University of Dhaka

A Report On
The Environment of Capital Market in
Bangladesh

Date of Submission: April 24, 2018

Course code: F-604

Course Title: Investment Analysis

 Report: The Environment of Capital Market in Bangladesh.

Submitted To:

Dr. M. Farid Ahmed

Professor
Department Of Finance

Faculty of Business Studies

University Of Dhaka

Submitted By:

Name Id
Mohammad Arman Reza 34003

Department Of Finance

University Of Dhaka

Date of Submission: April 24, 2018

The Environment of Capital Market in Bangladesh 2|Page

 Letter of Transmittal

April 24, 2018

Dr. M. Farid Ahmed
Professor
Department of Finance

University of Dhaka

Subject: Submission of the Report Titled “The Environment of Capital Market in

Bangladesh”.

Respected Sir,
With due respect, I would like to inform you that, it is a great pleasure for me to submit
the report titled “The Environment of Capital Market in Bangladesh”. My main incentive
was to prepare this report according to your guidelines and in accordance with your
directions. I have tried my best to make the work as per your structures. I hope that I have
done a satisfactory job considering my level of experience and capability and have been able
to relate the fundamental things with realistic applications.

So, I therefore, request and hope that you would be kind enough to accept my report and
oblige thereby.

Sincerely Yours

Mohammad Arman Reza (Id-34003)

The Environment of Capital Market in Bangladesh 3|Page

 Acknowledgement

I express my gratitude to my honorable course teacher Professor Dr. M. Farid Ahmed,

department of Finance, University of Dhaka, who has given me the opportunity to work
on this report.
I am very much grateful to my honorable course teacher for assigning me such an
important course which is very much beneficial for my later part of life.

I also want to thank all who have helped me in preparing this report and worked hard to
make this report happen.

The Environment of Capital Market in Bangladesh 4|Page

 Table of Contents
Table of Contents ......................................................................................................................................................... 5
EXECUTIVE SUMMARY.............................................................................................................................................. 6
Chapter- 1 -INTRODUCTION.................................................................................................................................... 7
1.1 Objective of the Study.................................................................................................................................. 9
1.2 Methodology of the Study .......................................................................................................................... 9
1.3 Limitations ....................................................................................................................................................... 9
Chapter- 2 - Capital Market of Bangladesh ................................................................................................... 10
2.1 Limitations of the Banking Based Financial System of Bangladesh ............................................. 11
2.2 Features of capital market ............................................................................................................................. 12
2.3 Classification of companies ........................................................................................................................... 12
“A” Category Companies: .......................................................................................................................................... 12
“B” Category Companies: .......................................................................................................................................... 12
“G’ Category Companies: ........................................................................................................................................... 13
“N’ Category Companies:........................................................................................................................................... 13
“Z’ Category Companies: ........................................................................................................................................... 13
2.4 Importance of Capital Market in the e c o n o m y ................................................................................ 13
2.5 Structure of the Capital Market IN BANGLADESH ............................................................................... 14
2.6 Bangladesh Stock Market.............................................................................................................................. 14
2.7 Current economy of Bangladesh ................................................................................................................. 15
2.8 Capital market development in Bangladesh ..................................................................................... 16
Chapter- 3 - Stock Market Crashes ......................................................................................................................... 18
3.1 Crash during 1996 ............................................................................................................................................ 19
3.2 Crash during 2010 ............................................................................................................................................ 19
3.3 Reasons behind the two major crashes ................................................................................................. 19
3.3.1 Political economy inducing demand since 2 0 0 7 ............................................................................... 20
3.3.2 Macro-economic factors inducing EXCESS SAVINGS ......................................................................... 20
3.3.3 Gas and power sector shortage and idle business f u n d s .............................................................. 20
3.3.4 Excess liquidity in financial sector IN 2009 ........................................................................................... 20
3.4 Reform of the market after the Crashes ................................................................................................... 21
Chapter - 4 - Capital Market-Present Scenario .................................................................................................. 23
4.1 Present scenario of Bangladesh CAPITAL MARKET ........................................................................... 24
4.2 Actions required for restoring investors' confidence on the market ........................................ 25
4.3 Recommendations ............................................................................................................................................ 25
Chapter- 5 Conclusion ................................................................................................................................................. 26

The Environment of Capital Market in Bangladesh 5|Page

EXECUTIVE SUMMARY

Bangladesh has recently achieved the status of developing country but it is a matter of sorrow
that the environment of capital market in Bangladesh is not satisfactory. An International
Finance Corporation (IFC) diagnostic mission has recently found the Bangladesh capital market
environment not conducive to the issuance of debt instruments or mobilisation of debt to help
local businesses with long-term finance. The mission that visited the country in December last
said long-term debt issuance is subject to higher issuance cost and rigorous regulatory due
diligence.

Earlier in April 2015, the IFC proposed to help Bangladesh in floating US$1.0 billion worth taka
bond. But later in October 2016, it retreated from the proposal for 'failing to raise funds'.The
IFC came up with the proposal as Bangladeshi businesses lack long-term debt in
absence of a 'vibrant stock market' in the country. It identified poor governance in both
public and private sector commercial banks, rising non-performing loans and other
structural constraints which also limit banking sector's capacity to remove the long-
term finance bottlenecks.

The IFC, the private-sector arm of the World Bank Group, said the long-term financing could
have been less difficult to mobilise had there been a deep and vibrant capital markets 'with
lead-ins for intermediation of long-term debts'. Presently, over 80 per cent of debt financing
comes from the banking sector, in particular commercial banks. "Dominance of commercial
banks also indicates prevalence of short and medium-term lending and limit on the capacity of
long-term financing."

The IFC identified three reasons behind long-term lending limitations of domestic banks. It said
the banks have no easy access to foreign exchange resources thus cannot lend in foreign
currency, they are short on long-term taka resources resulting in failing to lend in takas beyond
five to six years of maturity, which is significantly shorter than the economic life of most long-
term investment projects.

Another reason, the IFC found, is that the banks rely on variable-rate resources (deposits) thus
cannot provide fixed rate loans although this will be the best practice for projects creating long-
term assets.

The Environment of Capital Market in Bangladesh 6|Page

 1
CHAPTER
INTRODUCTION

The Environment of Capital Market in Bangladesh 7|Page

Bangladesh is a country with great potentiality. It has the opportunity to become one of the best
countries in terms of economy. To do this the capital market of this country has to be very
strong and their performance should be above the satisfactory level.

However, the performance of the Dhaka Stock Exchange during the last two years has raised
questions about the structural impediments facing the capital markets in Bangladesh. Many
small investors saw their life savings dissipate due to a free fall in the price of the stocks that
they had invested in. This is not what it was supposed to be. Unfortunately, this phenomenon is
not unique to Bangladesh. While the large emerging markets and world equity benchmarks are
enjoying strong investor demand, the world's next emerging markets the so-called Next-11 (N-
11) markets including, Bangladesh, Pakistan, Sri Lanka and Vietnam, have lost some of their
attractiveness. Rampant inflation, chronic trade deficits, and a lack of structural reform have
deterred investors.
Despite a growing global risk appetite in early 2012, which would usually see money flow into
emerging markets, N-11 markets have barely moved. These markets are less liquid, although
their relative underperformance probably means investors expect lower near-term growth.
Investors find that it is much tougher to do business in these countries as rampant corruption
has stifled economic reform and development. In Bangladesh, political and security concerns, in
particular, add to the downside risk.

Another challenge is inflation. Rising food prices and energy shortages are driving up inflation,
creating a headache for investors and policymakers. As the world's larger economies are easing
off the monetary breaks and beefing up liquidity to safeguard growth, a tightening bias persists
in many of the Asian countries. Stocks in both Bangladesh and Sri Lanka, for example, have
declined substantially in recent months as authorities have lifted interest rates to slow double-
digit inflation, reduce credit growth, and narrow the trade deficit.

Experience has shown that development boosts imports and weakens currency. Most
developing economies including Bangladesh run trade deficits, with a heavy reliance on imports
of capital goods and oil to drive development. Machinery and equipment and energy products
account for a large portion of Bangladesh's imports, for example. Since these economies
typically produce low-value-added goods such as textiles, one unit of domestic production
contains a high-import component. In Bangladesh, this ratio of imports to domestic production
is estimated to be more than 75%, making it difficult to narrow the trade deficit without a
substantial move up the value chain of production.

The Environment of Capital Market in Bangladesh 8|Page

1.1 Objective of the Study

The main objectives of this report are:

 To map out the limitations of the bank-based financing system of Bangladesh.

 To examine the structure of the existing financial sector of Bangladesh emphasizing on

an organized capital market.

 To analyze limitations and examine opportunities of the capital market of Bangladesh

covering both equity and debt markets in creating a congenial investment climate.

 To provide a useful basis for building a sustainable capital market with a view to

creating a healthy investment climate in Bangladesh.

1.2 Methodology of the Study

In order to complete the study, two types of data have been used-
Data Collection
 Primary Data
 Secondary Data
Secondary data sources are World Development Indicators, International Financial Statistics,
Asian Development Outlook, Annual Reports of Bangladesh Bank and BAPLC, including various
reports and publications of SEC, Chittagong Stock Exchange (CSE) and Dhaka Stock Exchange
(DSE). I have completed my report by taking information from different journals from
Bangladesh Bank regarding capital market of Bangladesh. I have also taken information from
different websites.

1.3 Limitations

There are a number of limitations while making this report. A time limitation is the biggest of them.
With this short time making such a report is really difficult. The most difficult part of the report was
lack of adequate knowledge about the selected topic. As I am very new to this arena, it is an arduous
task to do such a report on environment of capital market in Bangladesh. However, I have tried my
best to make this report successful.

The Environment of Capital Market in Bangladesh 9|Page

 2
CHAPTER
Capital Market of Bangladesh

The Environment of Capital Market in Bangladesh 10 | P a g e

2.1 Limitations of the Banking Based Financial System of Bangladesh

Since the 1990s, the banking sector has gone through a long reform process with the ultimate
objective of making it more efficient, competitive and resilient to adverse economic conditions.
Although a gradual improvement in banking sector has been observed but the potential of this
sector is still untapped. Some major limitations of the banking sector are mentioned below:

One of the major problems in the financial system of Bangladesh is the absence of an exit policy.
In one way or another, banks are allowed to continue their operation even in the face of severe
problems. A number of banks in our country, in the past, continued their operation without
meeting the minimum capital requirement and with a substantial amount of defaulted loans. It
seems that depositors were also not made aware of varying levels of risk with different banks
and, as a result, are unable to take their deposit decisions based on the riskiness of the bank.
This is an example of a moral hazard problem where weak banks are not pressurized by the
stakeholders, especially by the depositors although they have representation in board of
directors of banks, to make their operation sound and efficient. This problem implies that
Bangladesh’s banking sector does not have adequate market discipline.

A major problem in our banking sector is the accumulation of huge amounts of non-performing
loans. Almost, all the state owned banks are facing a very high defaulter rate. Comparing to
developed countries, where the tolerance range of non-performing loan is up to 3 percent, and
the performance of the banking sector of Bangladesh is very poor. Even comparing to the
neighboring south Asian countries, the non-performing loan amount is much higher in
Bangladesh.

In many cases, banks place an undue weight on collateral security rather than on forecasted
cash flow in approving/rejecting a loan application which makes it difficult for some potential
entrepreneurs to meet the banks’ requirement (The World Bank Report, 2008). As a result the
idea of ‘entrepreneurship development’ by banks is not practiced or cultured in our banking
system.

Bank management must ensure the same set of standards both for the insider loan and loans
granted to the others. The issue of loans given to insider parties emerged as a matter of concern
in the mid ’80s after the operation of private commercial banks in Bangladesh has begun.
Although Bangladesh Bank has adopted various measures for ensuring prudent management of
insider-loans, our banking sector is still burdened with a high amount of defaulted loans granted
to insiders.

The Environment of Capital Market in Bangladesh 11 | P a g e

Although there is a wide area network of branches of state owned commercial banks in
Bangladesh, lending is concentrated in urban areas. Thus, inequitable transfer of funds from the
rural areas to the urban areas is observed. Moreover, private commercial banks, in operation
since 1990, have very few rural activities. This pattern of urban-based credit portfolio makes
the target of equitable development unachievable. Also there is a disparity between the rural
areas and the urban areas in the quality of banking services offered. In recent years, a number of
modern information and communication technology based banking products have been made
available mainly in the urban areas.

2.2 Features of capital market

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 market economy, capital market stands up to 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.

2.3 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

The Environment of Capital Market in Bangladesh 12 | P a g e

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.

2.4 Importance of Capital Market in the e c o n o m y

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 won- der 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
The Environment of Capital Market in Bangladesh 13 | P a g e
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.

2.5 Structure of the Capital Market in BANGLADESH

Bangladesh capital market is one of the smallest in Asia but within the south Asian re- gion,
it is the third largest one. It has two full-fledged automated stock exchanges namely Dhaka
Stock Exchange (DSE), Chittagong Stock Exchange (CSE) and an OTC exchange operated by
CSE. It also consists of a dedicated regulator, the Securities and Exchange Commission (SEC),
since, it implements rules and regulations, monitors their implications to operate and
develop the capital.

It consists of Central Depository Bangladesh Limited (CDBL), the only Central Depository in
Bangladesh that provides facilities for the settlement of transactions of dematerialized
securities in CSE market and DSE.

2.6 Bangladesh Stock Market

Amid all the formidable obstacles, our country’s securities market has been gaining
momentum. Even in the backdrop of Global Financial Crisis 2008 when the stock mar- kets

The Environment of Capital Market in Bangladesh 14 | P a g e

in almost all the developed and developing countries crashed and Governments of those
countries spent thousands of dollars to rescue the markets. Both depth and di- mension in
Bangladesh capital market has been becoming gradually strong and securi- ties market
registered significant growth at the initial stage and later market fell a little bit. The reason is
might be that the amount of foreign portfolio in Bangladesh securities market is more or less
only two percent. But lack of supply of fundamentally sound shares has been causing
overheating situation and circumstance like overpricing has been a common phenomenon
here in recent times. Transaction has risen from a daily Tk. of 250 crore two years ago to
Tk. 2,500 crore now and DSE General Index has risen to record 8,918 from 2,400 two years
back. But demand and supply should match at a certain point to the tune of bringing time-
bound balance in the securities market.

2.7 Current economy of Bangladesh

Bangladesh today is the 48th Largest Economy with US $225 billion GDP on the basis of
purchasing power parity. In nominal terms, the per capita income is US $750 with a GDP

size of nearly US $90 Million, Bangladesh is the 70th largest exporter and the 4 largest
th

RMG exporter in the world, Bangladesh is also the 21 st fastest growing economy.

Impressive growth of 5% and above in the last two decades have indeed taken the economy
to a new growth trajectory contributed by steady agricultural production, increased export
earnings, healthy remittance and vibrant domestic demands. The steady growth of GDP
during recent global recessions has demonstrated the resilience of our economy, adding
that the economy has strong fundamentals.

Bangladesh has through unique times just as many of the countries in the region passed
through in the recent past. Several International banks and risk analysts have given strong
recommendation to Bangladesh's steady growth recently. They recognized that Bangladesh
has:

The world's two top credit rating agencies, Standard and Poors (S&P) and Moody's
Investor Service, for the first time, assigned sovereign credit ratings to Bangladesh.
S&P assigned BB- and Moody's Investors Service assigned Ba3 to Bangladesh and
termed the countries macroeconomic outlook stable, putting Bangladesh at par
with Philippines, Vietnam and Turkey. In the South Asian context, Bangladesh is
positioned higher than Pakistan and Sri Lanka.

Several global financial institutions have also identified Bangladesh as one of the
potential economies of the world, heading US investment bank Goldman Sachs has
included Bangladesh as one of the Next 11 (N1l) countries, after the BK1C nations
of Brazil, China, India and Russia as one of the rising economies of the world.
The Environment of Capital Market in Bangladesh 15 | P a g e
 Similarly JP Morgan, another global leader in investment banking has included
Bangladesh in its 'JP Morgan frontier Five'. And in a recent update of their 2006
report on "The World in 2050-Price Waterhouse Coopers" extended their analysis
to include 13 other emerging economies including Bangladesh in their new ' PWC
30 list' as one of the long term potential growth economics by 2050.

JP Morgan in its "Ho Chi Minn Trial to Mexico" research report states that it is the
demographics that justify the inclusion of Bangladesh in the "JP Morgan Frontier
Five". Their report identifies that:

1. The country ranks fourth in growth in economically active population.

2. Five year economic growth is strong at 6.1% per annum.

3. Progress has been made over the last few years to

reduce poverty, in- creasing literacy levels and
moderating population growth to a more sustainable
level.
4. There is an assertive judiciary,
5. An active civil society,
6. A relatively free media which has increased public accountability

Over the past two decades, privates sector has been contributing hand in hand with the
state-owned industries. The policy makers are taking initiatives for the private sector to grow
even further while dynamic entrepreneurs joined the race with their inimitable ideas.
There is also an inflow of qualified and matured professionals in the service industry
including the financial sector.

2.8 Capital market development in Bangladesh

Bangladesh stock markets have grown significantly during the last decade. Still, the size of
the market is relatively small compared to other Asian Markets. Size and liquidity of the
companies provide some distinguishing features of developing markets. The market
capitalization ratio, defined as the value of listed stocks divided by GDP, is used as a
measure of stock market size. It has got economic significance because market size is
positively correlated with the ability to mobilize capital and diversify risk. Total market
capitalization of DSE was US $ 1.049 billion in 1994 compared to US $ 127.515 billion in
India, US $ 12.263 billion in Pakistan, US $ 191.778 billion in South Korea and US
$199.276 in Malaysia. This market is also small relative to the size of the economy. Market
capitalization in Bangladesh was only 4.07 per cent of GDP in 1994 against 25.77 per cent
in Pakistan, 24.03 per cent in Sri Lanka, 104.14 per cent in Thailand and 294.56 per cent in

The Environment of Capital Market in Bangladesh 16 | P a g e

Malaysia. This ratio for Bangladesh is 0.075 in June 1997 and 0.05 in June 2000.

Almost 33 lakh investors are now involved in the capital market at the moment; more than
70% of which are general investors. The total market capitalization of all shares and
debentures of the listed securities stood at USD 49.4 billion by the end of 2010, indicating an
84% growth from the year before. The total turnover has increased from USD 0.13 billion
to USD 0.25 billion at the end of 2010 which indicates a 91% growth. However, the capital
market has been exposed to greater risk since PE ratio rose from 19.9% to 29.71% from
January, 2010 to November, 2010.

Dematerialization may be successful in stimulating the further growth of Bangladesh

capital market, but to ensure the success of such an initiative, it will be necessary to ensure
that the regulatory framework and authority are sufficiently strong, in order to strike a
balance between the interests of both the members of stock exchanges and the public.

On a long-term basis, it may be important for a successful bond market to be built in

Bangladesh. This can assist in creating more instruments for investors and, at the same time,
creating some depth in the capital market. Bond markets can also be utilized by the
government in raising necessary funds, and can serve as an efficient method of financing in
large projects

The Environment of Capital Market in Bangladesh 17 | P a g e

 3
CHAPTER
Stock Market Crashes

The Environment of Capital Market in Bangladesh 18 | P a g e

The capital market of Bangladesh had two major debacles which occurred in 1996 and 2010,
creating some bad impacts upon the country’s total capital market.

3.1 Crash during 1996

During 1996 some local and foreign initiatives succeeded in drawing some international
attention which was followed by an international conference in 1994. The conference
followed by some regional as well international market destabilizing events, some hedge
fund managers started investing in the local capital market. The market was neither
operational nor in terms of legal structure ready to absorb such sudden surge in demand
both at home and abroad. Consequently within a very short tenure (from July to October of
1996) the market price level soared to a record level (of that time) height with the index
rising from 894 levels lo 3627 level. The market P/E ratio of all the listed securities reached
to the level of 66.5 within a short period of 4 months. The 'cry-out' auction based trading
system of DSE could not handle the huge demand coming from several thousand investors
who crowded the Motijheel thoroughfare. Consequently street based curb market took over
the legal trade executed through stock market sys- tem. Unsuspecting inexperienced new
entrant investors allured by very quick profit potentials were buying anything without
understanding substance, legality and validity of their investment. Unscrupulous market
players (which even include some issuers) were minting fortunes by selling fake securities
to the crowd who were eager to make quick profit from the market. Thereafter, for obvious
reason the market experienced first major crash in l996 affecting about fifty thousand
investors.

3.2 Crash during 2010

The market crash of 2010 drew greater degree of attention because much larger segments
of population spreading all around the country are affected this time as the market in this
period has gained significant growth. The securities market debacle in 2010 need to be
viewed from different perspectives. The following section attempts to examine those issues
mostly from demand side factors. This is a plain logical analysis supported by some facts
and figure. The analysis covered the period from 2004 till 2010 because, the impacts of
1996 continued until 2003 period. It can be considered that, the market started
consolidation and development from 2004.

3.3 Reasons behind the two major crashes

Analysis shows that, the capital market of the country experiences some abnormal
upheaval during the last few years, which had full bubble effects in 2010 concluding with
the burst. The causes and factors to such behavior are as following:
The Environment of Capital Market in Bangladesh 19 | P a g e
3.3.1 Political economy inducing demand since 2 00 7
The political reality of 2007 was one of the major reasons for creating a sudden rise in the
market. Until 2006, the growth pattern in the market was gradual and moderate. From
January 2007, the market experienced a sharp rise in terms of transaction and price level.
Especially the political situations in late 2006 made the market little shy of investment. The
emergence of military backed caretaker government (CTG) initially encouraged the
investors to come back to capital market. At the time of declared campaign against
corruption, budgetary policy support for legalization of undisclosed in- come through
investment in securities market also encouraged new investors to transfer their funds to
this market. Besides new civilian investors, influx of armed forces members as investors
also boosted the demands in the market.

3.3.2 Macro-economic factors inducing EXCESS SAVINGS

Since the last decade, the economy of the country has been growing at a fairly steady rate
with national savings rate remaining around 30% of GDP. Such high savings rates were
attained mostly due to robust growth in inward remittances from expatriate Bangladeshis
over the years. While savings rates were good along with rising GDP, the in- vestment rates
were not matching. The real ADP in terms of budgeted amount as well as implemented
amount was not increasing. As a result the public sector investment declined from a level of
more than 6% to slightly over 4% level. Due to different infra- structural and political
reasons, the private sector investments also could not match the shortfalls in public sector
investments. Thus an overall surplus savings has been created in the economy.

3.3.3 Gas and power sector shortage and idle business f u n d s

Due to shortage of power and gas, the government declared moratorium on new
connections. Such policy almost stopped establishment or expansion of new industrial units
and even residential buildings. The moratorium was further extended by the newly elected
government until middle of this year. Consequently private sector in- vestment for
manufacturing sector almost stalled for quite some time. The global financial crisis of 2008-
09 also made many export oriented business to keep their production facilities partially or
totally closed. Therefore, the business people having idle funds found incentives to move
their funds lo capital market. The transfer of such funds also created excess demand pushing
the price level upward.

3.3.4 Excess liquidity in financial sector IN 2009

The decline in private sectors' new or expansion oriented investment also created
significant volume of surplus liquidity at the hands of financial institutions. The financial
institutions started investment in the securities market as one of the avenue to utilize their

The Environment of Capital Market in Bangladesh 20 | P a g e

liquidity. Almost all the major financial institutions got involved in deploying a portion of
their idle funds in the market.

3.4 Reform of the market after the Crashes

The stock market crash reveals structural weaknesses of the market rules, laws and
guidelines are framed and implemented to improve infrastructure and foundation on which
the stock ex- changes can operate effectively. Major notable features of capital market
reforms implemented so far include:

a) Reorganizing SEC to strengthen infrastructure capabilities and build capacity

b) Updating rules, laws and guidelines to improve regulation framework:

a) Amendment of the SEC Act 1993 to empower SEC a vetting power, financial
penalty power with a view to monitoring and enforcing compliance of rules.
SEC is also allowed to conduct special audit to detect window dressing in the
accounts of the listed firms, if it suspects.

b) Information disclosure rule specifying the requirements to comply with the

International Accounting Standard (IAS) and International Standards of
Auditing (ISA) for timely and quality information disclosure in the market.

c) In the new issue rule, the pricing of IPOs has been delegated to the issue
manager.

d) In the merchant bank regulation, three activities, viz., issue management,

underwriting and non-discretionary portfolio management, are restricted to
merchant banks operating in Bangladesh.

c) Separation of the management from the ownership at both DSE and CSE

d) Inclusion of the representatives of the listed companies and the investors on the
governing bodies of both DSE and CSE

e) Automation of trading at both DSE and CSE introducing order-driven system re-
placing out-cry system

f) Amendment of the Trust Act, 1882 enabling pension fund and insurance fund
investing in securities market and thereby create demand for securities.

g) Enactment of the Central Depository Act enabling national securities ltd. com- pany
to establish CDS. The implementation of the on-line CDS will in fact avoid problems
of "fake shares" and "short sale" to a great extent.

However, a few important reform measures are still pending. These include, among others:

a) Restructuring Investment Corporation of Bangladesh (ICB) by creating three

The Environment of Capital Market in Bangladesh 21 | P a g e
 subsidiary companies carrying out the function of merchant banking, fund
management and securities brokerage house

b) Divesting government holdings in SOEs and MNCs through securities market

c) Issuing government securities with medium term and long-term maturities on a

regular basis through the securities market.

Thus the period of 2003 to ‘06 can be viewed as a period of consolidation & restoration.

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 4
CHAPTER
Capital Market-Present Scenario

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4.1 Present scenario of Bangladesh CAPITAL MARKET
Albeit Bangladesh economy is not more integrated with the global economies, Global
Financial Crisis 2008 has dented every sphere of Bangladesh. Bangladesh economy has also
been limping since being dented by the blow of financial meltdown. On the one hand,
Bangladesh economy has been gaining benefits from the crisis and on the other hand it has
lost. Because of income declining of developed countries’ citizens low-priced garments of
Bangladesh have been very popular registering more growth in the country’s apparel sector.
But financial collapse in many developed countries slowed down the infrastructural
development especially construction works in Middle East which have pushed many
Bangladeshi workers come back. Remittance inflow has risen but number of workers going
abroad has fallen drastically. In the year 2009-10 a record $11 billon remittance has come to
Bangladesh against $9.76 billion in 2008-09 fiscal year. Country’s foreign currency reserve
hit new record of $11.35 billion recently be- cause of low import expenditure and rising
trend of export earnings. But still 44 per- cent people are under poverty level; the
Government and other concerned organizations should take comprehensive efforts to
eradicate poverty. But to achieve desired level of growth to turn Bangladesh into a middle
income country by 2021, growth rate should be accelerated. To do that more investment in
infrastructure especially power sector, roads and highway, modern and sophisticated port
facilities are badly needed. Cost of doing business should also be reduced along with the
removal of red tapes in commencing business. Instead of eying towards foreign countries,
multi-lateral donors and agencies Government should choose country’s capital market to
raise fund for development projects especially for the construction of Padma Bridge,
elevated express-way and other big projects which will also ensure people’s association in
profitable Government properties. Associating general people in lucrative Government
venture means to create the way of ensuring equitable distribution of wealth and this is
only possible through strong and vibrant capital market. Because of sluggish economic
activities investment has not gotten momentum in recent years but for the sake of rapid
economic growth more savings and investment are also necessary. Another important issue
is that tax to GDP (Gross Domestic Product) is very poor in Bangladesh, which has been
another cause of fiscal deficit in almost every year.

The Government has been regularly depending upon the borrowing both from internal and
external sources. Because of huge Government borrowing from the country’s formal
banking sector private industrial ventures and other commercial set ups have been on
declining trend. Instead of borrowing from banking sources and other foreign lenders
Government should depend on raising fund from the country’s capital market.

The Environment of Capital Market in Bangladesh 24 | P a g e

4.2 Actions required for restoring investors' confidence on the market
Present situation of Bangladesh stock markets needs to be strengthened to provide greater
investors' confidence and to improve market liquidity and competitiveness. The existing
trading and settlement systems need to be addressed for reform. To this end, the issues that
deserve immediate attention are as follows:

The membership of stock exchanges to institutions and corporate sector with

adequate capital is required. Improvement of the flow of information, introduction of
a system of market-maker in addition to the prevailing order-driven system, credible
quicker settlement and the development of over-the counter markets (OCT) for large
green field projects and non-listed securities are the prerequisites.

To redress the problems of the stock markets in Bangladesh, policy prescription

should aim at par to the favorable environment within which the flaws of the market
could be mitigated, activities of hidden consortia would be ineffective and the likely
exposure of investors to various market abuses including market manipulation
should be reduced.

Due emphasis should be given to implement the existing rules and regulations;

Regulatory framework should be adequate for the prevention of un- bridled

speculation, market-rigging and insider trading so that erosion in public confidence
can be contained;

Attempts should be taken to make the present order-driven system of automation

foolproof so as to eliminate the opportunity of manipulating the market.

4.3 Recommendations
Capital market in Bangladesh is now going through a hard time currently as there are some
upheavals in the market and there exists an upsetting condition in the stock markets. But as
per the past occasions, it is evident that our current capital market has a good ground now
for future developments. We should take this opportunity to boost up the market as well as
contribute to our economy. In addition, our mindset needs to be changed regarding earning
profit from the capital market overnight. Foreign investments also need to be increased to
ensure a sound capital and along with this, the government should make an authentic list of
the companies that has credibility and accountability. If we can develop our capital market, it
will definitely enhance our national economy.

The Environment of Capital Market in Bangladesh 25 | P a g e

 5
CHAPTER
Conclusion

The Environment of Capital Market in Bangladesh 26 | P a g e

Developing countries which accounts for 75% of the world's population, have an enduring
need to attract capital and technology to improve their infrastructure and standard of living.
Thus, they look forward to their capital markets as the engine for future growth as its
existence ensures mobilization of surplus funds to the ones suffering from deficit. In
Bangladesh we have a capital market that is yet to be further nurtured to get the fruit out of
it. Without doing this we cannot undergo heavy industrialization and other capital based
development. We must overcome all sort of problems to strengthen our capital market.
Various methods and policies may be adapted regarding this, but the investors’ mindset is
one of the most important thing that must be changed to ensure the development of the
market. If we can strengthen the market properly, it is only then we can have a sound
economy in terms of capital and related developments in our country

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