When Professor Shibli Rubayat-Ul-Islam was appointed Chairman of Bangladesh Securities and Exchange Commission (BSEC), the regulatory body of capital market, in May this year the country was under the throes of Coronavirus pandemic and market operation was in an induced comma as there was no trading for 66 days.
Amid uncertainty along several dimensions, distinguished prof. of finance and banking and author of finance and banking textbooks, Shibli took over with a mission to inject new blood into the country’s capital market. In an exclusive interview with Ziaul Karim and Arka Dev Biswas of Colors, BSEC chairman talks about the challenges to turn the capital market to its vibrant self and his commitment to facilitating the market to growth paths.
“The first thing I did was implement IT infrastructure so that the financial inclusion and access to service improve. The financial market did not necessarily harness technology before I came in. Setting up the infrastructure and establishing a fluid system became a goal for us,” said the Chairman of Bangladesh Securities and Exchange Commission (BSEC) Shibli Rubayat, He is trying to leave his mark in almost every project he has been a part of – from establishing the first e-library to digitizing insurance facilities, to making Shadharan Bima Corporation into a technologically developed institution.
Creating an IT-friendly environment before the pandemic hit the next peak becomes the new target for the chief of the BSEC, the regulator of the stock market. He believes automated trading will improve financial inclusion and allow the capital market to be digitized. “The financial market is on the path of harnessing IT infrastructure with the help of international donors, who always envisioned a digital financial market for Bangladesh,” he observed. As a safety net, even the Bangladesh government is on board to digitize the market.
Overdependence on banks
The financial market of Bangladesh has never grown in reality. The pretext to this statement is that the financial market has instruments in the form of Sanchaypatras, common stocks, and loans from banks. Having only these three options increases the risk for both borrowers and lenders.
“Our dependence on banks for funds, especially long-term projects make banks prone to defaults. The financial market is segmented in two parts, the capital market, and the money market. The former helps in long-term investments and the latter helps with short-term investments. The sources of these funds depend on the instruments available,” he said adding that developed nations have varieties of instruments to raise funds. “Due to lack of instruments, the overreliance on banks lead to the high numbers of payment defaults.”
He pointed out that mega projects require high levels of investment and the payments have to be made over 10-20 years. During the period, it is inevitable that some payment obligations are not met. “This as a result reduces the creditworthiness of institutions, individuals, and investors’ willingness to invest in projects due to lack of returns. These factors increase the risk of investment, increase the required return for investors and fewer loans are passed due to fears of default,” he explained.
Professor Islam maintains that the capital market has to play its due role in funding mega projects. The pressure on banks can be alleviated only if the capital market provides a wider range of instruments.
“If people are taxed in order to fund the projects, they will not be happy. And it is not the banks’ responsibility to fill in the investment gap. Instead, if bonds are used to fund projects and the return on these bonds are better than bank interests, investors will be more willing,” the BSEC chairman added.
Bangladesh lacks a proper bond market, mutual funds market, and zero-coupon bond market due to the lack of incentives and insufficient returns on investment, he said and pointed out that liquidity management and non-performing loans aggravate the condition of the financial market. “That worsened further due to lack of diversity in financial instruments,” Professor Islam said expressing optimism that restructuring the bond market, introduction of Municipal Bonds, and development of the Mutual Funds market would be a step in the right direction. He mentioned that using the Municipal Bonds, funds for the Gulshan 2 market will be raised.
Future projects will also gain funds through these forms of bonds. The BSEC Chairman emphasizes strengthening of ICB (Investment Corporation of Bangladesh), which would act as the umbrella for the financial market. “ICB’s role would be to protect the market from price volatility, using finances to curb external forces from destabilizing the market. ICB used to have a background role” he said. Professor Islam has viewed that ICB can be the force it deserves to be.
Professor Islam believes that the financial market needs more varied investors. Investors usually comprise of either large investors who can influence the market or investors who enter the market due to the herd mentality of seeing others. “Both become an issue over time. Large investors become juggernauts and they get to easily manipulate the market. Small investors buy and sell on a whim and are influenced by the indices that they see.”
“We need to help these small investors to be literate. Financial literacy can help to alleviate their conditions, as they slowly start to comprehend the market. We need to empower small investors through financial literacy,” he stated.
“We have created adverts that aim to educate individuals. Small investors add up in volume and their impact in the market can be significant. And ensuring they know what they are doing is something that we need to ensure. These investors over time, will get more investment opportunities as we diversify our investment instruments,” he expressed his views.
The BSEC Chairman observed that attracting FDI (foreign direct investment) is a bit difficult due to their past experience in the Bangladesh financial market. Changing old perceptions and instilling trust in the system becomes the target for the regulator.
“As the bond market starts to open up, the investments will increase. Corporate bonds and government bonds will bring in more investors, only when the returns are attractive. Government bonds are safe simply because it’s the government which is borrowing. Thus, investors will be more willing to take part,” he said. These steps, he thinks, will enable better investment, but corporate governance has to improve. “Only when the hierarchy is clear in terms of its goals and ambitions, the financial market will be able to flourish.”