Interest rates on government securities should be lowered so a vibrant bond market can be built in the country, said Arif Khan, a former commissioner of the Bangladesh Securities and Exchange Commission.
Khan, who is managing director and chief executive officer of the IDLC Finance, was speaking at a virtual press meet by the Bangladesh Leasing and Finance Companies Association (BLFCA) on Tuesday.
He discussed the problems that are not allowing financial institutions to accumulate long-term stable funds through bonds.
The government is the most reliable borrower and debt securities issued by the government offer the lowest interest. Rates in government securities like treasury bonds and bills are used as the benchmarks for interest in financial markets all over the world, he added.
In Bangladesh, treasury bonds with three- to five-year maturity are still offering 7.5 percent interest followed by some 100 basis points decline in recent days. In neighbouring India, the rate is around four percent.
Now, if a private sector issuer, like a lender, offers bonds to investors, they demand an added interest and the issuer needs to pay at least eight to nine percent for mid-term bonds, while for long-term bonds, the cost of funds also reaches double-digit figures.
The stable funding costs far more than funds collected from deposits, said Khan, who is also a former president of the Institute of Cost and Management Accountants of Bangladesh.
Hence, in reality the interest rate is yet to be a win-win for both issuers and investors.
The lack of an investor class with appetite for bonds is also a problem for the Bangladesh market, believes the former president of CFA Society Bangladesh.
Across the world, including in India, institutional funds are the main investors in bonds. They have fixed-income mutual funds, pension funds, and insurance funds to flood the markets with money for bond issuers.
Bangladesh should immediately start fixed-income mutual fund as that is the easiest among others, said Khan.
He also pointed out some issues that make bond issuance a tough job for corporations.
In Bangladesh, bond issuers need approval from the securities regulator, and also from the central bank, if the issuer is a bank or a financial institution.
Both the regulators take time to check issues within the issuer, and also approve the interest rate.
Even in India regulators do not ask for approval anymore, nor do they fix the interest rate, which is a result of issuer-investor negotiation.
He mentioned an example where investors had agreed to subscribe to two-thirds of a corporate bond but later turned away only because of a delay in regulatory approval.
"The Indian regulator has now said to issuers, you do not have to take approval, rather comply with the criteria set in regulation and just keep us informed of the updates," said Arif Khan, the CEO of the largest non-bank financial institution of the country.
The secondary market for bonds would offer yield curves and also liquidity that attracts investors. The cost of bond issuance, listing and trading in exchanges should be lowered, he added.
Very importantly, corporate governance within issuer firms is a must for a healthy bond market that can solve a lot of structural problems in Bangladesh's financial system, said Khan.
He is hopeful seeing the securities regulator's initiatives to build a vibrant bond market.
The government was about to repeal tax incentives for zero coupon bond investors during this budget, and the BSEC chairman's effort restored it.
Fiscal incentives are important to popularise the new types of securities on the markets, Arif Khan said.