The potential of Bangladesh capital market

The capital market is the engine of growth for an economy, and performs a critical role in acting as an intermediary between savers and companies seeking additional financing for business expansion. Vibrant capital market is likely to support a robust economy.
While lending by commercial banks provides valuable initial support for corporate growth, a developed stock-market is an important pre-requisite for moving into a more mature growth phase with more sophisticated conglomerates.
Bangladesh capital market where the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE) play a dominant part has multiple roles in a nation's economy. They provide avenues for investment and capital acquisition and also gives an indication of overall economic condition.
The functioning of an efficient capital market may ensure smooth transfer of funds from the savers to the investors. While banking systems cannot meet up the total need for funds to the market economy, capital market stands up to supplement.
An organised and well-managed stock market prompts economic development by recognising and financing productive projects that lead to economic activities. An unpredictable stock market causes a lag in financing of productive projects and allocation of capital proficiency; and lacks in diversification of risk, market instrument, domestic saving, corporate governance and facilitation of exchange of goods and services.
On the financial front, the uncertain nature of stock market has a major macroeconomic impact, leading to inevitable contraction of credit, business bankruptcies and firing of workers, and banks could face failures and a linked decline of money supply.
Moreover, the impact of high volatility of a stock price will accelerate the speed at which the cycle moves, which means it may intensify an economic downturn if it is already in motion, or slow down the rate of growth of GDP in a growing economy.
Bangladesh stock market is still not broad and deep enough. Current and prospective issuers do not use the full potential of the market for raising equity capital by issuing shares and borrowing funds by issuing corporate bonds.
Moreover, people with savings feel uncomfortable in investing in Bangladesh capital market instruments in recent times. Rather they feel more comfortable in maintaining their savings with banks as fixed deposit receipts (FDRs) and Savings Certificates in recent times. It seems that regulators have failed to address the problems faced by both the issuers and the investors adequately.
Volatility in share markets has become a matter of concern in recent times for investors, regulators and brokerage firms. This concern centres on the perception that high volatility can lead to a general erosion of investors' confidence and flow of capital away from the share market. The recent political turmoil added an extra pressure to the stock market.
Access to high quality and credible corporate information remains a major problem in the market. While a handful of institutional investors may enjoy certain benefits since they have an investment unit manned with qualified officers, nothing exists for retail investors.
The market needs more and more good scrips. The process would be easier if it could draw attention of good issuers by improving the market governance system and eliminating scope for manipulation.
Inadequate disclosure requirement and a culture of family-owned conglomerates deter the expansion of corporate governance into the local industry. The regulators need to play an active role in removing the bureaucratic bottlenecks, and promote rules that provide incentives to these groups of companies to list.
The absence of independent research houses, retail investors primarily focus on advice given by their brokers, which often consists of market rumours. This is not acceptable, and it often leads to enormous losses for small investors who are vital for a low-income and emerging market like Bangladesh.
The market also does not have an adequate number of fundamentally sound scrips. The focus should be on the privatisation of state owned enterprises through public offerings in the bourses. The market has to reach such a stage of development that companies will take it as a serious alternative to bank financing.
An estimate suggests that the ratio of institutional-to-small investors is still low in Bangladesh, even relative to other emerging markets. Institutional investors bring long-term commitment and a greater focus on fundamentals and, hence, stability in the market.
The presence of institutional investors is also expected to ensure better valuation levels due to their specialised analytical skills. While public sector as well as private sector institutional investors in the economy, proprietary investment from these institutions is not significant.
Corporate governance of international standard is still lacking. Multinational corporations and institutions operating in Bangladesh often adhere to a very high international standard compliance regime.
An important aspect for Bangladesh capital market is reflection of fair value of scrips. This is not adequately present in the current scenario, and due to this reason the market is not receiving the attention of an important segment of investors, both foreign and local.
Investors are perhaps depending more on speculative analysis, resulting in volatility in the market, as opposed to fundamental analysis, which could attract more stable long-term investors who are sure about their investment tenure and expectations.
In terms of creating market depth, more profitable state-owned-enterprises should be listed. The supply of securities can be increased if the State Owned Enterprises (SOEs) are allowed to operate through the stock exchanges. Floatation of SOE scrips is expected to expand the market by couple of times. Corporatisation of SOEs will bring in transparency as well as confidence on the government financial system.
Incentive for private sector entrepreneurs to access the capital market should be more noticeable. Tax gap between listed and non-listed companies could be increased.
In a more developed market, institutional investors such as merchant banks, commercial banks, insurance companies, are major traders of securities. It needed enforceable and more effective laws and rules to attract foreign institutional investors.
The Bangladesh stock exchanges now demutualised. But demutualisation itself cannot solve all problems. It need to educate investors, owners, management and as such all stakeholders to adjust to the changed scenario and make best out of this.
The Bangladesh capital market still has a long way to go. The measures taken by the present government are yet to create positive impact on the market. If more investor-friendly policy reforms were to be implemented, the capital market will undoubtedly play a critical role in leading Bangladesh towards being the next Asian tiger with growth comparable to India, Vietnam and the other most dynamic economies in the region.
The writer is a staff reporter of the FE