In the last two decades, country's policymakers have taken a series of measures to create a vibrant bond market. While almost all the elements of an active bond market have long been present, these measures are yet to yield any effective outcome. The bond market is now only about 5.0 per cent of the country's Gross Domestic Product (GDP).
Bond market is a part of the capital market; its other part is equity market which is popularly known as stock or share market. Money market and capital market together form the financial market. Though foreign exchange market is part of the money market, it is sometimes considered as the third pillar of the financial market.
Bond is fundamentally a debt instrument and bond market is also called debt market. To put it in another way, investment in bond means investment in debt. Any government or corporate body may issue a bond to take a loan from the market. Investors or those who purchase the bond will get back the principal amount with a fixed or preset rate of interest after a certain period or on maturity. That's why bond is also known as fixed-income security.
The activity of bond market in Bangladesh is limited and fragmented. It is still dominated by the government securities. There are Treasury Bills (T-bills) and Bangladesh Government Treasury Bonds (BGTB or T-bonds) with different maturity periods. T-bills are short-term and t-bonds are long-term fixed income government securities. Latest statistics of the central bank show that total turnover of the secondary trading of the t-bills and t-bonds stood at Tk 282.91 billion in 2017 while the value was Tk 514.08 billion in 2016.
Absence of a secondary market is another problem. Currently, the secondary trading of the t-bills and t-bonds takes place in regular auctions through primary dealers. Banks and financial institutions as well as individuals are also eligible to invest in these bonds through the primary dealers. The secondary trading activity is basically confined within the primary dealers who are also obliged to hold a certain portion of t-bills and t-bonds to facilitate the government's monetary management through the central bank.
Moreover, absence of corporate bond shows the fractional nature of the bond market. Over the years, some corporate entities have issued different types of bonds in the market. These are placed privately. Interestingly, no updated data is available on the status of the corporate bond which is a vital element of the bond market. There is only one corporate bond now listed on the Dhaka Stock Exchange (DSE) and traded occasionally. Two other bonds, listed earlier, were redeemed on maturity. Again some 221 t-bonds are listed on the DSE. But not a bond has been traded so far while a large number of t-bonds have already been redeemed. Thus, listing in the stock exchange doesn't warrant the secondary transaction of bonds.
Higher rate of interests on different savings certificates issued by the government is also a big barrier to developing a vibrant bond market. Savings certificates are very attractive due to higher rate of return. Anyone can purchase a certain amount of savings certificates from the banks. Receiving profits and encashment is easy.
The annual average profit rate of savings certificate is now around 11 per cent while savings deposit rate in the banks is now 5.0 per cent which is even below the average level of inflation. Again, the average yield rates of t-bonds with different tenure (2-year to 20-year) is now hovering between 5.0 per cent and 8.50 per cent. Yield rates of the t-bills and t-bonds have declined sharply in the last couple of years. The reason is: t-bonds are guided by market mechanism, while saving certificates are fully administered by the government.
It is also costly for the government to borrow by selling the savings instruments. Higher rates of interests increase the interest burden of the government. Moreover, it discourages individuals to invest in the bonds. In fact, savings certificates dominate the country's fixed-income securities market as more than 50 per cent of the outstanding amount of such securities belong to different types of savings certificates. Currently, four types of such certificates are active in the market.
In the absence of a functional bond market, businesses and enterprises are heavily dependent on banks and financial institutions. It also creates a huge volume of bad loans. Taking the advantage of political support, some businesses have even embezzled huge amount of bank loans. This is taking a heavy toll on the financial sector.
Had there been an active bond market, pressure for bank finance might be less. Moreover, the bond market itself has some in-built transparency mechanism, and so it is difficult to mislead the investors. The bond market is also less speculative and acts as a counter-weight to the share market.
The Seven Five-Year Plan (7FYP) clearly mentioned that the government would make efforts to develop the long-term domestic bond market by issuing longer-maturity government bonds and bills, and thereby reduce its dependence on borrowing through the National Savings Schemes. It also pointed out that the development of domestic bond market with the proper development of the regulatory regime and the demand and supply side of the domestic bond market will be important for diversifying the domestic financing sources.
Recently, International Finance Corporation (IFC) has conducted a diagnostic study of the country's bond market and suggested a series of reforms and measures to make the market vibrant. Earlier, the Asian Development Bank (ADB) extended its support as a part of its Capital Market Development Programme. The Bangladesh Securities and Exchange Commission (BSEC) joined the move.
Meanwhile, the latest annual report of the central bank, released a few weeks earlier, contains a one-page note titled 'State of Bond Market development in Bangladesh.' But the note is merely a brief description of several steps taken so far to develop a bond market in the country.
However, there is no shortage of technical and financial support to develop an active bond market. What is lacking is initiative from the concerned authorities.
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