashar, also the managing director of MTB Capital Ltd, the investment banking subsidiary of Mutual Trust Bank.

The stock market on Sunday

Following a huge selling pressure over the last three days of the previous week, both bourses of the country witnessed sharp rallies on the day, though a decreased volume remains a concern to some analysts.

DSEX gained 1.34 percent, following a weekly fall of 1.6 percent. 

Shariah-based DSES index gained 2.4 percent at the opening session of the week, while the blue-chip index DS 30 increased 1.76 percent.

Grameenphone, along with some large, mid and small-cap stocks gained price, supporting a rise in indices.

But an over 20 percent drop in trading volume generated questions among competent analysts regarding the strength of the day's rally. Buy-sell at the premier bourse has come down to Tk304 crore.

The price of 185 scrips increased, while that of 106 fell, and the price of 60 shares, mutual funds and corporate bonds remained unchanged at the DSE.

At the Chittagong Stock Exchange, the broad index CSCX gained 1.29 percent to reach 9,076 points, amid a moderate increase in turnover.