Prospects and Challenges of Financing through Capital Market M. Shaifur Rahman Mazumdar, FCA, FCMA Managing Director Chittagong Stock Exchange Limited Abstract Bangladesh capital market started in 1950s with the establishment of Dhaka Stock Exchange in 1954. It got the momentum after the establishment of Chittagong Stock Exchange in 1995. The country had to wait long time to get a world standard regulatory and IT structure. Now it is ready to accommodate the growing requirement of the economy. Financing from this sector is still very insignificant in comparison with the banking sector. The size and growth of the capital market do not match with the size of the economy as well as with the growth of economic indicators. This presentation would like to highlight the potentials of the sector in the economy and to identify the challenges for ensuring a sustainable growth. 1.1 Introduction Bangladesh was one of the largely agro-based developing countries in the world. Since her independence in 1971, agriculture has been the core sector of Bangladesh economy, which is still contributing around 17 percent of the GDP and also providing employment to 45 percent labor force. Around 84 percent of the rural people of the country depend on agriculture for their livelihood directly or indirectly [1]. Over the years contribution of industrial sector in GDP has been increased. The size of economy is currently USD 221.42 billion which according to IMF will rise to USD 322 billion by the year 2021 creating enormous economic opportunities. Bangladesh offers the liberal FDI regime allowing 100 percent foreign equity with unrestricted exit policy, remittance of royalty and repatriation of equity and dividend. Bangladesh has made substantial progress in reducing poverty. The country achieved the MDG 1 on halving poverty five years ahead of time, with 20.5 million people rising from the poverty level during the period 1991-2010 [2]. The capital market of Bangladesh is also developing gradually but not at par with the country s economy. If we consider the strength of the economy, the capital market has huge untapped opportunities. 1.2 Objectives of the study The general objectives of this presentation are as follows: a. Measure the current status of Bangladesh capital market; b. Establish a comparison of the capital market viz a viz strengths of the economy; c. Identify the potentials of Bangladesh capital market in the economy. d. Identify the challenges and obstacles for shaping the capital market at a desired level. Page 1 of 9
1.3 Scope of the Study The scope of the study is confined to analysis of economic and capital market statistics of the country as well as the south Asian region. 1.4 Methodology of the Study This paper has been prepared based on secondary data. Different research articles, reports of Bangladesh Securities and Exchange Commission, Bangladesh Bank, World Federation of Exchanges, World Bank and web site of different Stock Exchanges are the major sources of information for this paper. 2 Benefits of Financing through Capital Market The best way to raise fund for company In the era of free economy and democracy, stock market provides an effective linkage between large pool of investors and entrepreneurs. Investors on their free will want to take risk and invest directly with the project and like to possess share of ownership and profit. Reduced reliance on debt finance Borrowing and their prescheduled compulsory debt servicing could be avoided if company is listed. Enhancement of efficiency The management of a public company must be accountable to their shareholders, which in turn play a role in ensuring that the company operates in an efficient manner. Shareholders will benefit from the enhancement of the company's operational efficiency. Outreach to investors for future finance need Once listed access to additional long-term capital is often easier. The company can issue right shares or capitalize profit by issuing bonus shares. Tax Benefit If a company is listed it pays less tax. At the current rate, listed companies pay 10% less corporate tax than those who are not listed. Increased visibility The company's name in the newspapers and other media will also help marketing of company s products and services. It has been found that shareholders are often loyal to their own company's brand. Liquidity Listing on the Exchange generally increases the liquidity of the listed securities. Entrepreneurs may love to develop one project successfully, run it in a transparent way and then change into cash it when needed for the sake of developing another one. Page 2 of 9
Prestige Being listed in the stock exchange raises the prestige of a company immeasurably. A listed company presents a positive public image. This image plays an important role in boosting the company's credibility in local and foreign stakeholders. Attract Foreign Investment Being a listed company can help attract foreign investment in the firm, opening up opportunities for business expansion and modernization. 3 Capital Market in Bangladesh Capital market is the engine of growth for an economy. It is known as barometer of the economy. It acts as an intermediary between savers and companies seeking additional financing for business expansion. It boosts the investment capacity for infrastructure and other long-term projects needed to secure bright and sustainable future and help support finance for new innovations and start-ups companies. Bangladesh capital market consists of the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE) which were incorporated in 1954 & 1995 respectively. The Bangladesh Securities and Exchange Commission (BSEC) regulates activities of the bourses and their TREC holders. Exchange provides automated trading facilities since 1998 while the Central Depository Bangladesh Limited (CDBL) the only securities depository of the country introduced its first electronic book entry in 2004. Currently the Market Intermediaries include 250 members of DSE and 148 members of CSE 391 Depository participants (DPs) 58 Registered Merchant Banks 30 Asset Management Companies 13 Security Custodians 8 Credit Rating Companies Although Bangladesh capital market came into existence in early 1950, for the next 40 years it failed to generate much activity. Key market indicators remained very low relative to its regional comparators. After 2011, huge regulatory reforms took place to shape the capital market a world standard platform for capital mobilization. Now the market is ready in respect to infrastructure and regulatory structure to take up the enhanced pressure of the growing economy. 4.1 Prospects Many analysts and observers have high hopes for the growth prospect of Bangladesh in future. Bangladesh will be 3 rd fastest growing economy in the world in terms of GDP. In its latest assessment, Pricewaterhouse Coopers (PwC), estimated that Bangladesh would maintain very good average annual growth for the next 32 years (by 2050) [3]. The growth in economy will Page 3 of 9
require the capital market to grow. Prospects of Bangladesh capital market in some areas are discussed below. Dominance of Banking sector Fund raising through capital market is very low and insignificant in Bangladesh. Most of the funds are raised through banking sector. It is evident from Table 1 that banking sector consists 32.63% of Free Float Market Capitalization to Total Free Float Market Capitalization as on 28 December 2017 at CSE, which is the highest among all sectors of the market. However, the banking system of Bangladesh is badly impacted by non-performing loan (NPL). The percentage of NPL to total outstanding loans in Bangladesh was 9.6% in the year 2016 [4]. The current structure of NPL now at alarming stage. So, it is highly important to ensure space for the capital market as an alternative and sustainable source of financing. This will keep the money market as well as the economy as sound and stable. Table 1: Sector wise Free Float Market Capital as on 28 December 2017 Name of the Sector Free Float Market Cap (in BDT ml) % of Free Float Market Cap to Total Free Float Market Cap BANK 411,506.44 32.63 PHARMA N CHEMICAL 218,457.69 17.32 ENERGY 100,505.73 7.97 ENG N ELECTRICAL 73,492.41 5.83 TELECOMMUNICATION 67,947.59 5.39 LEASING N FINANCE 64,907.85 5.15 MISCELLANEOUS 58,138.87 4.61 TEXTILE N CLOTHING 52,663.61 4.18 CEMENT 51,570.90 4.09 FOODS N ALLIED 38,064.92 3.02 LIFE INSURANCE 24,663.64 1.96 MUTUAL FUNDS 23,654.14 1.88 SERVICES N PROPERTY 23,352.34 1.85 GENERAL INSURANCE 19,162.73 1.52 LEATHR N FOOTWEAR 11,576.80 0.92 CERAMIC 9,554.57 0.76 ICT 7,169.31 0.57 PAPERS N PRINTING 2,332.57 0.18 Source: CSE Lower Market Capitalization to GDP As shown in Table 2, contribution of Market Capitalization to GDP in Bangladesh is very low, which is lower than other regional countries. It is also seen that out of the countries mentioned in the table, it was highest in Malaysia and the lowest in Bangladesh. Table 2: Market Capitalization (% of GDP): Year 2014-2017 Name of the Country 2014 2015 2016 2017 Bangladesh 24.32 24.04 18.42 21.62 India 79.61 69.90 72.75 86.34 Pakistan 30.20 28.46 27.13 28.25 Srilanka 30.89 28.39 22.61 23.68 Page 4 of 9
Thailand 97.53 109.98 101.32 110.33 Malaysia 168.65 137.61 139.11 142.24 Source: Annual Reports of BSEC and Publication of BSEC for Unnoyan Mela 2018 Less Listing Number of listed companies in Bangladesh capital market is less than other regional countries. Only 9 companies were listed in 2017, whereas listing of a good number of companies is a must for maintaining the present growth in Bangladesh capital market. Table 3 shows that number of listed companies were highest in India and lowest in Bangladesh after Srlinaka. As per the statistics of Registrar of Joint Stock Companies and Firms(RJSC&F), around 150,000 companies are registered with the RJSC&F. Out of which only 301 companies are listed. Table 3: Listed Domestic Companies (Numbers) Name of the Country At the end of the Year 2017 Bangladesh 301 India 5828 Pakistan 559 Srilanka 296 Thailand 538 Malaysia 903 Source: Web site of respective countries Stock Exchanges and World Federation of Exchanges Data Very good return We have seen from Table 4 that Return on Investment from Bangladesh Capital Market is much more than banking sector. CSE Selective Categories Index (CSCX) increased by 39.06% from the year 2013 to 2017 and stood at 11,649 at the end of 2017 from 8,377 at the end of 2013. It shows 39.06% gain in 2017 from 2013. Table 4: Latest status of Capital market in Bangladesh (Chart from CSCX data from 2013-2017) Index Name Year Closing Value Closing Value Date CSCX 2013 8,377 12/30/2013 CSCX 2014 9,058 12/30/2014 CSCX 2015 8,572 12/31/2015 CSCX 2016 9,369 12/29/2016 CSCX 2017 11,649 12/28/2017 % return in 2017 than 2013 39.06 Source: CSE Page 5 of 9
14,000.0000 Chart Title 12,000.0000 10,000.0000 8,000.0000 6,000.0000 4,000.0000 2,000.0000-2013 2014 2015 2016 2017 4.2 Future Products Bangladesh capital market is at present Equity based market. It has enormous opportunities to develop new products and services. Among others development of Small Capital Companies market, Exchange Traded Fund (ETF), Clearing Corporation, Commodity Exchange and Derivatives are notable. And at present development of Small Capital Companies market and ETF are in the pipeline. 4.3 Major reforms took place in recent times There were some major reforms took place in recent times in the capital market of Bangladesh which are mentioned below. Demutualization of Exchanges Stock Exchanges of the country became Demutualized in 2013. Demutualization converted stock exchanges not for profit" organization to a for profit organization. It is a milestone development in country s capital market, legally separating management & ownership and trading rights. Special Tribunal Bangladesh government established a special tribunal for speedy disposal of cases related to the capital market in early 2014 which is a significant progress in boosting investors confidence. Public Issue Rules, 2015 New Public Issue Rules, 2015 which ensures more disclosure and better price discovery process in the capital market. Page 6 of 9
Corporate Governance Guidelines (CGG) Revision of BSEC s latest Corporate Governance Guidelines is in process. This will enhance better transparency, accountability and efficiency in the market as strong corporate governance has a positive impact on investor decisions. It will enhance investor confidence, increase reliability of financial information, reduce information asymmetry, and thus will ensure benefit of investors. Financial Reporting Act, 2015 The much-awaited Financial Reporting Act-2015 got passed in the Parliament on September 6, 2015. The Act includes provisions for setting up an independent Financial Reporting Council (FRC). The FRC will be entrusted to ensure accountability and improve performance of the professional accountants of Bangladesh. The FRC will be the sole watchdog to monitor the functions of auditors and ensure transparency and accountability in accounting and auditing of organizations including various government, autonomous and non-government institutions [5]. 5 Challenges: Bangladesh capital market is now facing a number of challenges in its development. Some of them are highlighted below. Good quality companies not listing A great challenge for the capital market in Bangladesh is to enhance listing of more quality companies. A large number of shares issued by companies from different sectors would help bring about better balance between demand and supply and enable investors to pick and choose on the basis of fundamentals rather than zooming on a limited number of existing shares, thus excessively inflating their prices and creating conditions for eventual downslide. Furthermore, adverse impact of manipulation by any errant market actor with respect to a few shares would be minimized. In order to ensure stability in the future, depth of the market needs to be increased by bringing in more IPOs [6]. Foreign companies not listing Foreign companies in Bangladesh are not interested to be listed in the country s capital market. Moreover, as per existing BSEC notification and other laws & acts of different authorities including BTRC and BEPZA, foreign companies are not required to be listed mandatorily. Government should impose conditions for mandatory listing requirement based on profit margin or annual turnover. However, BEPZA authorities can also grant some extra incentives for listing of EPZ companies. Good Govt. companies not listing There are only a few number of government companies are listed in Bangladesh capital market. Though there are many good and profitable state-owned companies exist in the country, they are not coming to the capital market despite many efforts have been taken so far. Page 7 of 9
Reluctance in Fair Disclosure and Presentation In the IPO process and during the time of post listing, it is required to ensure fair disclosure and presentation of financial activities. But it is observed that a mindset prevails from the side of entrepreneurs, whereby, they feel shaky or reluctant in ensuring such fair financial disclosures. This also creates a great hurdle in ensuring large numbers of quality companies to be listed. Diversification of products and features Bangladesh capital market is mainly based on equity products. But other products like bond, derivatives, commodities etc. are also traded through Exchange platform at the contemporary markets in other regions. But, we are still behind in respect of regulatory and policy framing. Coordination among Regulators Coordination among the different regulators and policy makers in formulating policy in the capital market is lacking. It is highly important to involve other regulators like Bangladesh Bank, NBR, BIDA, BEZA, BTRC etc. But still it remains a great obstacle. 6 Recommendations The study has suggested the following recommendations to make Bangladesh capital market sustainable: Framing policies to attract good companies Policies to be designed in such a way so that good quality companies can be attracted to enlist in the market. Policies to be designed in the annual fiscal plan and also in five years plan. Coordination among the different regulators and policy makers in formulating policy is a must in this respect. New products and features To make the Bangladesh capital market vibrant and sustainable, introduction of new products and features is an urgent need at the moment. Some advanced products can be designed and implemented at the earliest possible time. Bond market, derivatives market, currency market and commodity market to be included in the platform of Stock Exchange. More Government companies to be listed At present, only a few government companies are listed in Bangladesh capital market. All profitable government companies to be pushed to enlist in the market through either IPO process or direct listing. Regulatory guidelines to be reshuffled Foreign companies in Bangladesh are not coming to Bangladesh capital market due to present exemptions given to them. Regulatory guidelines to be reshuffled to enlist foreign companies. Special regulatory reforms are required in the structure and Page 8 of 9
guidelines of Bangladesh Bank, BEPZA, BEZA, BIDA, Bangladesh Telecommunication Act and Bangladesh Energy Regulatory Commission Act. Target basis listing To reduce the present dearth of listed companies in the market, immediate steps should be taken to increase the number of listed companies by listing at least 50 to 100 companies within a very shortest possible time on target basis. 7 Conclusion With the growing economy, the capital market of Bangladesh is also growing at the same time. There are huge untapped opportunities in the capital market of Bangladesh. Currently the market is only equity based. There are opportunities to establish other products and services like derivatives market, commodities exchange, clearing corporation, development of the bond market, Exchange Traded Funds, etc. At present establishment of National Clearing Corporation, ETF and platform for Small and Medium Enterprises are in the pipeline. Inclusion of such instruments will bring the capital market to a new level of international standard. Moreover, the capital market of Bangladesh could be an effective source of financing for implementing sustainable development goals. It can be made sustainable and model market in the globe if the challenges discussed in this paper can be handled efficiently and effectively. References: 1. Rahman, M.T. (2017) "Role of Agriculture in Bangladesh Economy: Uncovering the Problems and Challenges", IJBMI- Volume 6, Issue 7, pp-36-46. 2. World Bank s Overview on Bangladesh, retrieved from http://www.worldbank.org/en/country/bangladesh/overview 3. The World in 2050, Pricewaterhouse Coopers (PwC). 4. Field Study Report of Study on Credit Risk arising in the Banks from Loans Sanctioned against Inadequate Collateral" dated 29 August 2017 by Bangladesh Bank. 5. Financial Reporting Council to be functional this year, retrieved from http://www.dhakatribune.com/business/2016/09/19/financial-reporting-councilfunctional-year/ 6. Islam, M.A (2014), Bangladesh Capital Market, (Paper Presented at First BEF Conference, Dhaka), Bangladesh Economists Forum, June, 21-22. 7. Annual Report of Bangladesh Bank, 2013-2014. 8. Annual Report of Bangladesh Bank, 2014-2015. 9. Annual Report of Bangladesh Bank, 2015-2016. 10. Annual Report of Bangladesh Securities and Exchange Commission, 2013-2014. 11. Annual Report of Bangladesh Securities and Exchange Commission, 2014-2015. 12. Annual Report of Bangladesh Securities and Exchange Commission, 2015-2016. 13. World Federation of Exchanges Annual Statistical Guide-2016. 14. Recent Registration Statistics of Registrar of Joint Stock Companies and Firms retrieved fromhttp://www.roc.gov.bd/site/page/2f14b592-33c7-4931-b276- e16b0a9ded0d/statistics-of-rjsc Page 9 of 9