Bangladesh falls short of most of the developing economies in terms of bond market size.
The bond market size of our neighbouring countries like Malaysia, Indonesia and Pakistan stand at $345 billion, $233 billion and $66 billion respectively whereas Bangladesh's bond market (both treasury bond and corporate bonds combined) currently stands at only $18 billion.
According to the Capital Markets Fact Book July 2021, the global bond market size currently stands at $124 trillion, while the global equity market size stands at $106 trillion.
Undeniably, Bangladesh falls short.
But the stock market regulator has stepped forward to popularise and strengthen the bond market so that it can be a long-term source of finance.
Last May, the BSEC had passed an order of getting listed as a prerequisite for the entrepreneurs issuing perpetual bonds, which are fixed-income security with no maturity date, for which these are not redeemable.
According to Tanzim Alamgir, the Managing Director and CEO of UCB investment, "The listing of perpetual bonds was necessary for the market to enhance its liquidity."
Despite these steps that the new BSEC committee has been working on for the last year, the bond market is yet to become popular among investors. Why is that?
We spoke to Tanzim Alamgir to know his perspective on these issues.
The Business Standard: We have crores of deposits in 60 banks all around the country, then why is the bond market still struggling?
Tanzim Alamgir: There are two kinds of people in the market; one is market-oriented and the other group is not. No matter how much you increase the bond rate, the latter group will never be interested to invest in bonds. They would rather invest in FDR (Fixed Deposit Receipt) in some bank.
And this is mostly because of our lack of understanding and experience related to fixed income securities. Understandably past crashes of the stock market still haunt the share market.
But then another question arises: if the banks which have FDR's, also have bonds (perpetual, tier II bond, zero-coupon bond), then the trust issue should not be a problem here. But then why are investors still reluctant?
All the bonds listed in the market are currently perpetual bonds. Apart from this, the banks usually do not list the other bonds they have because of the high cost of listing and lengthy process.
DSE and CSE might opt to reduce the costing and processing time so that bank's and FI (financial institutions) can list their subordinated bonds and ZCB (Zero-coupon bond) to popularise the bond market among individual investors.
Perpetual bonds come without maturity, implying that they cannot be liquidated at any instance, in theory. So although there are new perpetual bonds listed in the market, it hasn't created an interest among the individual investors yet.
Currently, there are five perpetual bonds worth Tk400 crore listed in the exchange and approximately Tk54,000 crore worth of bonds are waiting to get listed. However, the trading of these bonds is still limited, which implies a lack of market demand. This mismatch between supply and demand needs to be mitigated to make the bond market vibrant.
TBS: We have perpetual bonds listed on the security exchange. Then why is this still not popular among the investors?
TA: It's about how we are distributing the market. We are mostly interested in the share market - where the more you risk, the more return you get. It's a simple calculation. While one may expect a return of up to 30 percent or more by investing in the stock market, why buy bonds that provide a yield of 10 percent on an annual or semiannual (twice in a year) basis?
Another step that the BSEC has taken is that now the intermediary institutions like the merchant bankers, portfolio managers, asset managers and stock dealers have to invest at least 3 percent of their own portfolio in the listed debt securities.
BSEC is encouraging the traders to invest in bonds and popularise the market through numerous directives which are indispensable for the bond market development. Additionally, they may opt for steps to educate the portfolio managers and organise workshops for their better understanding of the debt market.
If you have Tk100 capital, you cannot invest the entire amount into the share market, into the FDR or even in the bonds. Rather put the money in different baskets, in bits and pieces, so that if one window gets imbalanced, you don't need to worry.
But not only merchant bankers, portfolio managers, asset managers and stock dealers, but there should also be a regulation saying that every individual investor will have to invest a certain percentage of what they have in their portfolios. To popularise this, the SEC should offer some incentives or even some embarkation for the investors.
Currently, DSE and CSE are organising training and workshops for portfolio managers to educate them about the debt market.
But at the end of the day, it's all about trust and reliability that the investors need to be assured of. Otherwise, no matter how many incentives you give or steps you take, it will be tough to bring investors into the field. So the regulatory bodies need to be stricter in order for the investors not to feel threatened and only then will the products of the security exchange be more polished and safer.
TBS: Would you suggest we invest in bonds now?
TA: Yes, however, it should be done with proper knowledge and understanding of the bond market.
All the bonds listed in the market now are perpetual bonds. Perpetual bonds remain a very lucrative investment opportunity as it provides a return of approximately 10 percent compared to Fund for Reconstruction and Development (6 to 7 percent) and Govt Certificates. However, since these bonds come without a date of maturity, I would urge the institutional investors to be the first ones to invest.
As for individual investors, they should step in after gaining enough understanding of the market.
Moreover, BSEC is working relentlessly to polish this sector, we just need to give it a bit more time and support their efforts.