The country's corporate bond market looks as grim as the market of T-bonds as banks remain a better, quicker and more easily accessible source of long-term financing.
Experts, however, suggest that a stronger bond market would have reduced businesses' dependency on banks for capital, which would in turn bring stability to the banking sector.
Banks rely on short-term deposits for long-term financing. To address the matter of maturity mismatch, the lenders deal with a constant pressure of booking more and more deposits for liquidity management.
That explains at least in part as to why nine of the 11 corporate bonds listed on the stock exchanges have been issued by private commercial banks for the purpose of raising their capital base.
Only green Sukuk bonds were issued by Beximco, and APSCL Fully Redeemable Coupon Bearing Bonds were issued by Ashuganj Power Station Company.
The face or par value of the corporate bonds ranges between Tk 100 and Tk 1 million. Four corporate bonds are trading at a discount.
Subscribers of the bonds issued by the banks are also mostly banks. Low yields keep away individual and institutional investors from investing in the debt securities.
Policy reforms, especially tax incentives and relevant cost cuts, are must to encourage enterprises to issue bonds while investors must get better yields - higher than savings certificates.
Banks Vs corporate bonds
The absence of a thriving bond market has resulted in an over-dependence of large corporations on the banking system. It is affecting capital market investors too as they do not have many options to balance their portfolios against risky investments in stocks.
According to IDLC Investments, banks have capacity constraints in providing long-term financing. The limitation could be easily overcome by the bond market.
The deposit structures of banks point to the fact that they accumulate capital mostly in the form of short-term deposits (70pc) -- less than one year.
"Bonds should be established as the primary way to meet certain financing requirements -- for example 10+ years of financing. Or bonds should be mandatory means for additional financing for large bank borrowers," said Salim Afzal Shawon, head of research at BRAC EPL Stock Brokerage Limited.
In doing so, the government has to cut cost of issuing bonds and listing in the secondary market.
The cost of issuing bonds is 1.5-2.0 per cent of the total volume. The high cost along with the time needed to raise funds discourages bond issuance.
Moreover, the issuer has to pay application fee, stamp duty, trustee fee, CDBL fee, annual listing fee etc.
The DSE charges 0.25 per cent of a corporate bond until the bond size exceeds Tk 100 million. For bonds bigger than that it charges 0.15 per cent of the total amount as initial listing fee.
The minimum initial fee is Tk 50,000 while the maximum Tk 10 million for listing on the DSE. As bonds tend to be much bigger than equity securities in terms of size, bond issuers have to pay the maximum fee for the listing.
On the other hand, a one-stop financing solution from the banking system is more convenient for corporations, said Mr Shawon.
What needs to be done to boost corporate bond market?
Long-term finance from the banking sector should not be allowed, said Prof Abu Ahmed, a former chairman of the economics department of the University of Dhaka.
The central bank may take measures to this end, he said.
But increasing bonds availability would only mitigate the problems of the supply side.
To create demand for the debt instruments, the government should bring down the interest rate of savings certificates to make it lower than the yields of corporate bonds, Prof Ahmed said.
At the moment, trading in corporate bonds in the secondary market is insignificant. It is partly attributed to "held for maturity" preference by institutional investors, Mr Shawon said.
"Fixed-income investments are sensitive to interest rate movements, and our interest rates are often static owing to policy matters."
If BB policies promote market-based movement of interest rates and instrument prices, it will create scope for gains from selling bonds in the secondary market.
A majority of the investors in Bangladesh prefer capital gains rather than long-term investment, which is reflected in their preference for stocks over bonds.
Many corporations lack adequate internal management strength to manage disclosure requirements and investor relationships associated with listing, said Mr Shawon. The bond market can become vibrant if more corporations with improved corporate governance and disclosure practices get listed in the capital market.
Bonds issuers being unable to pay back investors is another major concern for investors who would not risk losing their principal amounts, a matter that could be solved by introducing insurance or other assurance mechanism, added the head of research of BRAC EPL Stock Brokerage.
To increase the demand for bonds, investors should be offered tax incentives.
Highlighting the insignificant size of the existing corporate bond market, Prof Hafiz Md. Hasan Babu, chairman of the DSE, insisted on tax exemption on investments in all kinds of bonds, including Sukuk and asset-backed securities, similar to zero coupon bonds, to make the bond market an attractive investment destination.
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