UNDERDEVELOPED BOND MARKET IN BANGLADESH: REASONS AND MEASURES TO IMPROVE

by

Md. Abid Hossain

A project submitted in partial fulfillment of the requirements for the degree of Professional Master in Banking and Finance

E amination committee!

"r. #undar $enkatesh %&hairperson' "r. Arun (umar )opalas*amy %&o+chair' "r. #ununta #iengthai %member'

,ationality! Bangladeshi Pre-ious "egree! Master of Business Administration .slamic /ni-ersity (ushtia0 Bangladesh #cholarship "onor! Bangladesh Bank

Asian .nstitute of 1echnology #chool of Management 1hailand May 2342

Acknowledgement A lot of effort and study ha-e been put in to make this report a reality. 1his *ould not ha-e been possible *ithout the genuine support and assistance pro-ided by the people *hom . approached during the -arious stages of *riting this report. . am thankful and grateful to all the employees of Bangladesh Bank0 #ecurities and E change &ommission %#E&' and "haka #tock E change %"#E' for their help. . also recall0 *ith gratitude0 the patience they sho*ed during my frequent interruptions in their regular jobs for ans*ering my -arious queries. Here . *ould like to con-ey my special thanks to Mr. Pro-ash &handra Mallick0 "eputy )eneral Manager0 E penditure Management "epartment of Bangladesh Bank for his all out support throughout the *hole period of this internship. . *ould like to especially thank "r. Arun (umar )opalas*amy0 $isiting Professor0 Asian .nstitute of 1echnology0 Bangkok0 1hailand5 *ho is my academic super-isor. 6ithout his kind guidance0 this report *ould not ha-e been possible.

ii

A !t"#ct 1here are a lot of impediments to the de-elopment of bond market in Bangladesh. 1he bond market is still at a budding stage. .t is attributed by a limited supply of debt instruments0 especially long+term instruments. &onsequently0 the reliable benchmark for long+term bonds or debentures does not e ist. 1he market is illiquid and trading is motionless. .t is slo*ed do*n by the relati-ely high interest rate bearing risk+free national sa-ings scheme0 though interest has been reduced a little bit in recent years. .n addition0 the issuance process of bond is burdensome and costly0 *hich becomes a disincenti-e to the de-elopment of effecti-e bond market. Finally0 the in-estor base has to be e tended in parallel *ith a suitable in-estor education. 7ecommended measures must be undertaken for de-eloping the bond market.

iii

T# le o$ %ontent! %&#'te" T(tle Ackno*ledgement Abstract 1able of &ontents 8ist of 1ables 8ist of Figures 8ist of Abbre-iations ) Int"od*ct(on 4.4 Background 4.2 Problem #tatement 4.9 #cope 4.: ;bjecti-es 4.< Methodology 4.=8imitations 4.> 7eport 8ayout + L(te"#t*"e Re,(ew 2.4 .ntroduction 2.2 "efinition of Bond 2.9 1ypes of Binds 2.:Features of Bonds 2.< Bond Market Participants 2.= 7isks Associated *ith Bonds 2.> Factors Affecting the Bond Market "e-elopment 2.? Prerequisites for "e-elopment of Bond Market Bond M#"ket (n B#ngl#de!& 9.4 History 9.2 &onstraints on "e-elopment of Bond Market 9.9 &orporate "ebt market 9.:)o-ernment "ebt Market . Second#"/ M#"ket o$ Go,e"nment Sec*"(t(e! :.4 History :.2 Primary "ealers #ystem :.9 Money Market ;perations :.: Money Market .ndicators :.< "ebt Portfolio of Bangladesh 0 1(nd(ng! <.4 #tatus of Bangladesh Bond Market <.2 Measures to .mpro-e Bangladesh Bond Market <.9 &onclusion 7eferences

P# ge i i i i i 4 2 2 9 9 : : < = = ? @ @ 4 3 4 2 4 9 4 < 4 > 4 ? 4 @ 2 4 2 9 2 2 > 2 ? 9 3 9 9 9

i-

L(!t o$ T# le! T# le T(tle P#ge 1able 2.4 $ariables and Effects on "e-elopment of Bond market in an Economy 1able 9.4 .ssue of &orporate "ebt #ecurities in Bangladesh 1able 9.2 .nterest 7ate on #a-ings Products by #ource and Maturity 1able 9.9 .nstruments A-ailable in Bangladesh 1able :.4 7ate of /nder*riting ;bligations 1able <.4 #iAes of #ome Asian Bond Markets 1able <.2 Finance .ndicators for #outh Asian &ountries 1able <.9 .ndicators of )o-ernance0 #outh Asia 4 3 4 : 4 > 4 > 2 2 ? 2 @ 2 @

L(!t o$ 1(g*"e! 1(g*"e Figure 2.4 Figure 2.2 Figure :.4 Figure :.2 T(tle P#ge #implified form of Financial Market Major 1ypes of Bonds Primary Bield &ur-e for 1+Bills Primary Bield &ur-e for B)1Bs < > 2 = 2 =

-i

L(!t o$ A
BB B"1 B)1B B;P &"B8 &77 "M" "PA "#E &#E "-P EF1 EM1 E7" FABA F&B F" F". FC Market FB )"P ),. );B .&B .P; .7" MP" ,BF. ,&B ,.B ,.1A ,#" P&B P" 7EE7 7EP; #&B #87 #1P 1+Bills 1+Bonds BB B"1 B)1B

"e,(#t(on!
! Bangladesh Bank ! Bangladesh 1aka ! Bangladesh )o-ernment 1reasury ! Balance of Payment ! &entral "epository Bangladesh 8imited ! &ash 7eser-e 7equirement ! "ebt Management "epartment ! "ebt Portfolio Analysis ! "haka #tock E change ! &hittagong #tock E change ! "eli-ery -ersus Payment ! Electronic fund transfer ! Electronic Money 1ransfer ! Economics 7elations "i-ision ! Finance and Budgets Accounts Branch ! Foreign &ommercial Bank ! Finance "i-ision ! Foreign "irect .n-estment ! Foreign E change Market ! Financial Bear %FB43 means! 2343+44' ! )ross "omestic Product ! )ross ,ational .ncome ! )o-ernment of Bangladesh ! .n-estment &orporation of Bangladesh ! .nitial Public ;ffering ! .nternal 7esources "i-ision ! Monetary Policy "epartment ! ,on+Bank Financial .nstitution ! ,ationaliAed &ommercial Bank ! ,ational .n-estment Bond ! ,on+resident .n-estorDs 1aka Account ! ,ational #a-ings "irectorate ! Pri-ate &ommercial Bank ! Primary "ealer ! 7eal Effecti-e E change 7ate ! 7e+purchase Agreement ! #tate+;*ned &ommercial Bank ! #tatutory 8iquidity 7equirement ! #traight through Processing ! 1reasury Bills ! 1reasury Bonds ! Bangladesh Bank ! Bangladesh 1aka ! Bangladesh )o-ernment 1reasury Bonds

-ii

&hapter 4 Int"od*ct(on )2) B#ckg"o*nd 1he financial sector is a crucial sector of any economy. A countryDs business en-ironment0 in-estment0 economic prospects0 social dimensions e-en po-erty are affected by financial market. 1he a-ailable -ast empirical and analytical literature suggest that in addition to other economic factors0 the performance of long term economic gro*th and *elfare of a country are related to its degree of financial sector de-elopment. "e-eloped countriesD e perience suggests that strong go-ernment bond market creates fa-orable en-ironment for the de-elopment of an efficient corporate bond market although it is not al*ays essential for a country to de-elop a go-ernment securities market. 1he financial markets0 pi-otal point of financial sector0 e ecute a crucial role *ithin the global economic system such as attracting and allocating sa-ings0 setting interest rate and disco-ering the prices of financial assets %7ose0 2339'. A *ell di-ersified financial sector is highly dependent on the e treme collaboration of financing from equity market0 bond market0 and banks 2 1he go-ernment bond market forms the backbone of a modern securities market in both de-eloped and de-eloping countries. Bangladesh has not been blessed *ith the contribution of both &orporate and )o-ernment bonds and consequently e periences the poor economic gro*th. 6ith the current financial structure0 characteriAing the dominating presence of commercial banks0 particularly the #tate ;*ned &ommercial Banks %#&Bs'0 the debt market of Bangladesh is -ery small relati-e to other #outh Asian countries amounting only <.< percent of countryDs )"P %Mujeri and 7ahman 233?'. .t is in the light of abo-e perspecti-e5 this report seeks to e plore some prerequisites to a sustainable bond market by studying a-ailable literature0 especially for the )o-ernment segment0 and putting some instructions for the de-elopment of Bangladesh bond market. Ho*e-er0 the objecti-es of this project are to put essential prerequisites to the de-elopment of bond marketing an economy in general and to recommend some *orthy lessons for bond market de-elopment of Bangladesh. )2+ P"o lem St#tement 1he issue of o-erall debt securities market has long been a foremost concern for policy makers in Bangladesh. High go-ernment debt stems from unrelenting budget deficit *hich in turn has a significant negati-e effect on the economy. Bangladesh is a poor country *ith -ery lo* per capita income %/# E>33'. Historically the country has been reliant on e ternal debt for de-elopment. 1he flo* of e ternal debt in the recent past has been decreasing increasing the significance of domestic debt many folds. Bangladesh Bank plays an important role in mobiliAing domestic debt on behalf of )o-ernment of Bangladesh %);B'. 1he finance ministry in collaboration *ith Bangladesh Bank assesses the needs of go-ernmentDs finances5 prepare the auction calendar for go-ernment securities. Bangladesh Bank %BB' acts as the banker and debt manager to )o-ernment of Bangladesh %);B'. BBDs role as a debt manager in-ol-es raising borro*ings for );B as and *hen required. 1he process of debt creation starts *ith automatic monetiAation.

Both in theoretical literature and in practice by most countries0 it is considered desirable to keep fiscal and monetary operations distinct. ,ot only in de-eloped countries0 but also most of the Asian countries especially in the neighborhood of Bangladesh ha-e acti-ely pursued de-elopment of debt markets not only to impro-e efficiency of financial system0 but also for a more effecti-e and cheaper borro*ing for the )o-ernment in the medium to long term. .t is necessary to analyAe the composition of go-ernment debt to identify possible risks. .n addition it is also necessary to find out the impact of go-ernment borro*ing in macroeconomic conte t of the country. 1his report has been prepared to e plore these areas of debt management. )2- Sco'e 1he report describes constraints for de-eloping a bond market and the role of Bangladesh Bank in managing the domestic debt for )o-ernment of Bangladesh. 1he report also attempts to analyAe the sustainability of debt portfolios of Bangladesh. .t mainly focuses on domestic debt. .nformation on e ternal debt is only used for checking the sustainability of public debt. )2. O 3ect(,e! 1he main objecti-e of this study is to contribute to de-eloping an effecti-e bond market and to e plore the role of BB in efficient domestic debt management in Bangladesh. 1he specific objecti-es of this study are! ii' 1o identify the specific characteristics of bond market in Bangladesh. iii' 1o identify the role of Bangladesh Bank in effecti-e domestic debt management. i-' 1o estimate the current debt composition of )o-ernment of Bangladesh -. 1o identify the constraints and to tackle the problems in order to enhance the de-elopment of bond market and -i' 1o make recommendations for the de-elopments of the bond market. )20 Met&odolog/ Both the primary and the secondary data are used to make the report. 1hey are mentioned belo*! P"(m#"/ D#t# Most of the primary data are collected from Bangladesh Bank %BB'0 #ecurities and E change &ommission %#E&'0 "haka #tock E change %"#E' and &entral "epository Bangladesh 8imited %&"B8'. #ome key personnel are inter-ie*ed to collect necessary information. Second#"/ D#t# 1he secondary data are collected from the follo*ing sources! F "ebt Management "epartment0 Bangladesh Bank %BB'. F 7esearch publications from Policy Analysis /nit0 BB. 2

Economic 7elations "i-ision0 Ministry of Finance0 )o-ernment of Bangladesh %);B'. F Finance "i-ision0 Ministry of Finance0 );B. F "onor publications. F )o-ernment publications. F ,e*spaper clippings. F 6ebsite materials. An#l/t(c#l $"#mewo"k4 An#l/!(! tec&n(5*e! 1he report is mainly descripti-e in nature. #ustainability of debt is analyAed based on some debt ratios and market risk indicators. )26 L(m(t#t(on! &ertain data set pertaining to go-ernment borro*ing especially for state o*ned enterprises is una-ailable. ,ot all data are -erifiedG -alidated due to data characteristics. )27 Re'o"t L#/o*t F F F F F &hapter 4 gi-es background0 scope0 methodology0 objecti-e and limitations of the report. &hapter 2 describes the definition0 types0 features0 risks and participants of bond market &hapter 9 states bond market history of Bangladesh and constraints to de-elop the market. &hapter : highlights secondary market of )o-ernment securities0 primary dealer system a money market operation and debt portfolio of Bangladesh. .n chapter < findings and recommendations are made.

&hapter 2

L(te"#t*"e Re,(ew +2) Int"od*ct(on Economists consider financial markets as a primary pillar supporting and stimulating economic gro*th and also in setting the -elocity of gro*th. 1he markets help in allocating sa-ings and deciding on the optimal use in the economic circuit. 1he markets in addition pro-ide an a-enue for raising capital mainly for the pri-ate sector0 the go-ernment and also public sector units. E-ery capital market has distincti-e characteristics0 resulting from history0 culture0 and legal structure though gradually today they tend to operate on common ground *ith identical basic features. Bond market is a connected part of the financial market %figure 2.4'. #ince the focus of this research is on bond markets0 the discussion is restricted to bond markets. Further discussion in this chapter *ill pro-ide some theoretical understanding about bond markets0 its features0 and general obstacles faced by bond markets in Asian countries in de-eloping the strategies.

1(g*"e +2): S(m'l($(ed $o"m o$ $(n#nc(#l m#"ket

+2+

De$(n(t(on o$ Bond A bond is debt instrument issued for a specific period for the purpose of raising capital by borro*ing. A bond is a long+term obligation. )enerally0 a bond is fi ed interest financial instrument issued by )o-ernment0 &orporate0 and other large entities. .n other *ords0 a bond is an agreement to repay the principal along *ith the interest or coupon. 1here are some bonds *hich carry a Aero coupon or interest but ha-e fi ed term. 1hese bonds are called as Aero coupon bond or deep discount bond bonds. 1hese bonds are sold at a price *hich *ill be far belo* the face -alue of the bond depending on the risk characteristics and pre-ailing interest rates in the market. Bonds are tradable and basically the price of a bond depends on the e isting interest rates in the market for a equally risky instrument and the coupon on the bond. A bond market has the role to facilitate the flo* of long+term funds from surplus units to deficit units. 1hus bond acts as a loan *here the buyer or holder of the bond is the lender or creditor0 the issuer is the borro*er or debtor and the coupon is the interest. +2- T/'e! o$ Bond! A simple *ay to classify bonds is based on the different kind of the issuers. 1he three main issuers are go-ernment0 go-ernmental agencies0 and corporations %figure 2.2'.

1(g*"e +2+: M#3o" T/'e! o$ Bond!

<

Go,e"nment Bond! According to the length of duration0 go-ernment bonds can be classified into three main categories. 1hey are as follo*s. B(ll!: debt securities *hose maturity period is less than one year. Note!: debt securities *hose maturity period is 4 to 43 years. Bond!: debt securities *hose maturity period is more than 43 years. M*n(c('#l Bond! 1hese are called go-ernmental agency bonds. 1hese bonds are not issued directly by the go-ernment but *ith the backing of the go-ernment. .n most countries0 the returns from municipal bond are free from go-ernment ta . Because of this ta ad-antage0 the interest on a municipal bond is normally lo*er than that of a ta able bond. 1hus0 a municipal bond can be a great in-estment opportunity on an after+ta basis. %o"'o"#te Bond! A company can issue bonds like stocks. &orporate ha-e many options to increase its capital from the market0 the perimeter is *hate-er the market *ill bear. &orporate may issue short+ term %less than < years'0 medium+term %< to 43 years' and long+term %more than 43 years' bonds. &orporate bond may be con-ertible i.e. the holder can con-ert it into stock. .t can be callable also0 *hich allo*s the company to redeem an issue prior to maturity. 1here are some other types of bonds such as lottery bond0 *ar bond0 serial bond0 re-enue bond0 climate bond etc. +2. 1e#t*"e! o$ Bond! 1he key features of bond are discussed belo*. F F 1#ce ,#l*e: .t is the amount on *hich interest is paid and normally *hich has to be repaid by the issuer at maturity. .t is also called principal0 nominal or par -alue. I!!*e '"(ce ! .t is the amount *hich buyers pay *hen the bonds are first issued. )enerally0 this -alue *ill be appro imately equal to the face -alue. 1hus the net amount *hich the issuer recei-es is the issue price minus issuance fees. M#t*"(t/! .t is the date on *hich the issuers ha-e to repay the principal amount. 1he issuers ha-e no more obligations to the bond holders *hen they repay the principal amount at the maturity date. /sually bonds can be di-ided into three categories on the basis of maturity. o #hort+term! bonds *hich ha-e maturities bet*een 4 to < years5 o Medium term! bonds *hich ha-e maturities bet*een < to43 years5 o 8ong+term! bonds *hich ha-e maturities more than 43 years2 %o*'on! .t is the interest rate at *hich the issuer has to pay to the bond holders. ,ormally the rate is fi ed throughout the life of the bond. =

%on,e"t( (l(t/! 6hen the bondholders are allo*ed to e change the bonds into the issuerDs common stocks0 these bonds are called con-ertible bonds. +20 Bond M#"ket P#"t(c('#nt! Both the bond market participants and the financial market participants are similar. 1hey are basically buyers0 sellers or both. ,ormally bond market participants include indi-iduals0 traders0 institutions0 and go-ernments2 +26 R(!k! A!!oc(#ted w(t& Bond! )enerally bonds are considered as risk+free instruments though they ha-e risks. Bonds are usually safer than stocks. #ome risks *hich are associated *ith bonds are discussed belo*. Inte"e!t "#te "(!k: 1he prices of bonds are negati-ely related to interest rates. .f the interest rates increase0 the prices of bonds *ill decrease. 1he coupon %interest' of a bond is set at the time of issuance. 1he buyers *ill not be *illing to purchase the bonds in the secondary market at earlier rate if the interest rates increase. For e ample0 if the coupon is >. and the interest rate of an equally risky instrument in the market is at ?H0 the interest rate on bond is less *hat makes in-estors moti-ated to in-est the high interest bearing instruments. 1hus it can be risky to buy long+term bonds at the time of lo* interest rates. %"ed(t "(!k: A fe* organiAations *ho issue bonds rarely default on their obligations just as indi-iduals occasionally default on their loans. 1he -alue of the in-estment is completely lost in this case. Bonds issued by go-ernment0 are usually protected from default. Municipal bonds are defaulted -ery infrequently. 1he best part s of municipal and corporate bonds are that the holders of the bonds are compensated *ith a higher interest rate for assuming a higher risk. 1he interest rate on corporate bonds is higher than that of municipal bonds0 *hich is higher than that of go-ernment bonds. Furthermore0 there is a rating system that helps the in-estors to kno* the amount of risk for each class of bonds. %#ll "(!k: 1he &ompany may call back some bonds *hich are issued earlier. 6hen a company *ants to issue ne* bonds at lo*er price0 it redeems it e isting bonds. 1his creates forces to the in-estors to rein-est the principal earlier than e pected0 usually at a lo*er interest rate. In$l#t(on "(!k ! /sually the yield on the bond is set at time of issuance0 as is the principal *hich *ill be returned at maturity date. 1he real -alue of the in-estment *ill suffer if there is a significant inflation o-er the period the in-estor holds the bond. +27 1#cto"! A$$ect(ng t&e Bond M#"ket De,elo'ment 1here are some fundamental economic factors %-ariables' that ha-e the effect %positi-e or negati-e' on the de-elopment of bond market in a country. 1able+2.4 sho*s 4: fundamental -ariables and their relations on bond market de-elopment.

>

T# le: +2) V#"(# le! #nd E$$ect! on De,elo'ment o$ Bond M#"ket (n #n Econom/ Sl No2 N#me o$ t&e V#"(# le! Rel#t(on N#t*"e o$ Bond M#"ket De,elo'ment

4 9 9 :

Economic #iAe Measured in the #iAe of )"P

Positi-ely associated

<

Positi-ely "e-elopment stage of associated economy E pressed in )"P Per capita Merely ,atural ;penness associated Measured in 7atio of e port to )"P ,egati-ely Banking &oncentration! correlated E pressed in moral suasion to .ssue public placement #iAe of the banking system Association of togetherness 7iskiness of in-estment Positi-ely En-ironment Measures in correlated &redit quality of issuer 8e-el .nterest rate ,egati-ely correlated

)reater economic siAe to greater bond market de-elopment and smaller economic siAe leads to smaller bond market de-elopment. .f economy is e panded to a higher degree in a country. .t *ill increase the le-el of bond market de-elopment. 1here is merely and strong relationship bet*een the le-el of E port and a countryIs bond market de-elopment. .f the bans highly persuade the issuer in against of the public placements or their spread is so high. 1he bond market *ill not be de-eloped. As the presence of bank is needed to play the role of market .both these t*o should de-elop in a line. .ssuer of higher credit quality means lo* amount risk for .n-estor. As such high quality in-estment profile increases the degree of bond market de-elopment. High interest rate tends to ha-e depressing impact on .ssuance and poorly capitaliAed bond market.

>

? @ 43 44 42 49

.nterest rate -ariability E change rate regime 8a* and ;rder ! international country 7isk 8e-el of corruption 8egal #ystem ! Measured in .n-estor right inde Absence of public sector funding ,eeds

,egati-el y correlated Positi-ely associated ,egati-el y correlated #trongly associated Positi-ely associated

High le-el of interest rate -olatility in the fi ed income securities market lends to lo*er bond market de-elopment. &ountries *ith stable e change rate are conduci-e to bondle-el market de-elopment. 8o*er of corruption lads to higher le-el of bond market de-elopment #tronger legal protection for in-estors! stronger bond market de-elopment J *eaker legal protection )i-es *eaker .f the public sector bond de-elopment market an pri-ate sector bond market *ork together. 1he total bond market *ill be bureaucratic de-eloped. quality indicate that the High country ha-e )ood practice of disclosure principal. #anction and punishment for manipulation. 1his tends accounting to de-elopstandard the bond more High gi-esmarket the rise of positi-e "e-elopment of bond market. ?

Poor regulatory Positi-ely enforcement! Bureaucratic associated quality corporate go-ernance and Positi-ely transparency ! E presses associated in accounting standards

4:

Note! #ummary of the findings of Barry and Piapot study is tabulated. +28 P"e"e5*(!(te! $o" De,elo'ment o$ Bond M#"ket For establishing an efficient and effecti-e bond market the follo*ings are prerequisites. F #ound monetary and fiscal policy5 F #table and credible go-ernment5 F #afe0 sound0 and smooth settlement procedure5 F Efficient ta 0 legal and regulatory procedure5 and F A liberaliAed financial system *ith rational intermediaries.

&hapter 9 Bond M#"ket (n B#ngl#de!& -2) H(!to"/ &urrently Bangladesh bond market plays a small role in the economy. 1he bond market is -ery thin compared to the neighboring countries. )o-ernment should take actions to impro-e the scope of bond market in Bangladesh. At the end of 233=0 the outstanding bond amount *as only 2 H of )"P0 compared to #ri 8anka %<<H'0 .ndia %9<H'0 Pakistan %94H' and ,epal %43H'. 1he share of the Bangladesh bond market among #outh Asian countries *as only 3.2H the smallest among the fi-e countries. 1he market is dominated by the fi ed income go-ernment debt instruments. 1he ma imum sa-ings of small in-estors are mobiliAed by only one instrument name ,ational #a-ing &ertificate. 1he interest on this sa-ing certificate is higher than that of other bonds in the market. Besides the national sa-ing certificate0 the other go-ernment debt instruments are treasury bills and treasury bonds. .n "ecember 23390 go-ernment issued < and 43 yearsD maturity treasury bonds and 4< and 23 yearsD bond *ere issued in Kuly 233>. 1he capital raising pattern has been changed from a focus in treasury bills to a note*orthy increase in treasury bonds. &onsequently0 the ratio of treasury bills from about 23 ! ?3 in 233< to ?3 !23 in 2344. Bank an financial institutions are the main buyers of treasury bonds. &ommercial banks ha-e obligation to purchase go-ernment securities as it is accepted security to meet their statutory liquidity requirement %#87' under the Banking &ompanies Act. 1his is still a small market. Banks and financial instruments *hich ha-e #87 obligations are the only participants in this market. 1he go-ernment bonds are rarely traded on the e change. .n #eptember 233=0 the Ministry of Finance started publishing the yearly treasury bills and bonds auction calendar. 1he calendar sho*s the information of dates0 types of instruments and amount of each auction. Bangladesh bank also started publishing the auction results on its *ebsite. Bangladesh corporate debt market is -ery small in siAe. 1he outstanding amount is only 3.2H of )"P. 1hus corporate bond market in Bangladesh is at a budding stage. "uring 4@??+23440 only 9 corporate bonds and 4: debentures *ere issued by public offerings %1able+9.4'. Many of these bonds and debentures *ere partially con-ertible to common stocks. 1he biggest issue of corporate bond *as made first in 233>. .t *as a perpetual bond named L.BB8 Mudaraba Perpetual BondD *ith a siAe of 1aka 90333 million %appro imately /#E :3 million'. .t is an .slamic bond on profit sharing basis since interest is prohibited by #ariah Principles. At the end of 23440 three corporate bonds and eight debentures *ere outstanding. 1he corporate bond market of Bangladesh faces manifold impediments although it has a good prospectus because of an e pected gro*th in financial market. .t is belie-ed that the a-ailability of long+term instruments is a prerequisite for de-eloping an efficient market structure.

43

T# le: -2) I!!*e o$ %o"'o"#te De t Sec*"(t(e! (n B#ngl#de!& Se"(#l Sec*"(t(e! 9e#" o$ no2 (!!*e
4 M 4>H Ba imco Pharma "ebenture 2 M 4>H Ba imco limited "ebenture 9 M 4>H Ba imco .nfusion "ebenture : M 4>H Bangladesh &hemical "ebenture < M 4>H Ba imco #ynthetic "ebenture = 4>H Ba imco (nitting "ebenture > 4>H Ba imco Fisheries "ebenture ? M 4<H Eastern Housing "ebenture @ 4:H Ba imco 1e tile "ebenture 43 4:H B" Nipper "ebenture 44 4:H Ba imco "enims "ebenture 42 4:H B" 8uggage "ebenture 49 4:H Aramit &ement "ebenture 4: 4<H B" 6elding Electrodes "ebenture 4< .BB8 Mudaraba Perpetual Bond 4= A&. Nero &oupon Bond 4> #ub Bonds ;f B7A& Bank 8td 4@?? 4@?@ 4@@2 4@@9 4@@9 4@@: 4@@: 4@@: 4@@< 4@@< 4@@< 4@@= 4@@? 4@@@ 233> 2343 2344

1e#t*"e!
23H &on-ertible 23H &on-ertible 23H &on-ertible 43H &on-ertible 23H &on-ertible 23H &on-ertible 23H &on-ertible Profit #haring 23H &on-ertible 2<H &on-ertible

S(:e;BD T

: 3 = 3 : < 2 93 > 2 : 4 2 ? 3 2 <:

Note! M marked debentures are not a-ailable at present. #ource! #E&0 "#E and &#E report.

93 3 4 < 4 42 9033 33 403 >3 903 33

44

-2+ %on!t"#(nt! on De,elo'ment o$ Bond m#"ket 1he sluggish gro*th of the bond market in Bangladesh has been recogniAed due to a number of factors. 1hey are discussed belo*. F L(m(ted n*m e" o$ (n,e!to": ;nly limited number of in-estors compared to total population is interested in in-esting in bond or stock market. F %#'(t#l g#(n! .mpact of cliental effect0 most of the in-estors in Bangladesh look for capital gain rather than fi ed flo* of income *hile making their in-estment decision. .n case of bond chance of capital gain is limited.

F H(g& "et*"n (n "(!k $"ee go,e"nment ond: 7ate of return in case of risk free go-ernment bond is too highs so corporate bonds ha-e to offer e-en higher rate for co-ering additional risk to the in-estors *hich make the rate non+-iable for the issuers. F Alte"n#t(,e !o*"ce! o$ de t $(n#nc(ng: ;ther sources of debt financing0 especially borro*ings from commercial bank are -ery easy and *idely used in Bangladesh. 1he charged by bank is less than borro*ing rate through bond issuance. Besides these0 borro*ing from bank is fle ible and quick. #o0 issuers donDt ha-e to depend on bond issue only to design their capital structure and to generate ta benefit from use of debt. F L(m(ted '"(,#te m#n#gement o$ 'en!(on $*nd: .n Bangladesh pri-ate management of long+term pension fund is -ery limited. #tate o*ned bodies J go-ernment organiAations do not raise fund through issue of debt instrument. 1hey depend on deficit financing J printing money from central bank for financing their projects. #o0 all these factors make secondary market for bonds -ery illiquid J discourage issuance of Bond. <e#k "eg*l#t(on! #nd m#"ket (n$"#!t"*ct*"e: 8a*s J regulations regarding go-ernance of bond market are inadequate. Market failure is common scenario in Bangladesh. 7isk free in-estors just prefer go-ernment bonds *hile risk takers go for in-estment in stock market. 1here are not enough in-estors for corporate bond market. Unde"de,elo'ed t#= !/!tem! 1a system in Bangladesh is not properly de-eloped. 1a can be e-aded through unfair means %bribe and other means'. #o0 ta incenti-e for issuing bonds is not -ery high *hich causes underde-eloped corporate bond market. Ill(5*(d !econd#"/ m#"ket ! .lliquidity in secondary market of go-ernment debt securities makes constraints on determining proper pricing of the treasury bonds in the primary market. H(g& (nte"e!t "#te: .ndi-idual sa-ings are attracted by national sa-ing scheme due to its high interest rate %1able+9.2'. ,ational sa-ing certificates are risk free though

its interest rate is high5 consequently other sa-ing products are cro*ded out from 42

the market. 1hus a company has to propose a higher coupon rate to attract in-estors *hich might become un-iable for the corporate. F H(g& t"#n!#ct(on co!t o$ (nd (!!*#nce: 1he high transaction cost of bond issuance is considered as constraint. Particularly0 the registration fees0 stamp duties0 ancillary charges and annual trustee fees on outstanding amount put forth to diminish the bond issue. F %&e#' !/nd(c#ted lo#n! ! .t is a common phenomenon that a syndicate is formed by a number of banks to finance large project. #yndicated loan is cheap as *ell custom+made and fle ible *hich makes bonds non+attracti-e to the corporate issuers.

F De$#*lt on (nte"e!t '#/ment ! .n early 4@@3s0 the interest payments of some corporate debenture *ere defaulted. .n the @3s0 the regulations of financial market *ere not adequate and credit rating *as not mandatory. Besides0 in-estorsD confidence *as eroded due to the failure of trustees to protect the debenture holdersD rights *hich makes the in-estors a-erse to in-est in corporate bonds. F Ine='e"(enced (n,e!to" ! .n Bangladesh most of the in-estors are ine perienced. 1hey are -ery much familiar *ith the bonds. 1hey consider that return %interest' on debt instrument is -ery small *ith no chance of capital gain. 1herefore0 they take in-estment decision in stocks for abnormal capital gain. H(g& (n$l#t(on! &omparati-ely high inflation has been pre-ailing since last decade0 *hich has made potential in-estors intro-erted to in-est in corporate securities.

49

T# le: -2+ Inte"e!t R#te on S#,(ng P"od*ct! / So*"ce #nd M#t*"(t/ ;>*l/ +?))@ = mont&! So*"ce 9 to 6 4 /e#" #nd to ) /e#" mont&! # o,e 9.><42.<3 :.3342.2< :.<344.33 Foreign banks >.3342.>< >.2<49.33 ?.3344.>< Pri-ate banks #tate o*ned commercial banks <.<3>.<3 =.><?.>< ?.3344.<3 #pecialiAed banks <.><>.2< =.33>.<3 =.><@.33 Post office 44.<3 ,A ,A ,ational sa-ings certificates #ource! 42.33 ,A ,A Bangladesh Bank -2- %o"'o"#te De t M#"ket (n B#ngl#de!& Bank loans are the main source of finance for corporate %1able+9.9'. 1he corporate bond market in Bangladesh is -ery small in siAe. Banking sector is dominating corporate finance since other sources of corporate debt instrument are underde-eloped. Alternati-e sources of finance other than bank loans should be de-eloped by di-ersifying the debt instruments in order to establish sound financial market in Bangladesh. A complete set of guidelines on bonds and debentures must be de-eloped to promote the corporate bond market. 1he go-ernment has to reduce the interest rate on national sa-ings certificates in order to a fa-orable en-ironment for de-eloping corporate bonds. T# le: -2- In!t"*ment! A,#(l# le (n B#ngl#de!& Nom(n#l Amo*nt;B(ll(on! o$ In!t"*ment! BDT@ Rel#t(,e !(:e A

9>.23 "eposits :392 H 92.93 Bank 8oans 9<34 H 42.93 1erm loans %as of Kune 2344' 4999 H ?.@3 )o-ernment sa-ing certificates @=< H :.@9 )o-ernment bonds <9: H 2.<3 1reasury bills 2>4 H 4.>> Equity %issued -alue' 4@2 H Pri-ate placement ,ot publicly a-ailable ++ 3.43 "ebentures J bonds 44 H #ource! "haka #tock E change0 ,ational #a-ing Bureau0 and Bangladesh Bank

4:

-2. Go,e"nment De t M#"ket (n B#ngl#de!& Bangladesh Bank ;rder+4@>20 article 23 and 1reasury rules+4@@? %Appendi +40 #ection+9' empo*ers Bangladesh Bank for the issue and management of )o-ernment securities. As per the abo-e mentioned la*s and regulations0 Bangladesh Bank %BB' acts as the banker and debt manager to )o-ernment of Bangladesh %);B'. 1a is the main source of go-ernmentDs re-enue. )o-ernment meets its deficit through sale of debt securities *hen e penditures e ceed its ta receipts. .n the past the financing of budget deficit for )o-ernment of Bangladesh *as being done through issuance of Lad hocD 1reasury Bills. Bangladesh Bank subsequently partially offloads these Lad hocD 1reasury Bills through the issuance of 1reasury Bills and Bonds to the market0 lea-ing the )o-ernmentDs cash position unaffected. LAd hocD 1reasury Bills *ere thus accessed both to meet cash mismatches as *ell as for financing the budget deficit. .ssuance of ad hocD 1reasury Bills has been discontinued no*. Financing budget deficit for )o-ernment of Bangladesh takes place through the issuance of %i' #pecial bonds0 %ii' Bangladesh )o-ernment 1reasury Bonds %B)1Bs'0 and %iii' sa-ings instruments %,#"'. Ho*e-er0 for small deficit0 Bangladesh Bank maintains a pretty cash account named L6ays and Means Ad-anceD %6MA'. ,ormally0 go-ernment borro*s from 6MA first and then through 1reasury Bills. For this ad-ance a floating interest rate %bank rate O 4H' is charged. At present the bank rate is <H.

4<

&hapter : Second#"/ M#"ket o$ Go,e"nment Sec*"(t(e! .2) H(!to"/ #econdary market for go-ernment securities is still not acti-e. Bangladesh Bank periodically conducts secondary trading and also buys back the go-ernment securities as per instructions of the go-ernment. "e-eloping liquidity in the secondary market is a gradual process. 1here is a substantial effort and time required to de-elop the trading beha-ior among institutions. 1he best that any institution *hich intends to promote secondary trading is to create a condition that is conduci-e for de-eloping a safe and efficient market place. 1rading -olume in )o-ernment securities is currently negligible in Bangladesh. 1o acti-ate the market0 it is necessary to push institutions %banks and other financial institutions' to encourage a culture of trading0 de-elop safe and efficient trading and settlement systems0 sensitiAe market participants to internaliAe effecti-e risk management practices and stabiliAe market standards. 1he follo*ing bottlenecks *ere identified as impediments to de-elopment of secondary market and corresponding recommendations are made to sol-e them by Bangladesh Bank. F P"o lem: Almost all bond markets in the *orld ha-e addressed the issue of settlement risk by introduction of "eli-ery -ersus #ettlement %"-P'. 1here is no established settlement system for the fe* secondary market transactions that take place in bond markets in Bangladesh.

Sol*t(on: "eli-ery -ersus #ettlement %"-P' based settlement ha-e been introduced from Kanuary 2343 for all marketable )o-ernment securities Ho*e-er net*ork connecti-ity and electronic settlement systems ha-e not been established yet. .n future0 more efficient "-P mechanisms can be introduced coinciding *ith the increase in market acti-ity. F P"o lem: .n the early stages of market de-elopment0 there *as a high degree of uncertainty regarding appropriate pricing. 6hile a market determined price disco-ery in primary markets can act as an effecti-e anchor for pricing0 the problem still remains on ho* to price securities in bet*een auctions.

Sol*t(on: .t may be desirable for the Primary "ealers %P"s' %through a trade association recogniAed by BB' to disseminate a yield cur-e of )o-ernment securities based on secondary market transactions0 on a monthly basis. .n the initial period %about a year' BB may -et this yield cur-e before being released in the public domain. 1o facilitate year+end -aluation0 BB may itself announce a yield cur-e -alid for the end of the year. F P"o lem: 8ack of proper mechanism for "issemination of 1rade .nformation among the market participants.

Sol*t(on: BB may take up the responsibility of collecting and disseminating secondary market trade information at the end of each day. 1he information it needs to disseminate should be P date of trade0 settlement date0 name of security0 amount of trade %F$'0 price and yield. .n the initial phase0 the information may be collected from Banks and P"s0 4=

consolidated and placed on BBDs *ebsite by end of day after suppressing buyer and seller names. .n due course0 as electronic net*ork for banks and other institutions are established and an electronic reportingGsettlement system is de-eloped0 dissemination of trade information can be real time. F P"o lem: 1ypically )o-ernment securities trade ;-er+the+&ounter %;1&' through a telephone market0 although trading on electronic platforms is pre-alent in some countries0 e.g.0 M1# system in Europe. A-ailability of electronic trading platform *ould encourage secondary trading to a large e tent.

Sol*t(on: .t is learnt that the trading platform in the "haka #tock E change can be modified for trading bonds. 1his should be enabled and the primary dealers should be gi-en the accountability of market making for go-ernment securities on the e change. Market participants may also be gi-en the choice of trading *ith each other on an ;1& basis. .

4>

.2+ P"(m#"/ De#le"! S/!tem H(!to"/ .n 23390 eight banks and one non+bank financial institutions %,BF.' *ere selected as primary dealers %P"s' to deal secondary transactions of 1reasury bills and other go-ernment bonds. 1he eight banks *ere #onali Bank 8imited0 Kanata Bank 8imited0 Agrani Bank 8imited0 /ttara Bank 8imited0 Prime Bank 8imited0 #outheast Bank 8imited0 Kamuna Bank 8imited0 and ,&& Bank 8imited0 and the only ,BF. *as .nternational 8easing and Financial #er-ice 8imited. Earlier all scheduled banks0 financial institutions and interested parties are in-ited to drop applications to the Foreign E change 7eser-e and 1reasury Management "epartment of Bangladesh bank by August 240 2339. Eighteen commercial banks and one ,BF. filed applications for getting primary dealer licenses. Ho*e-er0 Bangladesh Bank acti-ated the primary dealer system from Kuly0 233>. Bangladesh Bank granted license to si more banks and financial institutions to act as primary dealers in "ecember0 233@. 6ith the additional the total number of primary dealers is fifteen %1able+:.4'. Role o$ P"(m#"/ De#le"! (n Mone/ M#"ket Primary dealers are selected to perform as market makers for go-ernment securities. 1hey act as under*riters of go-ernment securities at the primary auction. 1his helps the go-ernment to raise money from the market at a reasonable cost. 6hene-er go-ernmentG BB finds the interest rates for go-ernment securities unacceptable at primary auctions0 it can collect the required amount from P"s. 1his reduces the borro*ing cost for the go-ernment. 1he main objecti-e of appointing P"s is to support the primary issuance process of )o-ernment securities and acti-ating the secondary market. Ho*e-er their other objecti-es are! F 1o support the primary issuance process of )o-ernment securities by de-eloping under*riting capabilities and promote price disco-ery process in auctions for go-ernment securities5 F 1o assist in de-eloping efficient and effecti-e liquidity management0 and to facilitate open market operations of monetary policy management. F 1o increase liquidity and intensity in the securities market by de-eloping price detection. P"s are required to under*rite go-ernment securities at primary auction at the follo*ing rates %1able+:.4'.

4?

T# le: .2) R#te o$ Unde"w"(t(ng O l(g#t(on! SL No P"(m#"/ De#le" P"o'o"t(on o$ Unde"w"(t(ng O l(g#t(on! ;A@

4 2 9 : < = > ? @ 43 44 42 49 4: 4<

#onali Bank 8imited Kanata Bank 8imited Agrani Bank 8imited Prime Bank 8imited #outheast Bank 8imited /ttara Bank 8imited ,&& Bank 8imited Kamuna Bank 8imited .nternational 8easing and Financial #er-ices 8imited Mutual 1rust Bank 8imited Mercantile Bank 8imited .ndustrial Promotion and "e-elopment &ompany 8anka Bangla Finance AB Bank 8imited ,ational Bank 8imited Tot#l #ource! "ebt Management "epartment0 BB

@. 33 @. 33 @. 33 ?. 33 ?. 33 ?. 33 ?. 33 >. 33 4. 33 >. 33 ?. 33 4. 33 4. 33 ?. 33 ?. 33 ) ?

Bangladesh Bank issued a guideline for the primary dealers in order to stimulate and simplify the countryDs secondary bond market in 2339 and after*ard also made some amendments. As per the guideline0 the primary dealers *ill subscribe and under*rite primary issues and make secondary trading deals *ith t*o+*ay price quotes. 1he primary dealers cannot make short sale in any particular issue and cannot carry a short position in

secondary dealings. 1he primary dealers cannot act as inter+bank or inter+dealer brokers.

4@

%*""ent Scen#"(o Bangladesh Bank introduced the #cheme of P"s in ;ctober 2339. 6hile the #cheme had the necessary prerequisites for a successful primary dealer system the P" system has not kicked off yet. A major reason is the absence of secondary market0 *hich deters P"s from bidding in primary auctions. P"s ha-e formed an association namely Primary "ealers Bangladesh 8td %P"B8'. 1he association has been *orking to form and build up a strong market mechanism for go-ernment treasury bills and bonds. 1hey are *orking on different aspects of making the treasury bills and bonds more striking to the prospecti-e in-estors. P"B8 is also in-ol-ing the &entral Bank and is attempting to make the association strong to de-elop the market mechanism by a*areness building campaign among non+resident Bangladeshis %,7BDs'. 1hey also help in arranging meetings and *orkshops *ith Bangladesh Bank and other related associates at regular inter-als for strengthening the secondary market by inspiring prospecti-e global in-estors and connecting them as de-elopment partners. .2- Mone/ M#"ket O'e"#t(on! Re'o 7epo %repurchase agreement' is a contract to sell a security at market -alue0 including accrued interest0 and to repurchase it in the future for the initial repurchase amount plus accrued interest on the repurchase agreement. .t is a contract *here the seller of securities agrees to buy them back at specific time and price. 1he cash loan is made by the buyer of the securities to the seller and is repaid *hen the securities is repurchased by the original o*ner. 7epos ser-e se-eral distinct purposes. &entral banks use 7epos as a monetary policy tool and in some cases as a means of fostering a secondary market for go-ernment securities. #ecurities dealers utiliAe 7epos to reduce the cost of financing their in-entories. Finally0 commercial banks and other in-estors utiliAe 7epos for temporary cash management. Bangladesh Bank has introduced 7epos for commercial bank and financial institutions as an indirect monetary instrument for day to day liquidity management to smoothen short+ term and unpredicted turbulences in the supply and demand for money. 1his opportunity *ill gi-e temporary liquidity in the money market against an eligible security *ithout necessitation of the security. Re,e"!e Re'o A security resale agreement %7e-erse 7EP;' is a contract to buy a security at market -alue0 including accrued interest0 and to resell it in the future for the initial resale amount plus accrued interest on the resale agreement. Banks and financial institutions can deposit money in Bangladesh Bank *hen they ha-e e cess liquidity. 1his is normally recogniAed as 7e-erse 7epo. A 7e-erse 7epo auction is held along *ith the treasury bills auction. . 23

Inte"B #nk Re'o 1he inter+bank 7epo is one type of secondary market for treasury bills and go-ernment securities. .t *as introduced in Kuly 2339. Banks are free to buy funds from the interbank market against the )o-ernment securities under 7epo agreement. .n such cases0 rates charged by the lending banks is not fi ed0 .t is determined on the basis of supply of money in the market and on the basis of the market prices of the securities up to their maturities. 7epo in the inter+bank market may be for any tenor and fund can be a-ailed for any purpose for any period. .2. Mone/ M#"ket Ind(c#to"! 9(eld %*",e o$ T"e#!*"/ Sec*"(t(e! Bield cur-e is the graphical representation that represents the relationship bet*een the yield %interest rate' and maturity dates for a set of parallel bonds0 generally 1reasures0 at a specified point of time. .t is the graphic illustration of the relationship bet*een the yields on the bonds of the same credit quality but different maturities. 1he yield cur-e can perfectly estimate the turning points of the business cycle. .t represents the relationship bet*een interest rates and the time to maturity of a set of debt securities *ith same issuer and same currency. Bield cur-es0 in particular Aero coupon cur-es are commonly used to calculate the market price of bondsG portfolios of bonds. 1he interest rates of long+term bonds are normally higher than that of short+term bonds in an up*ard sloped yield cur-e. 1he yield cur-e generally has a positi-e slop because interest rates of long+term bonds normally e ceed that of short+term bonds. 1he shape of yield cur-e is affected by a lot of factors including the relati-e risks bet*een long+term and short+term securities and by in-estorsD e pectations *ith regard to the le-el of future interest rates. 1he maturities are depicted on the horiAontal a is and the yield is depicted on the -ertical a is on the yield cur-e. 1hat is to say0 if the yield cur-e trends up*ard0 it represents that interest rates for long+ term securities are higher than short+term securities0 it is called a normal yield cur-e . ;n the other hand0 a negati-e yield cur-e represents that interest rates for short+term securities age higher0 and a flat yield cur-e represents that they are around the same. Bield cur-es are most usually plotted *ith go-ernment treasuries *ith different maturities. 1hus it is used to forecast future trends in interest rates. 1*o separate graphs representing yield cur-e for 1+Bills %Figure+:.4' and Bangladesh )o-ernment 1reasury Bonds %Figure+:.2' are gi-en belo*.

24

1(g*"e: .2) P"(m#"/ 9(eld %*",e $o" TB (ll!

1(g*"e: .2+ P"(m#"/ 9(eld %*",e $o" B#ngl#de!& Go,e"nment T"e#!*"/ Bond! .20 De t Po"t$ol(o o$ B#ngl#de!& &entral )o-ernment debt outstanding has increased consistently o-er the period of 233<+ 2343. registering an increase of 2?H %/#E93 billion in 233< to /#E:3 billion in 2343'. 1his trend *as mainly dri-en by domestic debt0 *hich increased by =3H during this same 22

period. 1he increase in domestic debt *as influenced by the sharp increase in o-erdraft facilities from the Bangladesh Bank in FB233=0 go-ernmentDs inclination to*ards borro*ing from market sources and increasing the sale of ,#" instruments. 1he composition of total go-ernment debt is shifting from e ternal to domestic. "omestic debt *hich *as 9?H of total debt in 233< has increased to :?H in 2343. E ternal debt0 on the other hand0 has decreased from =2H of total debt in 233< to <2H in 233@. 1his *as due to the continuing emphasis by the )o-ernment on soft loan borro*ing from the de-elopment partners0 the change in policy and priorities of partners0 the scarcity of e ternal soft loans0 and the increasing le-els of undisbursed loans. Ho*e-er the importance of e ternal debt is still underscored by its major share in the total debt composition. .n terms of local currency0 total domestic debt has increased by ?4H %in dollar terms =3H' during 233<+2343. .t sho*s a shift from non+marketable instruments to marketable instruments. .t also emphasiAes go-ernmentDs inclination to*ards mobiliAing funds from domestic sources. . Bangladesh )o-ernment 1reasury Bonds %B)1Bs' ho*e-er sho* an increasing trend. 1heir share of domestic debt increased to 94H in 2343 from @H in 233<. .t sho*s the preference of go-ernment to borro* funds from the market source at a competiti-e rate. .t allo*s the go-ernment to collect long term fund from the market at a rate less than the ,#" instruments. &urrently0 the implicit strategy of the go-ernment is to maintain a ratio of ><!2< *hile borro*ing through 1+bonds and 1+bills respecti-ely. .t has also been planned to increase the ration to ?3!23 in the upcoming Financial Bear %FB 2344+42'. All these efforts are designed to raise the a-erage maturity of the outstanding debt stock to decrease the financing risk.

29

&hapter < 1(nd(ng! #nd An#l/!(! 02) St#t*! o$ B#ngl#de!& Bond M#"ket 1he debt market in Bangladesh comprises mainly of t*o categories0 firstly the )o-ernment securities and the second category comprises of the non )o-ernment securities i.e. the corporate bonds and debentures. 1he actual status of the bond market of Bangladesh is stated belo*! i. %om'#"(!on o$ go,e"nment ond m#"ket (n !ome A!(#n co*nt"(e!: 1he siAe of Bangladesh go-ernment bond market *hich is 4>.4H of )"P has not de-eloped on the similar line as of other e merging East Asian bond market like &hina0 #ingapore0 Malaysia and 1hailand %1able+<.4'. .ndia has the largest part of )o-ernment bond market of all the south Asian countries *hile Bangladesh holds the lo*est position *ith the siAe of 4>.4H of )"P. T# le: 02) S(:e! o$ Some A!(#n Bond M#"ket! ;A o$ GDP@ %#tego"/ Ko"e# M#l# %&(n# S(ng T&#(l#nd P&(l(' Ind(# S"( P#k BD )o-ernment :?.? :?.4 :=.4 :4.2 :3.> 99.9 9=.4 94.= 2>.< 4>.4 &orporate =4.? 9>.< :.> 93.> 4<.@ 9.< 9.@ + + #ource! Asian Bond on 8ine0 B.#0 7B.0 March 233?.

((2 M#t*"(t/ !t"*ct*"e : A mature bond market e hibits longer a-erage maturity since in-estorsD confidence is gauged by their *illingness to commit resources to longer time horiAons %Barry and Pipat 233:'. .n #outh Asia0 .ndia is the only country to ha-e succeeded in building a risk+free so-ereign yield cur-e that can pro-ide guidance to market players across the broad spectrum of maturities. (((2 An#l/!(! on $(n#nce (nd(c#to"! : .n terms of the assessment of Finance .ndicators as depicted in %1able+<.2'0 .ndia has the soundest financial sector among the south Asian economies. .t occupied the top rank *ith an o-erall composite score. .ndia has e ceedingly done *ell %ranked 4' on three micro indicators namely capital market de-elopment0 market concentration and competiti-eness0 and financial stability. T# le: 02+ 1(n#nce Ind(c#to"! $o" So*t& A!(#n %o*nt"(e! d*"(ng +??)B?C Ind(# P#k(!t#n B#ngl#de!& Ne' Ind(,(d*#l (nd(c#to"! S"( #l "#nk L#nk# ;-erall rank 4 2 9 : < Access to finance 9 : 4 2 < 9 4 2 : : Performance and efficiency 4 2 9 : < &apital market de-elopment 4 : < 2 9 Market concentration and competiti-eness Financial stability 4 2 9 : <

2:

#ource! )etting Finance .ndicators. (,2 %o"'o"#te go,e"n#nce: 1he assessment of south Asian Bond Market in terms of )ood )o-ernance .ndicators0 leads to belie-e that .ndia has a le-el of good go-ernance in terms of political stability0 -oice and accountability0 control of corruption0 and regulatory frame*ork *hich has led to the financial de-elopment %1able+<.9'. Moreo-er0 credit information inde and the legal right %1able+<.9' sho*s that the lender and borro*er of capital are not *ell protected in Bangladesh and they do not get the credit information easily. %o*nt"/ Bangladesh .ndia Pakistan #ri 8ank T# le: 02- Ind(c#to"! o$ Go,e"n#nce!D So*t& A!(# +??82 Pol(t(c#l Vo(ceE %ont"ol o$ Reg*l#to"/ R*le! o$ St# (l(t/ Acco*nt# (l(t/ %o""*'t(on F*#l(t/ L#w +3.=9 +4.3< +4.: +3.?= +3.?4 O3.9? +3.9@ +3.34 +3.22 O3.43 +4.3< +3.?9 +2.:: +3.<= +3.@9 +3.9@ +3.49 +4.@= +3.44 O3.3= #ource! #outh Asian Financial sector re-ie*0 233@. Go,e"nment %"ed(t Leg#l R(g&t E$$ect(,ene!! In$o Inde= Inde= +3.?4 2.3 ?.3 O3.39 :.3 ?.3 +3.=2 :.3 =.3 +3.2@ <.3 =.3

Note: )o-ernance score ranges +2.< to O2.<0 *ith higher scores representing better go-ernance. 1he credit information inde ranges from 3 to =0 *ith higher scores indicting more credit information a-ailable. 1he legal right inde ranges from 3 to 430 *ith higher scores depicting better designed la*s.

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02+ Me#!*"e! to Im'"o,e B#ngl#de!& Bond M#"ket .n spite of earlier setbacks0 the bond market of Bangladesh is ready for takeoff. .t seems reasonable that Bangladesh can take the follo*ing steps to boost up its bond market2 i. E!t# l(!&(ng # !o,e"e(gn /(eld c*",e to !e",e t&e '"(c(ng g*(de (n t&e ond m#"ket: 8ack of benchmark bonds has been primary reason that the Bangladesh debt securities market has not taken off. 6ithout benchmarks0 all other fi ed+income instruments0 including corporate bonds *ill lack the pricing base. Based on the e perience of say .ndia the maturity of the bonds can be increased by issuing a bond *ith 93 years maturity. ((2 P"o,(ng t&e go,e"nment #! # c"ed( le (!!*e" #nd m#"ket de,elo'e": 1he de-eloped financial markets ha-e been brilliant in issuing standard di-ersified and high quality debt instruments on a regular basis. For e ample .ndian )o-ernment issues treasury bills of three maturities %@40 4?20 or 9=: days' and medium and long+term securities %capital inde bonds0 floating rate bonds0 Aero coupon bonds0 bonds *ith call and put options' and Qplain -anillaR bonds %the most popular and acti-ely traded'. .n contrast0 the go-ernment of Bangladesh issues only 1reasury bill0 treasury bonds0 ,ational .n-estment Bonds0 and ,ational #a-ing certificates. E cessi-e dependence on ,#" certificate by the go-ernment of Bangladesh has distorted the market by establishing a high benchmark rate for the corporate sector. 1his is primarily the reason that the )o-ernment of Bangladesh should come for*ard *ith a broad spectrum of go-ernment securities. (((2 De,elo'(ng # le,el 'l#/(ng $(eld $o" $o"e(gn #nd "et#(l (n,e!to": 8ike de-eloped countries0 #ecurity and E change commission of Bangladesh should permit registration to foreign institutional in-estor to in-est in Bangladesh. 1he go-ernment of Bangladesh should also take necessary actions to encourage retail participation in the go-ernment debt security market. (,2 E!t# l(!&(ng # wellB$*nct(on(ng !/!tem $o" '"(m#"/ de#le"!: 6ith fifteen primary dealers %42 commercial banks and 9 non+banking financial institutions' Bangladesh go-ernment bond market has not been ser-ed yet to full s*ing. Bangladesh should practice the scope0 scale and regulation of the primary dealer system like .ndia. -. T#k(ng !te'! to en&#nce !econd#"/ m#"ket l(5*(d(t/: 1he secondary market for go-ernment debt securities in Bangladesh is still in a -ery budding stage. For e ample0 in the "#E0 24< B)1Bs are listed *ith a total *orth of 1aka <9: billion but only one 43 years B)1B *as transacted on the secondary market since the inception of debt securities in "#E in 233<. 1hus0 in fa-or of Bangladesh go-ernment0 BB can lo*er minimum denomination to 1ake 4333 and gi-e *ide range of facilities to the P"s. ,(2 Inc"e#!(ng t"#n!'#"enc/ (n t&e !econd#"/ m#"ket t&"o*g& d(!!em(n#t(on o$ m#"ket (n$o"m#t(on: 1ransparency in the secondary market for go-ernment debt securities remains limited in Bangladesh. ,o central source of information on trading acti-ity in the ;1& market is a-ailable. Bangladesh bank does not publish the information *hile it recei-es reports on ;1& trading from primary dealers. .nformation on debt securities and the money market should be distributed through press releases or by the BankDs publications. 2=

,(((2 Int"od*c(ng del(,e"/ ,!2 '#/ment !/!tem ;D,P@ ! 1he payments in securities transactions are handled manually though both stock e changes0 "#E J &#E ha-e an automated system for the trading of securities0 *hich means that securities cannot be settled on a deli-ery+-ersus+payment basis. Bangladesh may be benefited by introducing "-P mechanism. (=2 De,elo'(ng ond (nde=: An inde is needed to compare the market participantsD performance as *ell as the performance of different classes of assets. 1he go-ernment of Bangladesh can establish the bond inde *hich *ill reflect the benchmark of this sector. . De,elo'(ng 5*#l(t#t(,e !t"engt&: Bangladesh should de-elop its poor performance in macroeconomic en-ironment0 institutional en-ironment0 equity market de-elopment0 corporate go-ernance0 -oice and accountability0 political stability0 financial stability and regulatory quality. 02- %oncl*!(on 1his report in-estigates the current status of bond markets of Bangladesh. 1he skinny bond market in Bangladesh faces multiple challenges like e cessi-e dependence on bank credit0 dominance of primary auction based go-ernment debt instruments0 lack of product -ariation0 and absence of benchmark yield cur-e. 1he prerequisites of the bond market de-elopment and factors to influence the bond market indicates that the neighbor countries ha-e dramatically progressed in almost all the categories *hile Bangladesh does not meet most of the preconditions to de-elop an efficient bond market. .t is belie-ed that Bangladesh *ill be able to accelerate its momentum in the bond market if she adopts all -iable strategies0 e periences and reforms program of de-eloped bond markets.

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Re$e"ence! Mujeri0 M. (. and 7ahman0 M. H. %233?'. QFinancing 8ong 1erm .n-estment in Bangladesh! &apital Market "e-elopment .ssuesR Policy Paper! Bangladesh Bank0! 3@3<. 7ose0 P. #. %2339'. QMoney and &apital MarketsR0 Financial .nstitution and2? .nstruments in a )lobal Market Place0 Eighth Edition0 Mc)ra* Hill0 Higher Education. PP. :+>. /sha 1horat and 1. 7abi #ankar0 %April0 233<+ April0 2344'0 Q"e-eloping a Bield &ur-e and Promoting #econdary Market for )o-ernment "ebt in BangladeshR0 Phase .+C.0 Bangladesh Bank. .slam0 Md. EAaAul and Bisnu Pada %233='0 QPublic "ebt Management and debt #ustainability in BangladeshR0 6orking Paper ,o. 6P3>3<0 PA/0 Bangladesh Bank0 "haka. Ahmed. Faruquddin. %4@@@'. Q1he Money Market in BangladeshS Bank Parikrama0 $ol C.C0 ,os. 9 J : #eptember and "ecember 4@@:0 pp. 4@+9:. AAad. Abul (alam %"ecember 2332'. SBeha-ior of 1reasury Bills Market in BangladeshS0 Kournal of Business #tudies. "haka /ni-ersity. $ol CC..0 ,o. 2. pp. 2?<+ 932. 7angarajan0 &.0 Aupam Basu and ,arendra Kadha- %4@?@'0 T "ynamics of .nteraction bet*een )o-ernment "eficit and "omestic "ebt in .ndia0 7B. ;ccasional Papers0 $ol. 43.90september. Bilquees0 FaiA %2339'0 QAn Analysis of Budget "eficit0 "ebt Accumulation0 and "ebt .nstability0R 1he Pakistan "e-elopment 7e-ie*0 $olume :2 ,o. 9 pp. 4>>+ 4@<. Ahmed0 #hamim and Md. EAaAul .slam %233=b'0 Q.nterest 7ate #pread in Bangladesh! An Analytical 7e-ie*R0 Bangladesh Bank Uuarterly0 April+Kune0 233=. PP. 22+2?. Mujtuba (abir0 %Kune 2343'0 Q#ustainability of Public "ebt in Bangladesh and 7ole of Bangladesh Bank R0 .ntern report0 .BA0 "/. Amihud0 B.0 and H. Mendelson0 %4@@4'. S8iquidity0 Maturity and the Bield on /.#. 1reasury #ecuritiesS0 Kournal of Finance0 :=0 4:44+4:2<. Brandt. 6 Michael and (a-ajecA A. (enneth0 %2339' SPrice "isco-ery in 1he /.#. 1reasury Market!1he .mpact of ;rder flo* And 8iquidity on the Bield &ur-eS0 ,BE7 6orking Paper @<2@.

&ammack0 E.B.0 %4@@4'0 E-idence on bidding strategies and the information in 1reasury bill auctions0 Kournal of Political Economy @@0 433+93. &ook0 1imothy U.0 %4@?4' S"eterminants of the #pread Bet*een 1reasury Bill and Pri-ate #ector Money Market 7ates0 S Kournal of Economics and Business0 -ol. 99 %#pring 4@?4'0 pp. 4>>+?> &ook0 1imothy U.0 and 1homas Hahn %4@@3'. S.nterest 7ate E pectation and the #lope of the MoneyMarket Bield &ur-eS Federal 7eser-e Bank of 7ichmond Economic 7e-ie*0 -ol. >=. pp.9+2=. Hardy0 8aniel &. %2333'. Building Beha-ior in 1reasury Bills Auctions0 E-idence Pakistan0 .MF 6orking Paper+6PG33G4440 Kune. (im0 Bun+H*an %2334'0 "e-eloping 1reasury #ecurities Market in Asia0 Asian "e-elopment Bank0 Manila0 Kune.S Mc&ullouch0 K. Huston.0 S1he Monotonicity of the 1erm Premium! A &loser 8ook0S Kournal of Financial Economics0 -ol. 4? %March 4@?>'0 pp.4?<+@2 ,yborg0 (.). and #. #undaresan0 %4@@='0 "iscriminatory -ersus uniform 1reasury auctions! E-idence from *hen+ issued transactions0 Kournal of Financial Economics :2. =9+43:. #imon0 ".P.0 %4@@:a'0 Markups0 quantity risk and bidding strategies at 1reasury coupon auctions0 Kournal of Financial Economics 9<0 :9+=2. #imon0 ".P.0 4@@:b0 1he 1reasuryIs e periment *ith single+price auctions in the mid+ 4@>3s! 6innerIs or ta payerIs curseF 7e-ie* of Economics and #tatics >=0 ><:+=3. #pindt0 P.A. and 7.6. #tolA0 %4@@2'0 Are /.#. 1reasury bills under priced in the primary marketF Kournal of Banking and Finance 4=0 ?@4+@3?.

Buiter0 6. H. %4@?<'0 QA guide to Public #ector "ebt and "eficitsR0 Economic Policy0 pp. 4:+>@. .MF %233>'! 1he "ebt #ustainability Frame*ork for 8o*+.ncome &ountries0 at /pdated0 ;ctober 930 .MF. .MF Mission %233?'0 QBangladesh! Koint Fund+6orld bank "ebt #ustainability AnalysisR0 .MF staff study. );B! Flo* of E ternal 7esources in to Bangladesh0 %$arious .ssues'0 Economic 7elation "i-ision0 Ministry of Finance0 and "haka.

);B! Economic 7e-ie*0 %$arious .ssues'0 Ministry of Finance0 "haka. 2@

);B! ,ational #a-ings "irectorate0 Ministry of Finance0 "haka. )o-ernment 1reasury Bond 7ules0 2339

Bangladesh

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