Bangladesh’s capital market has spent too long waiting for confidence to return on its own. It will not. A functioning capital market is more than a venue for buying and selling shares. It is one of the principal channels through which savings are converted into investment, businesses raise long-term capital and industrialisation gains momentum. The capital market, money market and broader economy ultimately move together.
Bangladesh’s market today remains far below that potential. Weak investor confidence, limited institutional participation, shallow product depth and fragmented regulation have left the market struggling to perform its role as a source of productive capital. Long-term reform is essential. But the market also needs measures capable of producing visible improvements in the near term. The immediate objectives should be straightforward: restore trust, attract investors and stabilise the market.
Bangladesh’s financial system is overseen by several regulators and government agencies, each with its own mandate. Yet risks increasingly move across institutional boundaries. A problem in banking can quickly affect capital-market liquidity. Tax policy can influence investment flows, while insurance, pensions and securities regulation shape the pool of long-term capital available to businesses.
That is why Bangladesh should establish a Financial Sector Stability Council to coordinate policy across the financial system without undermining the independence of individual regulators. The council could bring together the finance minister, Finance and Banking Division secretary, Bangladesh Bank governor, National Board of Revenue chairman, Bangladesh Securities and Exchange Commission (BSEC) chairman, Invest Bangladesh Authority executive chairman and Insurance Development and Regulatory Authority chairman, along with a private-sector capital-market professional. BSEC could serve as its secretariat.
The council should ensure that policies affecting banking, taxation, insurance, investment and capital markets are considered as parts of the same financial system, rather than becoming another layer of bureaucracy. Without such coordination, one regulator can undermine what another is trying to achieve.
One immediate way to deepen the market would be to list part of the government’s shareholdings in multinational companies through direct listing.
A minimum of 10 percent of government-held stakes in such companies could be brought to the exchanges within a defined period, allowing the market to determine their prices. Listing stakes in established multinational businesses could broaden market depth, improve liquidity and signal to domestic and foreign investors that the government intends to use the capital market as a serious financing and investment platform. Bangladesh’s exchanges need more quality companies, not merely more companies.
Retail investors cannot be expected to carry the market on their own. State-owned commercial banks, private banks and financial institutions should temporarily increase participation through their dealer accounts, within appropriate regulatory safeguards. Such participation could be maintained for one to two years and accompanied by temporary tax and regulatory incentives. The purpose should not be to prop up individual share prices, but to restore institutional depth to a market where retail sentiment can otherwise dominate trading.
Consistent participation by credible institutions could improve liquidity and reassure retail investors that they are not operating in isolation. Any such intervention, however, must remain temporary. Institutional participation should serve as a bridge to a healthier market, not become a permanent mechanism for supporting prices. Bangladesh’s tax system should distinguish between speculation and long-term investment.
A graduated capital-gains tax for institutional investors could create that distinction. Under such a framework, investments held for six months could face a 10 percent capital-gains tax, those held for one year could face 5 percent, and investments held for more than two years could be exempt. The longer capital remains invested, the more favourable the tax treatment. That would encourage investors to think beyond short-term price movements and support more stable ownership of listed companies.
Foreign portfolio investors also face unnecessary complexity. A turnover-based taxation framework, similar to approaches used in some frontier markets, could simplify tax compliance. Instead of cumbersome calculations and settlement procedures, a clearly defined turnover tax could serve as final settlement, giving the government predictable revenue while reducing administrative friction for international investors. Bangladesh should also establish a clear exit framework for foreign portfolio investors.
Capital is more likely to enter a market when investors understand both how to invest and how they can eventually repatriate their funds. Ease of entry without certainty of exit is not enough.
Bangladesh also needs to rethink how market performance is measured. The main index is heavily influenced by a relatively small number of large-cap stocks. Movements in a few companies can therefore dominate perceptions of the entire market. This creates what might be called index-phobia: investors react to the headline index even when the performance of many companies tells a different story.
Bangladesh should introduce separate large-cap, mid-cap and small-cap indices so investors can see which parts of the market are actually rising or falling. Sectoral indices are equally important, allowing investors to track banking, pharmaceuticals, textiles, telecommunications, engineering and other major sectors independently. Better indices would improve price discovery, research and asset allocation, while making the market easier for institutional investors to analyse.
Bangladesh cannot build a mature capital market around equities alone. Government Treasury bonds are already traded through Bangladesh Bank’s electronic system and are technically available through the stock exchanges. Yet supply in the secondary exchange market remains negligible. Bangladesh Bank, BSEC and the stock exchanges should coordinate to ensure meaningful availability and trading of government securities through the exchanges.
A deeper Treasury-bond market would provide investors with lower-risk alternatives, improve turnover and help develop a broader yield curve for pricing other financial assets. It would also make the exchanges more than equity-trading platforms.
None of these measures is a substitute for deeper reform. Bangladesh still needs stronger corporate governance, better enforcement, high-quality listings, credible financial reporting, efficient settlement systems and predictable regulation.
A credible short-term programme could restore momentum through better regulatory coordination, more quality securities, deeper institutional participation, tax incentives for patient capital, improved market indices and stronger Treasury-bond trading. These measures aim to deliver immediate results by boosting investor morale, improving market liquidity, and reinforcing regulatory trust.
While long-term reforms remain essential, these immediate measures can lay the groundwork for restoring stability and unlocking momentum for broader capital market development.
The views expressed in this article are solely those of the author
The writer is the Managing Director and CEO of Alliance Capital Asset Management Limited. Email: [email protected]
