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Assignment: Why does Bangladesh have no functioning bond
Bonds are defined as fixed income local currency security instruments. The purchaser lends money to the issuer in exchange for regular periodic payments and return of the principal amount at a maturity date. The main categories of bonds are
corporate bonds, municipal bonds, and government treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries". Two features of a bond - credit quality and duration - are the principal determinants of a bond's interest rate. Bond maturities range from a 90-day treasury bill to a 30-year government bond. Corporate and municipals are typically in the three to 10-year range.
The development of a bond market is a crucial growth engine for an economy. Yet Bangladesh remains behind its neighbors, even Nepal, in the percentage of GDP held in bonds. As funds from external assistance are drying up, the country would need long term financing to setup the infrastructure that would let its economy takeoff and elevate a vast majority of the population up from below the poverty line. In the corporate sector, bonds allow firms access to funds from small savers. Ideally, a country’s investment should be equal to its savings. Any gap that exists is a sign that there exists some inefficiency in the market structure. Some of the major reasons behind the bond market not taking off in Bangladesh are outlined below: 1. Government bonds in the form of Savings Certificates, Prize Bonds, T-Bills hold a high rate of return on investment. This discourages people to invest in corporate bonds which are considered to be more risk-averse. Furthermore, governments bonds are not traded on the stock exchange.
2. A vast majority of the debts securities available in the market are nontransferable. This means that bond holders need to hold the bond till maturity, rendering the price of the bond lower. The SOEs get a large portion of their requirement from direct financing by the state-owned banks or foreign donors. This makes a large portion of the banks’ business too. This means the economy is mostly flooded with a lot of loans that are never repaid while sectors that need money are underinvested. The bonds simply cannot compete with these low borrowing rates. 3. The market offerings lack innovation and variability in their reward and issuing schemes. Innovation would probably bring in more investors 4. Fiscal deficit and bad loans mean that there is always a shortage of money supply in the economy to loan out to corporate. This has the two-fold evil of crowding out investment and increasing the interest rates demanded by bond purchasers. 5. There is a shortage of unsecured debentures in the market. On the other hand, trustees have sometimes made controversial rulings as to the ability of the firm to make payments on bonds. This creates insecurity in the mind of the investor. 6. The long-term debt sector is dominated by NCBs. On the other hand, there is only a small presence of NBFIs. 7. Absence of a yield curve means that the interest rates are fixed using unscientific methods. Hence, a proper valuation of the debentures is quite impossible to achieve. This means secondary trading is based on guesswork and not concrete facts 8. No strict guidelines on training and skill requirements of traders in the Stock Exchanges mean that more instinct and less skill goes into the market. In the short term, this can destabilize the market while in the long-term it can lead to loss of market capitalization. 9. The laws governing the debt securities in Bangladesh are vague to say the least. It suffers from a wide array of loopholes. Governments have also often
been reluctant to formulate such laws. Disputes take a long time to settle and arbitration decisions are not accepted. In addition, the court has a number of social and religious barriers towards strictly enforcing certain laws. 10.The SEC and Bangladesh Bank have overlapping roles in controlling the bond and stock markets. In addition, the SEC does not have the ability to pass new laws, it merely has to enforce the sometimes cumbersome age-old laws that need to be peeled out and rewritten. The procedural nature of having the right to issue bonds makes it both time consuming and expensive. In addition, the bond issuer must pay about 7% of the total bond issue in charges and taxes to the government. 11.Loans are often cheaper and organizations have to comply with fewer regulations. 12.Over the years, some bonds have shown woeful performance figures. Investors have sometimes not been able to recover their investments by the sale of assets. Sometimes, the trustee has stated reasons for non-payment of dues to purchasers 13.There are no reputable credit rating agencies in the country with sufficient experience in the field. 14.The strict disclosure policies required by the SEC are often a disincentive to the issuer. 15.Non-institutional buyers cannot take a issuer to money loan court.
List of References
1. International Workshop on the Development of Bond Market in Bangladesh www.bangladesh-bank.org 2. Current status & overview of the debt market in Bangladesh, AIMS of Bangladesh
3. http://www.freeonlineresearchpapers.com/bond-market-bangladesh 4. http://www.ifc.org/ifcext/publications.nsf/AttachmentsByTitle/Building_Local_Bonds_Chp.14/$FILE/Building_
5. Addressing critical market impediments for securitization in Bangladesh Ziaul Hassan Siddiqui.