The Bangladesh Securities and Exchange Commission’s (BSEC) proposed margin rules, now open for public comment, contain many sensible reforms. Much of the draft moves in the right direction by placing greater responsibility on brokers to assess clients and manage risk rather than relying solely on prescriptive regulation.
Yet three provisions raise a more fundamental question. They do not simply regulate margin lending. They appear to shape where margin capital can flow and how investors may deploy it.
Every financial regulation should answer one simple question: what problem is this rule trying to solve? If that question cannot be answered, regulation risks moving beyond risk management into capital allocation.
Banks: a 3 times ceiling on an NAV few fully trust
Under the draft, shares of banks and non-bank financial institutions qualify for margin lending if their market price is within 3 times of net asset value (NAV).
At first glance, the rule appears conservative. In practice, it is difficult to see what risk it addresses.
Banks were supposed to maintain around Tk4.6 lakh crore in provisions against bad loans. They currently hold about Tk2.6 lakh crore, leaving a provisioning shortfall of nearly Tk2 lakh crore. That gap remains reflected in reported equity, making NAV appear stronger than the underlying economic reality.
If the benchmark itself is overstated, using a multiple of that benchmark becomes a questionable measure of risk.
There is another puzzle. The banking sector already trades at a price-to-earnings ratio of roughly 6 to 7, compared with around 12 to 13 for the broader market. Most listed banks also trade below book value, meaning virtually all would qualify under a three-times NAV threshold anyway. If that is the case, why create a separate rule for banks at all—and why build it around what is arguably the sector’s least reliable accounting measure?
Insurance: ceiling at NAV that naturally understates value
Insurance companies face the opposite treatment.
Under the proposal, an insurance stock qualifies for margin lending only if its market price remains within its NAV.
The difficulty is that, particularly for life insurers, NAV does not fully reflect economic value. Surpluses accumulated in life funds do not flow directly into book value. Consequently, many insurers trade above NAV not simply because of speculation but because of the way insurance accounting works.
The market reflects that reality. Most listed insurers trade at around 1.5 to 3 times NAV.
The practical effect is that much of the sector would fall outside margin eligibility.
Speculation and manipulation in parts of the insurance sector are genuine concerns. But this rule does not distinguish between speculative counters and fundamentally sound companies. It considers neither earnings nor dividend records nor company quality. A well-run insurer and a casino counter are treated the same.
Placed side by side, the contrast becomes difficult to ignore. Banks receive a three-times ceiling based on an NAV that may overstate underlying value, while insurers receive a one-times ceiling based on a NAV that structurally understates economic value.
That is not a consistent way to measure risk. It has the practical effect of determining which sectors margin money may enter and which sectors it may not.
Your margin portfolio, designed by regulation
The draft also limits investment in any single stock to 20 per cent of a client’s margin loan.
The implication is straightforward. Anyone wishing to use the full approved margin facility must purchase at least five stocks, whether they want to or not.
Yet margin lending already contains multiple layers of protection. The investor’s own equity absorbs the first loss. If equity falls below 70 per cent, a margin call is triggered. Below 50 per cent, brokers may liquidate the position without prior notice.
If those safeguards already exist, what additional problem does the 20 per cent concentration limit solve?
Consider an investor who has spent months analysing a single company. They understand the business, have reviewed its financial statements, assessed management and concluded that it offers the best investment opportunity available. They are fully convinced and wish to deploy their entire margin facility into that one stock.
Under the proposed rule, they cannot.
To use the full margin loan, they must buy at least five stocks regardless of how strong one company is or how much due diligence they have performed. Diversification may be sound investment practice, but the question is whether it should be mandated by regulation.
A contradiction at the heart of the draft
Perhaps the biggest inconsistency lies in the philosophy of the proposal itself.
The draft’s central message is deregulation. Brokers are expected to assess their own clients, evaluate risk and exercise professional judgement.
Yet the same draft determines which sectors remain broadly eligible for leverage and dictates how concentrated an investor’s margin portfolio may be.
Either brokers are trusted to assess risk, or regulation continues to make those decisions for them.
Margin rules should have one objective: ensuring that lenders remain protected and loans remain adequately secured. They should not determine which sectors receive easier access to leverage or prescribe how investors construct their margin portfolios.
BSEC deserves credit for opening the draft to public consultation. That process is valuable because it allows fundamental questions to be asked before rules become permanent.
The most important question is not whether the right number is 3 times, 1 times of NAV or the cap of 20 per cent.
It is whether a margin framework should simply manage lending risk—or whether, intentionally or otherwise, it starts picking sectors and designing investors’ portfolios.
That distinction goes to the heart of sound regulatory design.
The Author is an Associate Professor of Finance at the University of Dhaka. Views expressed in the article are solely those of the author.
