Development of Bond Market in Bangladesh: Issues, Status and Policies

By Jahur, Mohammad Saleh; Quadir, S. M. Nasrul | Management Research and Practice, September 2010 | Go to article overview

Development of Bond Market in Bangladesh: Issues, Status and Policies


Jahur, Mohammad Saleh, Quadir, S. M. Nasrul, Management Research and Practice


1. DEVELOPMENT OF BOND MARKET IN BANGLADESH: ISSUES, STATUS AND POLICIES

1.1. Introduction

The development of economy of any country depends mostly on the establishment of sound, effective and efficient financial system in that country. A well-developed financial system plays an important role in accelerating economic growth by mobilizing savings and facilitating investment in an efficient manner (Mu, 2007). Financial market is composed of different markets- Money Market, Capital Market, Derivative Market etc. All the markets play an interactive role for the development of economy by formation of capital through mobilizing funds, industrialization of economy through supplying adequate funds, providing services, linking investors to the industrial entrepreneurs etc. Besides, this requires sound regulatory framework, sound and investment sensitive administrative infrastructure, fiscal supports for making their role effective for economic development.

The financial sector of Bangladesh is characterized by the dominating presence of commercial banks, especially the Nationalized Commercial Banks (NCBs). Although, a paradigm shift in the degree of dominance has been observed of late with the emergence of private commercial banks-traditional and shariah based banking. Banking sector accounted for about 75 percent of the total financial system. Most of the available funds go to the NCBs in the form of deposits and channeled into lending. However, the NCBs had substantial nonperforming loan (NPL) portfolios. Both insurance and mutual funds industries are very small.

The debt market being an integral part of financial market plays a complementary role in developing economy through allocation of funds to the different deficit sectors. The debt market consists of money market, mortgage market, bond market and derivative market. The debt market of Bangladesh is very small. The size of domestic debt accounted for only 20 percent of the financial system. Bangladesh's bond market represents the 'smallest' in South Asia, accounting for only 12 per cent of the country's gross domestic product (GDP), a World Bank report said. "It is surprising that Bangladesh, which is much larger than Nepal in terms of population, land area and other measures, has the smallest bond market in the region," the report added. Like in any other country, a well-developed tradable bond market is critical to ensuring stability and efficiency of the financial market in Bangladesh. An efficient bond market is important for managing public debt and bank liquidity and for efficient conduct of the monetary policy. So far the bond market has played a limited role in the economy. The priority of the development of Bangladesh's capital markets should be to promote the bond market development. Without a functioning bond market, the monetary transmission processes of policy measures would be circumvented, and the desired impact on the real economy can not be fulfilled, which compromises the effectiveness of the monetary policy operations. In view of this, the present study has been undertaken in order to evaluate the present bond market status and to identify the issues and factors that prompt the development of bond market in Bangladesh.

1.2. Objectives of the Study

The principal objective of the study is to evaluate present bond market status in Bangladesh. To accomplish this principal objective, following specific objectives have been covered:

1) To highlight the Bond Market status of Bangladesh.

2) To highlight the benefits of bond market for the parties to the Bond Market.

3) To identify the problems that impedes the development of Bond Market in Bangladesh.

4) To suggest some important policy measures for the development of Bond Market in Bangladesh.

1.3. Scope of the Study

The inferences of the study would be used for the development of Bond Market in Bangladesh. …

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