Developing an efficient capital market to spur economic growth
Wednesday, 30 December 2009
Md Sajib Hossain
GROWTH in a modern economy hinges on an efficient financial sector that pools scattered small domestic savings and mobilises foreign capital for productive investment. In Bangladesh, the financial sector is dominated by the banking sector which enjoys a monopoly in fixing the lending rate. The capital market has, however, been growing steadily for the past couple of years, with market capitalisation reaching Taka 1848.76 billion and market capitalisation to GDP ratio to 30.06 as in November 2009. This growth rate of the capital market must be sustained and accelerated to expedite the economic growth of the country.
Garretsen, Lensink and Sterken (2004) have found a causal relationship between economic growth and financial market's development: a 1.0 per cent improvement of economic growth determines a 0.4 per cent rise of market capitalisation/GDP ratio. Beck, Lundberg and Majnoni (2006), have also found a positive correlation between capital market development (measured by a dummy variable computed to reflect if the market capitalisation exceeds 13, 5 per cent of GDP) and economic growth. Bose (2005) offers a theoretical financial model that explains the positive correlation between stock market development and economic growth. Beckaert, Harvey and Lundblad (2005) have analysed financial liberalisation as a special case of capital market development and determined that equity market liberalisation, on average, leads to a 1.0 per cent increase in annual real economic growth.
Development of capital market means at the fundamental level that more scattered funds are brought together efficiently for investment purposes, leading to higher economic growth.
The government must play a key role in developing the capital market by clearly defining legal and regulatory framework, facilitating the users and suppliers of funds, and eradicating the mismatch between the supply and demand of stocks with minimum intervention in the market. In recent times, a significant number of investors entered the capital market, together with greater than before participation by the institutional investors, creating an extra demand. This is a very positive sign if this augmented demand can be exploited by increased supply of securities. The government may offload its holdings in different SoEs (state-owned-enterprises) and MNCs (multinational companies) operating in Bangladesh. This will meet, on one hand, the increased demand of stocks and reduce the government's dependence on excessive bank borrowing and foreign loan on unfavourable conditions, on the other.
Moreover, the government must create a confidence among the investors that their hard-earned money is not subject to any manipulation, syndicate, irresponsible comments and decisions from regulatory authorities.
Our capital market has undoubtedly got a very big exposure in recent times with tens of thousands of new investors entering the market, dozens of IPO (the biggest being the IPO of GrameenPhone) hitting the market, market capitalisation reaching more than Taka 1.86 trillion, average daily turnover crossing Taka 100 billion mark, the benchmark DSE general Index passing 4400 points, market capitalisation to GDP ratio reaching 30.06, and some modern techniques such as Book Building Method for fixing IPO price being introduced. However, our capital market has passed through and has been passing through some uncertainties which require to be properly addressed. Mutual Fund verdict, SEC's appeal against High Court verdict on Mutual Funds amended rule, shifting of poor performing companies to the OTC (over-the-counter) market, new laws regarding insurance companies' paid-up capital and operation, Bangladesh Bank's directive regarding increased paid-up capital of NBFIs and, most importantly, the frequent intervention of SEC in the market raised confusion and uncertainty among the investors. This may impede development of our capital market in the long run. As capital market is a quite sensitive and responsive place, so any matter needs to be urgently and quickly addressed in consultation with and suggestions from all the relevant stakeholders.
The role of both financial and information intermediary is noteworthy for sustainable progress of the capital market. The financial intermediary (banks, NBFIs, Mutual Funds, insurance companies and other institutional investors) must play a greater role in encouraging and bringing new issuers to the market, efficiently aggregating funds from investors and investing the same. It is important to mention that there are some issue managers in our capital market who did not bring or manage a single issue during the last couple of years.
Moreover, the significance of information intermediary (auditors, credit rating agencies, financial analyst and financial newspapers and journals) is also increasing day by day. As our capital market is at its infancy and most of the investors lack investment knowledge and insights, information intermediary can assist in disseminating information to the investors and issuers, add value by enhancing credibility of the financial reports and news, educating the general investors in analysing financial and investment information and finally, help both the users and suppliers in predicting the performance of the company, the individual industry to which the company belongs to, the short- and long-term movement of economy at macro level.
Finally , if we can really create a sound and efficient capital market, which is an efficient tool for resources mobilisation and allocation, greater dependence on the banking sector can be reduced, medium and large projects of both public and private sectors can be financed through raising funds from the capital market, excessive borrowing of the government from banking sectors, foreign countries and multi-lateral development partners (such as World Bank, IMF and ADB) on tight caveat can be avoided, and dynamism in the economy can be injected exploiting all the investment opportunities. This will result in higher economic growth, such as 7-8% growth of the GDP.
(The writer can be reached at
e-mail: sajibfin06@yahoo.com)
GROWTH in a modern economy hinges on an efficient financial sector that pools scattered small domestic savings and mobilises foreign capital for productive investment. In Bangladesh, the financial sector is dominated by the banking sector which enjoys a monopoly in fixing the lending rate. The capital market has, however, been growing steadily for the past couple of years, with market capitalisation reaching Taka 1848.76 billion and market capitalisation to GDP ratio to 30.06 as in November 2009. This growth rate of the capital market must be sustained and accelerated to expedite the economic growth of the country.
Garretsen, Lensink and Sterken (2004) have found a causal relationship between economic growth and financial market's development: a 1.0 per cent improvement of economic growth determines a 0.4 per cent rise of market capitalisation/GDP ratio. Beck, Lundberg and Majnoni (2006), have also found a positive correlation between capital market development (measured by a dummy variable computed to reflect if the market capitalisation exceeds 13, 5 per cent of GDP) and economic growth. Bose (2005) offers a theoretical financial model that explains the positive correlation between stock market development and economic growth. Beckaert, Harvey and Lundblad (2005) have analysed financial liberalisation as a special case of capital market development and determined that equity market liberalisation, on average, leads to a 1.0 per cent increase in annual real economic growth.
Development of capital market means at the fundamental level that more scattered funds are brought together efficiently for investment purposes, leading to higher economic growth.
The government must play a key role in developing the capital market by clearly defining legal and regulatory framework, facilitating the users and suppliers of funds, and eradicating the mismatch between the supply and demand of stocks with minimum intervention in the market. In recent times, a significant number of investors entered the capital market, together with greater than before participation by the institutional investors, creating an extra demand. This is a very positive sign if this augmented demand can be exploited by increased supply of securities. The government may offload its holdings in different SoEs (state-owned-enterprises) and MNCs (multinational companies) operating in Bangladesh. This will meet, on one hand, the increased demand of stocks and reduce the government's dependence on excessive bank borrowing and foreign loan on unfavourable conditions, on the other.
Moreover, the government must create a confidence among the investors that their hard-earned money is not subject to any manipulation, syndicate, irresponsible comments and decisions from regulatory authorities.
Our capital market has undoubtedly got a very big exposure in recent times with tens of thousands of new investors entering the market, dozens of IPO (the biggest being the IPO of GrameenPhone) hitting the market, market capitalisation reaching more than Taka 1.86 trillion, average daily turnover crossing Taka 100 billion mark, the benchmark DSE general Index passing 4400 points, market capitalisation to GDP ratio reaching 30.06, and some modern techniques such as Book Building Method for fixing IPO price being introduced. However, our capital market has passed through and has been passing through some uncertainties which require to be properly addressed. Mutual Fund verdict, SEC's appeal against High Court verdict on Mutual Funds amended rule, shifting of poor performing companies to the OTC (over-the-counter) market, new laws regarding insurance companies' paid-up capital and operation, Bangladesh Bank's directive regarding increased paid-up capital of NBFIs and, most importantly, the frequent intervention of SEC in the market raised confusion and uncertainty among the investors. This may impede development of our capital market in the long run. As capital market is a quite sensitive and responsive place, so any matter needs to be urgently and quickly addressed in consultation with and suggestions from all the relevant stakeholders.
The role of both financial and information intermediary is noteworthy for sustainable progress of the capital market. The financial intermediary (banks, NBFIs, Mutual Funds, insurance companies and other institutional investors) must play a greater role in encouraging and bringing new issuers to the market, efficiently aggregating funds from investors and investing the same. It is important to mention that there are some issue managers in our capital market who did not bring or manage a single issue during the last couple of years.
Moreover, the significance of information intermediary (auditors, credit rating agencies, financial analyst and financial newspapers and journals) is also increasing day by day. As our capital market is at its infancy and most of the investors lack investment knowledge and insights, information intermediary can assist in disseminating information to the investors and issuers, add value by enhancing credibility of the financial reports and news, educating the general investors in analysing financial and investment information and finally, help both the users and suppliers in predicting the performance of the company, the individual industry to which the company belongs to, the short- and long-term movement of economy at macro level.
Finally , if we can really create a sound and efficient capital market, which is an efficient tool for resources mobilisation and allocation, greater dependence on the banking sector can be reduced, medium and large projects of both public and private sectors can be financed through raising funds from the capital market, excessive borrowing of the government from banking sectors, foreign countries and multi-lateral development partners (such as World Bank, IMF and ADB) on tight caveat can be avoided, and dynamism in the economy can be injected exploiting all the investment opportunities. This will result in higher economic growth, such as 7-8% growth of the GDP.
(The writer can be reached at
e-mail: sajibfin06@yahoo.com)