The World Bank has identified five impediments to developing long-term finance in Bangladesh, officials said.
The Washington-based lender has cited the weak points in a diagnostic report prepared under a joint capital market development programme. The report was submitted to the government recently.
The barriers are: distortion in resource allocation both in the savings and lending markets, the absence of a reference rates and a representative yield curve, anomalies in different policies and regulations, and the lack of institutional investors, and capacity constraints of main regulators.
The World Bank said the high, non-market based interest rates of national saving scheme instruments distort the savings markets, crowding out private sector banks and the capital markets from the required resources for investments.
Despite finding yield rate of savings tools to be much higher than the existing market rates, Finance Minister AMA Muhith made it clear that this government would not bring any change in the rate.
He would put forward the matter to the next government for a decision.
Finance ministry officials said due to the high yield rate of savings tools, the government needs to pay a large amount of money every year from the public exchequer, which puts pressure on economic management.
The World Bank also said in the absence of a vibrant secondary market for government treasury bonds, there is no credible reference rate and yield curve representative of the true cost of funds.
"Consequently, the private sector issuers of bond face difficulties in pricing their instruments and investors are wary of coming forward to buying the bonds," it noted.
The Washington-based lender also found there are glitches and incongruence in key laws and regulations in Bangladesh.
These are "inconsistent with the government's willingness to develop capital markets as a source of long-term financing for development projects," the bank said.
Pension and life fund investment regulations are inadequate and need updating, the bank suggested.
The World Bank also found in the absence of pension funds and investible life insurance funds, the capital markets lack solid institutional sources of long-term investment.
"The country will need to undertake significant reforms to develop a sustainable base of institutional investors for the long-term debt instruments," it suggested.
The lender also noted the debt management department of Bangladesh Bank, the main financial sector regulator, lacks institutional and technical capacity to promote secondary markets for treasury bonds.
Besides, the Bangladesh Securities and Exchange Commission, the main capital markets regulator, requires a reengineering of its institutional set up and legacy system business processes.
The Insurance Regulatory and Development Authority (IDRA) recognised its need for capacity building whilst the existing provident funds are effectively operating without oversight, the World Bank said.
Contacted, a senior official at the financial institutions division told the FE the government has been working with the World Bank jointly to create long term finance sources other than the banking sector.
He said the findings of the World Bank are under scrutiny and steps will be taken in line with its recommendations.
