The aftermath of the COVID-19 Pandemic coupled with the Ukraine-Russia war has undoubtedly led to major setbacks in the Bangladeshi economy, dampening credit growth and reducing investor confidence. Md. Sayadur Rahman, The Managing Director of EBL Securities discusses the impact on banks, businesses, and the capital market along with responses from the financial institutions and the government to cushion the blow and expedite the recovery process of businesses from the obstacles.
The COVID-19 pandemic has had a widespread detrimental impact on the livelihood of a large segment of people leaving them jobless. The situation has worsened further due to the rise in the prices of essential food commodities and power that arose from the Ukraine-Russia war. The ripple effect of this has spread to banks and the capital market as well. The combined effect has significantly made expenditure on basic necessities difficult and since income has not risen in line with inflation in general savings have fallen. People who had savings are utilizing that to finance their survival while people who used to save before are preoccupied in making their ends meet. This means that fewer funds are available to the banks to lend to businesses, negatively affecting the circular flow of income and the liquidity scenario of the country. On the bright side, when compared with other countries Bangladesh is performing well in some indicators and is in a stage of recovery.
The lives of the people and the banks are interlinked in some ways. Due to the global food shortage from one of the leading grain producers and exporters such as Ukraine and the lack of adequate electricity from Russia, countries reliant on their commodities are at a standstill. In the western world, since they have alternative sources of energy and food, it has cushioned the blow to some extent. However, the adverse impact felt in the developing eastern countries is more profound. Since the bank is in the middle of the circular flow, with the changes in people’s lifestyles the banks are impacted from both ends the individuals and the businesses.
Interest rate cap
It was challenging for the banks to keep up with the rising prices since the interest rate on deposits was lower than the inflation rate over the last year. A lot of people especially senior citizens chipped away from their savings or retirement funds that they kept in the banks to finance their living. It’s difficult for these groups of people under the status quo since food commodities and medicines have become more expensive. In light of the current situation, the interest rate should be raised to maintain stability.
If the interest cap is lifted then there will be negative and positive implications. Currently, the lending ceiling is 9% while the deposit ceiling stands at 6%. When the lending ceiling is increased then the deposit rate will increase as well. Borrowing may be discouraged from the producers’ side, but ultimately the interest rate will impact the consumers. Since the price of essentials has risen, along with the interest rates, therefore the cost of production has also increased. Producers will set a profit margin accordingly and offer products at a higher price to consumers. Sayadur Rahman added, “The calculation in the capital market through the cost price method rather than the market price was proposed 3-4 years ago. This has released a lot of pressure from the capital market since it’s done by cost price now compared to before.”
The floor price had been set during the covid-19 pandemic to protect the interests of the shareholders during times of crisis. It was lifted when the situation was becoming more stable. However, the Ukraine-Russia war has brought back the uncertainty of returns to ordinary shareholders. The capital market authorities have introduced the floor price once more to prevent the market from crashing. This is a temporary measure and not a permanent solution; once the war is over the floor prices will be removed. The floor price reduces the transactions in the market and it also prevents shareholders from switching to other shares. It is a temporary problem and it will be resolved soon.
Concerning the cap set on dividend issuance, Sayadur Rahman said, “Banks need to be strengthened, to do so the reserve of the banks must be increased. If the entire profit is distributed then during times of crisis the banks will be in trouble. Therefore, the initiative to set a dividend cap of 35% is a positive measure implemented by the central bank so that the surplus can be retained in the reserve, that way the health of the bank can be good.” It may seem to pose a threat to the shareholders because the dividend that is owed to them in a year may not be entirely provided to them in the next year, however, from another perspective it can allow banks to sustain the returns to the shareholders over time.
For ordinary shareholders, it is entirely up to them how they wish to utilize their dividends. However, if it’s the director or owners of a business then there are a lot more responsibilities that entail and some formal procedures that need to be followed. If a director wants to retain the money then the person must do so as a Fixed Deposit Return (FDR). If the owner wants to purchase shares of the company then it must be done by declaring it to the capital market authorities. That is a formality that must be maintained.
Banks and meeting financial needs across the country
Since Dhaka and Chittagong are more industrialized therefore the banks are concentrated in these two areas more than in rural areas. However, in rural areas, there has been an influx of SME businesses. They have successfully proven themselves as bankable and creditworthy and have also created a lot of job opportunities. This has indicated to banks to finance them with short-term loans. For them to flourish financial institutions will come up with more facilities for SME businesses in the future.
The operations of the banks are fundamentally different from the governments or any development organizations. The latter creates and develops an area by meeting their needs. Banks are responsible to move to areas that are already developed and densely populated, and where people have the financial capability to borrow and repay loans. Therefore, on that basis banks choose the area they will expand their services.
Measures to make securities more attractive
When it comes to the expansion of the capital markets two things must be kept in mind. On the one hand, if it is not required but facilities are being provided then growth will not take place. On the other hand, if growth is expected but adequate facilities are not provided then the outcome will not be reached. Hence, both have to go hand in hand. A fascination that attracts people to invest in the capital market is capital gains. A lot of the time shareholders do not have adequate information to invest but it is the allure of a higher return that draws people in. It is, however, not the only function of the capital market. Its role is to distribute capital. One of the measures that the government can take to attract more shareholders is to remove or lower the tax on dividends. A large number of taxes need to be paid by investors and the tax acts as a deterrent to buying shares. There is a lot of buzz about making the bond market popular. However, bonds don’t give the capital gains that are attainable in the equity market. To incentivize bonds the tax on bond dividends should be reduced. The capital market is essential for the progress of the country. Development of the money market is not enough. Therefore, policies must be devised and implemented to attract not only local businesses and investors but to also bring in big and reputable global businesses.
There are a lot of positive changes that can be forecasted for the future of Bangladesh’s capital market.
Brokerage houses are using their operating systems; in the future, this can be expanded. When that happens then the usage of apps trading through mobile phones will become much more mainstream and easily accessible to the audience from anywhere in the country than it is now. The director is hopeful to reach the milestones of a digital capital market within 2030.