JAGAN

NATH
UNIVE
RSITY

Assingment On : Development of Government bond market in Bangladesh.

Submitted to:
Dr. Md. Monzur Morshed Bhuiya
Professor and Chairman,
Department of Finance,
Jagannath University.

Submitted by:
Group No : 05
Course title: Financia market and institution,
MBA (Evening) program ,
Jagannath University.

Date of Submission: 01 December, 2019

Faculty of Business studies,
Jagannath University.
SERIA ID NO NAME OF WORK ASSESSMENT
L THE LOAD WRITE PRESENT TOTAL
NO STUDENT UP(15) -ATION MARK
(5) S (20)
01 M- Yeasmin Akter 20%
19160203303
02 M- Fahima Akter 20%
19160203305
03 M- MD. Najmul 20%
19160203312 Hayder Munna
04 M- Fatema Aktar 20%
19160203319 Jidna
05 M- Sourav Chandro 20%
19160203337 Sarker
TOTAL 100%

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ACKNOWLEDGEMENT
We would like to start this report by acknowledging our gratefulness to the Almighty . We
would like to express heartfelt gratitude to every single person who has assisted us in the
preparation of this report. We wish to thank them for their support, guidance and belief in
every step.

We would like to acknowledge our indebtedness and render our warmest thanks
to our supervisor, Dr. Md. Monzur Morshed Bhuiya, Professor & Chairman, Department of
Finance, Jagannath University, who made this work possible. His friendly guidance and
expert advice have been invaluable throughout all stages of the work. , we are grateful to
Jagannath University for allowing us the opportunity to research about an area and gained
valuable information while doing so.

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SERIAL PAGE
CONTENT
NO. NO.
INTRODUCTION
1. 01
OBJECTIVES
2. 01
SCOPE OF THE STUDY
3. 01
LIMITATION OF THE STUDY
4. 01
METHODOLOGY OF THE STUDY
5. 01
Collection of Primary Data
6. 01
Collection of Secondary Data
7. 02
ANALYSIS OF DATA
8. 02
STATUS OF BOND MARKET IN BANGLADESH
9. 02
SIZE AND COMPOSITION OF THE BANGLADESH MARKET IN
10. COMPARISON WITH SOUTH ASIAN COUNTRIES 02

TYPES OF BONDS
11. 03
GOVERNMENT BONDS
12. 03
GOVERNMENT BOND TYPES
13. 04
TREASURY BOND
14. 04
TREASURY NOTES
15. 04
TREASURY BILLS
16. 04
PROCESS OF COLLETING GOVERNMENT BOND
17. 04
PRESENT SITUATION ON GOVERNMENT BOND
18. 04
MARKET OF GOVERNMENT BOND
19. 06
Growth of Treasury Bond and Corporate Bond
20. 07
ADVANTAGES OF GOVERNMENT BONDS
21. 07
22. DISADVANTAGES OF GOVERNMENT BONDS 07

iv
 DEVELOPMENT OF GOVERNMENT BOND
23. 07
PROSPECT OF DEVELOPING BOND MARKET
24. 08
25. READY FOR TAKE-OFF 08
REQUIRED REGULATORY ENVIRONMENT
26. 09
CHALLENGES
27. 09
WAY FORWARD
28. 09
29. CONCLUSION 11

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EXECUTIVE SUMMERY
Bond market plays a vital role in economic development of a country. Bond market provides
long term finance to issuers by creating alternative source of finance through stock market,
besides providing stable source of income to investors against volatile stock market.
Governments typically issue bonds in order to raise capital to pay down debts or fund
infrastructural improvement .The Development of bond market is a precondition for the
development of stock market.

This study is about how government bonds in Bangladesh are developing, what are the future
aspects and what are the present situation, the barriers and way of overcome from that.

Suggestions have also been provided based on the specific problems in the bond market such
as improving financial literacy, encouraging and promoting investments in bonds. If
implemented accordingly, the Bangladesh bond market will be likely to flourish in the
upcoming years.

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INTRODUCTION
The development of the economy of any country depends mostly on the establishment of
sound, effective and efficient financial system of that country. A well-developed financial
system plays an important role in accelerating economic growth by mobilizing savings and
facilitating investment in an efficient manner. Financial market is composed of different
markets- Money Market, Capital Market, Derivative Market etc.  Bond market is a part of
capital market. The bond market is often called the debt market or credit market is a financial
marketplace where investors can trade in government-issued and corporate-issued debt
securities. Governments typically issue bonds in order to raise capital to pay down debts or
fund infrastructural improvements.  The Development of the bond market is a precondition
for the development of the stock market. The Treasury bond market holds the major share in
the bond market of Bangladesh. The present study has been undertaken in order to identify
the influencing factors of growth and development of government bond market. 

OBJECTIVES
The principal objective of the study is to evaluate present bond market status, how the bond
market is developing, what will be the situation in future in Bangladesh. To accomplish this
principal objective, following specific objectives have been covered: 
 To highlight the Bond Market status of Bangladesh. 
 To highlight the benefits of Government bond market for the parties to the Bond
Market. 
 To identify the problems that impedes the development of Government Bond Market
in Bangladesh. 
 To suggest some important policy measures for the development of Government
Bond Market in Bangladesh.

SCOPE OF THE STUDY

The report describes constraints for developing a bond market and the role of Bangladesh
Bank in managing the domestic debt for Government of Bangladesh. The report also attempts
to analyze the sustainability of debt portfolios of Bangladesh. It mainly focuses on domestic
debt. Information on external debt is only used for checking the sustainability of public debt.

LIMITATION OF THE STUDY

Certain data set pertaining to government borrowing especially for state owned enterprisesis
unavailable. Not all data are verified/ validated due to data characteristics.

METHODOLOGY OF THE STUDY

The study has been both theoretical and empirical one. Both primary and secondary data have
been used.

 Collection of Primary Data

We have prepared a questionnaire on the basis of survey of existing literature as well as of
discussions made with our group members & Reflection of our honorable Professor briefing.

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  Collection of Secondary Data
The secondary data has been collected from different sources- Annual Reports of Bangladesh
Bank, World Bank Reports, published research journals, published books, websites, etc.

ANALYSIS OF DATA
Analysis of data is a method of reducing a large number of variables (tests, scales, items,
persons and so on) to a smaller number of presumed underlying hypothetical entities called
factor (Fruchter, 1967). It tries to simplify and diverse relationship that exist among a set of
observed variables by uncovering common dimensions or factors that link together the
seemingly unrelated variables and consequently provides insight into the underlying
structures of the data( Dillon and Goldstein, 1984). The purpose of factor analysis is mainly
two folds: data reduction and substantive interpretation. In the present study, „Principal
Components Varimax Rotated Method‟ of factor analysis has been used in order to identify
the factors influencing the development of Bond Market in Bangladesh. Principal component
factor explains more variance that the loadings obtained from any method of factoring. In
order to define the group membership, an algorithm may be used to uncover a structure
purely on the basis of the correlation structure of the input variables.

STATUS OF BOND MARKET IN BANGLADESH

Bond Market is composed of Treasury bond, Municipal Bond and Corporate Bond. This is of two
kinds- Organized and OTC markets. There are various types of bond products depending on
provisions, maturities, coupon rate, options, convertibility, etc. Bond Market in Bangladesh is
dominated by treasury debt securities. It has now only one corporate bond; but does not have any
municipal bond/debenture. In recent years, around 70 percent of the domestic savings are held in the
form of bank deposits, while only 30 percent are investments in the debt market which is entirely
dominated by government instruments. There hardly exists a corporate bond market in the country; it
has a debenture market with only a small number of well-known issuers.

SIZE AND COMPOSITION OF THE BANGLADESH MARKET IN

COMPARISON WITH SOUTH ASIAN COUNTRIES
The size, access, efficiency and stability of the bond market across countries may by used to judge the
state of the bond market development in Bangladesh. Compared with the neighboring countries,
Bangladesh bond market is rather small and has played a limited role in its economy. The survey of
existing Publications shows that Bangladesh bond market represent the smallest in South Asia,
accounting for only 12% of the country's gross domestic product (GDP).

It is surprising that Bangladesh which is much larger than Nepal in term of population, land area and
other measures, has the smallest bond market in the region. India’s bond amounted to 35% of GDP
while Nepal’s domestic bonds were 15%.

As a percent of GDP, South Asian equities account for 77%, banking assets around 61% and bonds
for only 34%. Sri Lankan bond market accounts for almost 51% of its GDP, comprising entirely of
government bonds.

As the country’s bond market remains less- developed, Bangladesh should improve the efficiency of
the primary market for government Securities by gradually increasing the share of marketable
Government Securities. Thereby rising liquidity in the secondary market.

2
Since the bond market of Bangladesh is still at initial stage of development. The bond market in
Bangladesh is characterized by low base market participants, non-diversified products, lack of tailor
made Securities etc.

TYPES OF BONDS

Bonds

Issued By Municipal Corporate

government Bonds Bonds
GOVERNMENT BONDS
A government bond is a bond issued by a national government, generally with a promise to pay
periodic interest payments called coupon payments and to repay the face value on the maturity date.
The aim of a government bond is to support government spending. Government bonds are usually
denominated in the country's own currency, in which case the government cannot be forced to default,
although it may choose to do so. If a government is close to default on its debt the media often refer to
this as a government debt crisis.

The terms on which a government can sell bonds depend on how creditworthy the market considers it
to be. International credit rating agencies will provide ratings for the bonds, but market participants
will make up their own minds about this.

The primary market of government securities is regulated by the Ministry of Finance and Bangladesh
Bank-the central bank of the country. The government securities are traded in two markets–money
market through dealers, and the OTC segment of DSE. The government securities traded in money
market is regulated by Bangladesh Bank; and that traded in the stock exchange is regulated by SEC.
Primary dealer of government securities are regulated by Bangladesh Bank. In Bangladesh bond
market fixed income Securities first time came into existence in 1987 with the floatation of debt by 2
companies. Government treasury bond started in December 2005 at the Dhaka Stock Exchange (DSE)

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GOVERNMENT BOND TYPES 

Issued By
Government

Treasury notes (More

Treasury Bond (More Treasury bills (less
than 1 years and less
than 10 years) than 1year)
than 10 years)

TREASURY BOND 
Treasury bonds pay a fixed rate of interest every six months until they mature. They are
issued in a term of 30 years.
Bangladesh has 2, 5, 10, 15 and 20 years maturities on T – Bonds.

TREASURY NOTES

Treasury notes, sometimes called T-Notes, earn a fixed rate of interest every six months until
maturity. Notes are issued in terms of 2, 3, 5, 7, and 10 years.

TREASURY BILLS
These are government bonds or debt securities with maturity of less than a year .Short-term
(usually less than one year, typically three months) maturity promissory note issued by a
national (federal) government as a primary instrument for regulating money supply and
raising funds via open market operations.
T bills has 91, 182 and 364 days maturities on the Bangladesh.

PROCESS OF COLLETING GOVERNMENT BOND

Purchase and sell government bonds at any branch of any Bank and Post Offices. To claim
any government bond need to fill up an application form available at any bank or post office. 
Also need to address the General Manager respective branch in the Bangladesh Bank.
Prize bond and Shanchaypatra are two facilities for local Bangladeshi citizens.
Non Resident Bangladeshis have numbers of opportunities to invest their money in different
bonds to earn attractive profit like premium bond, investment bond etc.

PRESENT SITUATION ON GOVERNMENT BOND

The present study has shown the growth and development of Treasury bond with different
maturities. It has been found from the analysis that the total outstanding of Treasury bond
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stood Tk.372.9 billion in 2019 and the market capital stood Tk. 357313 million in 2019. The
average market capital is Tk. 88826.77 million. The growth rate in market capital has been
found on the declining trend. The share of government bond to total market capitalization has
been found 18.93 percent in 2019 and the average share of government bond to total capital is
13.715%. The growth in share of government bond to total market capital has been increasing
over the study period with an exception in 2019. These imply that the size of Treasury bond
market is reasonably large. This also indicates that the government recourses to the issue of
more number of treasury bonds with different maturities for borrowings in order to finance
the national budget deficit amongst important reasons. It has also been found that institutional
investors-banks and insurance companies are the dominant players in Treasury bond market.
Bangladesh’s Government Treasury Bond Rate: 10 Years data was reported at 8.930 % pa in
Oct 2019. This records a decrease from the previous number of 9.260 % pa for Sep 2019.
Bangladesh’s Bangladesh Government Treasury Bond Rate: 10 Years data is updated
monthly, averaging 10.005 % pa from Dec 2003 to Oct 2019, with 156 observations. The
data reached an all-time high of 12.500 % pa in Mar 2007 and a record low of 5.950 % pa in
Feb 2016. Bangladesh’s Bangladesh Government Treasury Bond Rate: 10 Years data remains
active status in CEIC and is reported by Bangladesh Bank.

Rankings of the customer satisfaction factors 

Factor Average Rank

Score

I Financial and Regulatory environment factor 2.53 3

II Investment and liquidity factor 2.28 6

III Trade and Reporting Factor 2.72 1

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 I Standardization Factor 2.63 2
V

V Term Structure Factor 2.32 5

V Tax at source Factor 2.49 4

I

The ranking show that factors III: Trade and Reporting Factor is the most important factor
that leads the growth and development of Treasury bond market in Bangladesh. This factor
includes variable Clearing and settlement system, Accounting and audit standard, and the
bond market- adequate number of dealer. This implies that the development of Treasury bond
market give emphasize on number of dealers and clearing system. So, the trade and reporting
related variables are key indicators of Treasury bond market development in Bangladesh.
The second most important factor is the Standardization Factor. This factor includes variables
such as suitable size of market lot and benchmark interest rate. These variables have been
found working as stimulates to the development of bond market in Bangladesh. The third
important factor is the Financial and Regulatory environment factor which includes Tax
treatment: fiscal incentive facilitates sustaining and stable macroeconomic environment, legal
and regularity framework –favorable legal environment, transparent government policy,
special incentives for primary dealers, and adequate supply in the secondary market. Other
important factors are tax at source factor, term structure factor, investment and liquidity
factor.

MARKET OF GOVERNMENT BOND 

Average market capital of govt. bond Tk. 1475.13 million; whereas that of Treasury bond
stood Tk. 88,826.78 million. The ratio of market capital of debenture to market capital of
Treasury bond Analysis of Relationship between Corporate Bond market and Treasury Bond
Market .The study has attempted to study the relationship between corporate bond market and
Treasury bond market with respect to growth in market capital and that in market share. So, it
has taken null hypothesis that there is no significant relationship between corporate bond
market and Treasury bond market. In view of this, the result of coefficient of correlations has
been exhibited in the following

Growth of Treasury Bond and Corporate Bond

Factors Coefficient Significant ( One 

of  tailed)
Correlation

Growth of Market capitalization of treasury  0.586 0.58

bonds - Growth of Market capitalization of 
corporate bonds and debentures

Growth of Share of treasury bond to total 0.561 0.25

market capitalization - Growth of Share of
corporate bond and debenture to total
market

6
 capitalization

It is evident from the above analysis that the coefficient of correlation between Growth in
Market Capital (GMC) of Treasury Bond and GMC of Corporate Bond is 0.585; and between
Growth in share of Treasury Bond and Growth in Share of Corporate bond is 0.561. They
indicate that corporate bond market and treasury bond market are positively correlated.
Besides, the coefficient of correlations between two bond markets has been found significant
at 10% and 5% levels respectively. This leads to the rejection of null hypothesis. This results
lead researchers to conclude that there exists a significant relationship between corporate
bond market and Treasury bond market. This implies that any change in any of the bond
markets influence each other.

ADVANTAGES OF GOVERNMENT BONDS

Government bonds have the following advantages

 Risk is usually relatively low compared to equities, as interest and principal will be
repaid provided the relevant governments do not default on their bonds.
 Bonds can be an excellent diversifier, as they frequently perform well when other
asset classes perform badly.
 Bonds are liquid and early redemption is easy, as bonds are bought and sold on the
open market every day.

DISADVANTAGES OF GOVERNMENT BONDS

Government Bonds have the following disadvantages

 The interest paid on bonds or the ‘yield’ can be low.

 Bonds can lose value on the open market if interest rate or inflation
expectations rise. This is because higher interest rates or higher inflation make
the fixed interest paid by bonds less attractive.
 Long run returns tend to be lower than for riskier assets such as equities and
property. However, bond returns tend to exceed cash deposits over long
periods.
 Bonds can be vulnerable if the government that issues them enters a fiscal
crisis that raises doubts about whether debt obligations will be honored.

DEVELOPMENT OF GOVERNMENT BOND

Bonds have been a stable source of finance for companies and government throughout the
world.  The market capitalization of bond in USA, China, Malaysia, Indonesia and Vietnam
are respectively around 144 per cent, 68 per cent, 98 per cent, 19 per cent, and 23 percent of
their GDP (gross domestic product); whereas it is only about 2.4 per cent of GDP in
Bangladesh.

The absence of a sufficiently large corporate bond market is resulting in an overly large
corporate lending by the banking system and creating maturity mismatch in the market. As a

7
result, the over-sized banking system becomes fertile ground for crony capitalism, resulting
in lax lending criteria and relaxed investment standards by companies.

As a consequence, it leads the whole financial sector towards poor accounting transparency,
regulatory imperfections, moral hazard problems, and, in too many cases, complicity and/or
inaction tends to delay the necessary corrective measures until a genuine crisis is in full
bloom. If we look at banking system of Bangladesh it is observed that the entrepreneurs are
much interested in taking loans from the commercial banks. But the capacity of the banks
with short-term tenure funds is already narrowed to provide long-term finance. Banks are
collecting mostly short-term (3 months to less than 1 year) liabilities to fund long-term
financial need of their customers. If we go through the deposit structure of the banking sector,
we would see that around 70 per cent deposits are within 1 year bucket, 25 per cent are more
than 5 years bucket and rest are in 5 years and above bucket. The presence of short-term
liabilities and relatively long-term assets in the books of the banks create a huge maturity
mismatch in the banking sector. Commercial banks are always trying to address the maturity
mismatch in their books by booking more and more deposits. Sometimes this creates uneven
competition in the market which affects the interest rates. As a result, both liquidity and
interest rate volatility is observed in the market which affect the profitability of the banking
sector as well as other components of the financial sector, particularly the capital market.

In the absence of the long-term bond market, banks are financing businesses and households
for shorter than actually needed tenors creating overdue and asset quality impairments in
books of lenders, which is reflected in the recent uptrend in non-performing loans (NPLs) in
the banking and financial institutions. Such a deficient market structure creates capital and
money market volatility and deters the development of derivative markets required for
effective risk management in the financial systems. The lack of a well-functioning bond
market also blunts the effectiveness of monetary policy operations: it weakens the
transmission of policy measures and thereby prevents the desired effect on the real economy .

PROSPECT OF DEVELOPING BOND MARKET

There are many factors in our economy to boost an effective bond market; some of the
important factors are:

 Consistent GDP growth rate,

 Government budget deficit,
 Significant role of the private sector in credit disbursement,
 Declining ability of state-controlled banks to fund industrial loans,
 Moderate inflation and exchange rate,
 Huge fund of insurance companies,
 Increasing investors’ confidence in the capital market, and
 Benefits of bond market participants.

READY FOR TAKE-OFF

Despite earlier setbacks, the bond market in Bangladesh is ready for a rapid take-off. It is
inspiring to know that Pran Group and Ashuganj Power Limited have come up with two debt
securities. Additionally, banks have, although all are in private placement, issued a total of 57
subordinate bonds amounting to Tk 230 billion (23000 crore) since 2019to insert capital
under tier II.

8
Large infrastructure projects and the housing sector are coming up as major destinations for
finance. Capital-intensive large industries and service units are increasingly being set up. A
huge amount of long-term debt capital, alongside equity capital, is necessary to finance this
inevitable change of the economy.

REQUIRED REGULATORY ENVIRONMENT

To develop a strong corporate bond market in Bangladesh, an important prerequisite is to

ensure a fully functioning regulatory body. There should be coordination on a regular and
collaborative basis to address the accountability, transparency and compliance issues of the
bond issuing agency and their trustees. Also, proper regulation of stock brokers, sub-brokers,
share transfer agents, merchant bankers, underwriters, portfolio managers, investment
advisers, and other intermediaries who are associated with the securities market is a priority.

Currently, service-holders of government, university and other autonomous bodies are

entitled to get retirement pension. There are also private funds and gratuity schemes for the
corporate sector, banks or nongovernmental organizations (NGOs). Many who work in other
sectors at home and abroad and contribute to the development of the country during their
working life are being expected to be included under the pension system or retirement benefit
schemes in future. It is, therefore, believed that accumulated amount of pension funds will be
enormous in the future.

CHALLENGES

The major functional challenges in developing an effective bond market can be grouped as
supply side constraints and demand side constraints. Some of the supply side constraints are

 Corporate borrowers prefer to rely for fund on banks other than bond market to avoid
the need to comply with disclosure and strict governance norms of market
 Lack of benchmark yield for pricing of bonds
 High cost for launching new debt products and high transaction cost of bond-
registration fee, stamp duties, annual trustee fees, and ancillary charges
 Government bond comprises 98 per cent of the existing market but are very
inconsistent in maintaining market availability
 Low free float - Total bond outstanding BDT1617.68 billion & SLR requirement of
banks & FIs BDT1132.29 billion
 Lack of varied corporate debt supply
 Absence of vibrant secondary market
 On the other hand some of the demand side constraints are
 Investor’s poor confidence as issuers, market, and legal and regulatory framework
 The investor base:  Banks and a few institutional investors like life insurance
companies, provident funds. No long-term funds like pension fund, mutual funds for
bond investment are available
 Banks and financial institutions (FIs) are captive investors in government securities as
a result of their need to comply with mandatory reserve requirement or investment
restriction
 No vibrant secondary market operation

WAY FORWARD

9
In this backdrop, it now calls for policy and market reforms bringing in new long-term
savings; and creating some liquidity augmenting mechanism at the long-term end as well as
driving the borrowers and investors towards the capital market. In order to achieve this we
should consider following policy measures

 Introducing long-term savings vehicles, like defined contribution individual

retirement/pension funds regulated by the government
 Deepening life insurance penetration
 Promotion of loan securitization by concerted BB-BSEC (Bangladesh Bank-
Bangladesh Securities and Exchange Commission) initiative of streamlining the issue
processes and paring down the issue costs
 Activation of market in mortgage-backed securities
 Ensuring the proper legal and regulatory frameworks
 Reducing corporate dependency on banks for long-term financing
 Developing market infrastructure by upgrading the depository, clearing, and
settlement arrangements
 Creating an enabling legal and regulatory framework, and strengthening the credit
rating industry.
 Ensuring sufficient supply of government debt securities to enhance the secondary
market operation and its liquidity which will help to develop a market-based yield
curve
 Bangladesh Bank  should look for alternatives of T-Bill (Treasury Bill) and Bonds for
maintaining SLR (statutory liquidity ratio) so that market float can be created
 BSEC and NBR (National Board of Revenue) should take necessary steps to reduce
issuing costs, tapping potential new issuers and creating an enabling environment for
asset-backed securitization and infrastructure bonds
 Need market makers:  For non-corporate bonds, there may be a government-
sponsored market player likes ICB (Investment Bank of Bangladesh) and for
mortgage bonds, HBFC (Bangladesh House Building Finance Corporation) can play
that role
 BSEC/DSE (Dhaka Stock Exchange) may create a pool of market maker for corporate
bonds.

CONCLUSION

The government bond market in Bangladesh is limited to institutional investors (banks and
insurance companies).This paper discusses the development and market position of
government bond in Bangladesh and also identifies the  influencing factor of government
bond market in Bangladesh, such as Tax treatment : Fiscal incentive, Facilitates sustaining
and stable macroeconomic environment, legal and regulatory framework- favorable legal
environment, transparent government policy, Special incentives for primary dealers, and
adequate supply in the secondary market, of Investment in Treasury bond market, Rating
Agencies- Best Rating grade, Awareness of market participants and investors, Clearing and
settlement System, Accounting and audit standard, the bond market- adequate number of
dealers etc.
Along with strengthening governance and improving disclosure and transparency in business
transactions to create confidence of investors and issuers alike, the development of an
effective inter-bank money market and a benchmark money market rate to assist secondary
trading should be given priority. In principle, efficient bond markets must encompass a

10
mobile primary market, a fluid secondary market, transparent rules and regulations, a
conducive tax system, market rules and awareness, well-functioning settlement and custody
systems, and a trustworthy rating system. To this end, regulators like SEC, Bangladesh Bank,
and Ministries of Finance and Commerce and organizations like FBCCI should support
research on different aspects of bond market development in order to devise appropriate
policies and implement supportive measures.

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