Examination Committee: Dr. Arun Kumar Gopalaswamy (Chairman) Prof. I. M. Pandey (Co-chair) Prof. I. M. Pandey (Co-chair) Dr. Sundar Venkatesh Presented by Md. Abid Hossain 1
Agenda Objectives of the research 1. 2. Sources of data Bond and bond market Bond and bond market 3. 3. Bond market in Bangladesh 4. Constraints on development of bond market 5. Findings and recommendations 6. Conclusion 7. 2
Agenda Objectives of the research 1. 2. Sources of data Bond and bond market Bond and bond market 3. 3. Bond market in Bangladesh 4. Constraints on development of bond market 5. Findings and recommendations 6. Conclusion 7. 3
Objectives of the Research Main objective – To contribute to develop an effective bond in Bangladesh. The specific objectives : � To get an overview and specific features of bond market in Bangladesh. � 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. 4
Agenda Objectives of the research 1. 2. Sources of data Bond and bond market Bond and bond market 3. 3. Bond market in Bangladesh 4. Constraints on development of bond market 5. Findings and recommendations 6. Conclusion 7. 5
Data Sources Primary Data- Interviews and discussion with some key personnel of Bangladesh Bank( BB), Securities and Exchange Commission (SEC), and Dhaka Stock Exchange (DSE). Secondary Data � Central Depository Bangladesh Limited (CDBL). � Debt Management Department, Bangladesh Bank (BB). � Research publications from Policy Analysis Unit, 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. � Website materials. 6
Agenda Objectives of the research 1. 2. Sources of data Bond & bond market Bond & bond market 3. 3. Bond market in Bangladesh 4. Constraints on development of bond market 5. Findings and recommendations 6. Conclusion 7. 7
Simplified form of financial market Financial Market Capital market Capital market Money Market Money Market ( Provide long term ( Provide short financing of more than term financing of one year) less than one year) Bond Market Stock Market 8
Bond- Definition � A bond is debt instrument issued for a specific period for the purpose of raising capital by borrowing. � In other words, a bond is fixed interest financial instrument issued by government, corporate, and other large entities. government, corporate, and other large entities. � Bonds are tradable and basically the price of a bond depends on the existing interest rates in the market for an equally risky instrument and the coupon on the bond. � Thus a bond is like a loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. 9
Types of Bonds T-bonds( more than 10 year) T-notes (more than 1 Issued by Issued by year and less than 10 year and less than 10 government year Municipal Bonds T-bills(less than 1 year) bonds Corporate bonds 10
Prerequisites for Development of Bond Market Prerequisites for establishing an efficient bond market include: � sound monetary and fiscal policies; � stable and credible government; � stable and credible government; � secure and smooth settlement arrangements; � effective legal, tax, and regulatory infrastructure; and � a liberalized financial system with competing intermediaries. 11
Agenda Objectives of the research 1. 2. Sources of data Bond and bond market Bond and bond market 3. 3. Bond market in Bangladesh 4. Constraints on development of bond market 5. Findings and recommendations 6. Conclusion 7. 12
Bond Market in Bangladesh � Currently bond market plays a limited role in the Bangladesh economy. � The bond market is very small compared to the neighboring countries. � End of 2010, the outstanding bond volume per GDP was only 15%, compared to � 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. � Government should initiate measures to improve the scope of bond markets in Bangladesh. 13
Corporate Debt Securities in BD Sl no. Debt Securities Year of Issue Features Size(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 7 17% BeximcoFisheries Debenture 17% BeximcoFisheries Debenture 1994 1994 120 120 8 *15% Easterning Housing Debenture 1994 10% Convertible 800 9 14% BeximcoTextile Debenture 1995 240 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 3,000 16 ACI Zero Coupon Bonds 2010 20% Convertible 1,070 17 Sub Bonds of BRAC Bank L 2011 25% Convertible 3,000 Note : * marked debentures are not available at present. Source: SEC, DSE and CSE report. 14
Agenda Objectives of the research 1. 2. Sources of data Bond and bond market Bond and bond market 3. 3. Bond market in Bangladesh 4. Constraints on development of bond market 5. Findings and recommendations 6. Conclusion 7. 15
Constraints on Development of Bond Market � Limited number of investors � Capital gain � High return in risk free government bond � High return in risk free government bond � Alternative sources of debt financing � Underdeveloped Tax system � Weak regulations and market infrastructure 16
Constraints on Development of Bond Market (contd) � High interest rate � Illiquid secondary market � The high transaction costs of bond issuance � Cheap syndicated loans � Default on interest payment in early 1990s � Inexperienced investors � High inflation 17
Interest Rate on Savings Products (July 2011) Source 3 － － 6 months 6mnths-1yr 1yr & above － － State owned commercial banks 5.50 － 7.50 6.75 － 8.75 8.00 － 11.50 Specialized banks Specialized banks 5.75 － 7.25 5.75 7.25 6.00 6.00 － 7.50 7.50 6.75 － 9.00 6.75 9.00 Private banks 7.00 － 12.75 7.25 － 13.00 8.00 － 11.75 Foreign banks 3.75 － 12.50 4.00 － 12.25 4.50 － 11.00 Post office NA NA 11.50 National savings certificates NA NA 12.00 Source: Bangladesh Bank . 18
Agenda Objectives of the research 1. 2. Sources of data Bond and bond market Bond and bond market 3. 3. Bond market in Bangladesh 4. Constraints on development of bond market 5. Findings and recommendations 6. Conclusion 7. 19
Findings -Status of Bangladesh Bond Market � Comparison of size of Bond Markets in Some Asian Countries , March 2011 (% of GDP) Category Category Korea Korea Mala Mala China China Sing Sing Thailand Thailand Philip Philip India India Sri Sri Pak Pak BD BD Government 48.8 48.1 46.1 41.2 40.7 33.3 36.1 31.6 27.5 17.1 Corporate 61.8 37.5 4.7 30.7 15.9 3.5 3.9 - - - Source: Asian Bond on Line, BIS, RBI. 20
Findings -Status of Bangladesh Bond Market (contd) � Finance Indicators for South Asian countries(2001-2011) Individual indicators rank India Pakistan Sri Lanka Bangladesh Nepal Overall rank Overall rank 1 1 2 2 3 3 4 4 5 5 Access to finance 3 4 1 2 5 Financial stability 1 2 3 4 5 Performance and efficiency 3 1 2 4 4 Capital market development 1 2 3 4 5 Market concentration and 1 4 5 2 3 competitiveness Source: Getting Finance Indicators Note : Score from 1 to 5, with lower score (higher values) denoting better (poor) position. 21
Findings -Status of Bangladesh Bond Market (contd) � Indicators of Corporate Governance, South Asia, 2011 Country Voice& Political Government Regulatory Rule of law Control of Accountability stability effectiveness quality corruption Bangladesh Bangladesh -0.63 -0.63 -1.4 -1.4 -0.81 -0.81 -0.86 -0.86 -0.81 -0.81 -1.05 -1.05 India +0.38 -0.01 +0.03 -0.22 +0.10 -0.39 Pakistan -1.05 -2.44 -0.62 -0.56 -0.93 -0.83 Sri Lank -0.39 -1.96 -0.29 -0.11 +0.06 -0.13 Source: South Asian Financial sector review. Note : Governance score from -2.5 to +2.5, with higher (lower values) denoting better (poor) governance . 22
Recommendations - Measures to Improve � Establishing a sovereign yield curve to serve the pricing guide in the bond market � Proving the government as a credible issuer and market � Proving the government as a credible issuer and market developer � Level playing field for foreign and retail investor � Establishing a well-functioning system for primary dealers 23
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