The capital market of Bangladesh was until recently in the doldrums following two major crashes, first in 1996 and then in 2010. Both the crashes were characterised by fast escalating stock prices followed by abruptly plummeting index. This had disastrous effect on small investors who constitute the majority of stock investors and pauperised them. They were left with no money to invest further and had to abstain from participating in the capital market. The crashes triggered violence among small investors who marched on the streets and demonstrated against what they called manipulation by a section of share traders. Although agitation ended after some time, normalcy could not be restored in the market due mainly to lack of trust of the investors.
If investors are not rewarded for taking higher risks by investing in the stock market, or if excess volatility weakens investor's confidence, they will not invest their savings there. This is precisely what happened in Bangladesh.
So the biggest challenge facing the capital market in Bangladesh is restoration of the people's trust in the market. Besides, the individual investors have some inherent weaknesses that need to be removed. These investors are by nature market-driven and not driven by knowledge. As a result, they are the worst sufferers in case of any anomaly in the market.
Our capital market is occupied by only a small fraction of the gross domestic product (GDP), i.e., a little over 17 per cent and is mostly dominated by equity market comprising fixed income government bonds. India leads the market in the South Asian region with a 36.1 per cent share of its GDP followed by Sri Lanka and Pakistan with 31.6 per cent and 27.5 per cent of GDP respectively. But Bangladesh is yet to develop this market and hence, it is a long way behind its close neighbours in stimulating the capital market.
Bangladesh has set a target to reach middle-income country status by 2021. This requires a significant rise in investment. A healthy capital market, where the secondary market remains stable, can meet such huge investment requirements. A capital market helps increase savings, which can be diverted in the form of investment for economic development.
Capital market influences individual economies in more than one way. It aids transfer of resources from savers to investors and acts as conduit for channelling funds from investors to borrowers. A market for long-term loans and equity capital, it is an engine for raising capital to accelerate industrialisation and the process of privatisation. It provides a linkage between savings and preferred investment across different economic units and enables all individuals, irrespective of their status, to share the increased wealth provided by competitive enterprises, particularly at a time when the banking sector of the country is struggling to bring down advance-deposit ratio to a sustainable level. Besides, capital market also provides a market system for purchase and sale of listed securities and thereby ensures liquidity. At the same time, it helps satisfy simultaneously entrepreneurs' demands for capital and liquidity for investors. That is why the developing countries consider capital market as an engine of future growth through mobilisation of surplus funds.
The capital market of Bangladesh, however, appears to have averted crisis as there had been some encouraging signs of improvement in recent past, thanks to some developments in the banking sector. Deposit rates in banks were recently lowered generating a renewed encouragement for investors to invest again in the capital market. Dhaka Stock Exchange Index also showed an upward movement and went past 5500 recently. But the overall situation in the capital market did not improve testifying to the fact that rising index alone is not enough to drive the investors back into the capital market. There is a lot more to be done to boost investors' confidence and strengthen market liquidity and competitiveness. Secondly, the existing trading and settlement systems appear inadequate and call for revision. Thirdly, institutions and corporate sector with adequate capital are required to be enlisted as members of stock exchanges. Fourthly, flow of information should be improved to help facilitate purchase of shares for investors. Finally, over-the counter sales (OTC) for large green field projects and non-listed securities should be developed.
Most of all, there should be a significant collaboration between the equity market and the bond market. Investment in capital market, like any other venture, involves risks and it is essential that the investors are aware of it and go for calculated risks. The stock market regulatory body, the Bangladesh Securities Exchange Commission (BSEC), has taken up financial literacy programmes to educate investors and create awareness among them about financial capability and investment risks that will help them take proper investment decisions and protect them against financial frauds. For example, earning per share (EPS) and net asset value (NAV) are two points where the investors are mostly cheated by unscrupulous share traders. The objective of the programme is to make the investors aware of such malpractices.
Financial literacy programmes should include necessary policies to be framed in a manner aimed at creating a favourable environment so that the flaws of the market could be overcome. At the same time, policies should also be formulated so that activities of hidden consortiums could be aborted and market abuses, including market manipulation, could be eliminated. Due emphasis should also be given to enforce the existing rules and regulations. Regulatory framework should be strong enough to prevent unbridled speculation, market-rigging and insider trading, so that erosion in public confidence can be contained. Attempts should also be taken to make the present order-driven system of automation foolproof so as to eliminate the chances of manipulation.
Developing countries, with about 75 per cent of the world population, now look forward to their capital markets as the engine of future growth. In Bangladesh, we have a capital market that is yet to develop to bear fruits. One of the drawbacks of our capital market is inadequacy of good scrips. Out of around 3,000 public companies, only 220 have issued securities keeping a large number away from the securities market. It is further observed that the government is still holding lion's share of many blue chip companies.
We must overcome all these problems to make our capital market strong and vibrant and in doing so, the investors' mindset is one of the most important things that must be changed. We can have a sound economy in terms of capital and related developments in our country only if the capital market is strengthened properly. Because, the capital market is required to meet at least two basic requirements: (a) it should support industrialisation through savings mobilisation, investment fund allocation and maturity transformation, and (b) it must be safe and efficient in discharging the aforesaid functions. Meanwhile, capital markets across the world's top emerging economies have prospered significantly over the past few decades as they strive to achieve sustained economic growth and attract more investment.