# Section 1-Bonds and Debentures

## Bond:

A bond is a type of security that is issued by govt. or corporations to obtain funds from people. It may promise periodic interest payments or a face value at maturity or both. For example, xyz company issued a 10%, 1000, 10-year maturity bond at \$950. It means that xyz company is obtaining \$950 by issuing each bond that offers a 10% annual interest payment on its face value for 10 years and an amount of \$1000 at the end of 10th year from issuing the bond.

Just as people need money, so do corporations and governments. Although people can collect funds by selling assets or by taking loans, this is often not suitable for governments and corporations due to their large funds requirement and less flexibility offered by loans, as well as other reasons. In such cases, the solution is very often raising funds by issuing bonds to a public market. The organization issuing the bonds is known as the issuer, while the purchaser of the bond is called the bondholder. A bond can also be viewed as a sort of IOU given by a borrower (the issuer) to the lender (the investor).

### Features:

Bonds usually have the following features-

1. Face value: it means the value of a bond at maturity. For example, a 10%, 1000, 10-year bond means that the bond offers \$1000 at its maturity. Usually bonds have a face value of 1000
2. Maturity date: it is the date at which the bond matures. As a bond is a long-term debt instrument, its maturity is often 10 years or more. For example, if a 10-year bond is issued at January 1, 2000, then it will mature at January 1, 2010.
3. Coupon rate: it is the annualized rate of interest paid on bonds. For example, a 5%, 1000 bond means that the bond provides 5% annual interest on its face value of 1000.
4. Coupon: it means the amount of periodic interest payment provided by a bond. In the previous example, if the bond provides annual coupon, then coupon amount = \$50, while if it pays semiannually, then the amount will be \$25 per period. Coupon can be provided annually, semiannually or in some other form

### Types:

As the need for funds rises and organizations faces several situations, there has been an emergence of a wide category of bonds in financial market. As a result, nowadays we see many types of bonds with different maturity, coupon rate, payment period, and other features. To summarize, we can classify bonds from following aspects-

#### Ownership structure:

From the viewpoint of ownership, bonds can be divided in two categories; namely-

i. Registered bonds: these bonds require the issuer to maintain records of who owns the bonds and automatically send coupon payments to the owners.

ii. Bearer bonds: these bonds require the owner to clip coupons attached to the bond and send them to the issuer to receive coupon payments.

#### Classification by issuer:

i. Govt. bonds: govt. bonds are bonds issued by the govt. in a country to acquire funds from people, including individual and organizations. As govt. can always raise taxes to pay bond payments, these bonds have almost zero default risk and as a result, they show excellent liquidity. However, as govt. fund requirements are high, usually these bonds have a high face value, usually in millions or more. As a result, usually institutional investors are the main customers of these bonds. Based on maturity, we can define them under following classes-

ii. Treasury bonds : govt. debt securities maturing in ten to thirty years

iii. Treasury notes: govt. debt securities maturing in one to ten years

iv. Consoles: a special class of debt securities that never matures. As a result, these bonds pay only interest. Of course, investors can always sell them in secondary market. These types of bonds exist only in England and are quite rare. They are not used in our country

Treasury bonds/notes are sold through auction, which take place at the middle of each quarter usually. Investors purchase them through participating in the auction and the bids in the auction may be competitive or noncompetitive. These bonds are also tradable in secondary market. However, due to poor structure of our financial market, this market is not quite strong in our country.

There are a few special types of treasury bonds that are seen in developed markets, especially in the U.S. market. Although these bonds do not exist in our country, a short description on them is provided below to illustrate the different variations in treasury bonds-

• stripped treasury bonds: the bond payments are stripped by financial institutions, thus separating the interest payments and principal payment.
• inflation-indexed treasury bonds: these bonds are adjusted with inflation rate to keep real rate of return on the bond constant. As inflation rate changes, the bond’s par value is adjusted, also changing the amount of coupon. Usually this inflation adjustments are done every six months
• savings bonds: these are small denomination bonds issued by the treasury, that usually have a long maturity like 30-year.usually these bonds do not have a secondary market and interest on these bonds are not subjected to local and state taxes
• federal agency bonds: these are issued by the federal agencies, not by the treasury. These bonds are usually backed by collateral assets or mortgages and usually have a lower degree of credit risk

Prior to our discussion to next topic, we would like to focus our attention on treasury bills, which are also a type of debt instrument issued by govt.  But these are debt securities maturing within one year. As a result, we do not include them in our definition of bond.

v. Municipal bonds: these are bonds issued by local municipality. These are quite similar to govt. bonds in nature, and as municipal authority can also make payments by collecting taxes, these bonds also have almost zero default risk. They provide a slight lower return than govt. bonds, but due to tax advantages from such bonds, the after tax return is often higher than govt. bonds. As a result, many investors prefer these bonds to govt. bonds. We can classify them as following-

•   General obligation bonds– bonds on which payments are supported by the municipal’s ability to collect taxes.
•   Revenue bonds– bonds whose payments are made from cash generated by revenues of the projects for which the bonds were issued

vi. corporate bonds: these are bonds issued by corporations. Although these bonds provide comparatively higher return than govt. or municipal bonds, they also have a higher default risk. And their face value is usually in 1000, which attracts small investors too. So, nowadays by the term bond, we usually indicate corporate bonds. Corporate bonds usually have the following characteristics-

•      indenture– a legal document specifying the rights and the obligations of both the issuer and the bondholders
•      sinking fund provision– a provision requiring the firm to retire a certain amount of bonds each year
•      protective covenants– restrictions on issuer corporation’s activities that are designed to protect and reduce bondholders vulnerability to default risk
•      call provisions– a provision allowing the firm to call bonds before maturity by paying a call premium
•      bond collateral– bonds usually have collaterals to secure payments. Usually the collateral is a mortgage on real property. Based on collateral, bonds can be classified by either as a first mortgage bond that has first claim on specific assets, or as a chattel mortgage bond which is secured by personal property

Usually following types of bonds are seen in today’s financial market-

•    coupon bonds– these are bonds that promises a fixed face value at the maturity and periodic interest payments
•    zero coupon bonds– these are bonds that do not provide any sort of interest payments, rather only provide the face value at maturity. As a result, these bonds are issued at a deep discount from par value. Since these bonds do not require any cash payment before maturity, corporations sometimes find it advantageous over other types of bonds
•    convertible bonds– these bonds allow investors to exchange bonds for shares of the issuer company. As shares show a potentiality of high return, investors are often wiling to accept a lower rate on them, which helps corporations to obtain funds at a lower cost
•    junk bonds– these are bonds that promise a high return but also has a high degree of default risk. Usually these funds are issued by firms that have a high degree of leverage in their capital structure and faces bankruptcy risk.

## Debentures:

Debenture is also a sort of IOU issued by institutions to collect funds from people. They can be viewed as a certificate of loan taken by the firm from investors. Debentures are, in many respects, similar to bonds. But the main difference with bonds is that debentures have a shorter maturity than bond, usually 1-10 years. Also while bonds provides coupon as well as face value at the end, debentures usually provide periodic payments covering both interest and principal, and payment stops at maturity. In addition, bond issuing firms usually have underlying assets as collateral that serves as a guarantee to make payments, while debentures usually do not have such assets as collateral. Usually, debentures are issued by large, financially sound firms whose ability to service the debt is not in question. Usually the main purchasers of debentures are pension funds and insurance companies.

In our country, a preference among firms has been seen to issue debenture than bonds. For example, Beximco Textiles (now BEXTEX) issued 96000 debenture of Tk.2500 each, at 14% at 7th may 1995. the debentures had a 10-year maturity, thus ending at 1st July 2005. the payments were made semiannually and included both interest and repayment of principal.

### Features:

Debentures usually have the following features-

• Periodic payment: like bonds, debentures provide periodic payments. But unlike bonds, periodic payments on debentures cover both interest and principal.
• Maturity date: similar to bonds, debentures also have maturity date at which payment stops.
• Interest rate: the rate at which debenture provides interest to investor. This rate is usually at annualized form
• secured/ unsecured: payments from debentures can be secured or unsecured
• Cumulative provision: some debentures provide cumulative features. In such cases, company fails to make payment in a year, the amount payable is added with next years payment and is cumulated until the firm has cleared out all the payments

### Types:

Debentures can be classified as the following-

•   Regular debentures– debentures that have first priority in fulfilling claims
•   Subordinate debentures– debentures that receive claim after bonds, regular debentures and secured short-term credits.

# Section 2-Bond and Debenture Market in Bangladesh

Like emergingmarket countries around the world, Bangladesh could benefit from having a local-currency, fixedincome securities market. At present, its main fixedincome financial products are bank deposits, bank loans, government savings certificates, term loans, treasury bills, and government bonds and corporate debt (syndicated loans, private placement, and debentures). But in general the corporate debt market is still very small compared with the equity market

 Table 1. Instruments Available in Bangladesh Nominal amount (billions of takas) Relative size (%) Instruments 474 31.9 Bank Loans 580 39.1 Deposits 184 12.4 Term loans (as of June 1998) 123 8.2 Government saving certificates 55 3.7 Government bonds 40 2.6 Treasury bills 27 1.8 Equity (issued value) 1.3 0.1 Debentures Sources: Bangladesh Bank, National Savings Bureau, Dhaka Stock Exchange. (1998)

From the Beginning . . .Bond Market means any place or incidence of transaction in which any kind of bonds changes hands. Before independence, the use of bonds as a means of resource mobilization was virtually non-existent in Bangladesh. Immediately after liberation, the government of Bangladesh reissued long-term bonds accepting the liabilities of the Income Tax Bonds and the Defense Bonds of the Pakistan government held by Bangladeshi nationals and institutions. The government also issued a 5% non-negotiable bond to Bangladeshi shareholders of nationalized industries. In addition, savings bonds were also issued to pay for the value of demonetized 100-taka notes in 1974. Most of these bonds are held by Bangladesh bank.

The first effort to mobilize savings for use of development expenditure was the issue of Wage Earners Development Bonds in 1981 to be sold to Bangladeshi wage earners abroad. Later, a two-year special treasury bond was issued in January 1984 to be sold to individuals, public and private sector organizations including banks. In December 1985, another instrument, the National Bond, was issued to be sold to non-bank investors.

### Government: the active participant

During the implementation period of the financial sector reform program that took effect from 1990, nationalized commercial banks, specialized banks and development financial institutions had to make considerable provisions for huge classified loans. As a result, the capital base of those banks and financial institutions eroded severely and their viability was seriously threatened. In this situation, the government issued a series of bonds to restructure the capital base of these banks and financial institutions as well as to assume the liabilities of the bad loans made to a number of public sector organizations.

The government also issued some bonds for augmenting loanable funds for specialized banks and financial institutions. Moreover, some bonds were also issued to mobilize funds for a number of public sector organizations like the T&T Board, Bangladesh Biman etc.

Following is a list of bonds issued by the government on various occasions:

1. 15-year treasury bond (recapitalization and bad debt provisioning, issued 30.12.1990)
2. 3-year Jatiya Biniyog Bond (national investment bond, issued 30.12. 1985)
3. Interest-free treasury bond (issued 1988, withdrawn from 15.10.1993)
4. treasury bond to specialized banks (issued 2.5.1993)
5. 3-year T & T bond (for digital telephone installation, issued 29.12.1993)
6. 3-year special treasury bond (for reimbursement of losses on A/C of working capital, issued 1.7.1993)
7. 15-year treasury bond (capitalization, provisioning and agricultural loans write-off, issued 16.10.1993)
8. 25-year treasury bond (jute sector liquidation, issued 1.11.1993)
9. 3-year treasury bond (reconstitution of BSRS, issued 16.4.1994)
10. interest free treasury bond (issued 30.6.1994)
11. 2-year treasury bond (issued 15.7.1995) for reimbursement of agricultural loan remission,)
12. 3-year treasury bond (reimbursement of loss in jute sector, issued 1.7.1994)
13. 3-year T&T bond (for digital telephone installation, issued 7.8.1994)
14. 3-year treasury bond (reimbursement of loan loss in BADC, issued 29.6.1995)
15. 3-year treasury bond (reimbursement of loan loss in BTMC, issued 29.6.1995)
16. 3-year T & T bond (for digital telephone installation, issued 30.1.1995)
17. 3-year jute treasury bond (for jute sector, issued 1.7.1995)
18. 25-year treasury bond (jute sector liquidation, issued 30.6.1994)
19. 5-year Biman treasury bond (to increase share capital of Biman, issued 29.6.1995)
20. 3-year jute treasury bond (issued 1.7.1995)
21. 25-year jute treasury bond (private banks jute loan liquidation, issued 1.7.1995)
22. 15-year agriculture treasury bond (reimbursement of agricultural loan remission, issued 16.4.1996)
23. 3-year T & T bond (for digital telephone installation, issued 30.11.1996)
24. 3-year treasury bond (reconstitution of BSRS, issued 19.6.1997)
25. 5-year Biman treasury bond (share capital, issued 1.4.1997)
26. 3-year treasury bond (reimbursement of loan loss in BTMC, issued 26.5.1996)
27. 3-year T & T bond (for digital telephone installation, issued 22.6.1999)
28. 10-year jute treasury bond (for jute sector, issued 1.7.1995)
29. 5-year Biman treasury bond (issued 25.5.1998)
30. 5-year Biman treasury bond (issued 15.7.1998)
31. 10-year BSC treasury bond (to meet the loss of BSC, issued 1.7.1998)
32. 10-year jute treasury bond (for jute sector, issued 1.7.1995)
33. 3-year T&T bond (issued 18.8.1999)
34. 3-year treasury bond (bad loan provisioning, issued 1.1.2000).

### Market condition:

Marketability of bonds issued in the country is very limited. The bulk of these bonds is held by the nationalized commercial banks. The few specialized and some private banks hold a part of them. Individuals and non-bank financial institutions also hold some of these bonds. Therefore, the main market of these bonds so far are being provided by the banks which hold them due to the government allocation system, as well as to maintain statutory liquidity requirements (SLR). Many of these bonds are non-negotiable. As there is no secondary market in the country, the holders of these bonds have to wait till the date of maturity for their encashment. [source: seminar of Syed Ahmed Khan and A Samad Sarker on bond market in Bangladesh]

### Treasury’s action:

The treasury, as on behalf of the govt., quite often issues Treasury bonds. As govt. has almost zero default risk, these bonds are highly liquid and have quite a good demand among institutional investors. They are also listed in Dhaka stock exchange, although they are rarely traded there.

The treasury obtains long term funding through Treasury bond auctions, which are conducted through periodic auctions in Bangladesh bank. They are normally held in the middle of each quarter. The treasury announces its auction plan, the date, amount needed, bonds maturity etc. at the time of the auction, institutional investors submit their bids themselves or through their brokers.

In our country, commonly the treasury issues bonds of two different maturities, 5-year and 10-year. Currently the coupon rate on 5-year treasury bond is 7.5% and on 10-year treasury bond is 8.5%.

Below is a list of treasury bonds issued by treasury and are currently listed in the stock exchange-

 10-year treasury bond 5-year treasury bond T10Y0214 (  8.5% BGT Bond Issued 090204 ) T5Y0209 (  7.5% BGT Bond Issued 090204 ) T10Y0215 (  8.5% BGT Bond Issued 070205 ) T5Y0210 (  7.5% BGT Bond Issued 070205 ) T10Y0216 (  8.5% BGT Bond Issued 13022006 ) T5Y0211 (  7.5% BGT Bond Issued 13022006 ) T10Y0414 (  8.5% BGT Bond Issued 050404 ) T5Y0409 (  7.5% BGT Bond Issued 050404 ) T10Y0415 (  8.5% BGT Bond Issued 040405 ) T5Y0410 (  7.5% BGT Bond Issued 040405 ) T10Y0416 (  8.5% BGT Bond Issued 10042006 ) T5Y0411 (  7.5% BGT Bond Issued 10042006 ) T10Y0614 (  8.5% BGT Bond Issued 070604 ) T5Y0609 (  7.5% BGT Bond Issued 070604 ) T10Y0615 (  8.5% BGT Bond Issued 060605 ) T5Y0610 (  7.5% BGT Bond Issued 060605 ) T10Y0616 (  8.5% BGT Bond Issued 12062006 ) T5Y0611 (  7.5% BGT Bond Issued 12062006 ) T10Y0814 (  8.5% BGT Bond Issued 020804 ) T5Y0809 (  7.5% BGT Bond Issued 020804 ) T10Y0816 (  8.5% BGT Bond Issued 07.08.2006 ) T5Y0811 (5 Year 7.5% BGT Bond Issued 07.08.2006 ) T10Y0916 (  8.5% BGT Bond Issued 06.09.2006 ) T5Y0911 (  7.5% BGT Bond Issued 20.09.2006 ) T10Y1014 (  8.5% BGT Bond Issued 041004 ) T5Y1009 (  7.5% BGT Bond Issued 041004 ) T10Y1016 (  8.5% BGT Bond Issued 04.10.2006 ) T5Y1011 (  7.5% BGT Bond Issued 18.10.2006 ) T10Y1213 (  8.5% BGT Bond Issued 291203 ) T5Y1208 (  7.5% BGT Bond Issued 291203 ) T10Y1214 (  8.5% BGT Bond Issued 061204 ) T5Y1209 (  7.5% BGT Bond Issued 061204 ) T10Y1215 (  8.5% BGT Bond Issued 121205 ) T5Y1210 (  7.5% BGT Bond Issued 121205 )

### The Beginning:

Although debentures have not received that much popularity among firms in our country, there do seems to be a few number of companies that thought it as a good way to collect funds. Among these firms, Beximco group gets maximum attention as most of these debentures are issued by subsidiaries of this group.

 Table 2. Prominent Issuers in the Debenture Market Debenture  issuing company Coupon rate Year offlotation Issued debenture(in millions of Tk.) Beximco Infusion Ltd. 17 1992 14.5 Beximco Synthetics Ltd. 14 1993 240.8 Bangladesh Chemical Industries Ltd. 17 1993 3.2 Eastern Housing Ltd. 15 1994 202.5 Beximco Knitting Ltd. 14 1994 188.4 Beximco Fisheries Ltd. 14 1994 94.3 Beximco Textile Ltd. 14 1995 222.8 B.D. Zipper Ind. Ltd. 14 1995 22.4 Beximco Denim Ltd. 14 1995 278.5 Bangladesh Luggage Ind. 14 1996 135.0 Aramit Cement Ltd. 14 1998a 112.5 No debentures were issued in 1997.

Debentures were first issued in Bangladesh by Beximco infusion ltd in 1992. later on, a few more companies took initiatives to use debentures as a source of financing. As a result, debentures did find their place in our financial market in the subsequent years, as we see in the following table.

### Current position

Currently there are 8 debentures listed in the Dhaka stock exchange and 4 in the Chittagong stock exchange. These are-

 Company Coupon rate Debenture name in DSE Debenture name in CSE Aramit cement Ltd. 14% DEBARACOM DEBARACOM Bangladesh luggage ind. Ltd. 14% DEBBDLUGG DEBBDLUGG BD welding electronics ltd. 15% DEBBDWELD DEBBDWELD Bangladesh zipper ind. Ltd. 14% DEBBDZIPP DEBBDZIPP Beximco denims ltd. 14% DEBBXDENIM – Beximco fisheries ltd. 14% DEBBXFISH – Beximco knittings ltd. 14% DEBBXKNI – Beximco textiles ltd. 14% DEBBXTEX – Total 08 04

Although they are listed, they are almost never traded in the secondary market. This may be either due to the lack of interest and knowledge of investors or the weak structure of our market. Lack of information can also be accused for this.

However, despite their insignificance, debentures are still categorized as an important section of financial market. As a result, in our stock exchanges, there is a separate section where debentures are listed.

A brief description of the debentures and the issuing companies is given below:

i. Beximco Denims Ltd.

The Beximco Denims Ltd was incorporated in Bangladesh as a Public Ltd Company. It has commenced commercial operation in 1995 and also went into the public issue of shares and debentures in the same year.

The Debentures of the company is listed with Dhaka Stock Exchange. The Company Was a member enterprise of the Beximco conglomerate and the address of the registered office of the Company is House No. 17, Road No. 2, Dhanmondi Residential Area, Dhaka 1205. The industrial unit (the factory) is being located at Beximco Industrial Park in Sarabo of Gazipur.  The debentures issued by the company have reached their maturity and thus have expired.

ii. Beximco Knitting Ltd.

The Beximco Knitting Limited was incorporated in Bangladesh as a public company with limited liability on 20 May 1993. It has commenced commercial operation in 1995 and also went into the public issue of shares and debentures in 1994. The debentures of the Company is listed with Dhaka Stock Exchange.

The Company is a member enterprise of the Beximco conglomerate and the address of the registered office of the Company is House No.17, Road No.2, Dhanmondi Residential Area, Dhaka 1205. The industrial unit (the factory) is being located at Beximco Industrial Park at Sarabo of Gazipur. The debentures issued by the company have reached their maturity and thus have expired.

iii. Beximco Synthetics Ltd.

Beximco Synthetics Limited, a member of the BEXIMCO Group, was incorporated in Bangladesh as a public limited company. It commenced commercial operation in July 1994 and went for public issue of shares and debentures in 1993.

The debentures of the Company are listed in the Dhaka Stock Exchange of Bangladesh.  The registered office of the Company is located at House No.17, Road No.2, Dhanmondi Residential Area, Dhaka-1205. The industrial units are located at Kabirpur, Savar, Dhaka. The debentures issued by the company have reached their maturity and thus have expired.

iv. Beximco Textiles Ltd.

Beximco Textiles Limited, a member of the BEXIMCO Group, was incorporated in Bangladesh as a public limited company. The company issued debentures in Dhaka stock market in 1995.The Company is a member enterprise of the Beximco conglomerate and the address of the registered office of the Company is House No.17, Road No.2, Dhanmondi Residential Area, Dhaka 1205. The debentures issued by the company have reached their maturity in 2006 and thus have expired.

v. Aramit cement Ltd

Aramit cement limited, a member of aramit group, was incorporated in Bangladesh as a public limited company. It issued debenture in Dhaka and Chittagong stock exchange in 1998.

Bangladesh luggage industries ltd. was incorporated in Bangladesh as a public limited company. It issued debenture in Dhaka and Chittagong stock exchange in 1996. The debentures issued by the company have reached their maturity and thus have expired.

vii. Bd. welding electronics Ltd.

Bangladesh welding electronics limited was incorporated in Bangladesh as a public limited company and it issued its debentures in both Dhaka and Chittagong stock market. The debentures issued by the company have reached their maturity and thus have expired.

Bangladesh zipper industries limited is a public limited company incorporated in Bangladesh. It issued debentures in Dhaka stock exchange in 1995. The debentures issued by the company have reached their maturity and thus have expired.

ix. Beximco fisheries Ltd.

Beximco Fisheries Limited, a member of the BEXIMCO Group, was incorporated in Bangladesh as a public limited company. It went for public issue of debentures in 1994.the debentures of the company are listed in Dhaka stock exchange.

### Outside the market:

HBFC DEBENTURE: During the period from 1973 through 30th june,2000, the house building finance corporation (HBFC) have raised total funds of Tk. 1,872.00 crores(provisional) by selling debentures to the Bangladesh bank, the commercial banks and the sadharan bima corporation. After repayment of Tk. 227.66(Provisional) crores, the outstanding balance against debentures stood at Tk. 1,644.34(Provisional) crores as on 30th June, 2000. Bangladesh Bank’s debenture financing to the Corporation stood at Tk. 1,169.95(Provisional) crores up to 30th June, 2000. The weighted average rate of interest paid by the HBFC against debentures declined slightly to 4.77 percent in 1999-2000 from 4.79 percent in the preceding year. It may be recalled that the HBFC sold debentures in 1997/98 at a rate of interest of 8.0 percent. On the other hand, the weighted average rate of interest on loans disbursed by the HBFC remained unchanged at 11.17 percent during the year under report. Total liabilities of the HBFC increased by Tk. 46.53 crores to Tk. 3,018.77(Provisional) crores at the end of June, 2000 from Tk. 2,972.24 crores as of end June of the preceding year.

Government securities market: The government securities market in Bangladesh is small, does not provide much of a yield curve to support a corporate bond market, and does not provide intermediaries with skills and a profit base to support the corporate bond market. At present, the government issues long-term savings certificates at high interest rates and government bonds, and it only has market-oriented rates for T-bills.

T-Bills: T-bills are auctioned weekly for 91 days and the Bangladesh Bank (BB) occasionally issues paper for 180 days, 365 days, and 720 days. Commercial banks participate in auctions weekly for 91-day T-bills, whereas the others are issued occasionally. Accepted bids are noted in the newspapers. The market is small, with outstandings of about US\$800 million. There is no secondary market and no market for repurchase agreements (“repos”). T-bills are transferable, but settlement is manual and very slow, done through BB. On the whole, T-bills are mainly used to satisfy statutory liquidity requirements (SLRs).

Government bonds, with maturities ranging from 3 to 25 years, are issued when needed; they do not create a yield curve as T-bonds are nontransferable, mostly because they are issued to recapitalize state-owned banks. Their notable feature is that they are guaranteed by the government and are eligible for SLRs.

Government savings certificates (GSCs) range in maturity from three to eight years. GSCs are offered to different types of investors in the retail sector (but small corporates are allowed to invest). The types of investors are mostly individuals and families but also include charity and provident funds. GSCs are issued in series through the year. The holder may redeem them at par at any time.

# Section 3-Overview Of The Situation

## Problems:

Numerous factors in Bangladesh today suggest that Bangladesh will not be able to develop an active, localcurrency fixedincome market. Economic and financial transactions are highly regulated, and the economy does not provide a sufficient number of appropriately structured and skilled issuers and investors. Although the government has recently began privatizing selected state-owned companies and deregulating the financial market, progress has been slow, leaving financial market participants skeptical about whether the government can succeed in this endeavor.

Bangladesh finds it difficult to move forward for several reasons:

• weak governance at the institutional and market levels
• high nonperforming assets among the nationalized commercial banks (NCBs)
• poorly defined and overlapping responsibilities of the Bangladesh Bank, Securities and Exchange Commission, and Ministry of Finance
• and the lack of incentives and private initiative to drive market developments.

These four problems are the principal obstacles to the development of bond and debenture markets in Bangladesh. The government is aware of them, and the World Bank and other organizations have been pushing for solutions. However, change is slow.

### Major Impediments to Bond and Debenture Market Development

The obstacles to bond market development can be divided into two broad categories: those around and across the market, and those inside the fixed-income markets.

#### Around and Across the Market:

The obstacles in this group stem from the political situation, the macroeconomic situation, and the broader financial system.

#### The Political Situation:

Nationwide program of strikes, processions, and mass meetings by political parties have weakened the government’s intentions to foster changes such as the development of the financial market.

In addition, certain commercial and financial regulations are outdated. Governance and accountability are lacking in certain areas, and inefficiency is present in the financial system, mainly concerning the state-owned banking sector. The problems created by these weak institutions are compounded by an increasingly confrontational political environment. Because the political environment is very fragile, laws and regulations are not being fully enforced. Although the government is aware of these problems, it has been slow to improve governance and develop strong institutional capacity.

#### Macroeconomic Situation:

The consolidated public sector deficit, taking into account losses incurred by state-owned enterprises, is much higher and underscores the need for improved fiscal management; however, a sense of urgency is missing in policymaking, despite the growing imbalances in the economy and crowding out as Bangladesh continues to channel vast monetary resources into servicing bad loans. Given that macroeconomic changes can happen in short periods of time and that nonperforming loans, which account for a third of the loan portfolio, can create financial sector vulnerability, the bad-loan situation could trigger a severe liquidity crisis nationwide. It can take decades to build a fixed-income market in the wake of such crises. This issue clearly needs immediate and focused attention.

Certain omissions or drawbacks of the broader laws and regulations directly affect development of the fixed-income market. First, with regard to the ownership of land, the law provides for the registration of deeds rather than of ownership, which makes it impossible to take land as collateral for bond issuance. Second, the law makes arbitration a cumbersome and slow process; moreover, foreign arbitration awards are not enforceable in Bangladesh. Third, in terms of obtaining issuers, there is no privatization law to lend transparency and authority to the privatization process, although one is at present being drafted. Fourth, Bangladesh’s laws represent a mixture of codified British common law and legal principles from various religious heritages. So, Bangladesh courts are limited in their ability to function effectively. Contract laws and commercial codes seem to be fair, but ensuring that they are observed is difficult because of a weak adjudication system.

The broader financial system includes the banking sector, nonbanking sector, government securities market, and short-term money markets.

Banking sector. Bangladesh’s banking system, which is dominated by state-owned NCBs, creates two serious problems for a local corporate bond market. First, the system provides low-cost loans to state owned enterprises, which account for a large part of the corporate sector. This undermines development of the corporate bond market because other financial institutions are unable to compete with these “under priced loans.” Indeed, the state-owned enterprises constitute a large part of the NCBs’ business. To complicate matters, development financial institutions (DFIs) also provide low-cost loans, priced at a small percentage over bank deposits for similar maturities. Second, the banking sector is faced with a substantial number of bad loans; nonperforming assets account for about 30% of total assets.

Nonbanking sector. The nonbanking portion of the financial sector consists of two small stock exchanges (Dhaka and Chittagong), both of which have still not recovered from the bull market problems of 1996, which left the public suspicious of corporate institutions because it is hard to get them to disclose their figures. The weak operating performance by listed companies and low confidence in the market overall has made it difficult for the market to recover. In sum, the nonbanking sector has not evolved in a way that would allow it to play an active role in the financial system. Nor is it prepared to play an active and skilled leadership role in developing and participating in an active fixed income market.

#### Government securities market:

GSC issuances offer significantly higher rates than local bank deposits, which create a relatively high rate for risk-free and tax-free government securities. This establishes a disincentive to invest in corporate securities. GSCs create a high benchmark interest rate foundation for corporate securities. That matters because it is very hard to compete with risk-free government debt. At present, Bangladesh law and the government’s fiscal and monetary policy combine to create a financial market monopoly for GSCs and NCBs, which in turn keeps alternate financial intermediation from emerging.

#### Short-term money markets:

Money markets provide another foundation for bond markets. The money markets in Bangladesh are quite small. There is an interbank market, in which commercial banks borrow and lend to adjust their short. Normal maturities range from overnight to 30 days. Bangladesh also has a forward market for U.S. dollars against the taka, but only for short maturities. There is no commercial paper market. This weak form of short-term money market also hinders the development of a strong bond debenture market.

## Future Prospects

Bangladesh is one of the poorest countries in the world, with approximately 140 million inhabitants, of which about 50% live below the poverty line. Although its GNP growth rates—in the range of 4%–5% year—are attractive, they suggest that it will take Bangladesh 25 years to double its per capita income. In order to reduce the incidence of poverty to about 11%, as it hopes to do, Bangladesh will have to achieve economic growth rates of 7.5% or more a year. According to several studies (see, for example, World Bank, “Bangladesh, Key Challenges for the Next Millennium,” April 1999), economy has the capacity to move out of poverty with increasing speed, but that will require decisive policy actions in several areas, not least of which is the financial market.

In the past few years, there has been a number of significant changes in Bangladesh economy. The RMG sector has survived and taken quite a strong position after removal of quotas. Jute industries have a new life and jute goods export have increased. Tea, leather and other industries are also in good shape now. Foreign remittance has increased significantly. Despite political violence, overall production and exports are stable yet. If major exporting industries get into financial market, then there would be a good chance for creating a strong bond and debenture market.

Also within the country, a wide class of new entrepreneurs has evolved and there are many new business firms operating. Growth have been very high in telecom and power (especially gas) sector. Current money market and govt. banks do not have enough funds to support all these firms. There would be a better scenario if these firms get in the market by issuing stocks, bonds and debentures. Recently, the govt. has made some new regulation that requires large firms to issue securities in the financial sector. These regulations will certainly help improve our financial market, especially bond and debenture market.

If the country’s positive macroeconomic trends continue into the future, the fiscal deficit and bad-loan situation will ease up and these factors would pose less threat to the financial market

Again, the government has committed itself to launching financial reforms that could help accelerate the country’s rate of growth. The main goal of these reforms is to reduce the direct controls on the financial system, and to deregulate and introduce a new set of market-oriented approaches to financial sector activity.

## Recommendations:

Bangladesh will eventually need an efficient capital & debt market that can mobilize domestic and foreign resources for investment. For the time being, however, Bangladesh should focus on creating a well organized, regulated, and attractive primary market in both public and private placements.

For this, Bangladesh needs a healthy non-bank financial institution (NBFI) sector to increase mobilization and make competitive financing available in a fixed-income market. To achieve that end, it must break the NCBs’ monopoly. Although the government is aware of this problem and has put forward some relevant reforms, there are no real incentives to speed up the process, maybe because of political considerations.

We also believe that the following steps are also necessary for development of a strong bond and debenture market in Bangladesh-

• Political problems should be minimized
• Laws and regulations must be updated
• Governance and accountability should be improved
• Weaknesses in the financial system should be removed
• Bad loan problem must be solved
• Large corporations should be encouraged to use financial market for funding
• GSC and NCB’s monopoly should be stopped
• Firms in the high growth industries, like telecom industries, should be brought into the financial market
• The money market should be improved to assist in developing a strong bond and debenture market.

## Our overview

In our study, we have seen that although there are a few bonds and debentures in our country, the market is very weak. This is due to problems in the political, macroeconomic and financial system and weakness in decision-making, law enforcement and financial market. Lack of sufficient information is another cause.

In spite of this situation, we have also seen that Bangladesh has a good prospect. If govt. acts properly and makes accurate decisions, and the suggestions mentioned above are implemented properly, then more firms will be encouraged to issue stocks, bonds, and debentures. This will certainly help to improve a strong market for bonds and debentures.

So, we hope that, the current problems that are hindering the development of bond and debenture market should be removed soon so that the overall financial market improves. Only Then we can hope for a sound financial system in our country that should help economy to improve. For this, it is the government who should take steps forward. Fortunately, currently govt. is taking initiatives to improve the financial market. So we believe we can expect for a well-organized strong bond and debenture market in the upcoming future in our country.

###### Appendix A

Figure 1: Debenture

Figure 2: Debenture – Backside

###### Appendix B

Composition of securities in Dhaka Stock Exchanges:

 Name of sector Listed companies in DSE Listed Companies in CSE Bank 34 24 cement 8 9 Ceramics Sector 4 4 Debenture 8 4 Engineering 22 20 Food & Allied 37 22 Fuel & Power 6 6 Insurance 31 25 Investment 14 12 IT Sector 7 7 Jute 4 0 Miscellaneous 13 14 Paper & Printing 8 9 Pharmaceuticals & Chemicals 25 20 Services & Real Estate 5 3 Tannery Industries 8 9 Textile 39 35 Treasury bond 28 0 Total 301 223

###### Glossary
1. Bond: Debt obligations with long term maturities issued by governments or corporations
2. Broker: One who executes securities transactions between two parties
3. Default risk: A risk that loans provided or securities purchased will default. Cutting off principal and/or interest payments
4. Debentures: Bonds that are backed only by the general credit of the issuing firm
5. Interest rate risk: Risk that an asset will decline in value in response to interest rate response.
6. Issue costs: cost of issuing stock, including printing, legal registration & accounting expenses.
7. Junk bonds: Corporate bonds that are perceived to have a high degree of risk
8. Liquidity: Ability to sell assets without loss of value
9. Market risk: Risk that the stock market experiences lower prices in response to adverse economic conditions or pessimistic expectations.
10. Money markets: Financial markets that facilitates the flow of short term funds
11. Money market securities: Short term securities, such as Treasury Bills or certificates of deposits whose maturities are one year or less.
12. Over The Counter (OTC)market: Market used to facilitate transactions of securities not listed on organized exchanges
13. Primary market: Market where securities are initially issued
14. Private placement: Process in which a corporation sells new securities directly without using underwriting services
15. Protective covenants: Restrictions enforced by a bond indenture that protect the bondholders from an increase in risk; such restrictions may include limits on the dividends paid, salaries paid & the additional debt the firm can issue
16. Secondary market: The market where securities are resold.
17. Treasury bills: Securities issued by the treasury that have maturities of one year or less.
18.  T bills discount : Percentage by which the price paid for a T bill is less than the par value
19. Yield to maturity: Discount rate at which the present value of future payments would equal the security’s current price
20. Zero coupon bonds: Bonds that have no coupon payments