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An Explotary Study On The Significance of Capital Market for Economic Development and It's Further Growth Potential In Context of Bangladesh

Abstract

This research paper investigates whether the role of capital market is significant for the economic development of Bangladesh. Literature suggests that well developed stock market can provide an extra impetus to economic activity. Similar conclusions were also drawn from the in-depth interviews. This paper also reveals a well-scanned scenario of the capital market highlighting its setbacks, current weakness, recent improvements and its prospective signs of development through which we can foresee whether the capital market has further growth potential or not. Thus the present study can also contribute in providing essential information that can also be used for further research.

Abbreviations

  • ADB- Asian Development Bank
  • CDBL- Central Depository of Bangladesh Limited CDS- Central Depository System
  • CSE- Chittagong Stock Exchange
  • DGEN- DSE general index
  • DSE- Dhaka Stock Exchange
  • GDP- gross domestic product
  • IPO- initial public offering
  • SEC- Security and Exchange Commission

1.0 Introduction

The financial market contributes to the economic growth and development by providing the needed finance for provision of goods and services. The financial market consists of two division- money market and capital market. The money market is basically entitled to supply finance on short-term basis to individuals, businesses, enterprises, government and their agencies. The capital market, on the other hand, provides finance on medium to long-term basis to corporate bodies, government and their agencies (Al-Faki, 2006).

Capital Market plays a crucial role in any modern economy as they allow investors’ fund to flow to the most promising opportunities, i.e., the funds are mobilized and channeled efficiently from savers to the users of funds (Al-Faki, 2006; DSE, 2006; Hubbard and Thornton, 2006; Ahmed, 1997). In Bangladesh financial intermediation relies mostly on the banking sector which further resulted in lack of equity financing (Salahuddin Ahmed, 2007; Islam and Hassan 2002).

Furthermore out of 5 million urban-based middle class people only four hundred thousand are participating in the securities market and among them roughly hundred thousand are active investors. A large portion is still ignorant of the nature and benefits of the capital market (Abu Ahmed, 2006; DSE Review, 2006; Islam and Hassan, 2002).

Developing more complete and deeper capital market would enhance a countries growth potential and innovation (Andritzky, 2007). The forces of globalization, technology, new forms of competition have noticeably transformed capital market worldwide (Hassan, 2004). The chief advisor Dr. Fakhruddin Ahmed stated that “Only a vibrant and well-regulated capital market can bring sustainable economic development in the country through making the real sector capable of meeting the challenges of the competitive global economic realities” ( DSE Monthly Review, June 2007).

Regardless of recent improvements, Bangladesh’s capital market remains underdeveloped as its size is still very small in terms of market cap (ADB, 2006; Salahuddin Ahmed, 2007; Islam and Hassan 2002). The market cap represents just above 9% of the GDP (Dr. Fakhruddin Ahmed retrieved from DSE Review). As Bangladesh capital market is still quite small compared to other regional market and to the size of its economy (CSE, 2006) despite its existence for a long time, this paper applies a framework for analyzing the significance of capital market for economic growth and development of Bangladesh, identifying its growth potentials through exploration.

2.0 Problem Statement

Bangladesh’s capital market is still underdeveloped, in spite of recent improvements. The size of the country’s capital market is quite small mainly due to the excessive dependence of leading corporate entities on the banks for financing. Moreover the overall transparency of market transaction is also low compared to international standards and generally there has been slow development of the underlying market infrastructure.

The government is making effort to develop the reliability and efficiency of stock exchanges as investment market. Compared to the other neighboring countries the numbers of participants are much smaller in Bangladesh as investor lack confidence. There is a supply side constrains in the capital market as quality shares are lacking. For all this reason this research is done to explore the importance of capital market in the economy and what are the prospective sign of development of the stock market.

3.0 Purpose of the Study

The purpose of the study is to explore a well scanned scenario of Bangladesh capital market, its significance and its prospects. Although some research has been conducted relating to this topic but there is little empirical evidence about how essential stock market is to economic development of a country.

A sound capital market prompts better economic base and influence its future growth and so it can help realize Bangladesh’s growth potential. The capital market of Bangladesh is on the brink to play its due role as a medium for financing investment and thereby making a notable contribution to economic growth, employment creation and poverty alleviation.

The capital market plays an important role in quickening the pace of economic development but the existing state of the capital market is under-developed and not in a position to ensure economic progress of the country. Hence this research will try to highlight the significance of capital market for the nation and explore what are the probable signs of progress.

4.0 Research Timeline

  • 2007 SeptemberWriting Research Proposal
  • 2007 SeptemberDeveloping Literature Review
  • 2007 OctoberCollecting Data
  • 2007 October- NovemberData Analysis and Interpretation of the Findings
  • 2007 NovemberPreparing Draft and Finalizing the Research Paper
  • 2007 DecemberSubmission of Research Paper

5.0 Limitations of the study

During conducting the research I came across certain limitations and among them the foremost one is time constrain. Although I got the opportunity to work in an organization that is capital market based but it was difficult to find spare time that could be used for the report. Moreover the interviewed person could not provide all necessary information due to lack of time.

The research timeline also reveals that time constrain was actually a barrier as there was plenty to find about this research topic. As the research is conducted for the first time, I did not get much support from previous research paper and further research is suggested. A huge portion of the report is based on secondary data collected through websites and so the depth of reliability varies as by the nature of website.

6.0 Review of the Literature

6.1 Financial Intermediation

According to Joseph Yam (2004) financial intermediation is channeling savings into investments. Aziz and Duenwald (2002) referred that financial intermediation affects growth through the following channels – (i) it can increase the marginal productivity of capital by collecting information to evaluate alternative investment projects and by risk sharing (ii) it can raise the proportion of savings channeled to investment through financial development.

According to Conning and Kevane (2002) “intermediation implies an intermediary”. Gorton and Winton (2002) added that “it is the root institution in the saving investment process”. They referred that financial intermediaries are firms that borrow from those who have excess money, that is, the savers and lend the money to companies that need resources for investment.

6.2 Performance Indicators

According to R. N. Agarwal (2000) the most commonly used standard to measure the size of a country’s stock market is market capitalization ratio, that is, the ratio of market value of stocks which are currently listed on a bourse to Gross Domestic Product (GDP). A small ratio of capitalization to GDP reveals the small size of a stock market. Alternatively, the size can be measured by the number of listed companies on a stock market. The height of maturity of an economy’s financial system is essential for economic development.

Bekeart et al., (2007), Hubard and Thornton (2006), Rosul (2002) all investigated the significance and relation of stock market development with the economic growth and their conclusion suggests that capital market development is positively correlated with long term economic growth and the capital market plays an important role in the economic development of any country. The size of the equity capital market has an optimistic effect on economic growth of the country, that is, much higher market cap and turnover has a major positive influence on the economy (Institute for Advanced Studies, IHS, 2006).

It is seen that the ratio of market cap to GDP in neighboring countries like India, Pakistan and Sri Lanka is relatively much higher, that is, more than 60% of their GDP (DSE, Kh. Asadul Islam, 2007; Dr. Fakhruddin Ahmed,2007). In Bangladesh the market cap is very small proportion of the countries GDP (Islam & Hassan, 2002) and this is due to significant dependence on the banking sector (DSE Review, Fakhruddin Ahmed, June 2007).

Market capitalization as a share of GDP was around 2.5%-3.3% during 2001-2003 compared with 1.4-10.1% during 1993-1996 and 2- 4% during 1997-2000. However in the year 2004 market cap reached 6.8% reflecting the rise in the DSE index from 968 to 1,971 at the end of 2003 and 2004 respectively (ADB, May 2005). The trend of market cap as percentage of GDP and other capital market indicators of DSE and CSE are shown through the help of statistical data represented in the discussion section in Table 1.

Despite the existence of the bourse from 1954, the capital market still exhibits features of an emerging equity market (Islam & Hassan, 2002). The finance sector is immensely bank-based (Salahuddin Ahmed, 2007) as resource mobilization for industrialization and economic development is made primarily through the regular banking system (Islam & Hassan, 2002).

Borrowing requires fixed payments and over-reliance on banks can cause credit default risk. According to (Mochammad Rosul, 2002) excessive reliance on bank borrowing results in a mismatch with long-term investments being financed with short-term bank loans. He added that such a risky situation can further contribute to the economic crisis and so the job of the principal fund supplier for business should be transferred from banking sector to the capital sector.

6.3 Regulatory Bodies

6.3.1. The Security and Exchange Commission (SEC)

The Security and Exchange Commission (SEC) exercises power under the Security and Exchange Commission Act 1993 and established on June 8, 1993. SEC, the sole Capital Market Watchdog and Regulator, has been pursuing a vigorous capital market development process including amendments of its existing regulations, conduction of investor awareness programs, rigid monitoring and surveillance to bring in transparency in the trading mechanism (SEC, Annual Report 2003 -04).

The responsibility of SEC includes the following:

  • Regulating the functions of Stock Exchanges
  • Registering and regulating the business of stock brokers, sub broker, share transfer agents, underwriters, registrar, portfolio managers, investment advisors, and other middlemen related to security dealings.
  • Registering, controlling, and monitoring of all types of mutual funds
  • Controlling and monitoring of all authorized self regulatory organizations
  • Prohibiting fraudulent and unfair practices related to securities
  • Promoting investor’s education program and providing training of intermediaries
  • Regulating substantial acquisition of shares and takeover of companies
  • SEC are detects market manipulation and also keeps constant vigil on the activities of stock exchanges to ensure effectiveness of the surveillance system.
  • Conducts research and publishes information for above purposes

(Source: Security Exchange Commission Website: www.secbd.com)

6.3.2 Stock Exchanges

6.3.2.1 Dhaka Stock Exchange (DSE)

On April 28, 1954 DSE was first incorporated as the East Pakistan Stock Exchange Association Limited. Formal trading began in 1956 with 196 securities listed on the DSE with a total paid up capital of about Taka 4 billion. On June 23, 1962 it was renamed as Dhaka Stock Exchange (DSE) Limited.

After 1971, the trading activities of the prime bourse remained suppresses until 1976 due to liberation war and economic policy pursued by the then government. Trading resumed at DSE in 1976 with only 9 companies listed having a paid up of Taka 137.52 million (Bashar et al., 2000; M Farid Ahmed, 1997). As of today there are 342 listed companies in the prime bourse with market cap exceeding 700,000 million (DSE, 2007).

The reforms that DSE undertook recently for ensuring professionalism and transparency focused on the trading of securities. The measure were taken to implement transparent trading system, efficient reporting of trade, real time delivery of information, strong surveillance and monitoring over trade of securities and settlement of shares (Rahman,Uddin and Malik, 2006).

6.3.2.2 The Chittagong Stock Exchange Limited (CSE)

The CSE is the countries second bourse that started its operation from the year 1995. It is also a self-regulatory non profit organization. Currently the numbers of listed securities are 223 of which the number of listed companies are 208, mutual funds 14, and one debenture.

6.4 Recent Capital Market Scenario of Bangladesh

According to Dr Fakhruddin Ahmed (DSE, 2007) political uncertainty, corruption and lack of transparency in all section of the social and economic fabric are some of the reasons for capital market deficiency. Bangladesh Governor Salehuddin Ahmed (2007) reveals that foremost problems include political instability, under developed infrastructure, poor port management, short comings in legal system and corruption (Financial Express Report).

On the other hand DSE general share price index reached its pinnacle and crossed 3000 points (Newage: www.newagebd.com). In fact the capital market witnessed a robust growth in the current year. Both turnover and market cap crossed new milestones at Tk 3000 million and Tk 700,000 million respectively during the year (DSE, 2006; DSE, 2007, IDLCSL). Recently our market cap crossed USD 10 billion that accounts for only 13% of its GDP which was only 8% a year back. (DSE Monthly Review, Oct 2007).

Though the contribution of capital market to GDP is still inadequate when compared to neighboring countries but still its increase is significant for the development of our economy. Comparison of indices and market cap among different countries is shown in Table 2 and Figure 2 in the discussion part. Entry of 12 new issues worth Tk 11,322.95 million helped raise the market cap.

Some of the reason for the progress in capital market development is central depository system and the automated trading system (ADB, 2006; SEC, 2005). The DSE has upgraded its automated online trading system and investors are able to trade from different parts of the country (SEC Quarterly Report, April-June 2007; ADB, 2006). Another reason for the vigorous improvement of the equity capital market is due to strenuous efforts taken by the SEC that further boosted investors’ confidence (DSE, 2007).

7.0 Research Methodology

7.1 Research Design

The present study endeavored to explore importance of capital market for the economic development of Bangladesh and its future prospects. Exploratory research is selected as research design as little information exists about the capital market of Bangladesh. The aim of exploratory research is mainly to gain enough information before doing more thorough research. We basically start by gathering as much information about the object as possible and with a vague impression of what we should study (Cooper & Schindler, 2003).

7.2 Research Instrument

The research was conducted using both primary and secondary data. For collecting secondary data, various books, websites, newspapers, annual reports, monthly reviews and significant articles were chosen. Also for collection of primary data in-depth interviews with a range of designated professional, related to this field, were taken.

7.3 Data Collection

Secondary data used in the paper has been collected through access of different source of books, journals, publications of DSE, SEC, ADB and other news paper and articles. The DSE and SEC library were visited to acquire secondary information. Various websites were browsed to collect relevant articles that are circulated on online sites. For collecting primary data, in-depth interviews of experienced people related to this field of

capital market were taken. Appointments were fixed initially and then the interviews were taken. The interviewed persons are Kh. Asadul Islam, CEO, IDLC Securities Limited (IDLCSL); Anwarul Kabir Bhuiyan, SEC, Executive Director; Tania Sharmin, SEC, Assistance Director (Surveillance); Abul Ehsan, Senior Officer, IDLC Finance Limited; Moumita Manzoor, Research Associate, IDLCSL.

Each of them was interviewed for 40 minutes approximately during the office hour while taking break from work. They were asked some essential questions associated to this research topic. Some of the questions that were asked are as follows-

  • What is the role of capital market in the economy?
  • What are the setbacks of the stock market in Bangladesh?
  • Explain the current scenario of the capital market
  • What are the prospective sign of the development of the capital market?
  • How can we be sure of a sound growth of capital market in Bangladesh?
  • Do you see a better or worse scenario ahead of us and why?

8.0 Discussion

8.1 Role of Capital Market in the Economy

According to Dr. Mirza Azizul Islam (2006) capital market can play an essential role in enhancing economic development through efficient intermediation of savings into productive investments and in encouraging the expansion of private entrepreneurship (DSE, 2006). The primary market can contribute to the growth of private entrepreneurship by facilitating the entrepreneurs to raise funds from surplus savers and consequently finance investment in a cost-effective manner.

For instance, if an industrialist with a viable new investment or expansion proposal is unable to execute his plan due to financial crisis then he can issue securities to meet the required deficit. Moreover issuing shares have the additional advantage that they do not create fixed charges for the companies issuing them and hence endows a better option than, say, financing through bank loans. A proficient and vibrant secondary market can also contribute copiously to economic growth.

If a company, for instance, is well-managed and the secondary market prices are higher than face value, subsequent rights issue can obtain premium. Therefore the company can finance its development plan in lucrative and cost-effective approach. So the capital market not only provides opportunity for companies to borrow funds needed for long term investment purposes but also provides avenue for the marketing of shares and other securities in order to raise fresh funds for expansion of operations, leading to increase in output or productivity.

The equity market offers opportunity for government to finance projects aimed at providing essential amenities for socio-economic development. Such market encourages inflow of foreign capital when foreign companies or investors invest in domestic securities. The securities market can help attain higher productivity by restructuring of ownership and management of the company as secondary market provides an exit option for the original founders and it also creates an avenue for the populace to participate in the corporate sector of the economy and share in its wealth through ownership of securities.

So it not only reduces the over-reliance of the corporate sector on short term finance for long term projects but truly makes available the needed money for venture capital development which could serve as a vehicle for industrial development. So through its allocating mechanism, the capital market ensures an efficient and effective distribution of scarce financial resources for the optimal benefit to the economy.

8.2 Major Setbacks of the Capital Market

Investment in capital market is limited to a small proportion of the population. Investors’ confidence in the capital market has not entirely recovered since the stock market crash in 1996. Share market debacle in 1996 was mainly the result of market manipulation by a section of stockbrokers in collaboration with some other market participants (SEC, 1997).

Some of the other notable reasons behind the stock market crash includes insider-trading and off-loading of shares by directors of the company, absence of circuit breaker in the securities market, disclosure of unregulated rumors and sensitive information, lack of attention given by investors to the relation between stock price and company fundamentals, weak regulatory body to name a few. The diagram below shows clearly the catastrophe that took place during 1996.

Figure 1 DSE General Price Index (DGEN) 1993-2007 (Source: IDLCSL)

On November, 2001 the DSE introduced the benchmark price barometer DSE General Index (DGEN) with a base index of 817.62 points. The index excludes companies of Z category and is calculated on the basis of price movement of individual stocks. Figure 1 displays the monthly DSE general index from the year January 1993 to November 2007, the latest month for which the data was available. From the diagram we can tell that the market behaved irrationally during the year 1996.

The DSE all share price index rose from 832 in 1 January 1996 to 3567 in 14 November of the same year, i.e. DGEN rose from 1106 to 4738.83. This conspicuous rise in DSI was followed by a drastic fall to 2261.47 points in the last week of December 1996 and again to 1140.65 points on April 1997. The market was dreary for a long period of time after the 1996 collapse but between July 20003 and June 2005, DGEN more than doubled from 823 to 1727. It appears that the index is performing modestly in the current year followed by an uptrend as it shows an increase in the index from 1527.29 in November 2006 to 3011.60 in November 2007, reaching its pinnacle after 1996.

The devastating history of 96 crashes still persists in the mind of potential investors but without mass participation the market cannot sustain in the long-run. Also it needs to bring back the foreign investors that fled in the 1996 debacle. Inflows of foreign direct investment need to be restored to stabilize the economy.

From the statistical data below in Table 1 it can be observed that foreign investors are least attracted to the securities market of Bangladesh. There were significant foreign investment inflows into equities in the year 1994 amounting to $ 106 million but by the mid 1997, most of the foreign portfolio investors had divested holdings and have not since returned.

The following table contains the key capital market indicators reflecting that the pace of primary market development had been fluctuating and the market’s contribution to resource mobilization of the economy remains below potential and the secondary market remained stagnant during 1997-2003 but showed some sign of recovery in 2004. Overall, investor confidence has not yet fully recovered.

Table 1 Capital Market Indicators- Dhaka Stock Exchange

Item

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

No of Listed

Companies

143

157

183

186

202

208

213

223

231

242

248

337

Market Cap

In taka (mn)

18099

41771

56518

168106

71302

50254

44789

62932

63777

71269

97587

224923

In $ (mn)

455

1038

1409

3960

1569

1036

881

1169

1119

1229

1685

3709

Market Cap as

% of GDP

1.44

3.08

3.71

10.11

3.95

2.51

2.04

2.65

2.52

2.61

3.25

6.76

DGEN

391.8

845.7

834.7

2300.2

756..8

540.2

487.8

642.7

817.8

848.4

967.9

1971.3

Trading Value

In taka (mn)

579

4288

6381

30137

17404

34369

38965

40365

40869

34984

19152

53181

In $ (mn)

14.79

107.2

158.7

721.2

396.6

732.7

793.7

774

732.2

604.2

330.8

881.8

Average Daily

Trading Value

In taka

2.03

15.5

25.1

118.2

65.2

127.8

151.6

145.7

153.6

121.9

67

199.18

In $

0.05

0.39

0.62

2.83

1.49

2.72

3.09

2.79

2.75

2.11

1.16

3.30

No of IPOs issued

5

18

27

3

16

6

5

10

9

10

14

3

Foreign

Investment in

Equity

8.4

105.9

(15.2)

(117)

(9.9)

(4.2)

(1.1)

1.2

(3.5)

(1.4)

-

-

Securities (mn)

(Source: ADB, February 2005)

In the United States one out of every three person is involved in capital market. Compared to the other neighboring countries, for example, India, Pakistan, Thailand and Sri Lanka, the number of participants are much smaller in Bangladesh. As investor confidence has not fully recovered since the crisis that occurred during 1996.

Despite attempts at reform, the overall transparency of market transactions is low by international standards and generally there has been slow development of the underlying market infrastructure. The problem that investors face is asymmetric information. As companies are reluctant and irresponsible in disclosing relevant, reliable and material information the investors fear to participate. A major portion of our educated populace is not convinced of relative profitability in investing in shares, they rather pay concentration in other sources of investment.

An investment culture needs to be developed through organization of training, seminars, and workshops to make people aware of the stock market benefits. In a study done by Rosul (2002) and ADB report, it also revealed that lack of market interest has, in turn, marginalized the function of capital market in mobilizing long-term funds for economy. Moreover the Asia- Pacific Domestic Equity Market portrays that Bangladesh is fairly behind in terms of market cap, number of trades in share, number of instruments and also in terms of performance of indices.

30000 25000 20000 15000 10000 5000

0

Performance of Global Indices

Figure: 2 Performances of Global Indices

(Source: Data taken from DSE Website: www.dsebd.org)

One of the major reasons for shortcoming of capital market is unavailability of listed securities. Although the number of listed securities increased over the time but it still remains small when compared to other countries. The trend of listed securities from the time of its inception till 1996 is shown in the Table 3, although the latest data are provided in the later part of the discussion. And the listed issues and market cap for the current year (July 2007) in comparison with other countries are also shown in Table 2.

Table 2 Overview of Global Market

Name of Countries

Listed Issues

Market Cap in USD mn

Bangladesh (Dhaka Stock Exchange)

338

7915

Pakistan (KSE)

651

65,820

India (SENSEX)

4853

1117910

Philippines (PSE)

242

93951

Kualalumpur (KLSE)

1009

302,741

Singapore (STI)

732

512895

Thailand (SET)

520

196421

Hongkong

1209

2,229,101

Japan

2417

4,674,472

London

3301

3,940,829

United States

5972

16,428,558

Germany

755

1,902,587

(Data retrieved from www.dsebd.com)

Table 3 Growth Pattern of Listed Companies, Paid Up Capital and Market Capitalization

Year

No of Listed-Securities

Paid Up Capital

Market Capitalization

Taka (mn)

% Increase

Taka (mn)

% Increase

1976

9

137.5

-

146.7

-

1977

11

230.5

67.61

248.5

69.36

1978

14

281.3

22.05

305.4

22.90

1979

18

365.0

29.77

393.7

28.93

1980

23

405.8

11.17

436.9

10.95

1981

26

528.1

30.12

603.2

38.08

1982

29

726.5

37.38

811.6

34.54

1983

44

1001.5

38.04

1211.3

49.25

1984

58

1546.6

54.42

2256.5

86.29

1985

72

2059.7

33.18

3492.6

54.78

1986

82

2653

28.81

5730.6

64.08

1987

92

3149.6

18.72

12670.9

121.11

1988

111

3663.7

16.32

13556.9

6.99

1989

116

4539.2

23.90

15350.5

13.23

1990

134

5361.1

18.11

11485.9

-25.18

1991

138

5586.6

4.21

10397.3

-9.48

1992

149

6020.3

7.76

12299.1

18.29

1993

153

8201.7

36.23

18098.7

47.15

1994

170

11673.8

42.33

41770.7

130.80

1995

201

19438.0

66.51

56518.1

35.31

1996

203

22114.7

13.77

81406.2

44.04

(Source: M. Farid Ahmed)

Currently the investors are stuck with very few quality shares which have been a major concern for a long time. Unavailability of quality shares stands in the way of restoring investors’ confidence. Comparatively the presence of bond market is also very weak.

Derivates and Option market are unavailable regardless of the existence of capital markets in the country for such a long period of time. Lack of technology has been a key reason for drawbacks of capital market. In fact this was another major factor for the 1996 share scam. Unavailability of automation system in the market caused the investors to suffer as fake accounts and shares started to occur.

8.2.1 Bond Market

The bond market is in its infancy (ADB, 2006). A number of initiatives to activate the secondary bond market remained dysfunctional since its inception in 2005, depriving the capital market of the benefits expected from it. In November 2004 the first asset backed securitized bonds were floated and Five and Ten Year bonds have been issued not long ago.

Despite offering higher returns on investment than long term bank deposits, bond market has failed to attract potential investors. In fact the capital market is mainly equity-centric. Of the total 342 securities traded on the stock exchange, 263 are number of companies, 57 Treasury Bonds, 14 Mutual Funds and eight are Debentures (DSE, Monthly Review, 2007). It must be kept in mind that no capital market can reach maturity without a strong bond market and so proper initiations to activate the bond market must be considered.

Some of the reasons for the inefficiency relating to bond market are:

  • Lack of sufficient government and institutional initiative
  • Lack of awareness of cost of capital and investment return
  • Lack of knowledge and research
  • Lack of regulatory institution

8.3 Current Scenario and the prospective sign of development of the capital market

Capital market has been experiencing a bullish trend over the last few months in Bangladesh. The DSE general index crossed 3000 points and also the average daily turnover crossed Tk 2,000 million. The market cap has also been growing tremendously crossing Tk 700,000 million or $10 billion, the highest ever in the history of Bangladesh.

This bullish trend is basically seen due to active participation of the institutions, which is 60% of the total trade, 20% of it comes from foreign investors and the remaining 20% comes from the retail investors. This is indeed a very good sign for the capital market of Bangladesh. According to Mr Asadul Islam market cap is expected to reach USD 15 billion within a short span of time.

800000 600000 400000 200000 0

DSE Market Capitalisation during 2007

month

Figure 3 DSE Market Cap during 2007

(Source: www.newagebd.com, www.desbd.com)

The number of listed securities in DSE started with only 9 in 1976 which has gradually increased and now reached 342 in 2007. The growth pattern of listed securities and market cap was rather slow during early 1990s (M Farid Ahmed, 1997; DSE, 2007). But recently its improvement is worth mentioning.

The number of securities listed on the DSE has recorded an appreciable increase over the years. The total number of securities increased from 9 in 1976 to 82 in 1986, 203 in 1996 and 310 in 1996 an increase of 811.11%, 147.56% and 52.71% respectively over the ten year span of comparison. The figure increased further to 342 in 2007. In 2004, however, the number decreased for the first time since 1993 as some non performing companies were de-listed. The Table 4 below shows the current trend of the market.

Table 4 Trend of the market for the last 5 years

Year

No of listed Securities

Market Cap

DGEN

2003

267

89756.7

967.88

2004

256

224923

1971.31

2005

286

233075

1677.35

2006

310

323368

1609.51

2007

342

628671

3071.44

(Source: DSE website- www.dsebd.org)

One of the interviewee Mr. Ehsan expressed his views about why the market recently witnessed an uptrend for last few months. This is mainly due to prevailing warm political stability in the country. Moreover, market cap is also growing as 52% of our market cap is based on the banking sector and there has been substantial increase of the financial sector.

The top 30 listed companies according to their market cap for the period October 31st 2007 is shown in Table 5. Mr. Islam added that the central bank also played a vital role as it brought transparency to the banking sector, which further inspired the retail investors to join the capital market with higher confidence. Above all, the continuous attempt of SEC has made it possible for the securities market to be free from fraudulent and manipulative activities.

Table 5 Top 30 listed companies according to their market cap for 2007

SL

Company

No. of

Market

Market

Market

NO.

Name

Shares

Price

Capitalization

Capitalization

Outstanding

31.10.07

(BDT million)

(US $ million)

1

Rupali Bank

12,500,000

2796

34,950.00

508.88

2

Square Pharma

8,942,400

3382.75

30,249.90

440.45

3

Lafarge Surma Cement

58,068,675

396.5

23,024.23

335.24

4

Power Grid

36,435,810

623.50

22,717.73

330.78

5

AB Bank

7,432,620

2842.75

21,129.08

307.65

6

IFIC Bank

6,706,996

3132.5

21,009.66

305.91

7

Pubali

21,000,000

977

20,517.00

298.73

8

Islami

3,801,600

5325.35

20,244.85

294.77

9

Prime Bank

22,750,000

838.5

19,075.88

277.75

10

BRAC Bank

12,000,000

1479.5

17,754.00

258.50

11

Uttara Bank

3,993,296

3868.25

15,447.07

224.91

12

NBL

12,082,073

1257.75

15,196.23

221.26

13

DESCO

12,711,940

1140.25

14,494.79

211.05

14

UCBL

2,992,054

4733.75

14,163.64

206.23

15

Summit Power

8,580,000

1522.5

13,063.05

190.20

16

Trust Bank

11,666,700

1093.75

12,760.45

185.80

17

Southeast Bank

22,817,583

532.25

12,144.66

176.83

18

Dutch-Bangla Bank

2,021,350

5924.75

11,975.99

174.37

19

Eastern Bank

10,350,000

1046

10,826.10

157.63

20

Beximco Pharma

135,326,506

71.40

9,662.31

140.69

21

Dhaka Bank

15,474,022

616.5

9,539.73

138.90

22

The City Bank

11,880,000

782

9,290.16

135.27

23

EXIM Bank

21,421,969

411.75

8,820.50

128.43

24

BATBC

60,000,000

119.7

7,182.00

104.57

25

Bank Asia

13,950,000

484.25

6,755.29

98.36

26

Shahjalal Bank

18,716,500

327.25

6,124.97

89.18

27

Mercantile Bank

14,988,984

402.5

6,033.07

87.84

28

One Bank Ltd

10,389,951

579.5

6,020.98

87.67

29

NCC Bank

13,520,121

422.5

5,712.25

83.17

30

MTBL

9,979,200

558.5

5,573.38

81.15

(Source: DSE Monthly Review, October, 2008; IDLCSL)

Floating of new initial public offerings (IPO) also contributed to the enhancement of the market and some big telecom companies along with some government owned

companies are also expected to take position in the market within a short span of time, which will eventually boost the capital market. An increasing number of IPO followed by over-subscription indicates enhanced prospects for the growth of capital market in an economy.

Although it can be seen from the Table 6 below that the IPOs are not also increasing when compared to its prior year but oversubscription of new issues are observed representing publics enthusiasm. In fact oversubscription has now become an obvious scenario and its prevalence in most years indicates higher demand compared to supply. Moreover, the domestic, non-resident Bangladesh and international investors had been recently participating in the IPOs with tremendous enthusiasm that resulted in over subscription of the IPOs indicating vivid prospects for the growth of the securities market.

For instance, during IPO offering period in July, Trust Bank raised around Taka 700 million from the capital market issuing 46.67 lakh shares to public at Taka 150 each with a premium of Taka 50 per share. The issue was over subscribed by 11 times. The recent IPO trends and increased involvement of institutional investors and market inquiries by companies also indicate that, larger companies like telecom, power, oil, sectors are keenly considering enlisting their companies with the stock exchanges. Currently Desco, Power Grid and Summit Power are enlisted and within end of November Meghna Petroleum and Jamuna Oil will be enlisted.

Table 6 IPO Statistics

4 Years IPO Statistics (2003-2006)

Year

No of IPO

Public Offer

Total Subscription

2006

7

1,433,950,000

15,241,930,000

2005

17

1,265,700,000

15,795,170,000

2004

3

473,900,000

6,233,400,000

2003

14

1351,200,000

26,305,700,000

(Source: DSE Monthly Review December 2006)

Trade expansion is mainly facilitated through automation and up gradation of the DSE. This further resulted in increased turnover over the time. The top telecommunication companies have decided to public which will eventually have a positive impact on the market and on the investors. Investors these days are optimistic to some extent as CDBL, which operates CDS in the stock market launched internet-based service that allow investors to know the status of their shares eliminating fraudulent acts that occurred earlier.

DSE Performance- September 2007

September

September 2006

% Change in

2007

1-year

DSE All Price Index

2108.49

1298.02

62.44

General Index

2548.49

2455.08

63.10

DSE 20

2002.61

1352.50

48.07

Market Capitalisation(Tk bn)

611.01

278.59

119.32

Market Capitalisation (US$ bn)

8.89

4.16

113.76

Total Turnover Value (US$ mn)

452.16

148.65

204.18

Total Turnover Value (Tk mn)

31063.47

9959.67

211.89

Total Turnover Volume (in 000)

239,692

88,777

169.99

Figure 4 DSE Performances for September 2007

Based on several indicators, Bangladesh’s capital market appears to have good prospects and a good opportunity to develop efficiently. This is especially true since capital market utilization is still well below an optimal level.

8.4 How can you be sure of a sound growth of capital market in Bangladesh?

Initiatives should be taken to attract investors of our own country first. With greater investor participation, activities in securities market will play more vital role in mobilizing long-term funds for spurring economic growth (ADB, March 2006). Steps should be taken to improve the political environment, steps to improve business climate to restore investor’s confidence regarding capital market investment.

The supply of quality shares needs to be ensured as well. Mr. Kh Asadul Islam, CEO of IDLCSL, mentioned that liquidity and lack of instrument would top the list of challenges that we have to encounter. He believes steps should be taken to attract more companies to the securities market. Compared to the international market the indices and market cap are quite low in Bangladesh, implying its setbacks as well as indicating ample amount of scope.

The interviewee also added that introducing Future and Option Market would contribute immensely as it is observed earlier that turnover and Market Cap of our neighboring country India grew substantially after introduction of these two markets. Derivates started in India in June 2000 and their daily trade volume was Rs 110 million. Today their average daily trade volume stands at Rs 350,000 million. Instruments like forward and spot trading, derivates, government bonds, share lending and borrowing can be introduced to expand the capital market scope. Investors will be able to diversify their fund and minimize risks.

Therefore emphasis should also be given on the cooperation among the stock exchanges among our neighboring countries as the same socio-political factors effect us rather similarly. “Through friendly dissemination of knowledge and experience, we can revitalize and energize our economies” (Kh. Asadul Islam).

The regulatory body, SEC, has become more active in monitoring all the discrepancies and fraudulent act done by any listed company and are more competent and professional in performing their duties. Also, it is observed that the two bourses of the country are performing their tasks and responsibilities in an efficient manner compared to their earlier performance.

This will further boost the confidence level of the investors in the near future that will eventually flourish the securities market. From one of the publication of DSE it is found that the president of DSE Mr. Md. Abdullah Bokhari mentioned that DSE is planning to arrange road show programmes in Dubai, London, New York and Toronto to attract investment in the stock market (DSE, 2007).

Some of the recent initiations taken by SEC include the following

  • Monitoring role of SEC was strengthened to ensure that the market actors-issuers, members of the bourses, merchant bankers, auditors etc, fulfill their duties and obligation.
  • Surveillance over the prices and trading volumes of individual script was strengthened
  • To increase awareness of the investors, the listed companies have been categorized as A, B, Z , G and N based on profit-loss, status of annual general meeting (AGM) and commercial operational status of the company.
  • CDBL started commercial operation upon receipt of business commencement certificate from SEC on December 2003 .After its introduction the issuance of primary shares through public offering is made through CDBL in dematerialized form that enhances the transparency in the capital market.
  • SEC formed a consultative committee to discuss the market related issues and recommend appropriate measure.
  • Government at the request of SEC came forward to offload shares of state-owned enterprises (SOE) in the capital market. Currently a number of SOEs of oil, power and telecom are under the process of being listed with the stock exchange.
  • SEC is working on changing initial public offering price system to encourage profit making local and multinational firms, which want proper prices of their IPO.

(Source: SEC, Annual Report-2003-2004, www.newagebd.com, in depth interview)

9.0 Significance of the Study

Investment in stocks and shareholders participation is limited to a small proportion of the population. So this research might bolster investor confidence in the capital market if they recognize its significance and its further potential for improvement. “Bangladesh currently stands at the cusp of strong economic growth where a sound local capital market can be just the fuel that accelerates realization of this potential” (Daily Star, 29 September 2007).

This research will also draw attention on whether Bangladesh’s future growth can be achieved through sound capital market. This report highlights both the weak points and the improvements of the capital market from which it can help predict its growth potential and thus can contribute in providing essential information that can also be used for further research.

10.0 Recommendations

In comparison with capital markets of developed economies, the depth of Bangladeshi market still needs to develop further. This can be done through ensuring supply of quality shares. Moreover the country’s capital market requires quality shares also to cope with the recent demand driven surge in the market. There are also not enough investment outlets in the market. This can be improved through introduction of new products like Option and Derivatives that will further broaden the investment horizon and bring enhanced depth and liquidity to the market and attract global customers.

Regulatory Bodies, SEC, DSE and CSE should endeavor to maintain pace with the global changes of capital market and reforms must also be made in line with automation. While preparing the national budget, government must put emphasis on capital market development and reforms. Market infrastructure must develop by adopting more sophisticated systems and improving operational and marketing capability. In order for the domestic market to be a stable source of funds, the average level of risks needs to be reduced.

To reduce risk of capital transaction, investors must be adequately protected through appropriate regulation by the stock exchange, SEC, government supervisory agency and other means. If the investors have greater confidence in the capital market, they will be inclined not only to invest more but also to hold their investments for longer periods. The capital market is very vital to the growth, development, and strength of any country and that is why it must receive more attention as we continue to reform the economy.

Lastly I would suggest that some research should be done for improvement of the bond market as no capital market can reach maturity without a strong bond market

This must be kept in mind and appropriate measures to activate the bond market must be taken.

11.0 Conclusion

A mature and sizeable stock market is perceived across the world as a barometer of the economic health and prospect of a country. Although stock market exists from 1954, its true shape of equity market started taking form from the nineties (DSE Monthly Review, 2007). Currently the security market in Bangladesh is experiencing growth. Bangladesh must have a dynamic capital market which can play the role of major source of industrial finance.

The capital market is equity-based and so attempts for diversification of capital market must be taken into consideration for stimulating the market. DSE, one of the barometers of the country’s economy, went through a reengineering process to become a systematic and efficient organization to serve and expand the capital market of Bangladesh. Factors that will be able to help sustain its improved performance includes- improvement in regulatory framework, strengthening human resource in SEC, introduction of the automated trading system by the bourses, operational of CDS that abolished circulation of fake shares, investors’ education program conducted by SEC, and closer collaboration and dialogue between SEC and the stock exchanges (Salahuddin Ahmed Khan, 2007).

Despite its improvements, Bangladesh still has a long journey on the road of development of a capital market. Timely implementation of the proper policies and initiatives will be able to turn the country’s economy along with its capital market towards a direction that will have long term sustainable development (DSE, 2007). It is possible that the capital market will take a competitive position in the global market and the future outlook of the market will be able to reach a new benchmark and contribute to the national economy.

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