Objectives of the Report:

I. Broad Objective:

Broad objective of our report is find the weak regulatory framework, supply-side constraints such as a lack of the benchmark bonds, demand-side constraints such as the limited investor base, a lack of intermediaries with expertise in debt products, a lack of confidence in corporate borrowers, market distortions which are caused by the National Savings Scheme (NSS) offering above-market returns; and A lack of interest from private companies, including financial intermediaries and large business, In launching new debt products due to high fees. We have mainly tried to use our bookish knowledge practically. We have also looked for any further development of the Bond Market in Bangladesh in future which is in need. Finally, the paper offers a roadmap for the development of the Bangladesh bond market. To contribute to develop an effective bond in Bangladesh. If we analyze of the Bond Market, it will increase our knowledge about finance Market. In future we will be able to analyze the financial statements of any Market.

II. Specific Objective:

To get an overview and specific features of bond market in Bangladesh. To identify the impediments/ constraints and to tackle the problems in order to enhance the development of bond market and to make recommendations for the developments of the bond market. And also by comparing the bookish knowledge and practical knowledge.

Introduction:
The bond market is a financial market where participants buy and sell debt securities, usually in the form of bonds. Bond Market is composed of Treasury bond, Municipal Bond and Corporate Bond. This is of two kinds- Organized and OTC markets. There are various types of bond products depending on provisions, maturities, coupon rate, options, convertibility, etc. Bond Market in Bangladesh is dominated by treasury debt securities. It has now only one corporate bond; but does not have any municipal bond/debenture. In recent years, around 70 percent of the domestic savings are held in the form of bank deposits, while only 30 percent are investments in the debt market which is entirely dominated by government instruments. There hardly exists a corporate bond market in the country; it has a debenture market with only a small number of well-known issuers. As of today, only one corporate bond has been floated. Money Market is an integral part of the financial market of a country. It provides a medium for the redistribution of short term loan-able funds among financial institutions, which perform this function by selling these short term securities that usually are highly marketable. The money market in Bangladesh is in its transitional stage. The various constituent parts of it are in the process of formation, while continuous efforts are being made to develop appropriate and adequate instruments to be traded in the market. At present Money market instruments such as Government treasury bills of varying maturity, Bangladesh Bank Bills, Certificates of Deposits, Bankers Acceptance or L/C and Repo and Reverse etc in limited supply are available for trading in the market. However, the short-term credit market of the banking sector experienced a tremendous growth since in recent years, a total of about 6000 branches of the scheduled banks provided short-term credit throughout the country in the form of cash credit, overdraft and demand loan. The paper first analyzes the current situation of the bond markets in Bangladesh: The bond market has played a limited role in the Bangladesh economy. The Bangladesh bond market is also rather shallow compared to the neighboring countries. Then, the paper analyzes the main impediments to the Bangladesh debt market include (I) the weak regulatory framework; (ii) supply-side constraints such as a lack of the benchmark bonds; (iii) demand-side constraints such as the limited investor base; (iv) a lack of intermediaries with expertise in debt products; (v) a lack of confidence in corporate borrowers; (vi) market 2

distortions which are caused by the National Savings Scheme (NSS) offering above-market returns; and (vii) a lack of interest from private companies, including financial intermediaries and large business, in launching new debt products due to high fees. Finally, the paper offers a roadmap for the development of the Bangladesh bond market.

Limitations of the study:

1. Time and cost is main limitation of this report. Only three and half months were found to complete this report. 2. It is very difficult to give of the whole Bond Market in Bangladesh. 3. It is not a group work. So, sometimes it is very difficult to find out information. 4. I have not the experience in this work. So it also may be limitation of the study

Rationale of the study

International Master of Business Administration (IMBA) Course requires a three months attachment with an organization followed by a report assigned by the supervisor in the organization and endorsed by the faculty advisor. I got the opportunity to do my Research Project at the Bond Market in Bangladesh. My faculty Head of the Md. Nazmul Hasan, lecturer of Institute of Business Administration, also approved the topic and authorized me to prepare this report as part of the fulfillment of Project requirement.

Methodology of the Report

To conduct this study, I have used both primary and secondary data.

Both primary and secondary data sources will be used to generate this report. Primary data sources are Interviews and discussion with some key personnel of Bangladesh Bank (BB), Securities and Exchange Commission (SEC), and Dhaka Stock Exchange (DSE). The secondary data sources are Central Depository Bangladesh Limited (CDBL), Debt Management Department, Bangladesh Bank (BB), Research publications from Policy Analysis Unit, BB, Economic Relations Division, Ministry of Finance, Government of Bangladesh (GOB), Finance Division, Ministry of Finance, GOB, Donor publications, Government publications, Newspaper clippings, and Website materials. To identify the implementation, supervision, monitoring and repayment practice- interview with the employee and extensive study of the existing file was and practical case observations were done.

Background:
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Before independence, the use of bonds as a means of resource mobilization was virtually nonexistent 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. Following is the list of bonds issued by the government on various occasions: 15-year treasury bond (recapitalization and bad debt provisioning, issued 30.12.1990); 3-year Jatiya Biniyog Bond (national investment bond, issued 30.12. 1985); Interest-free treasury bond (issued 1988, withdrawn from 15.10.1993); treasury bond to specialized banks (issued 2.5.1993); 3-year T & T bond (for digital telephone installation, issued 29.12.1993); 3-year special treasury bond (for reimbursement of losses on A/C of working capital, issued 1.7.1993); 15-year treasury bond (capitalization, provisioning and agricultural loans write-off, issued 16.10.1993); 25-year treasury bond (jute sector liquidation, 5

issued 1.11.1993); 3-year treasury bond (reconstitution of BSRS, issued 16.4.1994); interest free treasury bond (issued 30.6.1994) and 2-year treasury bond (issued 15.7.1995) for reimbursement of agricultural loan remission,); 3-year treasury bond (reimbursement of loss in jute sector, issued 1.7.1994); 3-year T&T bond (for digital telephone installation, issued 7.8.1994); 3-year treasury bond (reimbursement of loan loss in BADC, issued 29.6.1995); 3-year treasury bond (reimbursement of loan loss in BTMC, issued 29.6.1995); 3-year T & T bond (for digital telephone installation, issued 30.1.1995); 3-year jute treasury bond (for jute sector, issued 1.7.1995); 25-year treasury bond (jute sector liquidation, issued 30.6.1994); 5-year Biman treasury bond (to increase share capital of Biman, issued 29.6.1995); 3-year jute treasury bond (issued 1.7.1995); 25-year jute treasury bond (private banks jute loan liquidation, issued 1.7.1995); 15-year agriculture treasury bond (reimbursement of agricultural loan remission, issued 16.4.1996); 3-year T & T bond (for digital telephone installation, issued 30.11.1996); 3 year treasury bond (reconstitution of BSRS, issued 19.6.1997); 5-year Biman treasury bond (share capital, issued 1.4.1997); 3-year treasury bond (reimbursement of loan loss in BTMC, issued 26.5.1996); 3-year T & T bond (for digital telephone installation, issued 22.6.1999); 10 year jute treasury bond (for jute sector, issued 1.7.1995); 5-year Biman treasury bond (issued 25.5.1998); 5-year Biman treasury bond (issued 15.7.1998); 10-year BSC treasury bond (to meet the loss of BSC, issued 1.7.1998); 10-year jute treasury bond (for jute sector, issued 1.7.1995); 3year T&T bond (issued 18.8.1999); and 3 year treasury bond (bad loan provisioning, issued 1.1.2000). Marketability of bonds issued in the country is very limited. The bulk of these bonds are held by the nationalized commercial banks. The few specialized and some private banks hold a part of them. Individuals and non-bank financial institutions also hold some of these bonds. Therefore, the main market of these bonds so far is being provided by the banks which hold them due to the government allocation system, as well as to maintain statutory liquidity requirements (SLR). Many of these bonds are non-negotiable. As there is no secondary market in the country, the holders of these bonds have to wait till the date of maturity for their encashment.

Literature Study:

Bond Market is a place or incidence of transaction in which any kind of bonds changes hands. References to the "bond market" usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger. The Securities Industry and Financial Markets Association classify the broader bond market into five specific bond markets. Corporate Government & Agency Municipal Mortgage Backed, Asset Backed, and Collateralized Debt Obligation Funding

Bond markets link issuers having long-term financing needs with investors willing to place funds in long-term, interest-bearing security. Bangladesh has both the issuers and the investors in place but it still has not been able to link them effectively through a bond market. The positive effect of developing a domestic bond market on the economy is well-known. On the one hand, bond markets are essential for a country to enter a sustained phase of development driven by market-based capital allocation and increased avenues for raising debt capital. On the other hand, the central position occupied by domestic bond markets in markedly increasing the resilience of a countrys financial system and insulating it against external shocks, contagion and reduction of access to international capital markets is established. Capital markets are essentially about matching the needs of investors with those that need capital for development. Bangladesh has no shortage of both such parties, a young and dynamic population that increasingly wants, and is able to, make provision for lifetime events, to save for 7

childrens education, for the possibility of ill health and ultimately for old age and retirement. On the other side of the equation, Bangladesh has a pressing need for investment resources to bolster its stretched infrastructure resources, to build more power stations, bridges, ports and gaspipelines to empower the people in the development of enterprise and the creation of jobs. Debt markets are an extremely effective mechanism for matching the long term needs of savers with those of entrepreneurs. Term capital is a precious commodity and it has been a frustration to see the process of long term savings, such as provident funds and life insurance contracts, being invested in short term instruments such as bank deposits, a process we call reverse term transformation but we could equally call it reverse alchemy in which the gold of term capital is turned into the lead of short term liabilities. As a development institution it is our goal to establish sustainable capacity. As Bangladesh has led the world in its development of the microfinance industry, we have impressed others with our ability to mobilize funds for productive purposes at the community level in the villages. What we need to see now is a similar degree of success at the institutional level in terms of mobilizing resources for infrastructure and other uses of long term funds. It is much more useful that Taka funds are mobilized to fund projects whose sole revenue source will be in Taka. Bangladesh should play a larger role in mobilizing its own capital resources and reducing the dependency upon donor institutions such as World Bank, IMF and ADB etc. Bond markets in most countries are built on the same basic elements: a number of issuers with long-term financing needs, investors with a need to place savings or other liquid funds in interest-bearing securities, intermediaries that bring together investors and issuers, and an infrastructure that provides a conducive environment for securities transactions, ensures legal title to securities and settlement of transactions, and provides price discovery information. The regulatory regime provides the basic framework for bond markets and indeed, for capital markets in general. Efficient bond markets are characterized by a competitive market structure, low transaction costs, low levels of fragmentation, a robust and safe market infrastructure, and a high level of heterogeneity among market participants. An important element of a domestic bond market is the government bond market. Development of a government bond market provides a number of important benefits if the pre requisites to a 8

sound development are in place. At the macroeconomic policy level, government securities market provides an avenue for domestic funding of budget deficits and avoids a build-up of foreign currency-denominated debt. A government securities market can also strengthen the transmission and implementation of monetary policy, including the achievement of monetary targets or inflation objectives, and can enable the use of market based indirect monetary policy instruments. The existence of such a market not only can enable authorities to smooth consumption and investment expenditures in response to shocks, but if coupled with sound debt management, can also help governments reduce their exposure to interest rate risk a situation that is looming large in the National Savings Certificates market, currency, and other financial risks. Finally, a shift toward market-oriented funding of government budget deficits will reduce debt-service costs over the medium to long term through development of a deep and liquid market for government securities. The prerequisites for establishing an efficient government domestic currency securities market include a credible and stable government; sound fiscal and monetary policies; effective legal, tax, and regulatory infrastructure; smooth and secure settlement arrangements; and a liberalized financial system with competing intermediaries. Since pension and life insurance reform helps in the development of government securities market, starting the process of pension and insurance reform now might be prudent because of the time it takes to feel the positive impact of such reforms on the capital market. The current emphasis on local-currency bond markets stems mainly from their risk-management benefits, as highlighted by the Asia and the Tequila crises. Issuing bonds can reduce the types of interest rate, foreign exchange, and refunding exposures that created those crises and can help ensure that emerging market borrowers have more shock absorbersmore toolsto limit the impact of those exposures. Foreign investment is clearly a plus for economic development but it does create certain risks. Since financial sector crises will never be eliminated, and, at least for many years to come, flows into emerging markets will be large in relation to the markets in which they are investing, any rapid outflow will create serious problems for the borrowing country. Emerging market countries must find ways to manage the risks, and hence benefit from international capital flows. They need to be able to reduce exposures to foreign-currency borrowing and also absorb the associated shocks and volatility, so that small problems will not 9

escalate into broadly based social catastrophes, harming people who were in no way directly involved in the markets. Local-currency bonds dampen the effect of crises created by international capital flows by locking in interest rates and local-currency funding. This allows borrowers to hold on to their funds and positions and work their way through a crisis. But, as happened in Asia, many borrowers want to rely on short-term, foreign-currency funding because when their economy and local currency is strong, such borrowing creates a double benefit to their net worth: the borrowers liabilities fall while its assets and revenues rise. The flip side is that when times turn bad, borrowers get a double hit on their net worth: liabilities rise and assets fall, causing strains and in some cases defaults. The solution to this problem is to use funding structures that have a neutral effect on net worth, as in the case of bonds. The difficulty lies in convincing borrowers that good times may turn bad, and in getting them to incur the potential opportunity cost from locking in stable funds and rates. Local bond markets also support major trends that stem from economic and financial sector growth. For issuers, infrastructure development is creating demands throughout Asia and other parts of the world for large-scale, longer-term funds that banks cannot often provide. Privatization, securitization (particularly for housing finance), and decentralization of governments are all creating new financing demands. On the investor side, many countries are now rich enough for insurance and social security and are creating institutional investors that need long-term assets. They want to keep their interest rate (fixed), reinvestment (long term), and local-currency risks to manageable levels. With macroeconomic stability increasing in many countries, issuers and investors alike are more willing to lock in rates. Local bond markets also strengthen the financial sector by encouraging greater transparency, pushing companies to disclose in public markets and forcing them to better understand themselves and in turn improve their management (as is the case in equity markets, too). Bond markets create competition with the local banking sector, which can reduce lending rates. Ideally, countries should try to build both primary and secondary markets for bonds. Primary markets reduce the three risks noted; secondary markets, by adding liquidity and broadening the investor base, help reduce funding costs. Many countries will not be able to create secondary markets, and some will find it hard to develop public primary markets. Whatever the situation, 10

reducing one or two of the three financing risks is worthwhile. Getting local-currency, fixed-rate, long-term funds in a private placement may cost more than a publicly traded issue but it might be all that a country can do, and will reduce the issuers risk. Developing bond markets can be more complicated than developing equity markets. Bond markets need supporting pricing infrastructure. They operate best when they have money market and longer term benchmarks. Most emerging markets lack these benchmarks. The issuers credit risk is another major concern. The issuer has to service and repay the bonds, whereas with equity the issuer can be incubated from payments as it grows. Investors need to make sure issuers have the cash flow to make interest payments and redeem principal. Bond markets simply cannot grow as quickly as equity markets can. Furthermore, bond markets need more sophisticated market participants. Issuers need to be able to manage their cash flow to make repayments. Bond markets typically need dealers and market makers, which means creating a new class of intermediaries who can take positions and manage their risks.

Bangladesh Capital Market

Brief History of Capital Market:
A. B.

Concepts started in USA at Wall Street in 1653. It came to South Asia in 1890.

11

C.

The origin of Stock Market in Bangladesh goes back to 28th April 1954 named East Pakistan Stock Exchange association at Narayangonj. Later it was s renamed East Pakistan Stock Exchange Ltd and Trading was started in 1956.

History of Bangladesh Capital Market:

East Pakistan Stock Exchange transferred in Dhaka in 1958. In 1964 it was renamed as Dhaka Stock Exchange Ltd. In 1976 Dhaka Stock Exchange Ltd started its operation with a bit different version. Securities & Exchange Commission (SEC) was established in 1994 to enhance the efficiency of countrys capital market.

A big wing of Bangladesh capital market, Chittagong Stock Exchange (CSE) incorporated in 1995.

Our Capital Market Products:

Shares Debentures Mutual Funds Bonds Derivates Future & Options

Capital Market Players:

Investors Private Limited Company Stock Exchange (DSE & CSE) 12

Brokers & Dealers Merchant Banks Securities and Exchange Commission (SEC) Central Depository Bangladesh Limited (CDBL)

Bangladesh Capital Market: Capital market is the market for securities, where companies and governments can raise long term funds. It is a market where money is lent for periods longer than a year. Capital market includes the stock market & the bond market. Our main regulator is Securities and Exchange Commissions (SEC) oversees the capital markets in their designated countries to ensure that investors are protected against fraud. Capital markets consist of the primary market and the secondary market. The primary markets are where new stocks and bonds are issued and sold (underwriting) to investors. And the Secondary markets are where existing securities are sold and bought from one investor or speculator to another, usually on exchange. At present Bangladesh have two stock exchanges: 1. Dhaka Stock Exchange.(Number of Registered Trading Members/Brokers is 195) 2. Chittagong Stock Exchange.(Number of Registered Trading Members/Brokers is 124) Bangladesh capital market is growing day by day, now there are two exchanges with 276 companies, 17 mutual funds, 8 debentures and 112 bonds. The market capitalization of Dhaka Stock Exchanges is BDT 104700 million and the market Capitalization of Chittagong Stock Exchange is BDT 800000 million. The average turnover of both exchanges is now around BDT 5000 million per day.

13

The Structure of Financial Market:

Treasury Treasury Bonds Bonds Treasury Treasury Bills Bills Credit Credit

Deposits Deposits

Banks Banks

Government Government General General Public Public Fixed Fixed Income Income Securities Securities (Debt (Debt Market) Market) Savings Savings Schemes Schemes

Subsidies Subsidies

State State Owned Owned Enterprises Enterprises

Secured Secured Debentures Debentures Primary Primary Market Market Secondary Secondary Market Market Corporates Corporates Government Government Machinery Machinery

Equity Equity

Types of bonds:
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On the basis of Variability of Coupon:

1. Zero Coupon Bonds

Zero Coupon Bonds are issued at a discount to their face value and at the time of maturity, the principal/face value is repaid to the holders. No interest (coupon) is paid to the holders and hence, there are no cash inflows in zero coupon bonds. The difference between issue price (discounted price) and redeemable price (face value) itself acts as interest to holders.

2. Floating Rate Bonds

In some bonds, fixed coupon rate to be provided to the holders is not specified. Instead, the coupon rate keeps fluctuating from time to time, with reference to a benchmark rate. Such types of bonds are referred to as Floating Rate Bonds. These bonds are known as Inverse Floaters and are common in developed markets. On the Basis of Variability of Maturity:

1. Callable Bonds These securities have provisions allowing the issuer to redeem the issue prior to the scheduled maturity date

2. Puttable Bonds

15

The holder of a puttable bond has the right (but not an obligation) to seek redemption (sell) from the issuer at any time before the maturity date. The holder may exercise put option in part or in full.

3. Convertible Bonds The holder of a convertible bond has the option to convert the bond into equity (in the same value as of the bond) of the issuing firm (borrowing firm) on pre-specified terms. This results in an automatic redemption of the bond before the maturity date. On the basis of Principal Repayment: 1. Amortizing Bonds Amortizing Bonds are those types of bonds in which the borrower (issuer) repays the principal along with the coupon over the life of the bond. For example - auto loans, home loans, consumer loans, etc. 2. Bonds with Sinking Fund Provisions Bonds with Sinking Fund Provisions have a provision as per which the issuer is required to retire some amount of outstanding bonds every year. The issuer has following options for doing so: I. By buying from the market ii. By creating a separate fund which calls the bonds on behalf of the issuer

Types of bond market:

16

The Securities Industry and Financial Markets Association classify the broader bond market into five specific bond markets. 1. Corporate 2. Government & Agency 3. Municipal 4. Mortgage Backed, Asset Backed, and Collateralized Debt Obligation 5. Funding

Corporate bond market of Bangladesh:

The issues of developing a corporate bond market that is currently near non-existent in Bangladesh. The two major sources of financing are the banks and capital market. Equity financing from capital markets through issuing new shares is lenient whereas debt financing through issuing corporate bonds is almost non-existent. Reasons for Non-existence of Corporate Bond Market: 1. High interest rate is a barrier to the corporate bond market. Government still borrow through various national savings schemes at high interest rates and banks collect deposits at quite high interest rates in competition with government securities. High interest rates deterred public borrowings by the corporate bodies, thereby thwarting the expected development of a corporate debt market. 2. Absence of secondary bond market is a major reason for non-existence of corporate bond market in Bangladesh. They mean that secondary organized market which includes OTC market, and private placement market for corporate bonds. 3. Lack of awareness and education deter to attract right issuers and investors in the corporate bond market. SOEs, multinational companies, infrastructure projects and large as well as medium enterprises shy away. The corporate sector of Bangladesh, for instance, insurance 17

companies, provident funds and pension funds of various organizations, mutual funds, etc. are not involved in this venture. 4. Lack of knowledge-based trading even for government bonds is an important reason for inactive corporate bond market. Bangladesh Bank has issued nine PD licenses but these are yet to fully start their activity. In the government bond market, PDs can play an important role to activate the secondary market of treasury bills and government securities. Later on, PDs can spread this knowledge based trading to the corporate sector. 5. Lack of innovative products has kept the market unattractive. Securities bearing zero and fixed coupons, and bonds following Islamic shariah only are available currently in Bangladesh. Bonds like Treasury Inflation Protected Securities (TIPS), Islamic Bonds (SUKUK Bond), High-Yield Bonds (HYB), and Deep Discount Bonds may help formation of corporate bonds market in Bangladesh. 6.

Corporate Debt Securities in BD

SI no. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. *17% Beximco Pharma Debenture *17% Beximco Limited Debenture *17% Beximco Infusion Debenture *17% Chemical Debenture *17% Beximco Synthetic Debenture 17% Beximco Knitting Debenture 17% Beximco Fisheries Debenture *15% Easterning Housing Debenture 14% Beximco Textile Debenture 14% BD Zipper Debenture Debt Securities Year of Issue 1988 1989 1992 1993 1993 1994 1994 1994 1995 1995 18 20% Convertible 10% Convertible 20% Convertible 20% Convertible 20% Convertible Features Size(BDT million) 40 60 45 20 375 240 120 800 240 40

11. 12. 13. 14. 15. 16. 17.

14% Beximco Denims Debenture 14% BD Luggage Debenture 14% Aramit Cement Debenture 15% BD Welding Electrodes Debenture IBBL Mudaraba Perpetual Bond ACI Zero Coupon Bonds Sub Bonds of BRAC Bank L

1995 1996 1998 1999 2007 2010 2011 Profit Sharing 20% Convertible 25% Convertible 20% Convertible 20% Convertible

300 150 110 20 3,000 1,070 3,000

Note: * marked debentures are not available at present. Source: SEC, DSE and CSE report.

Bond Market Participants of Bangladesh:

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. 1. Issuers:

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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 wellknown 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. 2. 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 ICBs 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.

3. Intermediaries:

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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.

1. 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

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2. 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

3. 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

Market Interest Rates and Bond Prices:

Once a bond is issued the issuing corporation must pay to the bondholders the bonds stated interest for the life of the bond. While the bonds stated interest rate will not change, the market. Interest rate will be constantly changing due to global events, perceptions about inflation, and many other factors which occur both inside and outside of the corporation. The following terms are often used to mean market interest rate:

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1. Effective interest rate 2. Yield to maturity 3. Discount rate 4. Desired rate

Interest Rate on Savings Products (July 2011) Source

State owned commercial banks Specialized banks Private banks Foreign banks Post office National savings certificates

36 months
5.507.50 5.75 7.25 7.0012.75 3.7512.50 NA NA

6mnths-1yr
6.758.75 6.00 7.50 7.2513.00 4.0012.25 NA NA

1yr & above

8.0011.50 6.75 9.00 8.0011.75 4.5011.00 11.50 12.00

Road Map to Bond Market

The International Finance Corporation (IFC) of the World Bank hosted the South Asian Regional Debt Market Symposium from October 6 to 8, 1999 at Bentota, Srilanka aiming to reach agreement on what is needed for the development of the debt market in each of the five participating countries through identifying the unique key problem areas and take action to eliminate these problems for the creation of an active debt market.

The symposium was attended by over 170 representatives from regulators, policy makers, market infrastructure providers, investors, market intermediaries and issuers from Bangladesh, India, Pakistan, Srilanka and Nepal as well as multilateral agencies like the World Bank, IFC, FMO 23

and ADB. It was also attended by debt market specialists from United States, New Zealand, Sweden, Malaysia, Hongkong and Australia. A 24-member delegation from Bangladesh was at the meet.

The participants dwelt on the importance of the bond market and how to assure their development; as to why fixed income markets are desirable in the emerging capital markets; their status worldwide and specifically in the South Asian region and where they are headed in the future. The type of problems that impede market development and the ways for their elimination as well as the impact of new instruments and globalization was also discussed.

Country report on the status of the market at each of the countries were presented by market experts, where Mr. Mikael Kviback of MK Financial Consulting, Sweden presented the paper on Bangladesh and Mr. Renato M. Limjoco, Senior Capital Market Specialist of ADB was the commentator.

In dealing with the impediments, the participants were divided in broad based group on Market Operations; Policies, Regulations & Regulators; Capital Market Infrastructure and Participation of Market Players which was followed by Country Specific Working Group discussions to draw a road map to develop the Money & Bond Markets in the respective countries. The Bangladesh session was led by Mr. Yawer Sayeed, MD & CEO of AIMS of Bangladesh Limited and attended by Mr. Michael Kviback of Sweden, Mr. Renato M. Limjoco of ADB, Dr. Yongbeom Kim of the Securities Policy Division, Ministry of Finance & Economy, Korea and Mr. Nicholas Vickery and Mr. Hafizuddin Ahmed of the IFC as well as all the delegate members from Bangladesh.

The Bangladesh delegation agreed to act as a Consultative Group on their return to Bangladesh to facilitate the advent of a structured Money & Bond Market in Bangladesh and chalked the following Road Map under the auspices of IFC: 24

1. Rationalization of the Interest Rate Structure whereby the Government borrows at the lowest possible rate to create a level playing field. 2. Establish benchmarking and long-term Yield Curve. 3. Provide a Legal Framework of user friendly Rules & Regulations, conducive to the creation and development of a market. 4. Develop a system of issuance of future Sovereign Papers (Sanchaya Patras etc.) of different maturities as Tradable and Transferable Securities. 5. Fund future infrastructure projects through issuance of Government and Private Bonds. 6. Lower Registration and Issue cost of Bonds and Debentures. 7. Create independent Credit Rating Agencies. 8. Develop and strengthen market intermediaries like dealers, investment analysts, investment/ merchant bankers etc. 9. Facilitate education process of market participants, including the investors and issuers. 10. Unbundle pension and insurance funds and promote flotation of private mutual funds, especially Money Market Mutual Funds. 11. Allow Investment Grade Corporate Bonds and Debentures to form part of SLR of Banks. 12. Facilitate Securitization and issuance of Asset Backed Securities and Colateralized Loan Obligations with the backing of multilateral agencies and development of Money Market instruments. 25

13. Establish Central Depository and Electronic Settlement and Registration System. 14. Upgrade Accounting and Disclosure Standards as well as Foreclosure Laws. At the concluding session, Country Papers were presented by one representative from the regulator and another from the market participant from each of the countries, where Mr. Tareque Moudud, Executive Director, SEC and Mr. Yawer Sayeed, MD & CEO, AIMS of Bangladesh presented their respective papers.

Cost of bond issuance in Bangladesh bond market:

To issue new bonds in Bangladesh is very much formal which includes huge amount of oversubscription fees. It greatly affects the issuance of bond in Bangladesh. The following is a list of considering factor. 1. Securities and Exchange Commission registration. 2. Publication of prospectus 3. Printing of prospectus and application 4. Certificate, post issue, postage 5. Listing fees 6. Issue manager or underwriter 7. Trustee fee 8. Credit rating, bankers, legal and audit 26

9. Central depository fee

Regulators and Regulations of Bangladesh bond market:

The regulator and regulation level is the overlapping authority between the two financial market regulators, Bangladesh Bank and the Securities and Exchange Commission (SEC), and no clear jurisdiction over the fixed-income market. In general, BB regulates the commercial banks and their activities, while the SEC regulates the NBFIs, the two stock exchanges, and the capital market. The SEC has no authority to issue rules and regulations, and the procedure as a whole is long and drawn out. As a result, the SEC has not proposed any regulations for the issuance of bonds or debentures. All rule proposals must first be submitted to the Minister of Finance for approval and then passed on for approval from Ministry of Law. Furthermore, potential issuers have to look at various sets of regulations and follow a long and cumbersome procedure. Although the SEC requires listed companies to meet international standards on accounting and auditing, accounting information appears to be of doubtful quality and reliability. The Securities and Exchange Act of 1993 confers vast regulatory authority on the state, and is regarded as a constraint on capital market development. There is a board of policymakers. Three of its members are appointed by the state, another is from the Ministry of Finance and one from the central bank, and the chairman is appointed by the government. In the present system, a company can float debentures up to a maximum amount of its current asset value and has to register its assets in the name of the Trustee as Security. Hence there is no provision for floating unsecured debentures.

27

Status of bond market of Bangladesh in South Asia:

The bond market has played a limited role in the Bangladesh economy. The Bangladesh bond market is also rather shallow compared to the neighboring countries. The size of debt market is very low as compared to other SAARC countries. There are huge opportunities for growth and making money for bond market participants. Bangladesh's bond market represents the 'smallest' in South Asia, accounting for only 12 per cent of the country's gross domestic product (GDP), a World Bank report said. At US$7.35 billion, the size of the country's bond market is far smaller than the banking assets, estimated at nearly $32 billion-equivalent to more than 50 per cent of GDP, the bank's report on South Asian domestic debt market" said. "It is surprising that Bangladesh, which is much larger than Nepal in terms of population, land area and other measures, has the smallest bond market in the region. It said that India's bonds amounted to 35 per cent of GDP while Nepal's domestic bonds were 15 per cent. As a per cent of GDP, South Asian equities account for 77 per cent, banking assets around 61 percent and bonds for only 34 per cent. While India dominates all three markets, Sri Lankan bond market accounts for almost 51 per cent of its GDP, comprising entirely of government bonds. For the East Asian countries, corporate bonds have amounted to nearly 9.0 per cent of the GDP while for the selected OECD countries the ratio is around 16 per cent. The size of the South Asian financial markets was some 14 per cent that of East Asia's. The total financial assets in the region amounted to nearly US$2 trillion as of end 2006 and India accounted for 89 per cent of the total. 28

The largest component of the South Asian financial assets is attributed to the equity market at$877 billion followed by the banking sector at $685 billion and the bond market at $380 billion. As the country's bond market remains less-developed, the report said Bangladesh should improve the efficiency of the primary market for government securities by gradually increasing the share of marketable government securities, thereby raising liquidity in the secondary market. Turning to the Islamic bonds, the bank report praised the issuance of Islamic bonds with sixmonth, 1.0 year and 2.0-year maturities that are in compliance with Islamic shariah rules. To purchase such bonds, Bangladeshi institutions and individuals as investors, are required to share profits or losses with bond issuers in accordance with the Islamic regulations.

Measures to develop the bond market of Bangladesh:

A sustainable bond market needs enabling policies. The following actions and policy measures are seen important to promote a bond market in Bangladesh. 1. Rationalization of the Interest Rate Structure whereby the Government borrows at the lowest possible rate 2. Establish benchmarking and long-term Yield Curve. 3. Provide a Legal Framework of user friendly Rules & Regulations 4. Develop a system of issuance of future Sovereign Papers as Tradable and Transferable Securities. 5. Fund future infrastructure projects through issuance of Government and Private Bonds. 29

6. Lower Registration and Issue cost 7. Create independent Credit Rating Agencies. 8. Develop and strengthen market intermediaries like dealers, investment analysts, investment/ merchant bankers etc. 9. Facilitate education process of market participants 10. Unbundle pension and insurance funds and establish Money Market Mutual Funds. 11. Allow Investment Grade Corporate Bonds and Debentures to form part of SLR of Banks 12. Facilitate Securitization and issuance of Asset Backed Securities and Collateralized Loan Obligations with the backing of multilateral agencies and development of Money Market instruments. 13. Establish Central Depository and Electronic Settlement and Registration System. 14. Upgrade Accounting and Disclosure Standards as well as Foreclosure Laws.

30

31

Findings

Data Analysis

Question 1: Gender..

Answer Offered
Male Female

Response
131 72

32

Analysis: In our survey we can see that 131 are male and 72 are female Respondents. In the survey of
this question we have found that men are more interested than women to invest in bond market.

Question 2: Age Answer Offered

a. Below 20 b. 20 - 29 c. 30 - 39 d. 40 49 e. 50 Above

Male
0 47 55 27 2

Female
4 23 34 11 0

33

Analysis:

In the second question of our survey four females are aged below 20, 47 males and 23

females are aged 20-29, 55 males and 34 females are aged 30-39, 27 males and 11 females are aged 4049, only 2 males are aged above 50. So we can see that 30-39 years old males and females are more interested to invest in bond market.

Question 3: Occupation.. Answer Offered

a. Business b. Service Holder c. House Wife d. Student e. Others

Male
47 66 0 18 0

Female
5 18 29 20 0

34

Analysis: 47 Males and 5 Females are related to Business, 66 males and 18 females are Service holder,
29 females are Housewife or 18 males and 20 females are Students. So Service holder and Housewife are more interested to invest.

Question 4: Is there any necessity of analysis to invest in the Bond Market? Answer Offered
YES NO

Male
41 90

Female
27 45

35

Analysis:

41 males and 27 females respondents are agree and 90 males and 45 females disagree with

the question. So a large number of respondents think that there is no need to analyze in the bond market.

Question 5: Following in which factors you will decide to invest in the Bond Market? Answer Offered
1. Financial Analysis 2. Previous Experience 3. Influenced by Others 4. Others

Male
42 54 32 3

Female
25 33 14 0

36

Analysis:

Out of 203 respondents, 54 males and 33 females said that previous experience is the more

important factor for investment.

Question 6: In what types of Bond Market are you interested to invest?

37

Answer Offered
1. Bond 2. Mortgages 3. Stocks

Male
39 14 82

Female
39 2 26

Analysis:

In this question we have offered our respondents type of bond to choose and out of 203

respondents 47 males and 23 females are interested to invest in government & agency bond.

38

Question 7: For how many years are you interested to invest in Bond Market?

a. Corporate:

Answer Offered
05 Year

Male
6 33 3 0

Female
6 13 3 0

6 10 Year 11 15 Year Above 16 years

39

Analysis:

Out of 42 males and 33 males are interested to invest in corporate bond for 6-10 years and

out of 22 females 13 females are interested in corporate bond for 6-10 years.

b. Government & Agency:

Answer Offered
05 Year

Male
2 36 5 4

Female
0 22 1 0

6 10 Year 11 15 Year Above 16 years

40

Analysis:

Out of 47 males and 23 females, 36 males and 22 females are interested to invest in

government agency bond for 6-10 years.

c. Municipal:

Answer Offered
05 Year

Male
0 4 0 0

Female
1 2 3 1

6 10 Year 11 15 Year Above 16 years

41

Analysis:

Out of 11 respondents 4 females are interested to invest in municipal bond for 6-10 years

and 3 females are interested to invest in municipal bond for 11-15 years.

d. Funding:

Answer Offered
05 Year

Male
1 28 1 0

Female
2 16 0 2

6 10 Year 11 15 Year Above 16 years

42

Analysis: Out of 30 males and 2 females, 28 males and 16 females are interested to invest in Funding
bond for 6-10 years.

e. Mortgages, Asset Backed:

43

Answer Offered
05 Year

Male
0 5 3 0

Female
0 0 0 0

6 10 Year 11 15 Year Above 16 years

Analysis:

Out of 8 respondents, only 5 males respondents are interested to invest in mortgages, asset

backed & collateralized debt obligation bond for 6-10 years.

44

Question 08: What is your existing Bonds Maturity Period?

a. Corporate:

Answer Offered
None 1-3 yrs 3-5 yrs 5-8 yrs Above 8 yrs

Male
1 11 14 14 2

Female
1 6 13 2 0

45

Analysis:

14 males respondents and 13 females respondents have told us that their existing bond

maturity period of corporate bond is 3-5 and 14 males respondents have told that their bond maturity period of corporate bond is 5-8 years.

b. Government & Agency:

Answer Offered
None 1-3 yrs 3-5 yrs 5-8 yrs Above 8 yrs

Male
2 4 3 7 31

Female
0 0 5 7 11

Analysis:

31 males respondents and 11 females respondents have told us that their existing bond

maturity period of government agency is above 8 years.

46

c. Municipal:

Answer Offered
None 1-3 yrs 3-5 yrs 5-8 yrs Above 8 yrs

Male
0 0 3 1 0

Female
0 0 7 0 0

Analysis:

3 males respondents and 7 females respondents have told us that their existing bond

maturity period of municipal bond is 3-5 years.

d. Funding:

47

Answer Offered
None 1-3 yrs 3-5 yrs 5-8 yrs Above 8 yrs

Male
0 2 10 16 2

Female
0 5 8 7 0

Analysis: 16 males respondents have told us that their existing bond maturity period of funding bond
is 5-8 years and 8 females respondents have told us that their existing bond maturity period of funding bond is 3-5 years. e. Mortgages, Asset Backed:

Answer Offered

Male
48

Female

None 1-3 yrs 3-5 yrs 5-8 yrs Above 8 yrs

0 0 0 4 3

0 0 0 1 0

Analysis:

4 males respondents and 1 females respondents have told us that their existing bond

maturity period of mortgages, asset backed & collateralized debt obligation bond is 5-8 years.

Question 9: What is your existing Bonds interest rate?

a. Corporate:

Answer Offered

Male
49

Female

None Below 8% 8% - 12% 12% -16% Above 16%

1 6 24 11 0

0 3 18 1 0

Analysis:

24 males respondents and 18 females respondents have said us that their existing bond

interest rate for corporate bond is 8% 12%. b. Government & Agency:

Answer Offered
None Below 8% 8% - 12%

Male
1 1 33

Female
1 1 14

50

12% -16% Above 16%

12 0

7 0

Analysis:

33 males respondents and 14 females respondents have said us that their existing bond

interest rate for Government & Agency bond is 8% 12%.

c. Municipal:

Answer Offered
None Below 8% 8% - 12% 12% -16% Above 16%

Male
0 1 3 0 0

Female
0 1 6 0 0

51

Analysis:

3 males respondents and 6 females respondents have told us that their existing bond

interest rate for Municipal bond is 8% 12%.

d. Funding:

Answer Offered
None Below 8% 8% - 12% 12% -16% Above 16%

Male
0 2 10 17 1

Female
0 2 11 7 0

52

Analysis:

17 males respondents and 11 females respondents have told us that their existing bond

interest rate for Funding bond is 12% - 16% e. Mortgages, Asset Backed:

Answer Offered
None Below 8% 8% - 12% 12% -16% Above 16%

Male
0 2 3 3 0

Female
0 0 0 0 0

53

Analysis: 3 males respondents have told us that their existing bond interest rate for Mortgages, Asset
backed bond is 8% 12% another 3 males respondents have told us that their existing bond interest rate for Mortgages, Asset backed bond is 12% - 16%.

Question 10: What is your expected Bonds interest rate? a.

Corporate:

Answer Offered
None Below 8% 8% - 12% 12% -16% Above 16%

Male
0 7 10 24 1

Female
0 9 9 4 0

54

Analysis: 24 males respondents have told us that their expected bond interest rate for corporate bond
is 12% - 16% and 9 females respondents expected bond interest rate for corporate bond is respectively below 8% and 8% - 12%.

b.

Government & Agency:

Answer Offered
None Below 8% 8% - 12% 12% -16% Above 16%

Male
0 0 20 27 0

Female
0 0 5 18 0

55

Analysis:

27 males respondents and 18 females respondents have told us that their expected bond

interest rate for Government & Agency bond is 8% 12%.

c.

Municipal:

Answer Offered
None Below 8% 8% - 12% 12% -16% Above 16%

Male
0 1 2 1 0

Female
0 4 2 1 0

56

Analysis: 2 males have told 8% - 12% and 4 females respondents have told below 8% is their expected
bond interest rate for Municipal bond.

d.

Funding:

Answer Offered
None Below 8% 8% - 12% 12% -16% Above 16%

Male
0 5 4 20 1

Female
0 8 4 8 0

57

Analysis: 20 males respondents have told us that their expected bond interest rate for Funding bond is
12% - 16% and 8 females respondents have told us that their expected bond interest rate for Funding bond is respectively below 8% and 12% - 16%.

e.

Mortgages, Asset Backed:

Answer Offered
None Below 8% 8% - 12% 12% -16% Above 16%

Male
0 0 1 7 0

Female
0 0 0 0 0

58

Analysis: Only 7 males respondents have told us that their expected bond interest rate for Mortgages,
Asset backed bond is 12% - 16%.

Question 11: In Bangladesh perspective how could be the investment increased in Bond Market?

Analysis: Investors are mentioned different types of point of view. All are given below:
i. ii. iii. iv. v. Establishing a sovereign yield curve to serve the pricing guide in the bond market Proving the government as a credible issuer and market developer Developing a level playing field for foreign and retail investor Establishing a well-functioning system for primary dealers Taking steps to enhance secondary market liquidity

59

vi.

Increasing transparency in the secondary market through dissemination of market information

vii. viii.

Developing bond index Developing qualitative strength

Question 12: Which of the following reasons you think, can turn your investment into Risk? Answer Offered
Political Situation Inflation Regulators & Regulations Others

Male
30 26 17 58

Female
33 8 31 0

60

Analysis: 58 males respondents think that their other reasons and 33 females think political situation
is then main reason for their investment risk.

Question 13: Do you think that Bangladesh market situation is perfect for Bond Market? Answer Offered
Yes No

Male
116 15

Female
70 2

61

Analysis: 116 males respondents and 7o females respondents think that Bangladesh market situation
is perfect for bond market. 15 males and only 2 females think that Bangladesh market situation is not perfect for bond market.

Question 14: Would you recommend to investing our Bond Market to your friends?

Answer Offered
Never May be Definitely

Male
1 114 16

Female
3 63 6

62

Analysis:

114 males and 63 females are agreed to recommend their friends to invest in the bond

market. So we can say that Bangladesh bond market is a likable place to invest.

Findings:
1. Men are more interested than women to invest in bond market.

2. 30-39 years old males and females are more interested to invest in bond market.
3. Service holder and Housewife are more interested to invest. 4. A large number of respondents think that there is no need to analyze in the bond market. 5. Previous experience is the more important factor for investment. 6. More investor interested to invest in government & agency bond.

63

7. Investors are interested to invest in corporate bond market for 6 10 years. 8. Investors are interested to invest in Government & Agency bond market for 6 10 years. 9. Investors are interested to invest in Municipal bond market for 6 10 years or 11 15 years. 10. Investors are interested to invest in Funding bond market for 6 10 years. 11. Investors are interested to invest in Mortgages; asset backed & collateralized debt obligation bond market for 6 10 years. 12. Investors existing maturity period for corporate bond is between 3 to 8 years. 13. Investors existing maturity period for Government & Agency bond is above 8 years. 14. Investors existing maturity period for in Municipal bond is between 3 to 5 years. 15. Investors existing maturity period for Funding bond is between 3 to 8 years. 16. Investors existing maturity period for Mortgages; asset backed & collateralized debt obligation bond is between 5 to 8 years. 17. Investors existing interest rate for corporate bond is 8% to 12%. 18. Investors existing interest rate for Government & Agency bond is 8% to 12%. 19. Investors existing interest rate for Municipal bond is 8% to 12%. 20. Investors existing interest rate for Funding bond is 12% to 16%. 21. Investors existing interest rate for Mortgages; asset backed & collateralized debt obligation bond is 8% to 16%. 22. Investors expected interest rate for corporate bond is 8% to 16%. 23. Investors expected interest rate for Government & Agency bond is 8% to 12%. 24. Investors expected interest rate for Municipal bond is 8% to 12%. 25. Investors expected interest rate for Municipal bond is 8% to 12%. 26. Investors expected interest rate for Funding bond is 12% to 16%.

64

27. Investors expected interest rate for Mortgages; asset backed & collateralized debt obligation bond is 16% to 16%. 28. More investors said that political situation is then main reason for their investment risk. 29. More investors said that Bangladesh market situation is perfect for bond market. 30. So we can say that Bangladesh bond market is a likable place to invest.

Problems and Prospects in the Bond Market:

A. Problems of bond market of Bangladesh
1. Absence of Market-determined Interest Rate 2. Regulatory Reform 3. Lack of Benchmark Bonds 4. Unbundled Pension and Insurance Funds 5. High Yielding Government Instruments Hindering Private Sector Bond Issue 6. Poor Marketability 65

7. High Time to Market for Time Consuming and Complicated Administrative Process 8. Undefined Economic Benefits 9. Investors Reluctance to Maintain Bond Portfolio 10. Conservative Policy of Investors 11. Lack of Awareness Program for Investors and Risk Associated Sequential Process 12. Adverse Perception by Market Participant of Settlement Risk 13. Lack of Intermediaries with Expertise in Debt Products 14. High Floatation Cost 15. Political Instability 16. Poor Disclosure of Accounting Information 17. Lack of Awareness and Confidence in Debt Products 18. Dominance of Banking System 19. Poor Savings and Investment Rate 20. Financial Sector Vulnerability for Huge Non-Performing Loans 21. Moderate Economic Growth 22. Low Interest Rate Environment

B. Prospects of a bond market in Bangladesh

Despite the earlier setbacks the bond markets in Bangladesh is ready to take off. The need for a bond market in Bangladesh deserves attention because of the following: 1. Foreign aid flow is diminishing and the trend is expected to continue. 2. Specialized banks are not in a position to supply desired level of long term fund. 3. Commercial banks have strategically cut down their long term lending. 66

4. The concept of prudent asset mix is most likely to generate demand for investment grade bonds. 5. The Provident Funds and Insurance Companies Funds are not generally allowed to invest their funds in stock market instruments. There is a bright possibility that these funds may be permitted to invest a part of their funds in marketable instruments subject to prudential guidelines, which may necessitate supply of lucrative debt instruments. 6. Reduction in the interest on Govt. savings instruments and withdrawal of certain savings instruments is expected to boost demand for debt instruments. 7. The registration fee for trust deed has been reduced from 2.5% (on the amount of debentures) to Tk. 2500.00 providing a very significant incentive. 8. There are now credit rating agencies to provide rating prospective issuer.

9. Any interest paid by investor on money borrowed for investment in debentures is deducted from total income. 10. Interest income not exceeding Tk. 20000 received by an individual investor on debentures approved by SEC is excluded from total income. 11. The interest on Zero coupon bond approved by SEC at the hand of the recipient is tax exempt upto Tk. 25000.00. Such interest exceeding Tk. 25000.00 is subjected to tax @ 10% deducted at source. Banks and other financial institutions and insurance companies which are the mainstay of demand for bonds will now pay 10% tax on interest on such bonds instead of 45% tax payable on other income.

12.Recommendations:
Recent developments and events have already created an environment conducive to fosterage of the debt market. A number of financial institutions have sold bonds or debentures to institutions. Further, an Islamic Bank has decided to issue perpetual bond subject to approval of relevant authorities. It is also expected that quite a number of institutions will float bonds through 67

securitization in the near further. A sustainable bond market needs enabling policies. The following actions and policy measures are seen important to promote a bond market in Bangladesh.

All issues of debentures be rated by independent rating agency prior to issue. Companies issuing bonds/debentures to public may be rated periodically to keep track of issuing company's financial position. Public utilities and infrastructure projects be asked to raise a part of debt through issue of marketable bonds. Industrial companies with good track record are advised to issue marketable bonds instead of relying on bank financing. Existing public utilities and infrastructure projects are advised to securities debts by issuing marketable bonds. Existing industrial companies be encouraged to replace a portion of bank/DFI loans with marketable bonds. To facilitate liquidity of marketable bonds, discounting facilities may be provided by financial institutions. Systems of market makers (specialists) may be evolved to facilitate market for marketable bonds. Bond maturities are diversified between one year and seven years as to give investors with different maturity profiles the option of purchasing debentures with different maturities. The methods of revolving underwriting facility (RUF) may be introduced so that companies can issue short-term debentures whenever necessity arises. RUF is a system in which a consortium of underwriters makes commitment to the issuing company to purchase all the unsold portions of 68

the short-term debentures which may be issued from time to time during a certain period (e.g. five years) up to certain maximum amount. Coupon rates and all other issuing conditions of debentures are determined by market forces. Coupon rates may differ according to the rating of the issuer accorded by independent rating agency. In order to make long-term investment more attractive, issuers may find it useful to increase the coupon rate as years go by, e.g. 9 percent in the first year, 10 percent in the second year, 11 percent in the third year and so on. Such increasing coupon rate methods will be useful, especially if the investor is given the right to call for redemption of the bonds at the end of each year so that he may choose to hold them to enjoy a higher coupon rate. Interest received by individual investors on bonds/debentures approved by SEC may be fully exempted from tax. Investment in bonds/debentures approved by SEC may be given tax-exempt status up to a certain limit. The tax rates/relief available to investors on Zero coupon bonds may be extended to all other bonds/debentures approved by SEC. If all the above things can be done, then this could pave the path for a well-functioning bond market that can change the existing bank-oriented financial system to a multilayered system, where capital markets can complement bank financing.

Conclusion:
Bond Market is an integral part of the financial market of a country. It provides a medium for their distribution of short term loan-able funds among financial institutions, which perform this function by selling these short term securities that usually are highly marketable .it can contribute a lot to a developing country like Bangladesh .Though the bond market of Bangladesh is very prospective, it is bested with numerous problems. If all the above things can be done, then 69

this could pave the path for a well-functioning bond market that can change the existing bankoriented financial system to a multilayered system, where capital markets can complement bank financing.

Reference:
Jeff Madhura. Financial Markets and Institutions (7th Edition). Thomson south-western Scott Besley & Eugene F. Brigham. Essentials of Managerial Finance(13th Edition). Thomson south-western Peter S. Rose & Sylvia C. Hudgins. Bank Management & Financial Services (7th Edition). McGraw-Hill International Edition 70

http://en.wikipedia.org/wiki/Bond_market (Retrieved on: 14.04.2008). http://www.bangladesh-bank.org/seminar/iwdbmbd/seciia06.html (Retrieved on: 14.04.2008). http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGRAM S/EXTTRADERESEARCH/0,,contentMDK:20625246~menuPK:64001880~pagePK:210083~pi PK:152538~theSitePK:544849,00.html (Retrieved on: 14.04.2008). http://www.ifc.org/ifcext/publications.nsf/AttachmentsByTitle/Building_Local_Bonds_Chp.14/$ FILE/Building_Local_Bonds_Chp.14.pdf (Retrieved on: 14.04.2008).

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