Development of Financial Market in Bangladesh
DEVELOPMENT OF FINANCIAL MARKET IN BANGLADESH

1. INTRODUCTION

The financial system in South Asia is dominated by the banking system in terms of assets, or finance of private households and domestic companies; major financial institutions are banks. This is why financial instrument of the financial market of Bangladesh are bank dominated. But a developed and diversified financial system with a sound debt and equity market enhances risk pooling and risk sharing opportunities for investors and borrowers. This also provides a safety cushion for banks as it helps move a crisis outside the banking system making it easier for the government to stand back. Bond financing reduces macroeconomic vulnerability to shocks and systemic risk through diversification of credit and investment risks. A mature bond market helps develop the derivatives market thereby facilitating hedging mechanisms and enabling greater diversification of risks by participants. Also, the wide variety of instruments available in a developed debt market results in gains to savers and borrowers. Besides, the coexistence of a developed domestic bond market and banking system helps each to act as a backstop for the other. In Bangladesh, an efficient bond market can play a critical role in supplementing the banking system to meet the requirements of the corporate sector for long-term capital investment and asset creation. It can provide a stable source of finance when the equity market is volatile. The bond market in Bangladesh, however, is thin and at a nascent state. While the size of tradable government bonds is small, secondary trading of government bonds is rare and there has been rarely any public issue of corporate bonds in the country’s bond