The persistent underdevelopment of Bangladesh’s capital market is frequently attributed to poor corporate governance and lax regulatory enforcement. While these issues are undeniably critical, treating them in isolation misdiagnoses the fundamental problem. Governance standards do not emerge in a vacuum; they are a reflection of the incentives embedded within the financial architecture. Without decisive structural reform, sustainable governance remains an elusive goal.
The primary bottleneck hindering the growth of bond and equity markets is a structural distortion: the financial ecosystem makes commercial bank credit artificially cheap and opaque. Many commercial banks operate with thin capital buffers, yet regulators permit them to fund multi-year industrial assets using short-term, low-cost deposits. This creates a perverse incentive for corporate borrowers to shun public markets, where transparency and disclosure requirements are stringent, in favor of bilateral bank loans.
In a balanced economy, fixed capital investments—such as factories and infrastructure—rely on long-term debt or equity backed by institutional investors. In Bangladesh, however, corporate borrowers bypass public markets due to deep-seated structural asymmetries. Issuing a corporate bond requires audited financial records, credit ratings, and rigorous public disclosure. Conversely, bank loans offer a path of least resistance, often lacking the transparency demanded by public markets. Consequently, long-term industrial risks remain concentrated within the banking sector, leading to recurring cycles of non-performing loans and acute liquidity crunches.
To break this cycle, the financial system must undergo a paradigm shift. The current reliance on banks for long-term industrial financing must be redirected toward a robust capital market. Regulators must address the 'banking arbitrage' that allows institutions to mismatch their assets and liabilities. Encouraging the development of a vibrant bond market is essential to offload long-term risks from the banking sector and provide a transparent platform for corporate financing.
Ultimately, the path forward requires more than just superficial policy tweaks; it demands a fundamental restructuring of how capital is allocated in the economy. By restricting banks to their core function of short-term liquidity management and incentivizing corporations to tap into public markets, Bangladesh can foster a more resilient and transparent financial environment. Without such structural realignment, the capital market will continue to struggle under the weight of an outdated and inefficient financial model.
