Welcome to Our

Presentation on
Developement of
Government and Corporate Bond
Market in Bangladesh
Group-01
 Bond Market:

The bond market is a financial market where participants buy and sell debt
securities, usually in the form of bonds. Bond Market is composed of
Treasury bond, Municipal Bond and Corporate Bond. This is of two kinds-
Organized and OTC markets. There are various types of bond products
depending on provisions, maturities, coupon rate, options, convertibility, etc.
Bond Market in Bangladesh is dominated by treasury debt securities. It has
now only one corporate bond; but does not have any municipal
bond/debenture. There hardly exists a corporate bond market in the
country, it has a debenture market with only a small number f well-known
issuers.
 History of Bond Market of
Bangladesh:
Before independence, the use of bonds as a means of resource mobilization was virtually non-existent in
Bangladesh. Immediately after liberation, the government of Bangladesh reissued long-term bonds accepting the
liabilities of the Income Tax Bonds and the Defense Bonds of the Pakistan government held by Bangladeshi
nationals and institutions. The government also issued 5% non-negotiable bond to Bangladeshi shareholders of
nationalized industries. In addition, savings bonds were also issued to pay for the value of demonetized 100-taka
notes in 1974. Most of these bonds are held by Bangladesh bank. The first effort to mobilize savings for use of
development expenditure was the issue of Wage-earners Development Bonds in 1981 to be sold to Bangladeshi
wage earners abroad. Later, two-year special Treasury bond was issued in January 1984 to be sold to individuals,
public and private sector organizations including banks. In December 1985, another instrument, the National Bond,
was issued to be sold to non-bank investors. During the implementation period of the financial sector reform
programmed that took effect from 1990, Nationalized commercial banks, specialized banks and development
financial institutions had to make considerable provisions for huge classified loans. As a result, the capital base of
those banks and financial institutions eroded severely and their viability was seriously threatened. In this situation,
the government issued a series of bonds to restructure the capital base of these banks and financial institutions as
well as to assume the liabilities of the bad loans made to a number of public sector organizations. The government
also issued some bonds for augmenting loan able funds for specialized banks and financial institutions. Moreover,
some bonds were also issued to mobilize funds for a number of public sector organizations like the T&T Board,
Bangladesh Biman etc.
 Types of Bonds:
A simple way to classify bonds is based on the different kind of the issuers. The three main issuers are
government, governmental agencies, and corporations.
2.4.1 Government Bonds
According to the length of duration, government bonds can be classified into three main categories. They are as
follows.
Bills: debt securities whose maturity period is less than one year.
Notes: debt securities whose maturity period is I to 10 years.
Bonds: debt securities whose maturity period is more than 10 years.
2.4.2 Corporate Bonds
A company can issue bonds like stocks. Corporate have many options to increase its capital from the market, the
perimeter is whatever the market will bear. Corporate may issue short-term (less than 5 years), medium-term (5 to
10 years) and long-term (more than 10 years) bonds. Corporate bond may be convertible i.e. the holder can
convert it into stock. It can be callable also, which allows the company to redeem an issue prior to maturity. There
are some other types of bonds such as lottery bond, war bond, serial bond, revenue bond, climate bond etc.
2.4.3 Municipal Bonds
These are called governmental agency bonds. These bonds are not issued directly by the government but with the
backing of the government. In most countries, the returns from municipal bond are free from government tax.
Because of this tax advantage, the interest on a municipal bond is normally lower than that of a taxable bond.
Thus, a municipal bond can be a great investment opportunity on an after-tax basis.
 Features of Bonds:
The key features of bond are discussed below.
Face Value: It is the amount on which interest is paid and normally which has to be repaid by the
issuer at maturity. It is also called principal, nominal or par value.
Issue Price: It is the amount which buyers pay when the bonds are first issued. Generally, this
value will be approximately equal to the face value. Thus the net amount which the issuer
receives is the issue price minus issuance fees.
Maturity: It is the date on which the issuers have to repay the principal amount. The issuers have
no more obligations to the bond holders when they repay the principal amount at the maturity
date. Usually bonds can be divided into three categories on the basis of maturity.
Short-term: bonds which have maturities between 1 to 5 years;
Medium term: bonds which have maturities between 5 to 10 years;
Long -term: bonds which have maturities more than 10 years.
Coupon: It is the rate at which the issuer has to pay to the bond holders. Normally the rate is fixed
throughout the life of the bond.
Indenture: It is the debt contract that includes the details of the issue such as the repayment
provisions and restrictive covenants.
 Constraints on Development of
Bond Market:01
The sluggish growth of the bond market in Bangladesh has been recognized due to a number of factors. They are
discussed below.
Limited number of investor: Only limited number of investors compared to total population is interested in
investing in bond or stock market.
Capital gain: Impact of cliental effect, most of the investors in Bangladesh look for capital gain rather than fixed
flow of income while making their investment decision. In case of bond chance of capital gain is limited.
High return in risk free government bond: Rate of return in case of risk free government bond is too highs so
corporate bonds have to offer even higher rate for covering additional risk to the investors which make the rate
non-viable for the issuers.
Alternative sources of debt financing: Other sources of debt financing, especially borrowings from commercial bank
are very easy and widely used in Bangladesh. The charged by bank is less than borrowing rate through bond
issuance. Besides these, borrowing from bank is flexible and quick. So, issuers don't have to depend on bond issue
only to design their capital structure and to generate tax benefit from use of debt.
Limited private management of pension fund: In Bangladesh private management of long -term pension fund
is very limited. State owned bodies & government organizations do not raise fund through issue of debt
instrument. They depend on deficit financing & printing money from central bank for financing their projects. So, all
these factors make secondary market for bonds very illiquid & discourage issuance of Bond.
Weak regulations and market infrastructure: Laws & regulations regarding governance of bond market are
inadequate. Market failure is common scenario in Bangladesh. Risk free investors just prefer government bonds
while risk takers go for investment in stock market. There are not enough investors for corporate bond market.
 Constraints on Development of
Bond Market:02
Underdeveloped tax system: Tax system in Bangladesh is not properly developed. Tax can be evaded through
unfair means (bribe and other means). So, tax incentive for issuing bonds is not very high which causes
underdeveloped corporate bond market.
High interest rate: Individual savings are attracted by national saving scheme due to its high interest rate
National saving certificates are risk tree though its interest rate is high; consequently other saving products are
crowded Out from the market. Thus a company has to propose a higher coupon rate to attract investors which
might become unviable for the corporate.
High transaction cost of bind issuance: The high transaction cost of bond issuance is considered as constraint.
Particularly, the registration fees, stamp duties, ancillary charges and annual trustee fees on outstanding amount
put forth to diminish the bond issue. Cheap syndicated loans: It is a common phenomenon that a syndicate is
formed by a number of banks to finance large project. Syndicated loan is cheap as well custom-made and flexible
which makes bonds non-attractive to the corporate issuers.
Default on interest payment: In early 1990s, the interest payments of some corporate debenture were defaulted.
In the 90s, the regulations of financial market were not adequate and credit rating was not mandatory. Besides,
investors' confidence was eroded due to the failure of trustees to protect the debenture holders' rights which
makes the investors averse to invest in corporate bonds.
Inexperienced investor: In Bangladesh most of the investors are inexperienced. They are very much familiar with
the bonds. They consider that return (interest) on debt instrument is very small with no chance of capital gain.
Therefore, they take investment decision in stocks for abnormal capital gain.
High inflation: Comparatively high inflation has been prevailing since last decade, which has made potential
investors introverted to invest in corporate securities.
 Bond Market Participants of
Bangladesh:
One of the preconditions of being efficient bond market is the existence of large number of market participants. Market
participants can be divided into issuers, investors and intermediaries.
Issuers: Most private sector enterprises are small and owner-run, many are of cottage size and most are in the garment
industry, which to date depends largely on short-term bank loans for financing. These enterprises could benefit from longer-
term funding but are neither large enough nor well known enough to issue bonds. Most of the large-scale industrial units and
commercial enterprises are state owned. Their shares are not listed, and they do not offer debentures since their financing
needs are met by the government or by the state-owned NCBs. These state-owned firms generally stay outside the capital
market.
Although Bangladesh has a debenture market, to date only a small number of well-known issuers have used the market. The
liquidity in those debentures at the stock exchange is insignificant because of the small number of investors and their buy-
and-hold mentality. The investor community does not seem to find this market too attractive owing to weak disclosure by the
issuers, which in turn reduces credibility and investor confidence.
Investors: Few investors are sophisticated enough to think about investing in bonds. About 80% of the base here is made up of
retail investors, whose primary concerns include the equity at the stock exchange or the government savings certificate. Of the few
institutional investors that could support a bond market, most are either prevented from investing in corporate bonds by restrictive
guidelines or are not professionally managed. The major institutional investors are the Investment Corporation of Bangladesh a
government-owned financial institution and the insurance companies. The mutual fund industry in Bangladesh is the exclusive
domain of ICB.
There are no private mutual funds to mobilize savings toward the debt market, and the ICBs Monopoly has prevented new
investor companies, that is, mutual funds, from developing in Bangladesh. Few foreign investors are attracted to this, mainly
because of the weak disclosure by the borrowers.
Intermediaries: Intermediaries in Bangladesh lack many of the skills needed to foster an active local corporate bond market.
Commercial banks dominate the financial sector and not enough intermediaries are skilled in securities. Few are able to identify
issuers and investors and bring them to the market. They provide little or no research analysis on industries or companies to
encourage investment in the local debt market. Too few private merchant banks are able to conduct financial advisory and trust
services. Hence the market is illiquid, with large spreads. At the same time, the fee structure and pricing are high enough to allow
intermediaries to make money. Even if they are able to participate, intermediaries are reluctant to take any risk in dealing.
 Benefits of Bond Market for Market
Participants:
Bond Market acts as buffer of equity market. This enables issuers and investors to convert the limitations of equity market
into the opportunities. Financial system to be sound and effective has to have an efficient bond market. Otherwise, Capital
Market especially cannot play its due role for developing economy through allocation of capital; and generating employment
opportunities through industrialization of economy of the country.
Benefits for Issuers:
Raising funds without collateral for long term.
Lower cost of debt and thereby lowering cost of capital for the firm.
Lower effective rate of interest for not being able to be compounded.
No change in interest rate with the increase in inflation rate.
Reduces tax burden since interest is shown as a charge.
Protecting firms from the exposition to the market volatility
Benefits for Investors:
Pays higher interest rates than savings.
Offers safe return of principal.
Have less volatility than the stock market.
Offers regular income.
Requires smaller initial investment.
Highly liquid
Benefits for Intermediaries:
Large spread can be exploited.
High commission/fees.
Phenomenal growth opportunities.
Cut down policy of commercial lending brings opportunity for broadening bond market base.
 Factors Influencing the Development of
Bond Market in Bangladesh:
Bond markets in most countries have been built on the same basic elements: a number of issuers with long term
financing needs, investors with a need to place savings or other liquid funds in interest bearing securities, and
intermediaries that bring together investors and issuers, and an infrastructure that provide a conducive
environment for transaction of securities, ensures legal title to securities and settlement of transactions and
provides price discovery information. The regulatory regime provides the basic framework for bond market.
Developing bond market can be more complicated that developing equity market. This need supporting pricing
infrastructure and more sophisticated market participants.
Bond Market acts as buffer of equity market. This enables issuers and investors to convert the limitations of equity
market into the opportunities. Financial system to be sound and effective has to have an efficient bond market.
Otherwise, Capital Market especially cannot play its due role for developing economy through allocation of capital;
and generating employment opportunities through industrialization of economy of the country. Developing bond
market can be attributed to the following reasons (IOSC, 2002):
An alternative source of domestic debt finance;
Lower cost of capital;
Reduced risks associated with maturity and currency mismatch;
Broadening of capital markets;
Efficient pricing of credit risk; and
Ensuring financial stability.
 Corporate Bond and Debenture: 01

The corporate bond and debenture market is regulated by the SEC. Public limited company is entitled to raise long
term funds by issuing corporate bond and debenture in the primary market subject to the fulfillment of required
terms and conditions and the permission from SEC. The size of corporate bond and debenture market is relatively
small as compared to other integral parts of the debt market.
Corporate Bond:
There are two corporate bonds in the debt market.
The first one- Mudaraba perpetual bond was floated in 2007 by the IBBL.
The second one- ACI zero coupon bonds was issued in 2010 in the market.
Two corporate bonds against 266 equity securities seem to lopsided development of corporate bond market in
Bangladesh (Monthly Review, CSE, 2011). It has been found that the total units of corporate bond were 4.34
million and market capital of the same stood Tk. 3812 million in 2010. The average growth rate in market value
has been found 8.43% over the study periods. The share of corporate bond to total market capital has also been
decreasing at different rates. The average market share is 0.226% which is found insignificant to total market
capital. The growth rate of share to total capital has been found negative. The average growth rate of corporate
bond to total capitalization is -39.54%. These signify that the size of corporate bond market is small relatively. This
also indicates the growth opportunities of corporate bond market in the future.
 Corporate Bond and Debenture: 02
Corporate Debenture:
Fixed income securities first came into existence in 1987 with the floatation of debenture by two companies. The study has
found existence of only ten debentures till the end of 2010. Besides, eight debentures got matured and liquidated. The study
found no issue of new debenture since 1999. The study has examined growth and development performances of both
corporate bond and debentures individually and jointly.
It is found from the analysis that total numbers of debenture units stood were 409000 units in the market at the end of 2010.
Average debenture market capital stood Tk. 558,590,566. The total debenture market remained stagnant with Tk.
576,000,000 for five year from 2006 to 2010. The average growth in debenture market capital is 1.88% and the growth rate
has been found steady over the period. The share of debenture to total market capitalization has been found decreasing
continuously for stagnancy with respect to new issue. The average debenture market share stood only 0.13%. The growth
rate of debenture to total capitalization has also been found decreasing which is -34.66 %( average). These imply that
corporate debenture market has been experiencing a phenomenal decline with respect to number of issues & units, market
value, and market share. This situation can be attributed to different factors such as regulatory, lack of fiscal incentives, lack
of awareness of corporate executives, absence of market measures like long term yield curve etc.

It has been found that the corporate bond and debenture market experienced remarkable growth in the years- 2004, 2007,
and 2010 for the influx of new issues into the market, and zero growth in the rest of the years understudy. This implies that
issue of new corporate bond and debentures appears to be occasional. It has also been found that the growth rates in
market capital- year by year as well as over the base year have been found positive and significant across the study periods
with exception in the year 2008. The increase in growth in market capital can be attributed to the market price of corporate
bonds being traded in the market. Market share of corporate bond & debenture to the market capital indicates as an indicator
of market size and flow of new issues to the market. The market share of corporate bond & debenture experienced ups and
downs over the study periods. The average market share of corporate bond & debenture is 0.29% of total market capital of
equities and debt securities. This implies that the size of corporate bond & debenture as compared to others is insignificant
in amount and number of units. This indicates a huge growth opportunities for corporate bond & debenture market in
Bangladesh
 Government Bond:

The primary market of government securities is regulated by the Ministry of Finance and
Bangladesh Bank-the central bank of the country. The government securities are traded in two
marketsmoney market through dealers, and the OTC segment of DSE. The CDBL provides the
depository function for all securities including government securities and corporate bond and
debentures. The government securities traded in money market is regulated by Bangladesh Bank;
and that traded in the stock exchange is regulated by SEC. Primary dealer of government
securities are regulated by Bangladesh Bank.
It has been found from the analysis of that the total outstanding of Treasury bond stood Tk.372.9
billion in 2009 and the market capital stood Tk. 357313 million in 2009. The average market
capital is Tk. 88826.77 million. The growth rate in market capital has been found on the declining
trend. The share of government bond to total market capitalization has been found 18.93 percent
in 2009 and the average share of government bond to total capital is 13.715%. The growth in
share of government bond to total market capital has been increasing over the study period with
an exception in 2009. These imply that the size of Treasury bond market is reasonably large. This
also indicates that the government recourses to the issue of more number of treasury bonds with
different maturities for borrowings in order to finance the national budget deficit amongst important
reasons. It has also been found that institutional investors-banks and insurance companies are
the dominant players in Treasury bond market.
Growth and Development of Government Bond
Market and Corporate Bond & Debenture
market:
It is a compare between corporate bond market and Treasury bond market with respect to:
- market capital,
-growth, and
-share of each market to total market capital
Market Capital of Bond Products:
It is evident from the discussion that has been exhibited in the following graphs:
400000

Market capitalization(ml.) of
government bond
350000
Value of debentures(Market
capitalization)ml.
Market capitalization(ml) of
300000 corporate bond

250000
amount(ml.)

200000

150000

100000

50000

0
2003 2004 2005 2006 2007 2008 2009 2010
ye ar
 Growth in Market Capitalization of
Bond:
The average growth rate in market capital of corporate bond and debentures and
government bond are 105.41% and 151.38% respectively.

Comparative growth of market capitalization

350
300 Growth of Market
capitalization(%)of govt. bond
Growth in percent

250
200 Growth of Market
150 capitalization(%) of corporate
bond
100
Growth of debentures(Market
50
capitalization)%
0
-50 2003 2004 2005 2006 2007 2008 2009 2010
Years

Comparative Growth of Market Capitalization of Bond Market

It is evident from the analysis of above:
-Corporate bond and debenture have been found ups and downs
-Treasury bond market, declining over the study periods.
This is substantiating the real debt market scenario of Bangladesh during study periods.
Market Share of Bond Market to total
Market Capital of the Economy:
The growth in share of government bond to total market capitalization-increasing
The corporate bond & debenture-declining.
The trend in growth of market shares in both the cases has been found fluctuating nature:
Comparative share of market capitalization

25

20
market share (%)

Share of Govt. bond to total

market capitalizatiom(%)
15
Share of Corporate bond to total
market(%)
10
Share of debentures to total
5 market(%)

0
2003 2004 2005 2006 2007 2008 2009 2010
Years

It is evident from the analysis of above diagram that the growth in market share
corporate bond & debenture market has been found moving ups and downs; but that
of Treasury bond, has been increasing on an average.
 Size and Composition of the Bangladesh
Market in Comparison with South Asian
Countries:
South Asian Countries:
The size, access, efficiency and stability of the bond market across countries may be used to
judge the state of the bond market development in Bangladesh. Compared with the neighboring
countries, the Bangladesh bond market is rather small and has played a limited role in its
economy.

Table 1: The Depth of South Asian Bond Markets (% of GDP)

1999 2000 2001 2002 2003 2004 2005 2008

Bangladesh 1.3 1.5 1.7 1.9 1.4 1.5 1.4 14.0

India 22.7 27.5 26.0 30.5 33.6 34.7 34.8 41.0

Pakistan 47.2 40.9 38.9 37.8 36.7 33.0 30.9 29.0

Srilanka 49.3 53.9 58.1 60.1 58.0 56.4 53.6 38.0

Sources: BIS, central banks, security commissions.

The Bond Market has played a very insignificant role in developing the economy of Bangladesh.
Since the bond market of Bangladesh is still at initial stage of development.
The bond market in Bangladesh is characterized by low base market and market participants,
non-diversified products, lack of tailor made securities etc.
Thank you..