Capital market is the heart of any economy. Through the stock market, savings are channelised into effective long-term investments. Such a market contributes immensely to a country's gross domestic product (GDP) growth. This is why sometimes it is called the barometer of an economy. A developing country like Bangladesh badly suffers from the lack of capital formation, a prerequisite for sustainable economic development. A developed and vibrant capital market can provide a big avenue for capital formation.
Although there are two stock markets in Bangladesh, their contribution to the country's GDP in terms of capitalisation is only around 25 per cent, whereas in Hong Kong it is 1090 per cent, in Malaysia 169 per cent, in Thailand 98 per cent, in India 80 per cent and even in the Philippines 91 per cent (as of June, 2014). Thus, compared to other countries' stock markets, ours is still very small. Moreover, our stock market is growing very slowly, but day by day it is becoming an important institution for capital formation.
Even though the history of our capital market is very long, about 60 years, it has not flourished properly due to post-independence political instability and the capital market debacles in 1996 and 2010.
However, even if it is late, our stock market has already implemented and finally initiated a number of contemporary reforms like online trading, state-of-the-art surveillance, next generation trading platform, demutualisation, Bangla website, investment protection fund, introduction of a new index benchmark by S&P, Shariah index and so on. Of all the recent reforms, demutualisation of stock exchanges was the most revolutionary initiative taken by the exchanges as it separated ownership (and voting rights) from the right of access to trading which will ensure transparency and accountability in exchange operation. The same people cannot play the role of a market player and a regulator in the market at the same time. It may cause market manipulation. It is our Finance Minister whose unbending attempt made it (demutualisation) possible.
Some people, particularly members and directors of stock exchanges, mentioned earlier that demutualisation would not bring any benefit for the exchanges at all. We cannot expect immediate benefits from demutualisation. It will take time to get the full benefits. If everything is alright, they will prove wrong very soon. However, after demutualization, the exchanges have to deal with many challenges. Of them, making profit is the foremost one as it has become a profit-oriented organisation from a non-profit one. Now the exchanges have an obligation to provide dividends for their shareholders. Empirically, most of the stock exchanges experience a positive impact of demutualisation on their profit unlike the Philippines Stock Exchange that experienced negative return just after demutualisation.
At the initial stage, the Dhaka Stock Exchange (DSE) will not face such a profit problem as it has sufficient reserve funds. The paid-up capital of the DSE is now Tk 18.03 billion. In the last two fiscal years 2011-12 and 2012-13, it made profits of Tk 1.15 billion and Tk 940 million respectively. Provided that the last fiscal year's profit is repeated in the current year, the DSE will be unable to pay at least 10 per cent dividend from its current profit to its shareholders. Paying dividend from its reserve is perilous. Thus the DSE has no option but to increase its income sources. After demutualisation, the DSE has already passed about one year, but we have not seen any visible initiative to increase profit for the exchange or make the exchange adaptable with the changing environment.
The DSE is mainly an equity-based market. Although the DSE has some corporate bonds and mutual funds, the number is very insufficient. The DSE has also treasury bonds, but those are not traded on the exchange. The DSE has to increase its product base e.g. financial derivatives, corporate bonds, mutual funds, government bonds and so on. We have long been hearing that the DSE has already taken an initiative to raise its product base by introducing index funds (Shariah index fund), exchange traded fund (ETF) etc. But, these exist in announcement only. In addition, the DSE has not recovered yet from the latest market turmoil that happened in the fiscal year 2010-11. The confidence of investors has not been restored yet. To cope with the situation, the DSE itself has to do something. It has to identify the problem and solve it accordingly.
Following are some issues discussed here and some propositions made to the DSE:
MORE MUTUAL FUNDS: The DSE has only 41 mutual funds. Their total market value is less than 2 per cent of the total market capitalisation. In a developed market, the share of mutual funds is 40 per cent or more of the total market. Mutual funds help keep the market stable. In addition, we have to bring more institutional investors in the market, because they are the real investors who hold shares for long. In the DSE, most of the investors are retailers who buy shares for immediate sale. Even the behaviour of institutional investors in our market is just like the retailers. As a result, once our market goes down, it continues to be down as most of the investors keep selling their shares. Thus, our stock exchanges should bring more mutual funds in the market to make our market more stable.
MORE FIXED INCOME PRODUCTS: Fixed income products (bond and debenture) mean those products that generate fixed income for its holders. Stock exchanges need such fixed income products for diversification of risks. Moreover, some investors are risk avoiders - they want assurance about fixed income. Nonetheless, the DSE has only three corporate bonds and 221 treasury bonds, but the treasury bonds are not traded in the exchange. The DSE should immediately make necessary arrangements for trading in treasury bonds and also enhance the corporate bond market.
Another issue concerning the debenture market is that the DSE has eight debentures which matured more than five years ago, but still are showed as listed instruments of the DSE. Even, none knows about the current status of those debentures. The DSE is recommended to settle this issue immediately as it may convey a wrong message to the investors. The DSE is also suggested to bring more debentures in the market for improving the depth of the market.
DERIVATIVE MARKET: To bring products' variation and increase the profit base of the exchange, the DSE has to introduce a derivative market without any delay. Derivative is a financial instrument, the value of which is 'derived' from something else - either another financial instrument or an index or measurement of some kinds (e.g. weather). Although the derivative market is a complex one, the DSE has to introduce this market very soon. If necessary, the DSE may arrange a number of workshops, seminars, awareness programmes and training for investors to make them aware about this and adaptable with this new product.
LISTING BIG FIRMS: There are about 5,000 companies in Bangladesh, but only 265 of them have been listed in the stock market, as of June 2014. It could be possible to identify at least 100 big companies or groups (both local and foreign) that are still unlisted. For instances, Basundhara, Jamuna, Akij, Abul Khair, Nasir, Rangs, Transcom, Partex, Concord, Walton, Rahimafrooz, Runner, PHP, TK, Habib, Bestway, Khaled Group and so on are still not listed. Some foreign giants like ALICO, Standard Chartered Bank, Citibank NA, HSBC, Uniliver Bangladesh Limited, Nestle Bangladesh, Robi Axiata, Banglalink, Airtel, Siemens, Ericsson, Symphony, Chevron, Avery Denison, Sanofi-aventis, Mobil and so on have also not been listed with the stock market. Our stock market cannot get established due to short supply of shares of fundamentally good and big companies. Most of the companies are very small in terms of paid-up capital and additionally their financial base is very poor. So the market is being manipulated by some large investors. This results in the regular ups and downs of the market and the consequent crash. In these circumstances, we have to bring more companies which are large in size and fundamentally strong. The government and the BSEC have to frame necessary laws, if possible, to bring such companies into the market in order to stabilise it. Most of the above-mentioned multinational companies are already listed in India. Therefore, the BSEC should look into the matter as to why it is not possible in Bangladesh. The BSEC also should take an initiative to bring all government-owned public companies in the stock market as early as possible.
UNORGANISED OTC MARKET: Our over the counter (OTC) market is still unorganised. The OTC market, by definition, means the facilities provided by an exchange for the purpose of buying or selling unlisted or delisted securities from the stock exchanges, but only delisted securities are traded in the OTC market of the DSE. Thus, the OTC market cannot contribute considerably to the DSE's turnover. If the DSE makes the OTC market organised, it could be an important source of income for the DSE. The bourse may initiate bringing unlisted securities alongside delisted securities in the OTC market. Furthermore, the trading platform for the OTC should be upgraded and automated. Another point the DSE should consider is that since small companies disrupt the main market, all small companies should be delisted and sent to the OTC market for trading separately.
SEPARATE CLEARING AND SETTLEMENT COMPANY: Former presidents and directors of the DSE and the CSE (Chittagong Stock Exchange) desired to establish a separate clearing and settlement company for both the bourses. But still the clearing and settlement activities at both the exchanges are performed by banks. If both the exchanges have a separate clearing and settlement company, several benefits will be attained-first, the clearing duration will be reduced; secondly, costs will be reduced; thirdly, the trading volume will increase. These will result in improved profits. Thus, both the exchanges should take necessary action to set up this immediately.
LACK OF PROFESSIONALS: Although the DSE has a well-furnished training academy, the training is mainly designed for the investors where a very little scope is there for its employees. In the changing situation, the DSE should make its employees skilled and professionals so that they can cope with the situation. Unfortunately, the DSE management has no initiative to make their employees competent through training. The DSE should arrange both local and foreign training for the employees to make them skilled and competent, especially in the capital market.
AWARENESS PROGRAMME: In the years 2009 and 2010, the DSE used to arrange many awareness programmes about the market for investors across the country. Unfortunately, the DSE stopped such programmes. Although some awareness programmes are still arranged, they are limited in the capital city. Large potential investors are still unaware or uninformed about the market. Whoever knows about the market, they have either wrong perception or do not know the mechanism of the market. The DSE itself has to make all those arrangements for making them informed and skilled through various programmes across the country.
NO EDUCATION ON CAPITAL MARKET: No institution or training centre for training or education about the capital market is there in the country. Although Finance Minister AMA Muhith inaugurated an institute-the Bangladesh Institute of Capital Market (BICM)-on December 9, 2010 with a view to strengthening the base of the country's stock market, the BICM could not start its academic curriculum yet. Its activities are still limited to some training for investors. Even our universities and other educational institutions did not include any curriculum on the capital market functioning. Whatever was done was based on the US capital market and mostly impractical. Consequently, we are not getting capital market specialists or experts either from investors or from employees. Nonetheless, the Finance Minister said informally that education on financial market would be included in textbooks.
Even though the DSE has many problems, it has very high potentiality to become an emerging market within a very short time. In fact, the DSE is now trying to recover from its recent turmoil and it implemented reforms in many areas during the last several years. But, it has still lots of issues to deal with. It is the high time to address all the anomalies.
Nonetheless, at present, the DSE needs to extend its existing business as well as search for new products like ETF, Shariah index fund, Index Fund, Sukuk and so on to ensure diversified products for investors. The DSE management should keep in mind that they have already passed one year after demutualisation. Still they could not show any improvement regarding an increase in their profit. If the DSE fails to ensure at least 10 per cent dividends for its shareholders, it will be put in the dock by its shareholders. However, we hope the DSE will be able to tap all the benefits of demutualisation.
The writer is the Lecturer of Finance and Banking Department of Islamic University, Kushtia and former senior executive at the Research and Development Department of Dhaka
Stock Exchange. bokhtiar_bank@yahoo.com