Bangladesh has emerged as a significant player in the global economy, boasting impressive growth rates in recent years. However, its financial markets haven’t mirrored this success story. Despite a burgeoning economy, the financial sector remains underdeveloped, hindering long-term economic stability and sustainable growth. While the country boasts a booming ready-made garment (RMG) sector and a rapidly expanding middle class, its stock market and other financial instruments haven’t witnessed a proportional rise in activity or investor confidence.

This article explores the key reasons behind this disparity and identifies potential solutions to unlock the true potential of Bangladesh’s financial markets.

Market Manipulation and Eroded Trust

One of the most significant impediments to growth is the lack of transparency and a history of manipulation in the Dhaka Stock Exchange (DSE). Investors remain wary due to practices like floor prices, which artificially inflate stock values and create a sense of false security. A 2023 report by The Daily Star titled “Everything that’s wrong with our stock market right now” highlights this issue, stating that “investors are skeptical about a market where fundamentals are often disregarded and artificial price controls take precedence.” This lack of trust discourages long-term investment and hinders the market’s ability to function efficiently. Data from the Bangladesh Securities and Exchange Commission (BSEC) reflects this, with the DSE & CSE’s combined market capitalization hovering around $126 billion in April 2024, a relatively low figure compared to the country’s GDP (28.23% of GDP for 2023 based on IMF’s GDP data). Whereas the neighboring country India’s stock market capitalization to GDP ratio was 124.0% in December 2023, as per CEIC’s economic database.

Government Intervention and Policy Uncertainty

Another factor hindering growth is frequent government intervention in the market. Sudden policy changes and attempts to control prices create uncertainty for investors. This unpredictability discourages long-term investment strategies and makes the market less attractive. For instance, frequent changes in margin loan regulations can create volatility and make it difficult for investors to plan their investments effectively. Frequent policy shifts create a “wait-and-see” approach, hindering the market’s ability to flourish. This highlights the need for a more predictable and market-driven approach from the government.

Inadequate Regulatory Framework and Weak Corporate Governance:

A robust regulatory framework and strong corporate governance practices are essential for fostering investor confidence and ensuring the smooth functioning of financial markets.  However, Bangladesh’s regulatory framework is still evolving. Weak enforcement mechanisms and a lack of independent oversight can leave investors vulnerable to unethical practices. Additionally, concerns persist regarding corporate governance standards in some Bangladeshi companies. Issues like inadequate disclosure practices and lack of transparency regarding financial statements can further deter investors from entering the market.

Limited Liquidity and Shallow Markets

Liquidity, the ease with which assets can be bought and sold, is another crucial factor. A lack of liquidity in the Bangladeshi market can make it difficult for investors to enter or exit positions. This is often caused by a limited number of actively traded companies. Only a handful of companies account for a significant portion of the DSE’s trading volume. This concentration creates a situation where a few large companies dominate trading activity, while a vast majority of listed companies see minimal trading volume. This lack of diversification makes the market more susceptible to fluctuations and discourages participation from smaller investors. It also discourages investors, particularly foreign investors, who seek markets with a wider range of investment options and the ability to enter and exit positions with ease. Bangladesh Bank’s report on Foreign Direct Investment and External Debt shows that foreign portfolio investment (FPI) has remained stagnant in recent years and it is hovering around 0.5% of GDP at the of June 2023, highlighting the need to address liquidity concerns.

Foreign Investment Concerns and Currency Stability

Foreign investors, who play a vital role in a healthy financial market, are often hesitant to enter the Bangladeshi market. This can be attributed to concerns about transparency, market stability, and the volatility of the Bangladeshi Taka (BDT). A lack of transparency in regulations and corporate governance can raise red flags for foreign investors. Furthermore, concerns about the government’s influence over the exchange rate can deter foreign investment. This limits the pool of capital available for growth and innovation within Bangladeshi companies.

Limited Access to Financial Services:

A significant portion of the Bangladeshi population remains unbanked or underbanked, hindering their participation in the financial system. This limits not only their access to savings and investment opportunities but also restricts the overall pool of potential investors. According to the World Bank’s Findex Database, only 53% of adults in Bangladesh have an account at a formal financial institution as of 2021. Although, expanding financial inclusion through initiatives like mobile banking and microfinance are playing a crucial role in broadening the investor base and promoting financial market growth.

The Path Forward: Building a Robust Financial Ecosystem

Despite these challenges, Bangladesh has significant potential to unlock the growth of its financial markets. Unlocking the true potential of Bangladesh’s financial markets requires a multi-pronged approach. Here are some key strategies that can pave the way for a more vibrant and robust financial ecosystem:

  • Promoting Transparency and Market Integrity: The BSEC needs to strengthen its regulatory framework and enforce stricter disclosure requirements. Independent audits and a crackdown on manipulative practices are crucial to rebuild investor confidence. Regulatory bodies need to work closely with listed companies to ensure timely and accurate financial reporting. Initiatives like online access to financial statements and real-time market data can further enhance transparency.
  • Predictable, Market-Oriented Policies and Long-Term Vision: The government should adopt a more predictable and market-driven approach. Policy changes should be well-communicated and based on sound economic principles. Consultation with industry stakeholders before policy changes is essential to ensure predictability and encourage long-term investment strategies. Reducing reliance on artificial price controls and floor prices will allow the market to function more efficiently.
  • Enhancing Regulatory Framework: Strengthening the legal and regulatory framework for financial markets is essential. This includes establishing independent oversight mechanisms, enforcing regulations effectively, and ensuring a level playing field for all investors.
  • Enhancing Liquidity and Market Depth: Efforts should be directed towards encouraging more companies to list on the stock exchange, particularly from diverse sectors. This will increase the pool of investable assets and reduce the market’s dependence on a few large companies. Streamlining the listing process and creating a more welcoming environment for initial public offerings (IPOs) can attract new companies. Measures to incentivize new listings and encourage broader participation can increase market liquidity.
  • Developing a Diversified Market: Developing a wider range of financial products, including bonds and derivatives, can provide investors with more options and attract foreign capital. Simplifying listing procedures and facilitating mergers and acquisitions can create a more diverse and dynamic market environment.
  • Attracting Foreign Investment: The government needs to actively address concerns of foreign investors. This involves implementing reforms that ensure transparency in regulations and corporate governance. Maintaining a stable exchange rate through market-based mechanisms will also be crucial to building trust with foreign investors. Creating a more open and predictable regulatory environment will further incentivize foreign participation. Streamlining regulations and guaranteeing a level playing field for both domestic and foreign investors will create a more attractive investment climate.
  • Encouraging Long-Term Investment Strategies: Government policies should incentivize long-term investment rather than short-term speculation. This can be achieved through increasing tax breaks for long-term investments and promoting the development of institutional investors like pension funds and insurance companies.
  • Financial Literacy and Investor Education: A crucial step is to educate the public about investment opportunities and risks. Financial literacy programs can empower individuals to make informed investment decisions and participate actively in the market. This will broaden the investor base and contribute to raise awareness of various investment options, and mitigate risks associated with the market.
  • Promoting Financial Inclusion: Expanding access to financial services through initiatives like mobile banking and microfinance can broaden the investor base and contribute to market growth.

Bangladesh’s financial markets hold immense potential to fuel the country’s continued economic growth. By addressing the challenges of market manipulation, government intervention, limited liquidity, and foreign investment concerns, the government and financial institutions can create a more robust and dynamic financial landscape. Fostering a culture of transparency, establishing a predictable policy environment, and promoting financial literacy are crucial steps towards unlocking the full potential of Bangladesh’s financial markets. A thriving financial sector will not only mobilize capital for further development but also position Bangladesh as a more attractive destination for global investment, solidifying its position as a leading economic player in the region.