Domestic capital markets have an important role to play in mobilizing private capital to finance domestic development. By giving companies the ability to borrow domestically in local currencies, domestic capital markets can also reduce currency mismatches for borrowers, thus reducing systemic risks. At the same time, government bond markets create tools to manage macroeconomic and fiscal risk and provide important pricing benchmarks. However, the capital markets can increase risks in the real economy, for example, due to market herding and boom and bust cycles. Stresses on the importance of regulations should be aimed at reducing volatility and incentivizing longer-term investment.
While countries have tried to harness the benefits of capital market development, they have not always succeeded. In several countries where stock exchanges have been created, there are only a few companies listed. A study of 20 middle-income countries found that the 10 largest companies represent more than half of the market capitalization in almost half the countries. Countries face multiple challenges in developing capital markets, such as inadequate market infrastructure, weak or inappropriate regulation and supervision, and the lack of reliable information on issuers. In addition, they also often face both limited demand and supply. To function, capital markets need a critical mass of investors, such as pension funds and insurance companies. These investors play a catalytic role in market development and add liquidity to the system. However, such an investor base remains limited in many developing countries. At the same time, there is often a limited supply of issuers. The number of issuers willing and capable of accessing markets is limited in many developing countries, with the cost and complexity of issuing securities restraining interest. Extremely low liquidity from insufficient supply and demand tends to lead to extremely high volatility, as there could be no demand when someone tries to sell a position, causing the price to collapse.
The capital market is an additional means of saving for the population and an important means of
attracting investment for companies. Developed, deep, transparent, and well-regulated capital markets contribute to sustained economic growth and the well-being of society. Therefore, reaching sound economic progress and development nowadays has become practically impossible without efficiently functioning, transparent, and well-regulated financial markets. The capital markets in emerging countries are still underdeveloped. The main source of attracting financial resources for business is the loan taken from commercial banks, and the source of financing with equity capital is relatively unused. Different segments of the market are usually evolving in a certain order, from simple tools to difficult ones. The functioning of the capital market requires the existence of a well-functioning money market, including central bank liquidity management tools. It is impossible to reach a developed, liquid, and deep market in a short time, with all its segments and complex financial instruments. The development of capital markets is hugely dependent on trust.
Developing stable, resilient financial markets is not a goal on its own but rather a process that can support development and growth in an economy. The ongoing enhancement sustainability of structural reforms by deepening and broadening the outreach program reforms have taken place, Now, roll over to be accelerated.
Stock Market Debacle of 2010
Bangladesh’s stock markets were characterized by large volatility with recurrent periods of boom and bust that have represented a destabilizing force for the economy. Following a bull run during most of 2010, the main Dhaka index fell by about a half from its December 2010 all-time high, corresponding to a loss of about 22% of gross domestic product (GDP) as of October 2012. The market correction wiped out $27 billion in market capitalization and, with it, bankruptcies, savings, and jobs, triggering a wave of social discontent. The ensuing liquidity crunch led to heightened solvency risks. Indeed, given the interconnectedness between banks and equity markets, there was grave concern that a perfect storm could result in a negative feedback loop from the financial sector to the real economy, potentially bringing the economy to a grinding halt. Following the market debacle, a high-level probe was established by the Government of Bangladesh in 2011 to examine the deficiencies that led to the crash. The probe also highlighted limited enforcement and commercial banks’ excessive investment in stock markets. The December 2010 episode reflected the vulnerable state of Bangladesh’s capital market and represented a convergence of factors that undermined sustainable development. A critical problem was a sense of excessive tutelage over the capital markets, which held back sector development and constrained responsible institutions from fully carrying out their mandates effectively. This, combined with a strong vested interest, resulted in an entrenched status quo. Despite the large financing needs of the economy, Bangladesh’s capital markets had not been particularly effective in channeling savings to support investment and growth. Bank credit often ended up pursuing speculative initiatives and fueling the stock market boom, which, following bull runs, proved unsustainable and led to sharp market corrections.
An analysis of December 2010, episode traced the proximate factors behind the boom and bust cycles to strained supervisory capacity and oversight, lax and excessive reliance on margin lending requirements, unreliable financial reporting standards, and weak coordination across financial regulators. Weak investor confidence prevailed in the capital markets and, therefore, limited demand for equities and bonds. Lax regulatory enforcement, lack of adjudication of securities cases (all securities cases of the 1996 crash are still pending), poor corporate governance, as well as weak governance, and operation of the stock exchanges further contributed to the state of the capital markets.
Domestic capital markets did not play a significant role in financial intermediation and resource
mobilization in the economy. While savings intermediated by banks amounted to 8.3% of GDP (30% of national savings), capital raised through equity and bond issues together was equivalent to only 0.07% of GDP in fiscal year (FY) 2012. The economy also remained over-reliant on bank financing (total bank assets of more than 80% of the country’s financial assets) that was unable to finance the infrastructure investments that the country required because this would expose banks to credit risks such as maturity mismatch issues. The bond market remained in its nascent stage, undermining long-term infrastructure financing requirements. The total bond market was only 5% of GDP (the government bond market was 4% of GDP, while the corporate bond market was 1% of GDP), which was significantly less than that of other large South Asian countries. Attempts to strengthen financial system stability had faced resistance from certain vested interests in support of the status quo that promoted government influence over the capital markets.
Structural Reforms Required
After the collapse in capital market 2010-2012 different organizations undertaken many steps but
unfortunately all of the recommendations were short term basis. Related measures are structural issues, operation and monitoring issues, management issues, and legal issues. Initiatives are needed to restore confidence and stability in the country’s capital market. The measures are given below The problems of the capital market are needed to be considered beyond the political stance, and more importantly, should be dealt with within the framework of a market where the “Rules of the game‟ will be reinstated.
To establish more strong regulatory authority of the capital market and should facilitate statutory authority to be exercised, to maintain all-inclusive financial discipline in the money market and
strengthen its coordination with the capital market, Commercial banks and insurance companies should not get diverted from their primary jobs, visible actions needed with regard to the investigation of fraudulent and illegal activities, enforce disciplinary measures against improper/illegal activities, to strengthen the surveillance mechanism of SEC, injection of funds should not be the measure to stabilize the market, to discourage short‐term trading in the stock market, to demutualization in the Sock Exchanges with strong monitoring, to strengthen the legal framework of the capital market, and to review of information dissemination and promotional measures.
But the investors’ mindset is one of the most important things that must be changed to ensure the development of the market. If it can strengthen the market properly, it is only then it can have a sound economy in terms of capital and related developments in our country.
Md Kafi Khan is the Company Secretary at City Bank Ltd.