Bond Market Information of Bangladesh

2 February 2017

A well-developed financial system plays an important role in accelerating economic growth by mobilizing savings and facilitating investment in an efficient manner (Mu, 2007).

Financial market is composed of different markets- Money Market, Capital Market, Derivative Market etc. All the markets play an interactive role for the development of economy by formation of capital through mobilizing funds, industrialization of economy through supplying adequate funds, providing services, linking investors to the industrial entrepreneurs etc.Besides, this requires sound regulatory framework, sound and investment sensitive administrative infrastructure, fiscal supports for making their role effective for economic development. The financial sector of Bangladesh is characterized by the dominating presence of commercial banks, especially the Nationalized Commercial Banks (NCBs). Although, a paradigm shift in the degree of dominance has been observed of late with the emergence of private commercial banks-traditional and shariah based banking. Banking sector accounted for about 75 percent of the total financial system.Most of the available funds go to the NCBs in the form of deposits and channeled into lending.

However, the NCBs had substantial nonperforming loan (NPL) portfolios. Both insurance and mutual funds industries are very small. The debt market being an integral part of financial market plays a complementary role in developing economy through allocation of funds to the different deficit sectors. The debt market consists of money market, mortgage market, bond market and derivative market. The debt market of Bangladesh is very small. The size of domestic debt accounted for only 20 percent of the financial system.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.

“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,” the report added. Like in any other country, a well-developed tradable bond market is critical to ensuring stability and efficiency of the financial market in Bangladesh. An efficient bond market is important for managing public debt and bank liquidity and for efficient conduct of the monetary policy.So far the bond market has played a limited role in the economy. The priority of the development of Bangladesh’s 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 can not be fulfilled, which compromises the effectiveness of the monetary policy operations. In view of this, the present study has been undertaken in order to evaluate the present bond market status and to identify the issues and factors that prompt the development of bond market in Bangladesh.

. Objectives of the Study The principal objective of the study is to evaluate present bond market status in Bangladesh. To accomplish this principal objective, following specific objectives have been covered: a) To highlight the Bond Market status of Bangladesh. b) To highlight the benefits of bond market for the parties to the Bond Market. c) To identify the problems that impedes the development of Bond Market in Bangladesh. d) To suggest some important policy measures for the development of Bond Market in Bangladesh. 3.

Scope of the StudyThe inferences of the study would be used for the development of Bond Market in Bangladesh. It has covered opinions of 22 financial executives of listed companies on the issues that impede to the development of Bond Market. 4. Methodology of the Study The study has been both theoretical and empirical one. Both primary and secondary data have been used. 1. Collection of Primary Data: The researcher has prepared a questionnaire on the basis of survey of existing literature as well as of discussions made with some executives associated with the stock market.

He conducted interview of 22 respondents personally. In this case, the researcher has selected 30 companies from a list of different economically important sectors conveniently, and attempted to conduct interview of 30 financial executives of 30 selected companies. Finally, he successfully has conducted interview of 22 financial executives. The opinions of 22 experts have been captured on five point-likert scales such as 5( Most significant), 4 ( Significant), 3 ( Indifferent), 2( Insignificant) and 1( Most insignificant). . Collection of Secondary Data: The secondary data has been collected from different sources- Annual Reports of Bangladesh Bank, World Bank Reports, published research journals, published books, websites, etc. 3.

Analysis of Data: The data thus collected has been tabulated first and then analyzed with the help of different financial, statistical and econometric techniques. The study has used financial ratio, percentage, mean, factor analytical technique etc. for analysis of data and drawing inferences.Factor Analysis: Factor analysis is a method of reducing a large number of variables ( tests, scales, items, persons and so on) to a smaller number of presumed underlying hypothetical entities called factor ( Fruchter, 1967). It tries to simplify and diverse relationship that exist among a set of observed variables by uncovering common dimensions or factors that link together the seemingly unrelated variables and consequently provides insight into the underlying structures of the data( Dillion and Goldstein, 1984). The purpose of factor analysis is mainly two folds: data reduction and substantive interpretation.In the present study, ‘Principal Components Varimax Rotated Method’ of factor analysis has been used in order to identify the factors influencing the development of Bond Market in Bangladesh.

Principal component factor explains more variance that the loadings obtained from any method of factoring. In order to define the group membership, an algorithm may be used to uncover a structure purely on the basis of the correlation structure of the input variables. Then the number of principal components to be retained in the study has been decided on the basis of Kaiser’s criterion (1958) of Eigen value >1 .Principal components having higher reliability coefficients are more reliable in the sense that the corresponding factors would be replicable in other similar kind of studies. Then Communality, symbolized by h2—– are then worked out which show how much of each variable is accounted for by the underlying factors taken together. Then, factor scores have been generated on the basis of weighted average of Principal Factor loadings and average of respective variables included into the concerned group. Ranking of each factor has been made on the basis of scores derived.

5. Organization of the StudyThe Study has been organized into three sections. The first section has covered introduction, objective of the study, scope and methodology of the study. The second section has covered findings of the study- Status of Bangladesh Bond Market, benefits of Bond Market participants, and identification of problems impeding the bond market development of the country. The final chapter deals with the summary of the findings, policy implications and conclusions. 2. 0 Findings and Their Analyses The Study has been undertaken aiming at evaluating the status of Bond Market and tracing the factors influencing the development of Bond Market in Bangladesh.

These have been discussed in the following paragraphs: 2. 1 Status of Bond Market in Bangladesh 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 f well-known issuers. As of today, only one corporate bond has been floated. 2. 1. 1 Size and Composition of the Bangladesh Market in Comparison with South Asian Countries The size, access, efficiency and stability of the bond market across countries may by used to judge the state of the bond market development in Bangladesh.

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