Reviving the capital market in Bangladesh

Bangladesh recorded nominal economic growth under the previous regime. The headline performance, however, concealed deep-rooted structural weaknesses from entrenched corruption, weak fiscal discipline, and severe governance failures. These deficiencies strained the economy, leading to a sharp build-up of public debt and one of the highest non-performing loan (NPL) ratios globally, estimated at 35.7 per cent. This alarming figure reflected widespread financial mismanagement and systemic abuse within the banking sector.
Foreign exchange reserves deteriorated rapidly, falling from US$34.3 billion at the end of 2022 to US$20.48 billion by July 2024, a nearly 40 per cent decline mainly due to capital flight and fund siphoning by politically connected entities. Inflation surged to a 12-year high of 11.66 per cent in July 2024. Despite these pressures, the government maintained a 9 per cent interest rate cap between April 2020 and June 2023. Even after the SMART lending rate framework was introduced, rates rose only to 11.52 per cent by June 2024, which was insufficient to contain inflation.
Bangladesh Bank worsened these pressures by aggressively expanding monetary policy, injecting about Tk 980 billion in FY23 to support distressed banks, especially those controlled by the S Alam Group. This liquidity injection coincided with a Tk 1 trillion decline in foreign assets, so monetary expansion added no real economic value and directly fuelled inflation. Weak data transparency obscured the true extent of these imbalances, preventing timely corrective action and eroding public trust.
Together, these failures led to acute economic distress and set the stage for the political upheaval that ultimately caused the collapse of the previous regime.
REFORM UNDER INTERIM GOVERNMENT: The Interim Government, which assumed power in response to public demand and the July uprising, has made tangible progress in macroeconomic stabilisation. A key priority was rebuilding foreign exchange reserves, which rose from US$21.4 billion in 2024 to US$28.1 billion in 2025, a 31 per cent increase supported by restrictive import policies and a surge in remittance inflows.
The introduction of a market-driven exchange rate stabilised the foreign exchange market and restored incentives for remittances, which increased by 31 per cent year-on-year as of November 2025. Inflation moderated to 8.29 per cent in November 2025 from its 2024 peak, easing pressure on household incomes and creating space for future monetary management also initiated reforms to address the NPL crisis through asset quality reviews and stricter loan classification and recovery standards, alongside efforts to improve data transparency and institutional accountability.
Despite these stabilisation gains, growth recovery has been weak. GDP growth for FY25 stands at 3.69 per cent, the lowest in five years, reflecting subdued business confidence and ongoing political uncertainty. Foreign direct investment in equity declined by 17 per cent, while low domestic investor participation underscores concerns about policy predictability and governance continuity.
THE PROSPECTS FOR GROWTH: Macroeconomic stabilisation has yet to translate into robust growth, mainly due to unresolved political uncertainty. The absence of a clear roadmap toward an elected government has weighed on investor sentiment, compounded by recent political developments that heightened uncertainty.
However, Tarique Rahman's return after 17 years in exile has brought greater clarity to the political landscape. As a leading political figure and potential prime ministerial contender, his re-emergence has reduced ambiguity around the electoral process. His public messaging emphasising stability, security, and national unity has resonated with investors seeking assurance after prolonged volatility.
With expectations of greater policy continuity under an elected administration, business confidence is likely to improve, supporting investment inflows and a gradual recovery in growth. Continued prudence in macroeconomic management should further ease inflation, allowing interest rates to decline and stimulate consumption and investment. The IMF projects GDP growth to rebound to 4.9 per cent in 2026.
BANGLADESH CAPITAL MARKET: Despite improving macro fundamentals, Bangladesh's capital market remains under severe stress. The DSEX traded around 4,880-4,960 points in late December 2025, down about 11 per cent from its September peak and near a five-year low reached earlier in the year. Valuations remain compressed at 9-10x P/E, well below the three-year average of 14.4x, reflecting risk aversion rather than earnings deterioration.
In contrast, regional peers have delivered strong returns. Pakistan's KSE-100 reached record highs after IMF-backed reforms, Sri Lanka's ASPI rose 42 per cent year-on-year after debt restructuring, and India's Sensex delivered high single-digit returns. Bangladesh's underperformance highlights country-specific challenges, including political uncertainty, liquidity constraints, and structural weaknesses.
Market depth indicators reinforce this divergence. Market capitalisation declined to Tk 3.49 trillion in January 2025, while foreign ownership in multinational stocks fell sharply, with net foreign outflows of US$66 million in early FY26. Although brief inflows followed recent political developments, sustained foreign participation remains elusive.
STRUCTURAL CRACKS: The market's prolonged weakness reflects deep structural deficiencies. No new IPOs have been listed in the past 18 months, as approval timelines exceed two years, far longer than regional peers. Combined with limited tax incentives and weak disclosure standards, this has left only 25-30 investable companies among nearly 400 listed entities. dominates corporate funding, with loans approved within months and minimal disclosure, while capital market fundraising has collapsed. High interest rates and attractive fixed-income instruments have diverted liquidity away from equities, while mutual funds remain underdeveloped, accounting for less than 3 per cent of market capitalisation. Since September 2024, nearly 80,000 investors have exited the market.
FUTURE PATH: These conditions have created a cycle of low liquidity, weak participation, and depressed valuations. Nevertheless, macroeconomic stabilisation, improving reserves, and emerging political clarity provide a narrow but meaningful window for capital market revival. However, sustained recovery requires coordinated reforms addressing structural bottlenecks and restoring institutional credibility as follows:
Tax Incentives & Fiscal Measures. Expanding the corporate tax gap to 10-15 percentage points would restore strong incentives for companies to list. Making dividends up to Tk 1 lakh tax-free would shift household savings toward equities. A 20 per cent tax rebate would stimulate bond issuance and the development of the fixed-income market. Tax exemptions on mutual fund dividends up to Tk 1 lakh would accelerate mutual fund growth.
Regulatory Efficiency & Market Operations. Streamlined, digitised disclosures would improve transparency and investor confidence. Reducing IPO approval time to 3-6 months would revive the listing pipeline. Mandatory independent directors would protect minority shareholders and improve governance. Stronger oversight and transparency would enhance market integrity. Institutional reforms would improve BSEC's credibility and enforcement. Strengthening ICB would restore counter-cyclical market support.
Bank & Credit Policy. Targeted incentives would encourage private firms to voluntarily list on public markets. Aligning savings rates would reduce liquidity diversion from equities. Moreover, higher insurance investment would add stable long-term capital. Faster approvals would support domestic bond market growth.
Investors Education. Inter-agency coordination would ensure policy consistency. Supporting the financial literacy and institutional investor development would reduce volatility and herd behaviour.
Mutual Fund. Higher quotas would anchor long-term demand for Mutual Funds. Lifting the 15 per cent cap on the fund would unlock institutional capital. Routing institutional funds through mutual funds would reduce volatility.
END NOTE: If implemented consistently, these reforms could drive valuation re-rating toward historical norms, delivering meaningful upside and attracting renewed foreign participation. With much-anticipated political stabilisation under an elected government, Bangladesh's capital market, now a regional underperformer, may have the opportunity to make a turnaround.

The writer is Waqar Ahmad Choudhury, Managing Director & CEO, Vanguard Asset Management Limited