MASTER OF BUSINESS ADMINISTRATION

MBA (EVENING)

Course Name: Investment Analysis

Report on
INVESTMENT ENVIRONMENT IN BANGLADESH
A STUDY BASED ON THE CAPITAL MARKET

Submitted to
Dr. M. Farid Ahmed
Professor,
Department of Finance,
University of Dhaka

Prepared by
AQEEBUR RAHIM
ID: 32050

Date of Submission
16th April, 2017
 Investment Environment In Bangladesh: A Study Based On The Capital Market

Letter of Transmittal

April 16, 2017

Dr. M. Farid Ahmed
Professor
Department of Finance
University of Dhaka

Subject: Submission of Report on INVESTMENT ENVIRONMENT IN BANGLADESH

Dear Sir,

I am pleased to present this report on Investment Environment in Bangladesh: a study based on

the capital market. This is to inform you that I have successfully completed the report.

Working on this report has been really interesting & informative experience for me. I learned many
unidentified facts which I believe will be supportive to my academic & professional career in the
future. I have enjoyed working on this and I hope that my report will meet the level of your
expectations. I would try my best and shall be obliged to provide you with any clarification
regarding the report.

Sincerely,

AQEEBUR RAHIM 32050

2
 ACKNOWLEDGEMENT

Firstly, I would like to thank the Almighty Allah for giving me the strength, the patience, and the

knowledge to do this report on Investment Environment in Bangladesh: an empirical study on the

capital market. I would also like to take this ultimate opportunity with pleasure to thank our course

instructor, Professor, Dr. M. Farid Ahmed, for giving me the opportunity to do the report. He has

been very helpful to us throughout the entire process and has always been there to help us heartily

even through his hard times.

Moreover, I would also like to thank the people who helped out in providing solution to every

problem through discussion, without any faulty. I really appreciate even the minor sacrifice they

made in doing that. Without their efforts, it would have been impossible for me to finish this Case

Solution at such convenience. I would also like to thank my friends and family members for

showing me their support and help me in every possible ways throughout the entire work process.

With presence in every aspect, completing this task seemed as festive and interesting as ever.

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

ABSTRACT

Over the past decade Bangladesh performed well on many macroeconomic indicators, became

more integrated with the world economy, and achieved impressive social gains. But the

performance of other low-income countries suggests that Bangladesh has fallen short of its growth

potential. While Bangladesh has maintained fairly high per capita growth for the past decade, its

growth has nonetheless lagged far behind that in some countries. One prerequisite of having a

healthy investment climate in an economy is the availability of financing facility for the existing

and potential borrowers. The two major sources of finance in any country are the banks and the

capital market. This report is based on how the financing opportunities are like in Bangladesh and

how the capital market emerged after the crashes in 1996 and 2010. In this report, I tried to shed

light on the present scenario and recommended some actions required for restoring the confidence

of the investors.

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 TABLE OF CONTENTS
Abstract ......................................................................................................................................................... 4
Introduction .................................................................................................................................................. 6
Methodology................................................................................................................................................. 7
Scope of the work ......................................................................................................................................... 8
Objective of the report ................................................................................................................................. 8
Limitations of the banking based financial system of Bangladesh ............................................................... 9
Features of capital market .......................................................................................................................... 11
Classification of companies......................................................................................................................... 11
A Category Companies: ....................................................................................................................... 11
B Category Companies:........................................................................................................................ 11
G Category Companies: ........................................................................................................................ 12
N Category Companies ......................................................................................................................... 12
Z Category Companies.......................................................................................................................... 12
Importance of Capital Market in the e c o n o m y ...................................................................................... 12
Structure of the Capital Market IN BANGLADESH ...................................................................................... 14
Bangladesh Stock Market........................................................................................................................... 14
Current economy of Bangladesh ................................................................................................................ 15
Capital market development in Bangladesh ........................................................................................... 17
Bangladesh Stock Market crashes .............................................................................................................. 18
Crash during 1996 .................................................................................................................................. 18
Crash during 2010 ................................................................................................................................... 19
Reasons behind the two major crashes .................................................................................................... 20
Political economy inducing demand since 2 0 0 7 ................................................................................... 20
Macro-economic factors inducing EXCESS SAVINGS .............................................................................. 20
Gas and power sector shortage and idle business f u n d s .................................................................... 21
Excess liquidity in financial sector IN 2009 ............................................................................................. 21
Reform of the market after the Crashes ..................................................................................................... 21
Present scenario of Bangladesh CAPITAL MARKET ..................................................................................... 23
Actions required for restoring investors' confidence on the market ....................................................... 25
Recommendations ...................................................................................................................................... 26
Conclusion ................................................................................................................................................... 26
References ................................................................................................................................................. 27

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

INTRODUCTION

Bangladesh is a country of great potential with a fast growing economy. The rapid development

of the financial sector has earn the country the spot of the second largest financial sector in South

Asia. The economy has developed at the rate of 6-7% p.a. in the course of recent years. While the

greater part of the GDP has a place with the administration area, almost 66% of Bangladeshis are

utilized in the horticulture segment, with rice as the absolute most-important production.

The investment climate is the condition in which entrepreneurs operate. It is advanced by the

legislature and its offices to bolster business entrepreneurs. Changes in investment conditions are

gainful to ventures of all sizes improving their capacity to get to the market and make investment

opportunities more lucrative. This, thus, will make job opportunities in return and courage

economic development. The investment atmosphere incorporates components that empower and

set conditions for the private sector to contribute.

One of the basic features of having a good investment environment is the easy access to financing

facilities for the potential entrepreneurs. The two main sources of fund in our country are the

financial institutions and the capital market. In the context of Bangladesh, a major portion of the

investments were funded by the financial institutions like banks. However, the limitations of the

banking industry is increasing the importance of having a sound and organized capital market for

fulfilling their financing needs.

A well-functioning capital market is one of the important element needed to attract both local and

foreign investors. So, more attention on making a competitive and efficient capital market would

ensure a sustainable flow of fund and an efficient mechanism for financing the private sector.

The Bangladesh equity market was extremely depressed due to mass exodus of investors from the

stock exchanges after the share market crisis in 2010. However, the market regained some of its

6
momentum in the last couple of years. Introduction of automated trading through electronic

registration and transfer of securities, simplification of rules and regulations, and guidelines on

corporate governance on compliance basis helped to regain such momentum. Even then, high

market investor base, near-absence of solid legal protection for investors seem to act as barriers to

mobilize adequate capital.

The financial turmoil that occurred in East Asia in mid-1997 taught the world that excessive

reliance on banks as the primary vehicle through which savings are channeled to investment

projects significantly exacerbates economic downturn when the banking sector suffers a crisis. The

special characteristics of the banking sector of Bangladesh include development orientation instead

of commercial orientation, vicious cycle of non-performing assets, lack of enforcement of

regulatory and supervisory arrangement, absence of good infrastructure, and lack of efficient

human resources. These inhibit banks ability in prompt conversion of savings into productive

investment. These limitations of the banking sector of Bangladesh increase the importance of

having a sound and organized capital market for fulfilling the needs of financing business

activities.

METHODOLOGY

This report is prepared on the basis of data from various sources of Bangladesh and with the

practical experience of the economic development of the country. Secondary data sources include

World Development Indicators, International Financial Statistics, Asian Development Outlook,

Annual Reports of Bangladesh Bank and BAPLC, including various reports and publications of

SEC, Chittagong Stock Exchange (CSE) and Dhaka Stock Exchange (DSE). In this paper, I have

stressed on the inflation, debt burden, social safety net programs and collapse of the capital market.

I also show the economic development of the country due to the creative activities of the

7
 Investment Environment In Bangladesh: A Study Based On The Capital Market

government of Bangladesh and various non-government organizations (NGOs). This study is

mostly quantitative in nature. Finally, based on the findings and analyses, policy recommendations

have been made. Statistical, financial and accounting tools and concepts have been applied in this

study where appropriate.

SCOPE OF THE WORK

Analyzing current performance of the selected countries in attracting foreign investment based on

available secondary data sources like ITC investment map. Government published data (in case of

availability) shall get priority to reflect the actual scenario. International standard of citation will

be strictly followed by the author to maintain high professionalism and acceptability of the study.

Looking after the challenges and recommending ways forward could be a major part of this study.

OBJECTIVE OF THE REPORT

The following specific objectives have been pursued in this study:

I. To map out the limitations of the bank-based financing system of Bangladesh.

II. To examine the structure of the existing financial sector of Bangladesh emphasizing on an

organized capital market.

III. To analyze limitations and examine opportunities of the capital market of Bangladesh

covering both equity and debt markets in creating a congenial investment climate.

IV. To provide a useful basis for building a sustainable capital market with a view to creating

a healthy investment climate in Bangladesh.

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LIMITATIONS OF THE BANKING BASED FINANCIAL SYSTEM OF

BANGLADESH

Since the 1990s, the banking sector has gone through a long reform process with the ultimate

objective of making it more efficient, competitive and resilient to adverse economic conditions.

Although a gradual improvement in banking sector has been observed but the potential of this

sector is still untapped. Some major limitations of the banking sector are mentioned below:

One of the major problems in the financial system of Bangladesh is the absence of an exit

policy. In one way or another, banks are allowed to continue their operation even in the

face of severe problems. A number of banks in our country, in the past, continued their

operation without meeting the minimum capital requirement and with a substantial amount

of defaulted loans. It seems that depositors were also not made aware of varying levels of

risk with different banks and, as a result, are unable to take their deposit decisions based

on the riskiness of the bank. This is an example of a moral hazard problem where weak

banks are not pressurized by the stakeholders, especially by the depositors although they

have representation in board of directors of banks, to make their operation sound and

efficient. This problem implies that Bangladeshs banking sector does not have adequate

market discipline.

A major problem in our banking sector is the accumulation of huge amounts of non-

performing loans. Almost, all the state owned banks are facing a very high defaulter rate.

Comparing to developed countries, where the tolerance range of non-performing loan is up

to 3 percent, and the performance of the banking sector of Bangladesh is very poor. Even

comparing to the neighboring south Asian countries, the non-performing loan amount is

much higher in Bangladesh.

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

In many cases, banks place an undue weight on collateral security rather than on forecasted

cash flow in approving/rejecting a loan application which makes it difficult for some

potential entrepreneurs to meet the banks requirement (The World Bank Report, 2008).

As a result the idea of entrepreneurship development by banks is not practiced or cultured

in our banking system.

Bank management must ensure the same set of standards both for the insider loan and loans

granted to the others. The issue of loans given to insider parties emerged as a matter of

concern in the mid 80s after the operation of private commercial banks in Bangladesh has

begun. Although Bangladesh Bank has adopted various measures for ensuring prudent

management of insider-loans, our banking sector is still burdened with a high amount of

defaulted loans granted to insiders.

Although there is a wide area network of branches of state owned commercial banks in

Bangladesh, lending is concentrated in urban areas. Thus, inequitable transfer of funds

from the rural areas to the urban areas is observed. Moreover, private commercial banks,

in operation since 1990, have very few rural activities. This pattern of urban-based credit

portfolio makes the target of equitable development unachievable. Also there is a disparity

between the rural areas and the urban areas in the quality of banking services offered. In

recent years, a number of modern information and communication technology based

banking products have been made available mainly in the urban areas.

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FEATURES OF CAPITAL MARKET

The functioning of an efficient capital market may ensure smooth floatation of funds from the

savers to the investors. When banking system cannot meet up the total need for funds to the

market economy, capital market stands up to supplement. To put it in a single sentence, we can

therefore say that the increased need for funds in the business sector has created an immense

need for an effective and efficient capital market. It facilitates an efficient transfer of resources

from savers to investors and becomes conduits for channeling investment funds from investors

to borrowers. The capital market is required to meet at least two basic requirements:

(a) It should support industrialization through savings mobilization, investment fund

allocation and maturity transformation, and

(b) It must be safe and efficient in discharging the aforesaid function. It has two segments,

namely, securities segments and non-securities segments.

CLASSIFICATION OF COMPANIES

The SEC classified firms in terms of A, B, G, N and Z categories that had not only guided retail

investors to know weak shares but also helped reducing netting and gambling done by a few hidden

consortia

A CATEGORY COMPANIES: Companies which are regular in holding the Annual General

Meetings (AGM) and have declared dividend at the rate of 10 percent or more in a calendar

year. (Mutual fund, debentures and bonds are being traded in this category).

B CATEGORY COMPANIES: Companies which are regular in holding the AGM but have

failed to declare dividend at least at the rate of 10 percent in a calendar year.

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

G CATEGORY COMPANIES: Greenfield companies.

N CATEGORY COMPANIES: All newly listed companies except Greenfield companies will

be placed in this category and their settlement system would be like B-Category companies.

Z CATEGORY COMPANIES: Companies which have failed to hold the AGM or failed to

declare any dividend or which are not in operation continuously for more than six months or

whose accumulated loss after adjustment of revenue reserve, if any is negative and exceeded its

paid up capital.

IMPORTANCE OF CAPITAL MARKET IN THE E C O N O M Y

The capital market is the market for long-term loans and equity capital. Developing countries

in fact, view capital market as the engine for future growth through mobilizing of surplus fund

to the deficit group. An efficient capital market may perform as an alternative to many other

financing sources as being the least cost capital source. Especially in a country like ours, where

savings is minimal, and capital market can no won- der be a lucrative source of finance.

The securities market provides a linkage between the savings and the preferred in- vestment

across the business entities and other economic units, specially the general households that in

aggregate form the surplus savings units. It offers alternative in- vestment windows to the

surplus savings units by mobilizing their savings and channelizes them through securities into

optimal destinations. The stock market enables all individuals, irrespective of their means, to

share the increased wealth provided by competitive enterprises. Moreover, the stock market

also provides a market system for purchase and sale of listed securities and thereby ensures

liquidity (transferability of securities), which is the basis for the joint stock enterprise system.

(The existence of the stock market makes it possible to satisfy simultaneously the needs of the

12
firms for capital and of investors for liquidity.) Especially at times when the banking sector

of the country is facing the challenge of bringing down the advance-deposit ratio to sustainable

level, the economy of the country is unfolding newer horizon of opportunities. Due to over-

exposure level of the financial system the securities market could play a very positive role,

had there been no market debacle. Due to the last market crash and follow through events, it

will be difficult to utilize the primary market to raise significant volume of funds. Thus the

greatest economic importance of securities market at this point can be understood from the

opportunities being lost. Bangladesh having its target to become a middle income country

must have significant level of rise in investment, which at the present state of banking system

cannot be met. The securities market could play the key role in meeting these huge investment

demands if the secondary market would remain stable.

The capital market also helps increase savings and investment, which are essential for

economic development. An equity market, by allowing diversification across a variety of

assets, helps reduce the risk the investors must bear, thus reducing the cost of capital, which

in turn spurs investment and economic growth. However, volatility and market efficiency are

two important features which will ultimately determine the effectiveness of the stock market

in economic development. If a stock market is inefficient due to insufficient informational

supply, investors face difficulty in choosing the optimal investment as information on

corporate performance is slow or less available. The resulting uncertainty may induce

investors either to withdraw from the market until this uncertainty is resolved or discourage

them to invest funds for long term. Moreover, if investors are not rewarded for taking on higher

risk by investing in the stock market, or if excess volatility weakens investors confidence, they

will not invest their savings in the stock market, and hence deter economic growth. The

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

emerging stock markets offer an opportunity to examine the evolution of stock return

distributions and stochastic processes in response to economic and political changes in these

emerging economies.

STRUCTURE OF THE CAPITAL MARKET IN BANGLADESH

Bangladesh capital market is one of the smallest in Asia but within the south Asian re- gion,

it is the third largest one. It has two full-fledged automated stock exchanges namely Dhaka

Stock Exchange (DSE), Chittagong Stock Exchange (CSE) and an OTC exchange operated

by CSE. It also consists of a dedicated regulator, the Securities and Exchange Commission

(SEC), since, it implements rules and regulations, monitors their implications to operate and

develop the capital.

It consists of Central Depository Bangladesh Limited (CDBL), the only Central Depository

in Bangladesh that provides facilities for the settlement of transactions of dematerialized

securities in CSE market and DSE.

BANGLADESH STOCK MARKET

Amid all the formidable obstacles, our countrys securities market has been gaining

momentum. Even in the backdrop of Global Financial Crisis 2008 when the stock mar- kets

in almost all the developed and developing countries crashed and Governments of those

countries spent thousands of dollars to rescue the markets. Both depth and di- mension in

Bangladesh capital market has been becoming gradually strong and securi- ties market

registered significant growth at the initial stage and later market fell a little bit. The reason is

might be that the amount of foreign portfolio in Bangladesh securities market is more or less

only two percent. But lack of supply of fundamentally sound shares has been causing
14
overheating situation and circumstance like overpricing has been a common phenomenon here

in recent times. Transaction has risen from a daily Tk. of 250 crore two years ago to Tk. 2,500

crore now and DSE General Index has risen to record 8,918 from 2,400 two years back. But

demand and supply should match at a certain point to the tune of bringing time-bound balance

in the securities market.

CURRENT ECONOMY OF BANGLADESH

Bangladesh today is the 48th Largest Economy with US $225 billion GDP on the basis of

purchasing power parity. In nominal terms, the per capita income is US $750 with a GDP size

of nearly US $90 Million, Bangladesh is the 70th largest exporter and the 4th largest RMG

exporter in the world, Bangladesh is also the 21st fastest growing economy.

Impressive growth of 5% and above in the last two decades have indeed taken the economy

to a new growth trajectory contributed by steady agricultural production, increased export

earnings, healthy remittance and vibrant domestic demands. The steady growth of GDP during

recent global recessions has demonstrated the resilience of our economy, adding that the

economy has strong fundamentals.

Bangladesh has through unique times just as many of the countries in the region passed

through in the recent past. Several International banks and risk analysts have given strong

recommendation to Bangladesh's steady growth recently. They recognized that Bangladesh

has:

The world's two top credit rating agencies, Standard and Poors (S&P) and Moody's

Investor Service, for the first time, assigned sovereign credit ratings to Bangladesh.

S&P assigned BB- and Moody's Investors Service assigned Ba3 to Bangladesh and

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

termed the countries macroeconomic outlook stable, putting Bangladesh at par with

Philippines, Vietnam and Turkey. In the South Asian context, Bangladesh is

positioned higher than Pakistan and Sri Lanka.

Several global financial institutions have also identified Bangladesh as one of the

potential economies of the world, heading US investment bank Goldman Sachs has

included Bangladesh as one of the Next 11 (N1l) countries, after the BK1C nations

of Brazil, China, India and Russia as one of the rising economies of the world.

Similarly JP Morgan, another global leader in investment banking has included

Bangladesh in its 'JP Morgan frontier Five'. And in a recent update of their 2006

report on "The World in 2050-Price Waterhouse Coopers" extended their analysis

to include 13 other emerging economies including Bangladesh in their new ' PWC

30 list' as one of the long term potential growth economics by 2050.

JP Morgan in its "Ho Chi Minn Trial to Mexico" research report states that it is the

demographics that justify the inclusion of Bangladesh in the "JP Morgan Frontier

Five". Their report identifies that:

1. The country ranks fourth in growth in economically active population.

2. Five year economic growth is strong at 6.1% per annum.

3. Progress has been made over the last few years to reduce

poverty, in- creasing literacy levels and moderating

population growth to a more sustainable level.

4. There is an assertive judiciary,

5. An active civil society,

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 6. A relatively free media which has increased public accountability

Over the past two decades, privates sector has been contributing hand in hand with the state-

owned industries. The policy makers are taking initiatives for the private sector to grow even

further while dynamic entrepreneurs joined the race with their inimitable ideas. There is also

an inflow of qualified and matured professionals in the service industry including the financial

sector.

CAPITAL MARKET DEVELOPMENT IN BANGLADESH

Bangladesh stock markets have grown significantly during the last decade. Still, the size of the

market is relatively small compared to other Asian Markets. Size and liquidity of the

companies provide some distinguishing features of developing markets. The market

capitalization ratio, defined as the value of listed stocks divided by GDP, is used as a measure

of stock market size. It has got economic significance because market size is positively

correlated with the ability to mobilize capital and diversify risk. Total market capitalization of

DSE was US $ 1.049 billion in 1994 compared to US $ 127.515 billion in India, US $ 12.263

billion in Pakistan, US $ 191.778 billion in South Korea and US $199.276 in Malaysia.

This market is also small relative to the size of the economy. Market capitalization in

Bangladesh was only 4.07 per cent of GDP in 1994 against 25.77 per cent in Pakistan, 24.03

per cent in Sri Lanka, 104.14 per cent in Thailand and 294.56 per cent in Malaysia. This ratio

for Bangladesh is 0.075 in June 1997 and 0.05 in June 2000.

Almost 33 lakh investors are now involved in the capital market at the moment; more than

70% of which are general investors. The total market capitalization of all shares and

debentures of the listed securities stood at USD 49.4 billion by the end of 2010, indicating an

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

84% growth from the year before. The total turnover has increased from USD 0.13 billion to

USD 0.25 billion at the end of 2010 which indicates a 91% growth. However, the capital

market has been exposed to greater risk since PE ratio rose from 19.9% to 29.71% from

January, 2010 to November, 2010.

Dematerialization may be successful in stimulating the further growth of Bangladesh capital

market, but to ensure the success of such an initiative, it will be necessary to ensure that the

regulatory framework and authority are sufficiently strong, in order to strike a balance between

the interests of both the members of stock exchanges and the public.

On a long-term basis, it may be important for a successful bond market to be built in

Bangladesh. This can assist in creating more instruments for investors and, at the same time,

creating some depth in the capital market. Bond markets can also be utilized by the

government in raising necessary funds, and can serve as an efficient method of financing in

large projects

BANGLADESH STOCK MARKET CRASHES

The capital market of Bangladesh had two major debacles which occurred in 1996 and 2010,

creating some bad impacts upon the countrys total capital market.

CRASH DURING 1996

During 1996 some local and foreign initiatives succeeded in drawing some international

attention which was followed by an international conference in 1994. The conference followed

by some regional as well international market destabilizing events, some hedge fund managers

started investing in the local capital market. The market was neither operational nor in terms

18
of legal structure ready to absorb such sudden surge in demand both at home and abroad.

Consequently within a very short tenure (from July to October of 1996) the market price level

soared to a record level (of that time) height with the index rising from 894 levels lo 3627 level.

The market P/E ratio of all the listed securities reached to the level of 66.5 within a short period

of 4 months. The 'cry-out' auction based trading system of DSE could not handle the huge

demand coming from several thousand investors who crowded the Motijheel thoroughfare.

Consequently street based curb market took over the legal trade executed through stock market

sys- tem. Unsuspecting inexperienced new entrant investors allured by very quick profit

potentials were buying anything without understanding substance, legality and validity of their

investment. Unscrupulous market players (which even include some issuers) were minting

fortunes by selling fake securities to the crowd who were eager to make quick profit from the

market. Thereafter, for obvious reason the market experienced first major crash in l996

affecting about fifty thousand investors.

CRASH DURING 2010

The market crash of 2010 drew greater degree of attention because much larger segments of

population spreading all around the country are affected this time as the market in this period

has gained significant growth. The securities market debacle in 2010 need to be viewed from

different perspectives. The following section attempts to examine those issues mostly from

demand side factors. This is a plain logical analysis supported by some facts and figure. The

analysis covered the period from 2004 till 2010 because, the impacts of 1996 continued until

2003 period. It can be considered that, the market started consolidation and development from

2004.

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

REASONS BEHIND THE TWO MAJOR CRASHES

Analysis shows that, the capital market of the country experiences some abnormal upheaval

during the last few years, which had full bubble effects in 2010 concluding with the burst. The

causes and factors to such behavior are as following:

POLITICAL ECONOMY INDUCING DEMAND SINCE 200 7

The political reality of 2007 was one of the major reasons for creating a sudden rise in the

market. Until 2006, the growth pattern in the market was gradual and moderate. From January

2007, the market experienced a sharp rise in terms of transaction and price level. Especially

the political situations in late 2006 made the market little shy of investment. The emergence

of military backed caretaker government (CTG) initially encouraged the investors to come

back to capital market. At the time of declared campaign against corruption, budgetary policy

support for legalization of undisclosed in- come through investment in securities market also

encouraged new investors to transfer their funds to this market. Besides new civilian investors,

influx of armed forces members as investors also boosted the demands in the market.

MACRO-ECONOMIC FACTORS INDUCING EXCESS SAVINGS

Since the last decade, the economy of the country has been growing at a fairly steady rate with

national savings rate remaining around 30% of GDP. Such high savings rates were attained

mostly due to robust growth in inward remittances from expatriate Bangladeshis over the

years. While savings rates were good along with rising GDP, the in- vestment rates were not

matching. The real ADP in terms of budgeted amount as well as implemented amount was

not increasing. As a result the public sector investment declined from a level of more than 6%

to slightly over 4% level. Due to different infra- structural and political reasons, the private

20
sector investments also could not match the shortfalls in public sector investments. Thus an

overall surplus savings has been created in the economy.

GAS AND POWER SECTOR SHORTAGE AND IDLE BUSINESS F U N D S

Due to shortage of power and gas, the government declared moratorium on new connections.

Such policy almost stopped establishment or expansion of new industrial units and even

residential buildings. The moratorium was further extended by the newly elected government

until middle of this year. Consequently private sector in- vestment for manufacturing sector

almost stalled for quite some time. The global financial crisis of 2008-09 also made many

export oriented business to keep their production facilities partially or totally closed.

Therefore, the business people having idle funds found incentives to move their funds lo capital

market. The transfer of such funds also created excess demand pushing the price level upward.

EXCESS LIQUIDITY IN FINANCIAL SECTOR IN 2009

The decline in private sectors' new or expansion oriented investment also created significant

volume of surplus liquidity at the hands of financial institutions. The financial institutions

started investment in the securities market as one of the avenue to utilize their liquidity.

Almost all the major financial institutions got involved in deploying a portion of their idle

funds in the market.

REFORM OF THE MARKET AFTER THE CRASHES

The stock market crash reveals structural weaknesses of the market rules, laws and guidelines

are framed and implemented to improve infrastructure and foundation on which the stock ex-

changes can operate effectively. Major notable features of capital market reforms

implemented so far include:

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

a) Reorganizing SEC to strengthen infrastructure capabilities and build capacity

b) Updating rules, laws and guidelines to improve regulation framework:

a) Amendment of the SEC Act 1993 to empower SEC a vetting power, financial

penalty power with a view to monitoring and enforcing compliance of rules.

SEC is also allowed to conduct special audit to detect window dressing in the

accounts of the listed firms, if it suspects.

b) Information disclosure rule specifying the requirements to comply with the

International Accounting Standard (IAS) and International Standards of

Auditing (ISA) for timely and quality information disclosure in the market.

c) In the new issue rule, the pricing of IPOs has been delegated to the issue

manager.

d) In the merchant bank regulation, three activities, viz., issue management,

underwriting and non-discretionary portfolio management, are restricted to

merchant banks operating in Bangladesh.

c) Separation of the management from the ownership at both DSE and CSE

d) Inclusion of the representatives of the listed companies and the investors on the

governing bodies of both DSE and CSE

e) Automation of trading at both DSE and CSE introducing order-driven system re-

placing out-cry system

f) Amendment of the Trust Act, 1882 enabling pension fund and insurance fund investing

in securities market and thereby create demand for securities.

22
 g) Enactment of the Central Depository Act enabling national securities ltd. com- pany

to establish CDS. The implementation of the on-line CDS will in fact avoid problems

of "fake shares" and "short sale" to a great extent.

However, a few important reform measures are still pending. These include, among others:

a) Restructuring Investment Corporation of Bangladesh (ICB) by creating three

subsidiary companies carrying out the function of merchant banking, fund management

and securities brokerage house

b) Divesting government holdings in SOEs and MNCs through securities market

c) Issuing government securities with medium term and long-term maturities on a regular

basis through the securities market.

Thus the period of 2003 to 06 can be viewed as a period of consolidation & restoration.

PRESENT SCENARIO OF BANGLADESH CAPITAL MARKET

Albeit Bangladesh economy is not more integrated with the global economies, Global

Financial Crisis 2008 has dented every sphere of Bangladesh. Bangladesh economy has also

been limping since being dented by the blow of financial meltdown. On the one hand,

Bangladesh economy has been gaining benefits from the crisis and on the other hand it has

lost. Because of income declining of developed countries citizens low-priced garments of

Bangladesh have been very popular registering more growth in the countrys apparel sector.

But financial collapse in many developed countries slowed down the infrastructural

development especially construction works in Middle East which have pushed many

Bangladeshi workers come back. Remittance inflow has risen but number of workers going

abroad has fallen drastically. In the year 2009-10 a record $11 billon remittance has come to
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 Investment Environment In Bangladesh: A Study Based On The Capital Market

Bangladesh against $9.76 billion in 2008-09 fiscal year. Countrys foreign currency reserve

hit new record of $11.35 billion recently be- cause of low import expenditure and rising trend

of export earnings. But still 44 per- cent people are under poverty level; the Government and

other concerned organizations should take comprehensive efforts to eradicate poverty. But to

achieve desired level of growth to turn Bangladesh into a middle income country by 2021,

growth rate should be accelerated. To do that more investment in infrastructure especially

power sector, roads and highway, modern and sophisticated port facilities are badly needed.

Cost of doing business should also be reduced along with the removal of red tapes in

commencing business. Instead of eying towards foreign countries, multi-lateral donors and

agencies Government should choose countrys capital market to raise fund for development

projects especially for the construction of Padma Bridge, elevated express-way and other big

projects which will also ensure peoples association in profitable Government properties.

Associating general people in lucrative Government venture means to create the way of

ensuring equitable distribution of wealth and this is only possible through strong and vibrant

capital market. Because of sluggish economic activities investment has not gotten momentum

in recent years but for the sake of rapid economic growth more savings and investment are

also necessary. Another important issue is that tax to GDP (Gross Domestic Product) is very

poor in Bangladesh, which has been another cause of fiscal deficit in almost every year.

The Government has been regularly depending upon the borrowing both from internal and

external sources. Because of huge Government borrowing from the countrys formal banking

sector private industrial ventures and other commercial set ups have been on declining trend.

Instead of borrowing from banking sources and other foreign lenders Government should

depend on raising fund from the countrys capital market.

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ACTIONS REQUIRED FOR RESTORING INVESTORS' CONFIDENCE ON THE

MARKET

Present situation of Bangladesh stock markets needs to be strengthened to provide greater

investors' confidence and to improve market liquidity and competitiveness. The existing

trading and settlement systems need to be addressed for reform. To this end, the issues that

deserve immediate attention are as follows:

The membership of stock exchanges to institutions and corporate sector with

adequate capital is required. Improvement of the flow of information, introduction

of a system of market-maker in addition to the prevailing order-driven system,

credible quicker settlement and the development of over-the counter markets

(OCT) for large green field projects and non-listed securities are the prerequisites.

To redress the problems of the stock markets in Bangladesh, policy prescription

should aim at par to the favorable environment within which the flaws of the

market could be mitigated, activities of hidden consortia would be ineffective and

the likely exposure of investors to various market abuses including market

manipulation should be reduced.

Due emphasis should be given to implement the existing rules and regulations;

Regulatory framework should be adequate for the prevention of un- bridled

speculation, market-rigging and insider trading so that erosion in public confidence

can be contained;

Attempts should be taken to make the present order-driven system of automation

foolproof so as to eliminate the opportunity of manipulating the market.

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 Investment Environment In Bangladesh: A Study Based On The Capital Market

RECOMMENDATIONS

Capital market in Bangladesh is now going through a hard time currently as there are some

upheavals in the market and there exists an upsetting condition in the stock markets. But as

per the past occasions, it is evident that our current capital market has a good ground now for

future developments. We should take this opportunity to boost up the market as well as

contribute to our economy. In addition, our mindset needs to be changed regarding earning

profit from the capital market overnight. Foreign investments also need to be increased to

ensure a sound capital and along with this, the government should make an authentic list of

the companies that has credibility and accountability. If we can develop our capital market, it

will definitely enhance our national economy.

CONCLUSION

Developing countries which accounts for 75% of the world's population, have an enduring

need to attract capital and technology to improve their infrastructure and standard of living.

Thus, they look forward to their capital markets as the engine for future growth as its existence

ensures mobilization of surplus funds to the ones suffering from deficit. In Bangladesh we

have a capital market that is yet to be further nurtured to get the fruit out of it. Without doing

this we cannot undergo heavy industrialization and other capital based development. We must

overcome all sort of problems to strengthen our capital market. Various methods and policies

may be adapted regarding this, but the investors mindset is one of the most important thing

that must be changed to ensure the development of the market. If we can strengthen the market

properly, it is only then we can have a sound economy in terms of capital and related

developments in our country

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