BANGLADESH is now ahead of its neighbors India and Pakistan in terms of gross domestic product growth, per-capita income, and child mortality. It is crucial to have a deep understanding and appreciation for the economy to continue its growth trajectory over its competitors and neighbours. Our GDP growth rate has been ranked as one of the best in the world. The real gross domestic product growth rate is often used to gauge the health of the economy. In general, an increase in real gross domestic products is a sign that the economy has a healthy state. The economy’s key element, the financial market, is closely linked to the gross domestic products.
A quick glance
A FINANCIAL market is a platform where the trade of financial securities — stocks and bonds — and derivatives — a financial instrument for managing risk — can take place at minimum transaction costs. You can also trade raw materials and precious metals on this platform. These securities are also known as commodities in the financial industry. The financial market also offers few other products such as the foreign exchange market, futures market, spot market, interbank lending market, spot and others.
The stock market and money market are the main components of the financial market. A stock market, also known as equity or share market is the collection of buyers/sellers of stocks. Also known as shares, these are shares that represent ownership in businesses. These shares can be listed on a stock exchange or traded privately. The money market, which provides short-term funds with a tenor of less one year, is another component of the financial markets. The wholesale trading of money markets is over-the-counter.
The term ‘market’ can be construed as exchanges, organisations that undertake the trade in financial instruments. The stock market refers to the network of exchanges and other interactions in which shares of publicly-held companies are bought, sold, and issued. These financial transactions are done through either institutionalised, formal, and electronic exchanges or via over-the counter marketplaces that follow a set of guidelines and regulations.
The terms ‘stock market’ and ‘stock exchange’ are often used interchangeably, but the latter expression generally means a subset of the former. It means that people trade on stock markets. They buy or sell shares on one of the stock exchanges that make up the overall stock marketplace.
The bond market — often known as debt market, fixed-income market, or credit market — is the collective name given to raise long-term funding by issuance of debt securities. In order to raise capital for large infrastructure improvements or debt repayments, governments typically issue bonds. When they need to finance long-term core capital requirements or business expansion, publicly traded companies might issue bonds.
History of the financial markets
THE world’s first stock exchange arguably was established in Antwerp, Belgium in 1460. It traded mostly financial securities and primarily bonds. Brokers and money-lenders could meet there to negotiate with corporations, governments, and even individual debts. However, academics have differing opinions on when corporate stock was transacted for the first time. Some believe in the 1602 founding of the Dutch East India Company, while others think in earlier possibilities.
Confusion of Confusions is a 1688 book by Joseph de la Vega, a Dutch-Jewish trader. It is widely recognized as the first book about securities exchange. It claims that the Amsterdam Stock Exchange, which was established in 1606, is the oldest security exchange in the entire world. Although Ulrike Malmendier, a prominent economist at UC at Berkeley, claims that the share market has existed since ancient Rome, most people agree with Joseph Vega that the Amsterdam stock exchange was the oldest. Joseph Vega’s book illustrated the inner workings and dynamics of a stock market. It was described as a dialogue between a merchant or shareholder. The market was sophisticated, but also prone high risks and excesses. Investors could also be advised on topics like the unpredictability and importance of patience when investing.
Over the next several centuries the stock market and the stock exchange developed and became a key indicator of the economic performance of both the private and public sector. Capitalism gained ground with the development and speed of communication, global growth of the middle-class population, technological advancements, and increased urbanisation. This resulted in huge amounts of investment flowing into stock markets, which in turn led to the creation of stock exchanges in nearly all developed and developing markets. The government, high net-worth individuals and pension funds were the main investors in the stock exchange. They also invested in venture capitals, insurance companies, corporations, and corporates to get higher returns on excess liquidity.
The growing and profitable world economy has led to an increase in stock market investments over the years. This is evident by the growth of stock exchanges worldwide and the increased market capitalization.
The global market capitalization of all publicly traded securities has risen from $2.5 trillion in 1980, to an impressive $94 trillion by 2020. There were 60 stock exchanges worldwide as of 2016. 16 of these exchanges have market capitalizations of $1 trillion and more. This accounts for 87.9% of global market capisation. These 16 exchanges, including the Australian Securities Exchange are located in North America, Europe and Asia. Some of the most well-known stock exchanges have large market capitalisations such as New York Stock Exchange and Japan Exchange Group, London Stock Exchange and Hongkong Exchanges, Shanghai Stock Exchange, and others.
The United States of America has the largest stock market (approximately 56%), followed by Japan (around 7%) and China (5%) as of January 2021.
The New York Stock Exchange (NYSE, nicknamed ‘The Big Board’) is an American stock exchange founded in May 1792. It is by far the world’s largest stock exchange by market capitalisation at $28.24 trillion as of October 2021. The average daily trading volume was $169 billion.
After several modifications, the London Stock Exchange’s current structure was created on December 30, 1801. It is one the major exchanges and claims that it executes the largest number foreign currency transactions per day.
Other than the banks extending loans and credit facilities to individuals and firms, a stock exchange, with its stated cliché enables companies to raise capital for expansion through selling shares to the investing public.
Bangladesh financial market
The Bangladesh financial market is composed of two stock exchanges — Dhaka and Chattogram — and a non-instrumental segment of institutional investors such as commercial banks, investment banks, corporates, merchant banks, Insurance companies and other depositors.
Bangladesh’s post-liberation development of the financial markets was slow due to rigid government regulations, and uncertain market conditions that resulted in the nine-month-long bloody war. We inherit a small capital market that consisted of 1,130 branches from 12 commercial banks, Dhaka Stock Exchange, 10 insurers, and the Samabaya Bank Ltd. The DSE was inactive until 1976. However, nine listed companies with a meagre $1.6m of capital reactivated it. The 1976 creation of the Investment Corporation of Bangladesh gave the necessary impetus to energise the stock market. It is an investment bank, established to accelerate industrialisation and develop a vibrant capital marketplace in Bangladesh. The Investment Corporation currently underwrites the public issuance of shares and provides bridging loans for priority sectors. It also participates directly in the purchase of shares, underwriting, sale, purchase, and transfer of debentures or bonds.
The slow recovery of capital market in Bangladesh was due to the tight supervision and market limitations. Government-owned development finance institutions were able to extend long-term funds at concessional and dictated rates to industrial establishments. Development finance institutions mobilize their investible resources through government allocations, contributions from international financial institutions, or loans from the Bangladesh Bank.
In the 1970s, there was no proper financial market so businesses had to borrow money from expensive banks and other informal sources at very high interest rates. Individual investors were reluctant at first to invest in the expanding but fragile capital market. People with power were more likely to turn to development finance institutions for capital. They could also use public funds to make intentional defaults on repayments. Because they were in a very early stage of the economy, they seized every opportunity to take advantage of the almost nonexistent recovery mechanism. There were no strict measures to recover defaulted loans and prevent them from becoming bad debts.
The Bangladesh capital market has now come a long way, composed of two stock exchanges — the Dhaka Stock Exchange founded in 1954, with a market capitalization of $68.5 billion and a total listing of 750 scripts and the Chattogram Stock Exchange established in 1995, with a market capitalisation of $38.1 billion and a listing of 250 instruments — and a non-instrumental segment of institutional investors such as commercial banks (61), merchant banks (50), insurance companies (81), pension funds and schemes, development finance institutions (5), postal saving schemes, pension schemes, security deposits, gift certificate deposits, sundry deposits, leasing companies, non-bank financial institutions, co-operatives and investment banks.
Stock exchanges now allow companies to trade shares, mutual funds, debentures and other securities. The market capitalisation of the stock exchanges as of June 30, 2021 was $107 billion.
In 1993, the Securities and Exchange Commission was established to regulate all activities in Bangladesh’s capital market. The commission has three main objectives: protect investors, create alternative funding channels, attract and grow the securities market and ensure compliance with securities laws.
Future of Bangladesh’s financial markets
BANGLADESH has remarkably turned around from what was once called a ‘basket case’, registering an astronomical performance reflecting in the consistent GDP growth over a long period. The GDP per capita grew by 9 percent last year to an astonishing $2,227. This is especially significant as we celebrate the 50th anniversary our independence and the centenary of Bangabandhu Sheikh Mujibur Rahamman, our father of the country. Meanwhile, Pakistan’s per capita income is $1,543 and India’s merely $1,947. While India is proud to be the only South Asian economy that matters, Pakistan’s per capita income is $1,543 and India’s is just $1,947.
Due to strong exports, uninterrupted flows of remittances, and a large foreign currency reserve, the Bangladeshi Taka has been recognized as one the most stable and stronger currencies in Asia. S&P reiterated its sovereign ratings of Bangladesh at BB- (long-term) and B- (short-term). They expected Bangladesh to post a higher-than-average economic growth despite facing critical short-term challenges.
Economist magazine ranked Bangladesh ninth among 66 countries. It used four indicators to assess financial strength. They included an impressive debt-to–GDP ratio (about 39%), an external debt–to–GDP ratio (17%), and annual debt servicing (less than 10%). The above demonstrates that Bangladesh has the financial power to tap the international financial market for large-scale foreign currency financial services. Based on its macroeconomic performance, Bangladesh has all it takes to be a developing nation by 2026.
Recent reverberations resulting from the Covid-19 epidemic have caused global markets to experience large capital outflows as well as an increase in bond yields within developing markets. In parallel, there has been an increase in the issuance by investment-grade companies and emerging economy governments of corporate bonds. This has led to a rise in capital market transactions.
Covid-19-related problems were reportedly successfully dealt with by the government. This included large-sized stimulus packages for all business sectors, prompt steps to contain the virus through strict lockdown, robust vaccination drives, and increased healthcare facilities. The country has shown remarkable resilience in ensuring that we have all avoided the storm and are now on our way to accelerated growth. We are on track for the next step.
It is important to highlight the steady development in all levels of public life, particularly over the past decade. This can be seen in the massive growth in gross domestic product due to our unique power and resilience. The world is observing our progress with keen interest as substantiated in identifying Bangladesh as one of the ‘break-out economies’ by Harvard Business review recently at the back of rapid digitisation, undergoing post-pandemic recovery as well as coordinated transformation towards the Sustainable Development Goals. It is being recognized by key stakeholders as a top performer among its peers.
Bangladesh must continue to make progress in financial market development, given its growing size. It is expected that Bangladesh will surpass $500 billion. Efficiency enhancements are also necessary to accelerate our development.
Touhid Shipar Rafiquzzaman, a retired banker.