Wednesday | 15 January 2025 | Reg No- 06
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Wednesday | 15 January 2025 | Epaper

Capital market could be an alternative source of financing

Published : Thursday, 26 December, 2024 at 12:00 AM  Count : 606
Noore Alam Siddiqui
Fuelled by mounting classified investments and a rising number of willful defaulters the banking sector in Bangladesh is grappling with a severe crisis. Over the past two decades, these issues have intensified, threatening the stability of the national economy. The current scenario raises a critical question- can the capital market serve as a pragmatic alternative for companies and industries to raise funds, especially for large-scale financing? Exploring this path in the context of Bangladesh's economic realities reveals both potential and challenges.

The financial sector in Bangladesh has long been under pressure due to rising non-performing loans (NPLs). According to the Bangladesh Bank, NPLs have surpassed BDT 1.56 trillion as of mid-2024, with willful defaulters being a primary contributor. These defaulters often misuse bank loans secured through political influence or weak regulatory enforcement. As banks struggle with liquidity, industries find it increasingly difficult to secure credit.

In such a scenario, alternative financing mechanisms become essential, with the capital market emerging as a viable option by distributing risks among hundreds of thousands of shareholders instead of concentrating them within a single bank or financial institution. However, leveraging the capital market requires deep structural reforms and market confidence.

Can the Capital Market be an Alternative? As a diversified funding source, the capital market offers companies a platform to raise long-term funds by issuing equity or debt securities, reducing dependency on traditional bank loans. This approach can lower companies' financial risks, especially in a banking crisis. Moreover, it might be an economic growth driver where a robust capital market can channel savings into productive investments. If regulated properly, it can help industries expand, create jobs, and contribute to GDP growth.

Regarding transparency and accountability, the capital market is a better alternative. Listed companies must adhere to stringent disclosure norms, ensuring greater transparency and reducing chances of financial mismanagement- a chronic issue in bank-financed enterprises. At the same time, a functional capital market could reduce the pressure on banks by transferring part of the financing load to market investors. This could enable banks to focus on small and medium enterprises (SMEs) and retail lending.

Some Successful Capital Market Models: Bangladesh can draw lessons from countries that have successfully developed their capital markets. For example, India has thriving equity and debt markets that complement bank financing. Regulatory reforms under the Securities and Exchange Board of India (SEBI) have played a pivotal role in reducing market manipulation.

Similarly, with one of Asia's most advanced capital markets, Malaysia efficiently finances major infrastructure projects through bond issuances, balancing banking sector dependency. At the same time, after the 1997 Asian financial crisis, South Korea restructured its financial system by strengthening its capital market and introducing reforms in banking regulations.

Challenges in Bangladesh's Capital Market: While the potential is significant, Bangladesh's capital market faces formidable challenges. Frequent policy shifts and economic shocks, such as inflationary pressures and currency devaluation, deter foreign investors. However, despite efforts by the Bangladesh Securities and Exchange Commission (BSEC), regulatory enforcement remains inconsistent. Market manipulation and insider trading continue to erode investor confidence. At the same time investors' lack of financial literacy and sound knowledge often leads to irrational investment decisions, further destabilizing the market.

As a result, only a fraction of the population actively participates in the stock market. A culture of speculative trading discourages institutional investments. Moreover, many companies have poor corporate governance practices, making them less appealing to investors.

Policy Recommendations for Success: To enable the capital market to function as a complementary financial source, several reforms are necessary. First of all, market regulation has to be strengthened. The BSEC must enhance its regulatory capacity to monitor and penalize market manipulators effectively. A transparent, predictable regulatory environment will attract more institutional and foreign investors. Similarly, enhancing corporate governance through the implementation of stricter listing and disclosure standards, coupled with rewarding compliant companies with favourable investment ratings, will boost credibility.

Promoting Financial Literacy is very much crucial. As the course of that effort, conducting nationwide financial literacy programs will create an informed investor base capable of making rational investment decisions. In addition to that incentivizing Capital Market Access by offering tax incentives to companies opting for capital market financing could encourage listings.

Establishing a vibrant bond market could also attract long-term investors, reducing equity market dependence. A vibrant bond market requires Enhanced Digital Infrastructure where a seamless trading platform can encourage retail participation while ensuring data security and transparency. Above all, Public-Private Partnership (PPP) through balanced collaborations between the government, financial institutions, and private investors can drive innovative investment products.

A Balanced Approach is required: Considering the current economic challenges of Bangladesh, turning to the capital market is not just a necessity but a strategic imperative. However, this must be a gradual and well-regulated transition. Relying solely on the capital market while neglecting banking sector reforms would be counter productive. Therefore, a dual approach involving banking sector restructuring and capital market development is crucial.

The government must simultaneously strengthen banking sector oversight, recover NPLs, and bolster financial institutions' governance while nurturing the capital market as a complementary financing source. This holistic approach can stimulate industrial growth, create jobs, and boost national GDP.

Bangladesh stands at a crucial juncture. The nation can no longer afford to rely solely on its banking sector plagued by default loans and mismanagement. The capital market presents a promising alternative, but its success depends on the government's commitment to systemic reforms, market transparency, and regulatory enforcement. With the right policies in place, the capital market can emerge as a dynamic engine for sustainable industrial growth, reducing dependency on banks and unlocking a new era of economic prosperity. We are optimistic that the present interim government can implement it without encountering any unwanted and unfair obstacles.

The writer is a contributor



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