Whither bond market?

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Shahiduzzaman Khan
Although stock market is gaining much popularity in Bangladesh, bond market remains conspicuously unattractive. With the recent fall in interest rates of government securities like treasury bills (T-bills) and bonds, people's willingness to buy bonds is likely to decline.
A vibrant domestic bond market can reduce a country's dependence on short-term borrowings from other sources and also help accelerate its economic activities. It can also speed up financial development of a country like Bangladesh.
But illiquid nature and lack of knowledge about it make bond less popular among potential investors in Bangladesh. There are some complexities with the bonds. One cannot sell bonds easily like shares on the market. It is also difficult to calculate bond price as coupon payment is made in future while principal amount is given at the end of maturity. Value of money decreases due to inflation and a person without very good knowledge about finance cannot calculate the prices of bonds.
The central bank sells treasury bills and bonds to meet short-term borrowing needs of the government. The mature periods for such bill are 28-day, 91-day, 182-day and 364-day. The treasury bonds are sold to meet budget deficit and long-term government financing. The mature periods are five years, 10 years, 15 years and 20 years. The central bank holds auction for treasury bonds every week and anybody can bid for it through any bank. The auction committee fixes bond interest rate and it is applicable throughout the bond's life. This means that buyers will get interest payment at the rates fixed by the committee. Any individual is allowed to buy government bond, which pays interest or coupon after every six months and it is of Tk 0.1 million denomination or its multiplier, from the primary or secondary market through any bank.
There is a secondary market for sale and purchase of bonds. Yet this market has not been functioning properly since its inception in 2005, depriving the capital market of the gains and benefits expected from it. Since its inception at the Dhaka bourse, there had been negligible transactions at the secondary market. IBBL Mudaraba Perpetual Bond, the only one corporate bond issued by Islamic Bangladesh Bank Limited (IBBL), however, showed some good performance. No capital market can reach maturity without a strong bond market. Once the government bond market becomes vibrant, only then the private sector bond market grows.
Meantime, the Bangladesh Bank (BB) is considering further steps to make bond market vibrant and attractive to investors by putting pressure on nine primary dealers to play a more active role. Despite offering higher returns on investment than long-term bank deposits, bond market failed to get desired response from potential investors. The BB partly blamed the financial institutions engaged as primary dealers (PDs) for the poor response. Since bonds are not easily convertible like other assets, investors might have been less enthusiastic about them.
The PDs are yet to look at the bond market as another earning window. These financial institutions have so far taken little initiative to lure investors into bond trading although it offers return ranging between 10.5 and 12.88 per cent in five to 20 years' time. There is an allegation that PDs of treasury bonds show unwillingness to offer government bonds for sales in the secondary market, rather they hold bonds as reserve requirements.
However, a spokesman for the PDs denied the allegation. He said they (the PDs) do not find investors who want to buy treasury bonds at the secondary market. Unattractive yields on bonds, tax on interest incomes from treasury bonds and high per-unit value of treasury bonds made the bond market unattractive to investors. General investors also do not have much confidence in the private sector as few corporate debentures are in default without any legal on moral recourse to the investors. The market requires more private sector bonds from banks and non-bank financial institutions to make the secondary bond market active.
In a recent circular, the BB has instructed commercial banks not to invest more than 10 per cent of their capital in bonds and debentures to protect the interest of small investors in the capital market. The BB said companies must take permission from the Securities and Exchange Commission (SEC) before launching bonds or debentures. Banks were so far allowed to invest any amount in the financial instruments to give the bond market the much-needed boost.
The new circular is otherwise aimed at encouraging small investors as it limits the banks' bulk purchase of bonds. Compliance for single borrower exposure also limits bank loan to 15 per cent of its capital to a single client. It means that if a company floats Tk 1.0 billion bonds and approaches a bank to buy all of them, the regulation will prevent the bank from doing so and leave a wider investment scope for small investors.
Undeniably, the country's stock market is yet not large and the existing bond market tiny. The government and the private sector need to issue more bonds. In Vietnam, the bond market is worth about US$5.0 billion while the Bangladesh's existing bond market is less than one-fifth of it, in value terms. Country's capital market also needs to be more mature and liquid. There should be provision for foreign investment in the domestic bond market. Like China and India, Bangladesh rules do not also allow foreign investment in domestic bond market. If a proper domestic market with adequate infrastructure, right financial instruments like government bonds and corporate bonds can be developed, it can expand the size of the country's capital market and facilitate its deepening in the desirable direction.
szkhan@thefinancialexpress-bd.com