Bangladesh, considered by many to be the rising star of South Asia, has shown resilient macro-economic performance even during the recent global economic crisis. Unlike comparable developing countries, Bangladesh has been able to impress with its notable improvements in various social and human development indicators simultaneously (see Fig. 1). In fact, Bangladesh has been successful in continuously developing its human resources, female empowerment and living standard improvements. This has made the country a unique proposition as a model for growth.
One important outcome of Bangladesh’s unique growth pattern is that it has been successfully shaping the domestic market as a robust shield against various external economic shocks. How so? Dissimilar to its regional counterparts, the economic growth of Bangladesh has not expanded the economic divide – rather the effects of the growth have been distributed evenly both in monetary and non-monetary forms. The result is a rising relative share of the middle-income segment along with a growing per capita income. Consequently, not only is the purchasing power of people increasing but also the consumer base is expanding. This strengthening domestic demand has been one big contributing factor in keeping the economy afloat even during difficult periods.
Another reinforcing factor in the Bangladeshi growth story is the composition of its population. The majority of the population is concentrated within the ‘working age’ category and the relative share of this age category is on the rise.
According to the World Bank, the working age (15-64 years) population reached 64.2 percent in 2012, up from 53.9 percent in 1990. Within the same time period, the dependent population (below 15 or above 64 years) as a percentage of working age population has dropped considerably, from 85 percent to 54.53 percent. Given the country’s labour costs are already one of the lowest globally, this growing labour force (see Fig. 1) and declining dependent population percentage guarantees a persistent labour cost competitiveness in various labour-intensive sectors.
Foreign exchange reserve growth
Net FDI Growth
listed companies and mutual funds
Total market capitalization
Market cap to GDP
Average market turnover
What needs to be done
Bangladesh is well on track to become an economic powerhouse in the South Asian region. Infrastructure development, coupled with a strong capital market and financial sector, is essential for sustainable growth. According to the World Bank, Bangladesh will have to invest between $7.4bn and $10bn a year until 2020 to build infrastructure for sustainable growth. The investment to GDP ratio, which has been hovering around the 25 percent mark for a long time, needs to be improved to attain the targeted eight percent GDP growth rate. The government is keen on overcoming these deficiencies, as evidenced by its undertaking several huge projects aimed at wide-scale infrastructure development in the last few years. However, it is a fact that government initiatives alone are not enough for rapid infrastructural transformation: contributions from the private sector are essential. The presence of a well-functioning, liquid and developed capital market, together with a robust financial sector, integrates this process.
Considering the commonality of emerging markets, it’s no surprise the Bangladeshi capital market has historically been extremely volatile. It went through two corrections within a span of about 13 years, in 1996 and 2010. The market has not yet fully recovered, even after four years, from the latter downturn.
One of the primary contributing factors behind this excessively long recovery period is the acute lack of diversification options in the market. The investors simply don’t have enough options to diversify away or hedge their risks by investing in different asset classes. Only plain vanilla equity securities are traded on the secondary market; the market for fixed income securities being effectively non-existent. Only a handful of corporate debentures or bonds are listed with virtually zero liquidity. Under these circumstances, the investors are left with few choices in terms of asset class – hence the slow pace of recovery in investor confidence.
Even though the major role of capital markets is to provide a means of raising capital, most of the financing needs of businesses and government projects are borne by the banking sector in Bangladesh. From 2010 to 2013, for every 100 taka of funds raised from the banking sector, only one taka was raised from the capital market. This shows that businesses have not used the capital market enough. As a result, whatever money was invested in the market by investors with promises of high returns contributed to creating market bubbles instead of providing capital to businesses. Consequently, the market crashed, with too much money chasing a limited number of stocks.
This leads to two key observations. First, different classes of investment products need to be brought to the market to address the investors’ needs for diversification and hedging of risk. A broader array of security classes will enable the investors to tailor their portfolios to their specific risk-return profiles. This, in turn, will attract more investors and the risk reduction potential will speed up the re-establishment of investor confidence in the market. Also, a wider range of asset classes will draw more foreign investment into the capital market.
Second, businesses should be driven towards the capital market to meet their capital needs. On one side, this will stop the formation of market bubbles during bullish times and, on the other side, it will enable the capital market to further accelerate economic development by channelling the excess funds to businesses that require new capital. Opening up the secondary market to both debt and equity products is essential in this regard.
The role of NDB Capital
NDB Capital, a subsidiary of the National Development Bank of Sri Lanka, has been playing an instrumental role in bringing about this desired change in the capital market of Bangladesh through its innovative investment banking activities. NDB Capital has been operating in Bangladesh since 2009. In 2013 alone, it raised about USD 129m for its clients in the form of both debt and equity securities. What sets NDB Capital apart from its competition is its strategy to introduce innovatively structured products to the capital market while adhering to strong corporate governance and ethical standards. By closely scrutinising the market and macro-economic scenario, business characteristics and the specific requirements of the client, NDB Capital formulates an optimised and customised solution on a case-by-case basis within the legal and regulatory environment.
Traditionally, the majority of the investment banks in Bangladesh have operated with a very narrow focus on a few plain vanilla products. NDB Capital has been striving to break this trend. Besides introducing a convertible preference share issue to the market to finance a green field project, NDB Capital successfully managed the issuance of the first-ever convertible bond with an embedded put option in 2013. It also facilitated foreign investment in Bangladesh by offering a full spectrum of investment banking services. NDB Capital took initiatives to build awareness about Sharia-compliant products in the market to address the growing appetite for alternative investment vehicles. Moreover, the firm is planning to introduce the first-ever revolving commercial paper in the Bangladeshi market. The significance of the role being played by NDB Capital in redesigning the local market has been reinforced by its winning a number of internationally recognised awards.
The road ahead
In order to sustain its healthy growth trajectory, Bangladesh needs to ensure adequate participation from all classes of investors: namely the government, institutions, the general public and foreign investors. For this, a well-functioning capital market and strong investor confidence is necessary. The investors need to be offered flexibility and diversity in their investment options to reduce the risks. Equally importantly, the private sector needs to be made aware of the various sources and instruments of fund raising while simultaneously minimising the cost of funds. In this regard, investment banks have a key responsibility in creating awareness among entrepreneurs. Also, the onus is on the investment banks to bring together global and local investors, and local industries through structuring innovative capital market products with appropriate risk mitigation strategies.
A large part of the development of Bangladesh’s capital market depends on how well the investment banks can perform this role of creating value on both sides of the continuum: the investors and the investees. NDB Capital, with its innovative strategic focus and a vision to initiate positive change, has been doing exactly that and will continue do so in the future.