Financial institutions' overexposure to capital markets
Saturday, 2 October 2010
According to a recent study conducted by Bangladesh Bank (BB), 18 among 29 financial institutions and many banks have invested in the capital market. As of Jun 30, more than 25 per cent of their paid up capital and reserves were invested with eight more than 50 per cent and seven more than 100 per cent.
It would not create so much unease if the stock markets in Bangladesh were anchored on strong foundations. As it is, despite considerable improvements, the stock markets here continue to be a source of much concern. Many fear that the stock markets are still under the manipulative influences of the scam makers of 1996, which led to the market crash.
Thus, in this context, it cannot be a prudent policy of the banks and other financial institutions to invest hugely in the capital market as they have done. They could take limited risks by making very studied and careful investments in the share market.
Bangladesh Bank restricted through a directive recently that financial institutions' investment in the stock markets can be no more than 25 per cent of their paid capital and reserves. But one wonders whether this is enough and that too coming late from the central bank. A former distinguished governor of the Bangladesh Bank, Salehuddin Ahmed, is of the view that under no circumstances banks should be allowed to invest more than 10 per cent of their money in the share market. But under BB's latest directive the ceiling on such investment is 25 per cent. Therefore, a further policy review in this area may well be the need of the hour for the sake of the longer term security of the financial sector of the country.
Banks and other financial institutions cannot just take risks like any other investors in the capital market because if their investments in this market suffer, the financial institutions may have to close down in such a situation putting their depositors in great peril. Indeed, such was the case in western countries recently where banks in great number just had to be closed down from insolvency arising out of their bad or doubtful investments.
It would not create so much unease if the stock markets in Bangladesh were anchored on strong foundations. As it is, despite considerable improvements, the stock markets here continue to be a source of much concern. Many fear that the stock markets are still under the manipulative influences of the scam makers of 1996, which led to the market crash.
Thus, in this context, it cannot be a prudent policy of the banks and other financial institutions to invest hugely in the capital market as they have done. They could take limited risks by making very studied and careful investments in the share market.
Bangladesh Bank restricted through a directive recently that financial institutions' investment in the stock markets can be no more than 25 per cent of their paid capital and reserves. But one wonders whether this is enough and that too coming late from the central bank. A former distinguished governor of the Bangladesh Bank, Salehuddin Ahmed, is of the view that under no circumstances banks should be allowed to invest more than 10 per cent of their money in the share market. But under BB's latest directive the ceiling on such investment is 25 per cent. Therefore, a further policy review in this area may well be the need of the hour for the sake of the longer term security of the financial sector of the country.
Banks and other financial institutions cannot just take risks like any other investors in the capital market because if their investments in this market suffer, the financial institutions may have to close down in such a situation putting their depositors in great peril. Indeed, such was the case in western countries recently where banks in great number just had to be closed down from insolvency arising out of their bad or doubtful investments.