Bank Bond Boom Tests Depth of Bangladesh’s Secondary Market

Five banks have secured regulatory approval to raise a combined Tk3,500 crore through subordinated and green bonds, signalling a fresh push to deepen Bangladesh’s underdeveloped debt market even as weak secondary-market activity continues to constrain liquidity and investor confidence.

The approvals by the Bangladesh Securities and Exchange Commission (BSEC) will allow the banks to bolster regulatory capital under Basel III while channeling funds towards green and sustainable financing. However, market analysts caution that a sustained bond-market revival will depend on fixing the structural weaknesses that have kept secondary trading largely inactive.

One Bank has received approval for a Tk400 crore, seven-year subordinated bond to strengthen its Tier-2 capital, while Southeast Bank will raise Tk800 crore through a similar seven-year instrument.

Al-Arafah Islami Bank has been cleared to issue a Tk500 crore, seven-year subordinated bond for Tier-2 capital, while Bank Asia will raise Tk800 crore through a seven-year sustainable subordinated bond aimed at strengthening Tier-2 capital and financing eligible green and sustainable projects.

BRAC Bank has secured approval for the largest issue�"a Tk1,000 crore, three-year zero-coupon green bond carrying a proposed 8.5 per cent discount rate. The proceeds are intended to support low-cost green financing.

Except for the BRAC Bank green bond, the subordinated instruments will carry floating coupons based on a reference rate plus 3 percentage points. The bonds are expected to be placed primarily with institutional investors and high-net-worth individuals.

Most of the instruments will be unsecured, non-convertible and redeemable, with mandatory listing on the stock exchange.

The latest approvals come at a critical juncture for Bangladesh’s bond market, which remains overwhelmingly dominated by government securities despite growing efforts to diversify corporate financing away from conventional bank borrowing.

Government Treasury Bonds (BGTBs) and Treasury Bills account for more than 90 per cent of outstanding domestic debt, leaving corporate bonds with only a marginal presence.

The government bond market is estimated at around 10�"11.5 per cent of GDP, far below the scale of debt markets in major regional economies such as Malaysia and China, where bond markets exceed 100 per cent of GDP.

The corporate bond market is even thinner, accounting for less than 0.5 per cent of GDP. Analysts attribute the weakness largely to the longstanding dependence of Bangladeshi businesses on bank loans rather than market-based debt financing.

The regulator and stock exchanges have recently introduced measures to change that equation.

The BSEC and Dhaka Stock Exchange (DSE) have been pushing incentives to encourage corporate bond issuance, with the DSE recently cutting bond listing fees by 80 per cent to reduce the cost of accessing the capital market.

The policy push is already generating activity, with several commercial banks obtaining regulatory clearance to raise funds through corporate, subordinated and green zero-coupon bonds.

Yet the surge in primary issuance is confronting a far bigger challenge: what happens after the bonds are issued.

The secondary market remains largely illiquid, with most transactions taking place through over-the-counter (OTC) arrangements rather than through an active exchange-based market. This limits price discovery, restricts liquidity and makes it difficult for investors to exit positions quickly.

The investor base is also heavily concentrated. Commercial banks hold more than 70 per cent of government securities, leaving the market vulnerable to concentration risk and limiting the participation of pension funds, insurers, mutual funds, retail investors and foreign institutional investors.

High minimum denominations�"often starting at Tk100,000�"further restrict retail participation and keep the bond market largely beyond the reach of small investors.

Market analysts say the expansion of the primary market alone will not be enough to create a vibrant bond ecosystem. Stronger secondary-market infrastructure, transparent and rigorous third-party valuation of underlying assets, reliable credit ratings and better disclosure standards will be essential to attract a broader investor base.

For international investors in particular, credible pricing, transparent risk assessment and the ability to trade securities efficiently are crucial before committing long-term capital.

The government is also seeking to connect Bangladesh’s domestic debt market with international capital markets.
Bangladesh is preparing for its maiden foreign-currency sovereign bond issuance, with a target of raising between US$500 million and US$1 billion. JPMorgan has been selected to manage the proposed debut, which officials expect could establish a benchmark for future international borrowing.

The planned sovereign issue, coupled with the latest wave of domestic bank bonds, could mark a significant shift in the country’s financing landscape. But analysts warn that the real test will be whether Bangladesh can turn a growing pipeline of bond issues into a genuinely liquid and diversified market.

Without an active secondary market, stronger investor protection and credible valuation and rating mechanisms, the latest bond boom risks remaining largely a primary-market phenomenon rather than developing into a deep and sustainable capital market.