Bond market of Bangladesh: Yet to be vibrant but promising

Bangladesh, one of the fastest growing economies in the world over the past decade, has an impressive track record of growth supported by a demographic dividend, strong ready-made garment (RMG) exports, and stable macroeconomic conditions. 

However, like other countries, Bangladesh faced the daunting challenge of fully recovering from the Covid-19 pandemic which has constrained economic activities and reversed some of the gains achieved in the last decade.

Nevertheless, after fighting two deadly Covid-19 waves, Bangladesh's economy is showing signs of recovery backed by a rebound in exports, strong remittance inflows, and the ongoing mass vaccination program. 

With a promise to be a developed nation by 2041, Bangladesh has undertaken many infrastructure projects like: Padma Multipurpose Bridge, Padma Bridge Rail Link, MRT Line-1 & 6, Rooppur Nuclear Power Plant Matarbari Coal Fired Power Project and so on. 

In order to maintain stability in the economy and to implement various projects, it is important to ensure the presence of both long and short term sources of funds. Hence, it is quite understandable that Bangladesh needs a vibrant bond market immediately to meet its huge financing requirement for infrastructure development and further industrialisation. 

Illustration: TBS

According to Capital Markets Fact Book July 2021, currently global bond market size stands at $124 trillion while global equity market size stands at $106 trillion as of 2021. Bond market size of neighboring countries like Malaysia, Indonesia and Pakistan stand at $345 billion, $233 billion and $66 billion respectively whereas Bangladesh's bond market (both treasury bond and corporate bonds combined) currently stands at $18 billion. Undeniably, Bangladesh falls short of most of the developing economies in terms of bond market size. 

Absence of a vibrant bond market in Bangladesh puts extreme burden on bank financing. Banks depend on short-term deposits to run operations. So, when they provide long-term loans with short-term deposits it creates pressure on their liquidity management that eventually leads to severe asset liability mismatch.

Looking into the Bangladesh Bond Market, we can see that it is a small market and it is highly dominated by government debt securities and capital bonds issued by banks and non-bank Financial Institutions (FI). 

Banks and FIs issue capital bonds to meet the regulatory requirement and to strengthen their capital base. Corporates also issue the ZCB or Coupon Bearing Bond but the percentage is still very low. 

Fortunately, the situation is getting better as time passes with the proactive and collaborative approach of regulators and related stakeholders. Very recently the country's first Shariah-compliant bond, the Bangladesh Government Islamic Investment (Sukuk), has drawn over eight times applications from investors in the final phase of auction. The fund was raised for the implementation of the government's safe water supply project for the whole country. The oversubscription clearly shows the interest and curiosity of the stakeholders towards this new financial instrument. 

Not only that, Bangladesh has also entered into the era of green bond in 2021 with the approval of its first green bond to finance environment-friendly projects including renewables. Bangladesh Securities and Exchange Commission (BSEC) has approved a Non-Governmental Organisation (NGO) named Sajida Foundation to raise money from the capital market by issuing green bonds.

In line with introducing some innovative solutions to create incentives, especially for the private sector, to promote financing for inclusive development, Bangladesh has also started working with Blue Bond. The blue bond is a new concept, and thus, there is still a lack of awareness and expertise in this area.

Furthermore, Bangladesh Securities and Exchange Commission (BSEC) has issued a debt securities rule in 2021 and afterward more than 10 banks have applied for perpetual bond and subordinated bond. Previously BSEC gave approval to another 11 banks to issue this BASEL III compliant AT-1 bonds. Perpetual Bonds are a new inclusion in this market as it was previously highly dominated with subordinate bonds issued by banks. 

The debt instrument size is 0.25 times of equity in Bangladesh's capital market and the total size of the debt issued since 2013 is around $3.9 billion in face value. This ratio is expected to improve in the future considering the proactive approach of the regulators and interest of stakeholders.

Undoubtedly, we have already put our initial step toward the development of the vibrant bond market as an alternative source of financing, however, we still have a long path to go. Financial literacy is essential in this regard to cross the barriers associated toward development. If we ourselves are not motivated enough to diversify our investment into FDR, bonds or any other financial instruments, we cannot expect others to do the same. 

Our regulators are trying their heart and soul to develop the market with the help of numerous road show, financial literacy programs in home and abroad. Now it is our duty to work with them collaboratively and make it work for the sake of the growth of our economy. 

Aroka Chowdhury ACMA, CGMA is currently working in an investment bank in Bangladesh. Email: [email protected].

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