History of Bond Market in Bangladesh:

Before independence, the use of bonds as a means of resource mobilization was virtually non-

existent in Bangladesh. Immediately after liberation, the government of Bangladesh reissued long-

term bonds accepting the liabilities of the Income Tax Bonds and the Defense Bonds of the

Pakistan government held by Bangladeshi nationals and institutions. The government also issued

a 5% non-negotiable bond to Bangladeshi shareholders of nationalized industries. In addition,

savings bonds were also issued to pay for the value of demonetized 100-taka notes in 1974. Most

of these bonds are held by Bangladesh bank.

The first effort to mobilize savings for use of development expenditure was the issue of Wage

Earners Development Bonds in 1981 to be sold to Bangladeshi wage earners abroad. Later, a two-

year special treasury bond was issued in January 1984 to be sold to individuals, public and private

sector organizations including banks. In December 1985, another instrument, the National Bond,

was issued to be sold to non-bank investors.

During the implementation period of the financial sector reform programmed that took effect from

1990, Nationalized commercial banks, specialized banks and development financial institutions

had to make considerable provisions for huge classified loans. As a result, the capital base of those

banks and financial institutions eroded severely and their viability was seriously threatened. In this

situation, the government issued a series of bonds to restructure the capital base of these banks and

financial institutions as well as to assume the liabilities of the bad loans made to a number of public

sector organizations.
The government also issued some bonds for augmenting loan able funds for specialized banks and

financial institutions. Moreover, some bonds were also issued to mobilize funds for a number of

public sector organizations like the T&T Board, Bangladesh Biman etc.

Present condition of Bond Market in Bangladesh:

Currently Bangladesh bond market plays a small role in the economy. The bond market is very

thin compared to the neighboring countries. Government should take actions to improve the scope

of bond market in Bangladesh. At the end of 2006, the outstanding bond amount was only 2 % of

GDP, compared to Sri Lanka (55%), India (35%), Pakistan (31%) and Nepal (10%). The share of

the Bangladesh bond market among South Asian countries was only 0.2% the smallest among the

five countries.

The market is dominated by the fixed income government debt instruments. The maximum savings

of small investors are mobilized by only one instrument name National Saving Certificate. The

interest on this saving certificate is higher than that of other bonds in the market. Besides the

national saving certificate, the other government debt instruments are treasury bills and treasury

bonds. In December 2003, government issued 5 and 10 years’ maturity treasury bonds and 15 and

20 years’ bond were issued in July 2007. The capital raising pattern has been changed from a focus

in treasury bills to a noteworthy increase in treasury bonds. Consequently, the ratio of treasury

bills from about 20 : 80 in 2005 to 80 :20 in 2011. Bank an financial institutions are the main

buyers of treasury bonds. Commercial banks have obligation to purchase government securities as

it is accepted security to meet their statutory liquidity requirement (SLR) under the Banking

Companies Act. This is still a small market. Banks and financial instruments which have SLR
obligations are the only participants in this market. The government bonds are rarely traded on the

exchange.

In September 2006, the Ministry of Finance started publishing the yearly treasury bills and bonds

auction calendar. The calendar shows the information of dates, types of instruments and amount

of each auction. Bangladesh bank also started publishing the auction results on its website.

Bangladesh corporate debt market is very small in size. The outstanding amount is only 0.2% of

GDP. Thus corporate bond market in Bangladesh is at a budding stage. During 1988-2011, only 3

corporate bonds and 14 debentures were issued by public offerings (Table-3.1). Many of these

bonds and debentures were partially convertible to common stocks. The biggest issue of corporate

bond was made first in 2007. It was a perpetual bond named ‘IBBL Mudaraba Perpetual Bond’

with a size of Taka 3,000 million (approximately US$ 40 million). It is an Islamic bond on profit

sharing basis since interest is prohibited by Sariah Principles. At the end of 2011, three corporate

bonds and eight debentures were outstanding. The corporate bond market of Bangladesh faces

manifold impediments although it has a good prospectus because of an expected growth in

financial market. It is believed that the availability of long-term instruments is a prerequisite for

developing an efficient market structure.

Bond Market Participants:

One of the preconditions of being efficient bond market is the existence of large number of market

participants. Market participants can be divided into issuers, investors and intermediaries.
Issuers:

Most private sector enterprises are small and owner-run, many are of “cottage size” and most are

in the garment industry, which to date depends largely on short-term bank loans for financing.

These enterprises could benefit from longer-term funding but are neither large enough nor well

known enough to issue bonds. Most of the large-scale industrial units and commercial enterprises

are state owned. Their shares are not listed, and they do not offer debentures since their financing

needs are met by the government or by the state-owned NCBs. These state-owned firms generally

stay outside the capital market.

Although Bangladesh has a debenture market, to date only a small number of well-known issuers

have used the market. The liquidity in those debentures at the stock exchange is insignificant

because of the small number of investors and their buy-and-hold mentality. The investor

community does not seem to find this market too attractive owing to weak disclosure by the issuers,

which in turn reduces credibility and investor confidence.

Investors:

Few investors are sophisticated enough to think about investing in bonds. About 80% of the base

here is made up of retail investors, whose primary concerns include the equity at the stock

exchange or the government savings certificate. Of the few institutional investors that could

support a bond market, most are either prevented from investing in corporate bonds by restrictive

guidelines or are not professionally managed. The major institutional investors are the Investment

Corporation of Bangladesh—a government-owned financial institution—and the insurance

companies. The mutual fund industry in Bangladesh is the exclusive domain of ICB. There are no
private mutual funds to mobilize savings toward the debt market, and the ICB’s monopoly has

prevented new investor companies, that is, mutual funds, from developing in Bangladesh. Few

foreign investors are attracted to this, mainly because of the weak disclosure by the borrowers..

Intermediaries:

Intermediaries in Bangladesh lack many of the skills needed to foster an active local corporate

bond market. Commercial banks dominate the financial sector and not enough intermediaries are

skilled in securities. Few are able to identify issuers and investors and bring them to the market.

They provide little or no research analysis on industries or companies to encourage investment in

the local debt market. Too few private merchant banks are able to conduct financial advisory and

trust services. Hence the market is illiquid, with large spreads. At the same time, the fee structure

and pricing are high enough to allow intermediaries to make money. Even if they are able to

participate, intermediaries are reluctant to take any risk in dealing.

Benefits of Bond Market for Market Participants:

Bond Market acts as buffer of equity market. This enables issuers and investors to convert the

limitations of equity market into the opportunities. Financial system to be sound and effective has

to have an efficient bond market. Otherwise, Capital Market especially cannot play its due role for

developing economy through allocation of capital; and generating employment opportunities

through industrialization of economy of the country.

Benefits for Issuers:

  Raising funds without collateral for long term.

 Lower cost of debt and thereby lowering cost of capital for the firm.

 Lower effective rate of interest for not being able to be compounded.

 No change in interest rate with the increase in inflation rate.

 Reduces tax burden since interest is shown as a charge.

 Protecting firms from the exposition to the market volatility

Benefits of Investors:

 Pays higher interest rates than savings.

 Offers safe return of principal.

 Have less volatility than the stock market.

 Offers regular income.

 Requires smaller initial investment.

 Highly liquid

Benefits of Intermediaries:

 Large spread can be exploited.

 High commission/fees.

 Phenomenal growth opportunities.

Cut down policy of commercial lending brings opportunity for broadening bond market base.