Development of the Bond Market in Bangladesh
It is a privilege to be here this morning at this pioneering event, and I would like to congratulate the Bangladesh Bank and the Securities and Exchange Commission for hosting the first-ever international workshop on the development of bond market in Bangladesh. Bond markets link issuers having long-term financing needs with investors willing to place funds in long-term, interest-bearing securitiBangladeshes. 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 country’s 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 children’s 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 gas-pipelines 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 iabilities. 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, you have impressed us all with your 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.
At the World Bank, we would like to help you in this endeavor; it is much more useful that Taka funds are mobilized to fund projects whose sole revenue source will be in Taka. I am sure that it is a shared ambition of us all that Bangladesh should play a larger role in mobilizing its own capital resources and reducing the dependency upon donor institutions such as ourselves. We at the World Bank would like to work with you to this end, so that we can move on from providing infrastructure finance for sustainable development to a higher level of developing a sustainable, national, infrastructure financing capacity.
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. It is my hope that this Workshop will debate and discuss the various initiatives that are necessary to develop the intermediaries, infrastructure and the regulatory regime so that a vibrant bond market becomes a reality in Bangladesh soon. 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 sound development are in place. At the macroeconomic policy level, a government securities market provides an avenue for domestic funding of budget deficits and avoid 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.
While some of these prerequisites have already been met, I hope that this Workshop will discuss the initiatives, their prioritization and the time horizon for their implementation, which will be necessary for putting the rest in place. Before ending, I would like to table a few suggestions for consideration in the Workshop. These are: 1. Creating a bond market in Bangladesh will be a long process, and the hard work of many architects, artisans and craftsmen will be required in the construction. I am optimistic that the foundations are now in place and this seminar is going to be one of many uilding blocks that will help create the market framework. This framework must be solid if a bond market is to gain investors’ confidence and hence allow public and private sectors to raise capital for the much needed investments in Bangladesh. 2. To ease the process, the Government bonds must come first. To increase the attractiveness of these bonds and to ensure their soundness, Bangladesh Bank will need to continue its initiatives to develop the secondary market, lower transaction costs and improve upon the market infrastructure to support secondary market liquidity.
The Bangladesh Bank has already achieved a great deal to this end in a very short time. It was not so long ago that government debt market trading was effectively zero; now we see a disciplined, organized market taking shape with maturities in traded securities out to ten years. We congratulate the Governor and his team for their achievements in this field and are proud if we have been able to play some small part in support of the Government and the Bangladesh Bank in this success. 3.
Banks are invariably amongst the major users of long term debt markets in order to raise long-term subordinate debt to supplement their capital bases. Many regulators now actively encourage the issuance of debt by banks in the local currency market as a step towards the discipline of “market monitoring” envisaged in the Basel II capital adequacy regime. It is probably the case that the state of the banking system in Bangladesh makes this a medium-term project, however, we have already been presently surprised by the progress we have seen in several fields in terms of banking sector reform and debt market development.
A prior requirement to facilitate issuance of fixed income capital instruments is the adoption of international accounting standards, and more effective enforcement of Bangladesh Bank’s supervisory standards. The increased use of credit rating agencies has often accompanied this development, but this can add value only to the extent that the opinion of the rating agencies is valued by the market. We have noted with interest the nascent development of a debt rating capacity in Bangladesh and hope to see this sector rise to international standards. . One other extremely important role that debt markets can play is in the development of the housing finance market, an area of activity where the ordinary citizens need to have access to long-term loans to fulfill their dream of owning their own property. While capital markets can not bring down the price of real estate in Bangladesh, efficient capital markets can make housing more affordable, and more attainable, through extending the maturity of loans and lowering monthly repayment terms. 5.
Not only will a bond market require good financial foundations, but long-term investment institutions will also need to be developed with demand for longer maturity assets. The insurance and pension markets are currently not fully developed in Bangladesh. These markets should be reformed as they are the natural buyers of long-term securities. We understand that the Ministry of Commerce is now in the process of disseminating much awaited investment guidelines which will allow insurance companies to offer more competitive products to their clients by allowing them to invest more productively, and securely, in the capital markets.
Reform and development of the pension sector, combined with a new approach to the NSS, should be next on the agenda. 6. The World Bank is already working with the Government and Bangladesh Bank on some of these key issues, and we shall be ready to work further with them within the limits of our own comparative advantage. We have been extremely pleased to see the coordinated approach of the Bangladesh Bank, Ministry of Finance, the SEC and the National Board of Revenue to work with IPDC to bring the first securitization transaction to market in Bangladesh.
This has been one solid step towards mobilizing finance for entrepreneurs and has confounded those skeptics who thought that securitization is “too sophisticated” for Bangladesh. Perhaps those skeptics would benefit from seeing the collected talent and enthusiasm for development gathered here in this room today. We would very much like to hope that the next securitization will be another transaction close to our heart, that of the securitization of a portion of the toll revenues of the Jamuna Bridge. The IPDC loan securitization was a long time in the making and the Jamuna Bridge securitization appears to be following the same path.
This is a transaction which all experts agree would have a major positive impact not only on capital market development in Bangladesh, but also in mobilizing taka finance for other strategic infrastructure developments such as the proposed Padma Bridge. We can only hope that the Jamuna Bridge securitization will enjoy the same long term success. To facilitate this process, it would be useful to have designated counterparts from the Government and Bangladesh Bank. Such a crucial market as a domestic bond market needs excellent domestic regulation and supervision if investors and borrowers are not to be disappointed or worse.
It cannot be created by outsiders. Along with you all, I am eagerly looking forward to the technical sessions, which have been very well-organized. In conclusion, I would urge the participants to discuss the issues at length and provide some specific recommendations for the Government, Bangladesh Bank, the SEC, and indeed all the stakeholders, which can be implemented immediately. 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. I wish the workshop and its participants all success.