Why banks are wary of special fund for capital market

A majority of the country's 52 local banks have not shown much interest in creating the special fund that the central bank introduced in 2020 for secondary market investment without the need to keep provision for unrealized losses.

While the major reason was the volatility of the market over the last one decade, liquidity shortage, especially in the Shariah-compliant banks, and higher returns from fixed-income securities also discouraged investment in listed securities.

According to data from the securities regulator, only 13 banks formed a special fund of Tk 2 billion each as of February this year. They are AB Bank, BRAC Bank, Eastern Bank, First Security Islami Bank, Mercantile Bank, Prime Bank, NRB Commercial Bank, Prime Bank, Community Bank, Shahjalal Islami Bank, Southeast Bank, IFIC Bank, and United Commercial Bank.

Of them, Shahjalal Islami Bank invested the entire fund of Tk 2 billion in the capital market, while IFIC Bank injected Tk 1.97 billion, First Security Islami Bank Tk 1.91 billion, Southeast Bank Tk 1.70 billion and AB Bank Tk 1.45 billion.

The City Bank formed a fund worth Tk 1.96 billion and utilized the whole amount in the capital market instruments.

"Banks' capital adequacy requirement and unpredictability of the market hindered their participation," said Mohammad Ali, managing director of Pubali Bank.

Under the Bessel-III requirement, a bank's risk-weighted asset would be Tk 200 million for a loan worth Tk 1 billion disbursed to an AAA-rated company. In that case, the company will have an additional capital requirement of Tk 30 million after tax.

The risk-weighted asset would be as high as Tk 2 billion if the same amount of money -- Tk 1 billion - is invested in shares of the same company, if listed. In that case, the lender will have to keep an additional capital of Tk 300 million after tax.

The bank will also have to keep in mind the need to pay dividends to shareholders. Hence, it will try to avoid making risky investments.

The secondary market has remained volatile since the Bangladesh Bank asked the banks to form a five-year-long special fund following a plea of the securities regulator to boost liquidity in the market.

The BB on Tuesday extended the tenure of the special funds by another 22 months to December next year in a bid to support the stock market rattled by low turnovers.

Wishing not to be named, a senior official of Shahjalal Islami Bank said the central bank extended the tenure of the special funds to contain the withdrawal of the money already injected into listed securities as that will intensify the erosion of the market's value.

Banks are suffering from liquidity crunch and many of them are even unable to pay back depositors, said Md. Ashequr Rahman, managing director of Midway Securities.

"Challenges of the banks are increasing day by day. They have to think before investing in the market as there is a fear of loss," Mr Rahman said.

As per the BB circular on the special fund, a bank can create such a fund with its own resources or with money received from the BB through the repo or re-financing schemes.

The fund can be invested in shares, mutual funds, bonds or debentures, and special purpose funds. And there is no need for keeping a provision against a decline in the market value of the assets.

Most banks showed little interest in creating the fund until 2023 as the market had experienced a persistent falling trend. Rather, they increased their investments in fixed-income securities for high returns.

Losses in equities also drove away investments from the market.

For example, Shahjalal Islami Bank experienced a 122 per cent year-on-year jump in income to Tk 1.31 billion in 2022 but income from the equity market fell 22 per cent to Tk 240 million.

Prime Bank showed the same reason for its lack of interest in investing in equities from the special fund.

Mr. Rahman, chief of Midway Securities, said many banks still have scope to invest in the market.

The tariff imposed by the United States of America hit almost all renowned stock markets across the globe. "But the country's stock market has faced no impact due to the US tariff, which indicates that the market has hit its bottom.

"Banks have scope to invest in good stocks," Mr Rahman added.

mufazzal.fe@gmail.com