Bond market analysis of Banglades

Executive Summary

In this analysis the bond market of Bangladesh and perfects to analyse the limited
number of bonds available in the market. It aims to figure out any correlation with the
Dhaka Stock Exchange by analysing the correlation coefficient between the prices of
bonds and the index numbers. This helps to understand whether the stocks at DSE are
affecting the bond prices or not.

It also talks about the reasons for the failure of bond market in Bangladesh through a
thorough of the bonds performance and investors sentiments. Several reasons such as
lack of understanding of the bond market, too much reliance on bank savings account
and poor accountability and corporate governance has eroded people’s trust in capital
markets.

Suggestions have also been provided based on the specific problems in the bond
market such as improving financial literacy, encouraging and promoting investments
in bonds. If implemented accordingly, the Bangladesh bond market is likely to
flourish in the upcoming years.

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Table of Contents
Organization Overview of Marico Bangladesh Limited.............................7
Vision, Mission & Values........................................................................................8
Analysis of Past 5 years performance.....................................................................9
My Responsibility as an Intern..............................................................................11
Challenges faced during the internship.............................................................................11
Introduction to the bond market.............................................................13
Objective of the Study..............................................................................15
Literature review.....................................................................................16
Methodology............................................................................................17
Terminologies................................................................................................17
Limitations.....................................................................................................17
......................................................................................................................................................................17
Analysis of Bond performance................................................................18
Correlation with DSEX.........................................................................................20
Bank Fixed Deposit rate.......................................................................................20
Reasons for sub-standard performance..................................................21
Recommendations..................................................................................22
Conclusion..............................................................................................24
Reference................................................................................................25
Introduction to the bond market

Bond market serves as one of the best alternative source of investment for investors around
the world while serving as one of the easier routes to ensuring finance for a business.

Bangladesh has seen significant economic growth over the years; however, the bond market
has yet to flourish in Bangladesh capital market, which has showed very little signs of growth.
The lack of a flourishing bond market has deprived Bangladeshi investors and companies of
various benefits that they could have reaped had their been a developed bond market. Bond
markets serve as a source of long-term finance for companies with sound financial
capabilities. Moreover, it also provides investors with a stable source of long-term income
compared to the unstable and volatile returns of the stock market. Also considering the high
volatility of the Dhaka Stock Exchange, a stable bond market would serve the necessities of a
general investor very well. The bond market in Bangladesh is comprised mainly of Treasury
bonds issued by the Government of Bangladesh with 221 T-bonds and only one corporate
bond that has been currently floating in the market.

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Bangladesh bond market size when compared with the neighbouring countries market is
significantly lower as shown in the graph below:

60.00%

50.00% 49.11%
45.09%

40.00%

30.00% Corporate bond as a % of GDP

Bond Market as a % of GDP

20.00%

11.42% 10.96%
10.00%
6.43%

0.13% 0.49% 0.98%

0.00%
Bangladesh India Srilanka Pakistan

As the chart above shows, Bangladesh corporate bond as a percentage of GDP is the lowest
among the countries of South Asia while the bond market overall is also very small compared
to GDP at 0.13% and 6.43% respectively. India leads the way in corporate bond market with a
size of INR 21,144,414,702,340, which represents about 11.42% of their GDP. The Indian
capital market has developed significantly over the last decade and their developments have
not only been focused on the stock market but also on the bond market. On the contrary,
Bangladesh’s bond market has not developed as compared to its GDP.
Literature review

Various researches have been conducted on bond markets however, very few research has
been carried out on the Bangladesh bond market. Alam, Islam and Chy (2014) found out that
only 5% of their respondents opted for investment in corporate bonds while 97.37% of the
respondents found the bond market too inefficient. According to Alam et. al (2014)’s survey,
67.5% and 57.5% of their respondents thought inefficient market regulation and lack of
actions against market manipulators few of the strongest reason to avoid investment in bond
market and their subsequent below-par development.
Analysis of Bond performance

The Treasury bond market is summarised below:

Variable Obs Mean Std. Dev. Min Max

Tenure 277 14.12635 5.200536 2 20

CouponRate 277 .1063758 .0200541 .0444 .1595
Outstandin~e 277 5009.842 7321.152 30 30000

The minimum tenure for T-bond starts from 2 years with maximum tenure reaching 20 years.
The coupon rate of the bonds also ranges from 4.44% to 15.95%. The average coupon rate in
T-bond market is 10.63% per annum, which is a healthy return considering the savings rate at
a bank is in single digits.

Summary of Coupon Rate

Tenure Mean Std. Dev. Freq.

2 .05015 .00419325 4
5 .0857 .01996583 32
10 .10069365 .01498958 63
15 .11090899 .0159597 89
20 .11582584 .01655097 89

Total .10637581 .02005409 277

The coupon rate comparison according to the tenure of the bond is summarised above. The
chart indicates the heavy portion of long-term bonds issued by the government and the
subsequent rise in coupon rates with the increase in tenure of the bond. Therefore, a rising
coupon rate indicates a rising yield curve - an upward sloping curve - an indicator of a healthy
and growing economy.
The chart below shows a small summary of the prices of 3 corporate bonds that are analysed
in this paper.

Variable Obs Mean Std. Dev. Min Max

ACIbond 729 878.2257 86.22264 750 1175.5

BRACBankBond 358 1044.161 34.65209 925.5 1200
IBBLMudaraba 933 964.7366 30.95753 874 1031.25

BRAC Bank and IBBL issued their bonds at a par value of 1,000 BDT. The standard
deviation of the bond prices is extremely high with deviations of as high as 86 for ACI bond.
On the other hand, the standard deviation for BRAC Bank’s bond and IBBL Mudaraba Bond
has been 34.65 and 30.95. The high standard in the bond prices shows the lack of stability in
the almost non-existent bond market.

The returns for the bonds are tabulated as follows.

ACI’s Zero Coupon Bond had an additional option, which allowed investors to convert 20%
of the bond at face value in a predetermined conversion strike price. The investor could have
executed the convertibility option assuming that the market value of ACI stock was higher
than the conversion strike price on the conversion date.
Correlation with DSEX

ACIbond BRACBa~d IBBLMu~a DSEX

ACIbond 1.0000
BRACBankBond -0.0122 1.0000
IBBLMudaraba 0.1236 0.0132 1.0000
DSEX 0.2419 -0.2620 0.0726 1.0000

The chart above shows the correlation between the corporate bond prices and the Dhaka Stock
Exchange’s index. The DSEX index has positive correlation with bond prices of ACI and
IBBL indicating a healthy equity market eventually boosts alternative markets as people start
investing in other securities. Therefore, a healthy stock market is required for an eventually
successful bond market. It is also noted that ACI bond has the highest positive correlation
with the stock market. It was probably due to the fact that the investor had the option to
convert 20% of the bond at face value at a predetermined conversion strike price. Thus, a
rising stock market index might have led to a rising share price of ACI, which increased the
demand for its bond.

Bank Fixed Deposit rate

Fixed deposit at a bank was the only reasonable comparison with a bond market due to the
long-term nature of the investment. We can see that fixed deposits have a return of just over
6.75% for over 1 year. While the 2-3 years return slightly increased at 6.78%, the 3 years+
return fell to a surprisingly 6.64%. This shows a sharp contrast with the bond market as the
coupon payments in for a bond rises as the tenure increases. A 5-year bond has an average
coupon rate of 8.57%, which is significantly higher than a fixed deposit rate.
Reasons for sub-standard performance

Lack of knowledge: One of the prime reasons for the underdevelopment of the bond market
in Bangladesh is the lack of understanding of bond market itself. The general investors are not
educated and do not possess the financial literacy required to understand the mechanisms of a
bond. The average investor has very limited knowledge about investing in stocks and many
investors are a victim of herding in Bangladesh. In spite of having an underdeveloped stock
market, the public is still yet to learn the basics of investing, while the bond market is close to
non-existent.

Lack of promotion: It has been seen that the issuers of bond prefer to issue the significant
number of bonds in private placements. Islami bank’s Mudaraba bond issued 50%, BRAC
Bank issued 90% and ACI issuing 40% of their bonds at private placements. This indicates
that institutions do not prefer to issue bonds to the public but instead opt for the easier and
cheaper route of issuing bonds to an institute.

Savings account dominance: Another key factor in the underdevelopment of bond market
has been the general notion in Bangladesh, which has always been saving their money in bank
accounts, which offer a very small and fixed rate of interest in a hassle free manner - a feature
preferred by the public in Bangladesh. The concept of investing in capital markets is still in
developing stage in Bangladesh and most people avoid investing in capital market due to
rumours of it being rigged and manipulated by the big players in the market. Therefore,
people’s attention has mostly been towards the savings account at banks instead of stocks and
bond.
Dominance of banks: High concentration of banks is also a key reason why bond market has
not flourished. There are 58 scheduled banks in Bangladesh – a number too high considering
the size of the economy. High concentration of banks in the financial system has made it very
difficult for other alternatives to flourish such as the bond market. This reasoning is supported
by Rajan and Zingales’s (2003) “interest group” theory of financial development that banks
appear to oppose corporate debt market development as a potential force for their own
disintermediation.

Recommendations

The bond market in Bangladesh lacks several key fundamentals that are essential in order for
the market to flourish.

Firstly, the general investors in a market need to be educated about the features and
mechanisms of a bond. An educated group of investors will eventually take the capital market
towards an “emerging capital market” tag with sound investment and valuation techniques.
An educated group of investors will also reduce the tendency of herding in the market, which
has led to several collapses in the market.

Another key reason for the underdevelopment of the bond market was the low promotion of
the market itself. As we saw before, the 3 corporate bonds were mostly issued at private
placements with IBBL and BRAC issuing 50% and 90% of their outstanding bonds at private
placements. This indicates the low effort that they put into promoting the security to the
general investor. Therefore, the government should encourage promotion of bonds issued by
themselves and the corporations.

In the analysis section, it was seen that IBBL Mudaraba bond’s standard deviation was the
lowest among the three bonds that were compared. One of the key reason for this could be the
Islamic law – Shariah - followed by the bank which made the investors feel more secure and
also satisfied due to the income generated being “halal”. The IBBL Muadaraba bond has been
floating since 2007 and recent reports have been that another issue is likely to be underway.
This tells us that the bond has been successful for the company and the comparatively low
standard deviation also indicates a slightly higher investor confidence in the bond. Therefore,
flotation of such Islamic bonds should be encouraged in the market.

Bangladesh has a Muslim majority population where people might refrain from investing in
fixed interest earnings due to interest being haram. Therefore Islamic bonds such as Sukuk
should be encouraged in the market. Sukuk has been every successful in Malaysia as reported
by The Star in 2018 and Bangladesh being a Muslim majority can also have their fair share in
the Islamic bond market. This would help remove the “interest” barrier that hinders a lot of
people from investing in the bond market.

Finally, increased support and security is required from the Government of Bangladesh,
Bangladesh Securities & Exchange Commission & the Dhaka Stock Exchange to make the
bond market flourish. A healthy and growing economy is always big boost to the development
of a market be it stock market or bond market.
Conclusion
The bond market of Bangladesh would eventually develop if the right regulations are
in place and when general investors in the economy are financially literate. To achieve
these 2 objectives, the government would need to invest heavily in regulations and
training and development of investors. A developed bond market would bring several
benefits to the economy as it would act as an alternate source of capital for the firms
and also provide great passive income for the general investors.
Reference
Bangladesh Bank (Ed.). (2018). ANNOUNCED INTEREST RATE CHART Of The
SCHEDULED BANKS (DEPOSIT RATE) (PERCENTAGE PER ANNUM). Retrieved
from https://www.bb.org.bd/fnansys/interestdeposit.php

Jahur, M. S., & Islam, M. S. (2014). Growth and Development of Bond Market in
Bangladesh-An Evaluative Study.

Malaysia continues to dominate the sukuk market. (2018, September). Retrieved

from https://www.thestar.com.my/business/business-news/2018/09/04/malaysia-
continues-to-dominate-the-sukuk-market/

Md Noman Bin Alam, A. H., Islam, S., & Chy, N. J. (2014). Evaluation of Corporate
Bond Market Performance in Bangladesh. IIUC Studies, 10&11, 127–144.