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Top priority for making bond market vibrant  

Shahiduzzaman Khan     | Published: October 12, 2019 22:23:39


Although stock market is gaining much popularity in Bangladesh, bond market remains conspicuously unattractive. Very recently, the Bangladesh Securities and Exchange Commission (BSEC) has sought a number of fiscal concessions to help develop the bond market.

It has put forward, according to reports, a set of proposals, including tax waivers, to the National Board of Revenue (NBR) for consideration. The tax waiver facility is conditionally available for zero coupon bonds. Such facility needs to be made available for all types of corporate bonds and investors concerned. There is also a need for rationalising tax at source in case of transaction of corporate bonds.

Currently, a 0.10 per cent tax at source is applicable to a broker, depending on the transaction price. For all practical purposes, tax should be realised based on number of transactions. Rationalisation of stamp duty on corporate bonds is necessary as well.

Also, a 2.0 per cent stamp duty is levied on issuance of corporate bonds. Again, a 3.0 per cent stamp duty is realised on 'value of consideration' of bonds. In fact, 'high' stamp duty is a barrier to healthy growth of bond market.

Market analysts say stamp duty on paper-based bonds should be fixed at 0.01 per cent or Tk 0.5 million. The BSEC chief recommended that stamp duty on dematerialised corporate bonds should be withdrawn.

There is no denying that weak bond market is intensifying pressure on the country's banking sector. Banks cannot collect funds from any other sources, except deposits of clients, due to weak bond market. The situation makes the corporate sector completely dependent on the banking sector for funds.

As such, lots of new securities like zero coupon bond and fixed coupon bond need to be introduced to make it popular among investors. Development of bond market, in fact, becomes an imperative for the country as both investors and authorities will benefit from it.

The bond market still remains at a very primary stage. The central bank, the BSEC and the NBR will have to work together to expand and popularise it. Bank officials will have to work carefully on the issue. Amendment to the existing Repo law is required to strengthen the bond market.

The presence of bond market is very limited in Bangladesh, compared with that of other countries. The government should take initiatives to change the situation as the country needs long-term investment to achieve its development goals. Dependency only on the banking sector should be overcome for financing its investment needs.

The bond market should get importance for financing to achieve sustainable development goals. It will not be possible to achieve the development goals depending only on bank financing. There should be a reduction in tax rate for expansion of the bond market to reduce pressure on the banking sector.

In another development, a finance ministry committee has made 18 points of recommendations to develop the country's bond market, including rationalisaiton of taxation and process simplification.

The inter-ministerial committee has recently submitted its recommendations to the finance ministry as to how to develop long-term financing and the capital market. Several government agencies were asked to take necessary steps on an emergency basis to implement the recommendations.

The central bank should rationalise the interest rates for long-, medium- and short-term bonds based on their demand and supply instead of the existing system. Currently, the central bank determines the rate for seven-year-long bonds based on three-month fixed deposit rate.

The committee has also recommended excluding the capital market exposure calculation for banks in case of investment in bonds and simplifying the bond approval process by avoiding delay caused by dual scrutiny by the BSEC and the central bank.

According to the existing procedures, the BESC approval of bond issuance is sent to the central bank for no-objection certificate causing delay in the process due to dual scrutiny of the same activities.

The BB should treat a bond defaulter as a loan defaulter in its database of the Credit Information Bureau so that the bond defaulters do not get loans from the banks.

The committee has recommended that the Finance Division should issue Taka-denominated sovereign bonds to demonstrate Bangladesh's financial capacity abroad. Steps should be taken to encourage institutional investors to invest their pension fund in the bond market.

The committee has further recommended that the BSEC ought to expedite the automation process, establish a specialised rating agency and introduce direct transactions between issuers and investors for the bond market.

There should be specific directives for introducing secondary bond market where government-sponsored bonds can be traded.

The Malaysian government has recently expressed its willingness to extend support to developing Sukuk bond market in Bangladesh. The Southeast Asian country has a strong command on the global Sukuk market. Sukuk is the Arabic name for financial certificates, also commonly referred to as 'Sharia compliant' bond.

A high-powered committee in Bangladesh, according to a report, has recommended issuing Sukuk bond on a priority basis to help spur dynamism in the fixed income market. The central bank has formed the committee comprising senior officials of five Islamic banks. It asked them to make detailed recommendations to launch the bond as a shariah compliant product.

The central bank has taken a move to make Islamic bonds popular by enhancing the volume of Islamic Bond Fund and creating scopes of the bonds' multiple uses. The committee had already finalised 13-point policy recommendation to bring dynamism in the country's Islamic bond market.

The committee has recommended introducing repo facility by the central bank against the Islamic bonds to meet short-term liquidity requirements of the Shariah-based Islamic banks and non-banking financial institutions (NBFIs).

Indeed, a vibrant domestic bond market can reduce a country's dependency on short-term foreign currency borrowing and help the country accelerate its economic activities.

All said and done, development of a domestic bond market should be the priority of a country and a proper localised bond market can speed up financial development of a country like Bangladesh.

 szkhanfe@gmail.com

 

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