Bond in Bangladesh

5/20/2018 Bond in Bangladesh

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Abstract

There are a lot of impediments to the development of bond market in Bangladesh. The bond

market is still at a budding stage. It is attributed by a limited supply of debt instruments, especially

long-term instruments. Consequently, the reliable benchmark for long-term bonds or debentures

does not exist. The market is illiquid and trading is motionless. It is slowed down by the relatively highinterest rate bearing risk-free national savings scheme, though interest has been reduced a little bit in

recent years. In addition, the issuance process of bond is burdensome and costly, which becomes a

disincentive to the development of effective bond market. Finally, the investor base has to be

extended in parallel with a suitable investor education. Recommended measures must be undertaken

for developing the bond market.

Executive Summary

The bond market has played a limited role in the Bangladesh economy. The financial sector of

Bangladesh is characterized by the dominating presence of commercial banks, especially the Nationalized

Commercial Banks (NCBs). Most of the available funds go to these NCBs in the form of deposits and

then are channeled into lending. However, the NCBs have substantial nonperforming loan portfolios. The

Bangladesh bond market is also rather shallow compared to the neighboring countries. End of 2010, the

outstanding bond volume per GDP was only 15%, compared to India (40%), Sri Lanka (35%), Pakistan

(31%), and Nepal (10%). The share of the Bangladesh bond market among South Asian countries was

only 2%, the smallest among the five countries. 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 distortions whichare 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.

A well-developed financial system plays an important role in accelerating economic growth by

mobilizing savings and facilitating investment in an efficient manner. The priority of the development of

Bangladeshs capital markets should be to promote the bond market development. Without a functioning

bond market, the monetary transmission processes of policy measures would be circumvented, and the

desired impact on the real economy cannot be fulfilled, which compromises the effectiveness of the

monetary policy operations. The authorities may want to consider the following roadmap for the

development of the Bangladesh bond market:

1. Strengthen the development of the government secur it ies market by

Improving the efficiency and transparency of the government securities primary market,

Gradually increasing the volume of the marketable government securities and reducing the

volume of the non-marketable securities, and

Strengthening the liquidity of the secondary market in the government securities.

2. Promote the corporate bond market development by

Developing a comprehensive set of guidelines on issuing bonds and debentures under thedirection of the Securities and Exchange Commission,

Further reducing issuing costs, and


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Creating an enabling environment for the development of asset backed securitization.

3. Br oaden the investor base by

Promoting the pension sector reform,

Strengthening the insurance sector development, and

Adopting reforms to attract foreign investors.

4. Reform the NSS by

Aligning its returns with market expectations,

Transforming the NSS into a modern retail program equipped with modern IT technology, and

Targeting small investors.

5. Promote the relevant market inf rastructure development and create an enabl ing envi ronment for

the bond market development by

Facilitating the money market development,

Strengthening government cash and debt management capacity,

Creating an enabling legal and regulatory framework for the bond market development, and

Strengthening the credit rating industry.


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Introduction

The financial sector is a crucial sector of any economy. A countrys businessenvironment, investment,

economic prospects, social dimensions even poverty are affected by financial market. The available vast

observed and analytical literature suggest that in addition to other economic factors, the performance

of long term economic growth and welfare of a country are related to its degree of financial sectordevelopment. Developed countries experience suggests that strong government bond market creates

favorable environment for the development of an efficient corporate bond market although it is not

always essential for a country to develop a government securities market. The financial markets, key

point of financial sector, execute a vital role within the global economic system such as attracting and

allocating savings, setting interest rate and discovering the prices of financial assets (Rose, 2003). A

well-diversified financial sector is highly dependent on the extreme collaboration of financing from

equity market, bond market, and banks. The government bond market forms the backbone of a

modern securities market in both developed and developing countries.

Bangladesh has not been blessed with the contribution of both Corporate and Government bonds and

consequently experiences the poor economic growth. With the current financial structure, characterizing

the dominating presence of commercial banks, particularly the State Owned Commercial Banks

(SCBs), the debt market of Bangladesh is very small relative to other South Asian countries

amounting only 5.5 percent of countrys GDP (Mujeri and Rahman 2008). It is in the light of

above perspective; this report seeks to explore some prerequisites to a sustainable bond market by

studying available literature, especially for the Government segment, and putting some instructions for

the development of Bangladesh bond market. However, the objectives of this project are to put

essential prerequisites to the development of bond marketing an economy in general and to

recommend some worthy lessons for bond market development of Bangladesh.

Scope

The report describes constraints for developing a bond market and the role of Bangladesh Bank in

managing the domestic debt for Government of Bangladesh. The report also attempts to analyze the

sustainability of debt portfolios of Bangladesh. It mainly focuses on domestic debt. Information on

external debt is only used for checking the sustainability of public debt.

Objectives

The main objective of this study is to contribute to developing an effective bond market and to explore

the role of BB in efficient domestic debt management in Bangladesh. The specific objectives of this studyare:

To get an overview of the bond market in Bangladesh.

To identify the specific characteristics of bond market in Bangladesh.

To identify the role of Bangladesh Bank in effective domestic debt management.

To estimate the current debt composition of Government of Bangladesh.

To identify the 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.


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Methodology

Both the primary and the secondary data are used to make the report. They are mentioned below:

Primary Data

Most of the primary data are collected from Bangladesh Bank (BB), Bangladesh Securities and Exchange

Commission (BSEC), Dhaka Stock Exchange (DSE) and Central Depository Bangladesh Limited

(CDBL).

Secondary Data

The secondary data are collected from the following sources:

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.

Government publications.

Newspaper articles.

Limitations

An enthusiastic effort was applied to conduct the study work and to bring a reliable and successful result

from which proper strategy can be adopted to this report. Some limitations were faced while preparing

this report.

Some of those limitations are highlighted below:

All the comments made, conclusion reached and suggestions for possible improvement providedare purely based on my level of understanding, knowledge and my way of interpreting aparticular statement.

Unable to collect most recent information.

Time constrains.


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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. End of 2010, the outstanding bond volume per GDP was only 15%, compared to

India (40%), Sri Lanka (35%), Pakistan (31%), and Nepal (10%). The share of the Bangladesh bondmarket 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 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). 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 3,00 0 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.

Corporate Debt Securities in BD

SI

no. Debt SecuritiesYear of

Issue FeaturesSize(BDT

million)

1. *17% Beximco Pharma Debenture 1988 20% Convertible 40

2. *17% Beximco Limited Debenture 1989 60

3. *17% Beximco Infusion Debenture 1992 45

4. *17% Chemical Debenture 1993 20% Convertible 20

5. *17% Beximco Synthetic Debenture 1993 375

6. 17% Beximco Knitting Debenture 1994 20% Convertible 240

7. 17% Beximco Fisheries Debenture 1994 120

8. *15% Easterning Housing Debenture 1994 10% Convertible 800

9. 14% Beximco Textile Debenture 1995 240


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10. 14% BD Zipper Debenture 1995 20% Convertible 40

11. 14% Beximco Denims Debenture 1995 300

12. 14% BD Luggage Debenture 1996 20% Convertible 150

13. 14% Aramit Cement Debenture 1998 20% Convertible 110

14. 15% BD Welding Electrodes Debenture 1999 20

15. IBBL Mudaraba Perpetual Bond 2007 Profit Sharing 3,00016. ACI Zero Coupon Bonds 2010 20% Convertible 1,070

17. Sub Bonds of BRAC Bank L 2011 25% Convertible 3,000Note: * marked debentures are not available at present.

Source: SEC, DSE and CSE report.

Outstanding Debentures

Company Coupon rate Debenture name in DSE Debenture name in

CSE

Aramit cement Ltd. 14% DEBARACOM DEBARACOM

Bangladesh luggage ind. Ltd. 14% DEBBDLUGG DEBBDLUGGBD welding electronics ltd. 15% DEBBDWELD DEBBDWELD

Bangladesh zipper ind. Ltd. 14% DEBBDZIPP DEBBDZIPP

Beximco denims ltd. 14% DEBBXDENIM -

Beximco fisheries ltd. 14% DEBBXFISH -

Beximco knittings ltd. 14% DEBBXKNI -

Beximco textiles ltd. 14% DEBBXTEX -

Total 08 04

Bond Marke t Par t i c ipant s o f Bang ladesh

One of the preconditions of being efficient bond market is the existence of large number of marketparticipants. Market participants can be divided into issuers, investors and intermediaries.

1. Issuers

Most private sector enterprises are small and owner-run, many are of cottage size and most are in thegarment industry, which to date depends largely on short-term bank loans for financing. These enterprisescould benefit from longer-term funding but are neither large enough nor well-known enough to issuebonds. 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 orby 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 haveused the market. The liquidity in those debentures at the stock exchange is insignificant because of thesmall number of investors and their buy-and-hold mentality. The investor community does not seem tofind this market too attractive owing to weak disclosure by the issuers, which in turn reduces credibilityand 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 thegovernment savings certificate. Of the few institutional investors that could support a bond market, mostare either prevented from investing in corporate bonds by restrictive guidelines or are not professionally


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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 theexclusive 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 inBangladesh. Few foreign investors are attracted to this, mainly because of the weak disclosure by theborrowers.

3. Intermediaries

Intermediaries in Bangladesh lack many of the skills needed to foster an active local corporate bondmarket. Commercial banks dominate the financial sector and not enough intermediaries are skilled insecurities. 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 thelocal debt market. Too few private merchant banks are able to conduct financial advisory and trustservices. Hence the market is illiquid, with large spreads. At the same time, the fee structure and pricingare high enough to allow intermediaries to make money. Even if they are able to participate,intermediaries are reluctant to take any risk in dealing.

Benef i t s o f Bond Marke t for Marke t Par t i c ipant s

Bond Market acts as buffer of equity market. This enables issuers and investors to convert the limitationsof equity market into the opportunities. Financial system to be sound and effective has to have an efficientbond market. Otherwise, Capital Market especially cannot play its due role for developing economythrough allocation of capital; and generating employment opportunities through industrialization ofeconomy 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.

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.


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Market In tere s t R ate s and Bond Pr ice s

Once a bond is issued the issuing corporation must pay to the bondholders the bonds stated interest forthe life of the bond. While the bonds stated interest rate will not change, the market. Interest rate will beconstantly changing due to global events, perceptions about inflation, and many other factors which occurboth inside and outside of the corporation.

The following terms are often used to mean market interest rate:

1. Effective interest rate

2. Yield to maturity

3. Discount rate

4. Desired rate

Interest Rate on Savings Products (July 2011)

Source 36 months 6mnths-1yr 1yr & above

State owned commercial banks 5.507.50 6.758.75 8.0011.50

Specialized banks 5.757.25 6.007.50 6.759.00

Private banks 7.0012.75 7.2513.00 8.0011.75

Foreign banks 3.7512.50 4.0012.25 4.5011.00

Post office NA NA 11.50

National savings certificates NA NA 12.00

Corporate Debt Market in Bangladesh

Bank loans are the main source of finance for corporate (Table). The corporate bond market in

Bangladesh is very small in size. Banking sector is dominating corporate finance since other sources of

corporate debt instrument are underdeveloped. Alternative sources of finance other than bank loans

should be developed by diversifying the debt instruments in order to establish sound financial market in

Bangladesh. A complete set of guidelines on bonds and debentures must be developed to promote

the corporate bond market. The government has to reduce the interest rate on national savings

certificates in order to a favorable environment for developing corporate bonds.

Table: Instruments Available in Bangladesh

InstrumentsNominal Amount(Billions of

BDT) Relative size %

Deposits 4032 37.20%

Bank Loans 3501 32.30%

Term loans (as of June 20111333 12.30%

Government saving certificates 965 8.90%


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Government bonds 534 4.93%

Treasury bills 271 2.50%

Equity (issued value)192 1.77%

Private placement Not publicly available --

Debentures & bonds 11 0.10%

Source: Dhaka Stock Exchange, National Saving Bureau, and Bangladesh Bank

Government Debt Market in Bangladesh

Bangladesh Bank Order-1972, article 20 and Treasury rules-1998 (Appendix-1, Section-3) empowers

Bangladesh Bank for the issue and management of Government securities. As per the above mentioned

laws and regulations, Bangladesh Bank (BB) acts as the banker and debt manager to Government of

Bangladesh (GOB). Tax is the main source of governments revenue. Government meets its deficit

through sale of debt securities when expenditures exceed its tax receipts.

In the past the financing of budget deficit for Government of Bangladesh was being done through

issuance of ad hoc Treasury Bills. Bangladesh Bank subsequently partially offloads these ad hoc

Treasury Bills through the issuance of Treasury Bills and Bonds to the market, leaving the

Governments cash position unaffected. Ad hoc Treasury Bills were thus accessed both to meet

cash mismatches as well as for financing the budget deficit. Issuanceof ad hoc TreasuryBills has

been discontinued now. Financing budget deficit for Government of Bangladesh takes place throughthe issuance of (i) Special bonds, (ii) Bangladesh Government Treasury Bonds (BGTBs), and (iii)

savings instruments (NSD).

However, for small deficit, Bangladesh Bank maintains a pretty cash account named Ways and

Means Advance (WMA). Normally, government borrows from WMA first and then through Treasury

Bills. For this advance a floating interest rate (bank rate + 1%) is charged. At present the bank rate is 5%.

C ost o f Bond I s suance in Bang ladesh Bond Marke t

To issue new bonds in Bangladesh is very much formal which includes huge amount of oversubscriptionfees. It greatly affects the issuance of bond in Bangladesh. The following is a list of considering factor.

1. Securities and Exchange Commissionregistration.

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

9. Central depository fee


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R egula tors and R egu la t ions o f Bang ladesh Bond Marke t

The regulator and regulation level is the overlapping authority between the two financial marketregulators, Bangladesh Bank and the Securities and Exchange Commission (SEC), and noclear 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 drawnout. As a result, the SEC has not proposed any regulations for the issuance of bonds or debentures. Allrule proposals must first be submitted to the Minister of Finance for approval and then passed on forapproval from Ministry of Law. Furthermore, potential issuers have to look at various sets of regulationsand 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 areappointed by the state, another is from the Ministry of Finance and one from the central bank, and thechairman is appointed by the government.

In the present system, a company can float debentures up to a maximum amount of its current asset valueand has to register its assets in the name of the Trustee as Security. Hence there is no provision forfloating unsecured debentures.

Major Barriers to Bond and Debenture Market Development

The barriers to bond market development can be divided into two broad categories: those around andacross the market, and those inside the fixed-income markets.

Around and Across the Market

The obstacles in this group stem from the political situation, the macroeconomic situation, and thebroader financial system.

The Political Situation

Nationwide program of strikes, processions, and mass meetings by political parties have weakened thegovernments intentions to foster changes such as the development of the financialmarket.

In addition, certain commercial and financial regulations are outdated. Governance and accountability arelacking in certain areas, and inefficiency is present in the financial system, mainly concerning the state-owned banking sector. The problems created by these weak institutions are compounded by anincreasingly confrontational political environment. Because the political environment is very fragile, lawsand regulations are not being fully enforced. Although the government is aware of these problems, it hasbeen slow to improve governance and develop strong institutional capacity.

Macroeconomic Situation

The consolidated public sector deficit, taking into account losses incurred by state-owned enterprises, is

much higher and underscores the need for improved fiscal management; however, a sense of urgency ismissing in policymaking, despite the growing imbalances in the economy and crowding out as


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Bangladesh continues to channel vast monetary resources into servicing bad loans. Given thatmacroeconomic changes can happen in short periods of time and that nonperforming loan, which accountfor a third of the loan portfolio, can create financial sector vulnerability, the bad-loan situation couldtrigger a severe liquidity crisis nationwide. It can take decades to build a fixed-income market in the wakeof such crises. This issue clearly needs immediate and focused attention.

Broader Laws and Regulations

Certain omissions or drawbacks of the broader laws and regulations directly affect development of thefixed-income market. First, with regard to the ownership of land, the law provides for the registration ofdeeds rather than of ownership, which makes it impossible to take land as collateral for bond issuance.Second, the law makes arbitration a cumbersome and slow process; moreover, foreign arbitration awardsare not enforceable in Bangladesh. Third, in terms of obtaining issuers, there is no privatization law tolend transparency and authority to the privatization process, although one is at present being drafted.Fourth, Bangladeshs laws represent a mixture of codified British common law and legal principles fromvarious religious heritages. So, Bangladesh courts are limited in their ability to function effectively.Contract laws and commercial codes seem to be fair, but ensuring that they are observed is difficult

because of a weak adjudication system.

Broader Financial System

The broader financial system includes the banking sector, nonbanking sector, government securitiesmarket, and short-term money markets.

Banking sector:Bangladeshs banking system, which is dominated by state-owned NCBs, creates twoserious problems for a local corporate bond market. First, the system provides low-cost loans to stateowned enterprises, which account for a large part of the corporate sector. This undermines developmentof the corporate bond market because other financial institutions are unable to compete with these

underpriced loans. Indeed, the state-owned enterprises constitute a large part of the NCBs business. Tocomplicate matters, development financial institutions (DFIs) also provide low-cost loans, priced at asmall percentage over bank deposits for similar maturities. Second, the banking sector is faced with asubstantial number of bad loans; nonperforming assets account for about 30% of total assets.

Nonbanking sector: The nonbanking portion of the financial sector consists of two small stockexchanges (Dhaka and Chittagong), both of which have still not recovered from the bull market problemsof 1996, which left the public suspicious of corporate institutions because it is hard to get them to disclosetheir figures. The weak operating performance by listed companies and low confidence in the marketoverall has made it difficult for the market to recover. In sum, the nonbanking sector has not evolved in away that would allow it to play an active role in the financial system. Nor is it prepared to play an activeand skilled leadership role in developing and participating in an active fixed income market.

Government securities market: GSC issuances offer significantly higher rates than local bank deposits,which create a relatively high rate for risk-free and tax-free government securities. This establishes adisincentive to invest in corporate securities. GSCs create a high benchmark interest rate foundation forcorporate securities. That matters because it is very hard to compete with risk-free government debt. Atpresent, Bangladesh law and the governments fiscal and monetary policycombine to create a financialmarket monopoly for GSCs and NCBs, which in turn keeps alternate financial intermediation fromemerging.

Short-term money markets:Money markets provide another foundation for bond markets. The moneymarkets in Bangladesh are quite small. There is an interbank market, in which commercial banks borrow

and lend to adjust their short. Normal maturities range from overnight to 30 days. Bangladesh also has aforward market for U.S. dollars against the taka, but only for short maturities. There is no commercial


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paper market. This weak form of short-term money market also hinders the development of a strong bonddebenture market.

Future 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:

A. Foreign aid flow is diminishing and the trend is expected to continue.

B. Specialized banks are not in a position to supply desired level of long term fund.

C. Commercial banks have strategically cut down their long term lending.

D. The concept of prudent asset mix is most likely to generate demand for investment grade bonds.

E.

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.

F. Reduction in the interest on Govt. savings instruments and withdrawal of certain savings

instruments is expected to boost demand for debt instruments.

G. 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.

H. There are now credit rating agencies to provide rating prospective issuer.

I. Any interest paid by investor on money borrowed for investment in debentures is deducted from

total income.

J. Interest income not exceeding Tk. 20000 received by an individual investor on debentures

approved by SEC is excluded from total income.

K. The interest on Zero coupon bond approved by SEC at the hand of the recipient is tax exempt up

to 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 ofdemand for bonds will now pay 10% tax on interest on such bonds instead of 45% tax payable on

other income.

Recommended

The debt securities market in Bangladesh remains at an initial stage, characterized by a limited supply of

debt instruments, particularly long-term ones, and by a lack of liquidity and active trading. The lack of a

well-functioning bond market reduces the effectiveness of monetary policy operations: it weakens the

transmission of policy measures and thereby prevents the desired effect on the real economy.

Recommended actions for developing the bond market form a broad road map:


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Strengthening the government debt securities market by improving the efficiency and transparency of

the secondary market and enhancing its liquidity.

Developing market infrastructure and an enabling environment for the bond market by upgrading the

depository, clearing, and settlement arrangements; promoting development of the money market;

strengthening the governments cash and debt management capacity; creating an enabling legal and

regulatory framework; and strengthening the credit rating industry.

Reforming the national savings scheme by aligning its returns with market expectations, transforming

the scheme into a modern retail program equipped with modern information technology, and targeting

small investors.

Broadening and diversifying the investor base by promoting pension sector reform, strengthening the

insurance sector, adopting reforms to attract foreign investors, and implementing an investor

education program.

Promoting development of the corporate bond market by streamlining the Securities and Exchange

Commission guidelines on issuance of bonds and debentures, further reducing issuing costs, tapping

potential new issuers, and creating an enabling environment for asset backed securitization and

infrastructure bonds.

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 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.

= 0 =


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References

Mujeri, M. K. and Rahman, M. H. (2008). Financing Long Term Investment in

Bangladesh: Capital Market Development Issues Policy Paper: Bangladesh Bank,: 0905.

Rose, P. S. (2003). Money and Capital Markets, Financial Institution and Instruments

in a Global Market Place, Eighth Edition, McGraw Hill, Higher Education. PP. 4-7.

Islam, Md. Ezazul and Bisnu Pada (2006), Public Debt Management and debt

Sustainability in Bangladesh, Working Paper No. WP0705, PAU, Bangladesh Bank,

Dhaka.

Mujtuba Kabir, (June 2010), Sustainability of Public Debt in Bangladesh and Role of

Bangladesh Bank , Intern report, IBA, DU.

GOB: Flow of External Resources in to Bangladesh, (Various Issues), Economic

Relation Division, Ministry of Finance, and Dhaka.

GOB: National Savings Directorate, Ministry of Finance, Dhaka.

Bangladesh Government Treasury Bond Rules, 2003

http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGR

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Documents

Bond in Bangladesh