Towards financial inclusion By Sajjadur Rahman

PHOTO: STAR ARCHIVE

On August 15, India's Independence Day, Prime Minister Narendra Modi announced a national mission of financial inclusion. Called the Prime Minister's People's Wealth Programme, it envisions bank accounts for all Indians. In its first phase, ending August 14, 2015, the target is 7.5 crore accounts. As Modi said, “There are millions of families who have mobile phones, but no bank accounts. We have to change this. The change will commence from this point.”
Bangladesh may not beat India on many economic and social indicators. But it can be asserted that Bangladesh has realised the importance of using mobile phones for banking for financial inclusion several years before India. There are 2.5 crore mobile bank account holders (almost one-sixth of the total population) and the number is increasing every day. On an average Tk 350 crore is being transacted every day through mobile banking. Another 1 crore Tk 10 farmers' accounts exist in state banks. Nearly 8 lakh students have bank accounts now. In addition, there are around 5.5 crore formal bank accounts in the country.
Altogether, the total number of bank accounts now stand at around 9 crore or over 56 percent of the total 16 crore population. If only the adult population is taken into account, nearly 90 percent people have bank accounts, which is a remarkable achievement for Bangladesh compared to the least developed and developing countries.
On the contrary, World Bank (2008) shows that in most developing countries, less than half the population has an account with a financial institution, and in many countries the number is less than one in five households.
“We are now the second biggest mobile banking country in the world after Kenya. We will become number one in a few months,” Dr Atiur Rahman, governor of Bangladesh Bank, told The Daily Star.
Rahman is believed to be the champion of the successful campaign for financial inclusion. He has motivated central and commercial bankers to bring the unbanked population into financial services. He made the mobile banking services 'well-regulated', both by the central bank and scheduled banks.
He dreams further towards sustainability. “Financial inclusion will lead us to financial sustainability. We have also launched green banking, keeping in mind the sustainability issue,” said the governor.

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Financial inclusion and financial literacy have long been the words used by policymakers, bankers and researchers across the globe. There are many opinions about what financial inclusion means.
The G20 association of major world economic powers added its imprimatur to financial inclusion by recognising it as one of the four pillars in the financial sector reform structure of its Global Development Agenda and given it equal standing along with financial integrity, financial consumer protection, and financial stability. In doing so, the G20 defined financial inclusion as:
"...a state in which all working age adults have effective access to credit, savings, payments, and insurance from formal service providers..." The 'newly banked', as the


beneficiaries of financial inclusion are often called, have not necessarily been deprived of all financial services. They may have significant and often negative experiences with informal moneylenders, unofficial exchange houses, and ancient transfer systems such as hundi and hawala.
It was not very long ago that Bangladesh was dubbed as an under-banked country. Financial inclusion was a far cry at that time. Discussions were limited to the challenges, such as lack of knowledge and awareness in financial inclusion in Bangladesh. A research conducted by the Bangladesh Institute of Bank Management shows that financial inclusion of the total population was 39.76 percent in 2004 which rose to 56.42 percent in 2010 due to the opening of 90 lakh Tk 10 farmers' accounts in state banks.
There are around 9,000 bank branches along with about 18,000 branches of NGO-MFIs, 1,200 thousands post offices and 183,000 co-operative outlets totalling about 2.1 lakh branches/outlets for the 56.6 million economically active population - generating at least one financial service point per 270 people.
The game started to change further in 2011 when Bangladesh Bank, the country's central bank, issued Mobile Financial Services (MFS) Guidelines defining a model where MFS must be bank-led, but partnerships with regulated micro-finance institutions were made to reach customers.
Two MFS providers have emerged as early leaders: bKash of BRAC Bank and Dutch Bangla-Bank mobile banking. Launched in 2011, bKash, initially a joint venture of BRAC Bank and the US based company Money in Motion, has emerged as the market leader with more than 15 million customers. Following IFC's investment, Bill & Melinda Gates Foundation, one of the largest private foundations in the world, also made an equity investment in 2014. The service provider has around 105,000 agent points nationwide to facilitate cash-in and cash-out services at every corner of Bangladesh. Besides money transfer, a bKash account holder can also use his or her mobile wallet for availing other services such as mobile phone top up, salary disbursement and payment for shopping.
Bangladesh Bank has made a big effort in increasing availability of the highest quality banking services to the farmers. As per regulations, any farmer showing his/her National Identity Card/Birth Registration Certificate and Agriculture Inputs Assistance Card issued by the Agriculture Extension Department can open a bank account by keeping only 10 taka as initial deposit. The banks do not require the filling of the Know Your Customer (KYC) form for this purpose. No condition of maintaining a minimum balance will be applicable in this regard and these accounts will remain free of any additional charge or fees.
BB has also allocated a Tk 200 crore refinance scheme for these farmers so that these bank accounts will remain active. The marginal and landless farmers, small shop owners, hawkers and people affected by river erosion having the Tk 10 accounts will get loans under the refinance scheme with a 9.5 percent interest rate.
Dr Mustafa K Mujeri, director general of Bangladesh Institute of Development Studies (BIDS), hailed the country's progress in financial inclusion, saying, “We have progressed a lot in access to finance in the last several years. The number of bank branches (nearly 9000), accounts and products have increased significantly over the years.”
But he warns of being complacent with the growth in numbers only. He said people have multiple bank and microcredit accounts.
“10  crore accounts do not mean that 10 crore people have accounts,” said the top researcher of the state-sponsored BIDS. “Still, many people are ignored by the current financial system for being too poor.”
He also lauded the government and the BB for their efforts to distribute subsidies through bank accounts, otherwise the accounts (one crore Tk 10 farmers' accounts) will remain dormant. “Time has come for the BB to assess how far these accounts are being utilised,” said Mujeri.

The writer is the chief business correspondent,
The Daily Star. He can be reached at suja74@gmail.com

Published: 12:00 am Tuesday, March 10, 2015

Capital market: Towards stability and transparency By Dr. M. Khairul Hossain

Illustration: Internet

Capital market plays an important role in the economic development of a country. Research studies conducted worldwide indicate that there is a high degree of positive correlation between the size of the capital market measured in terms of market capitalisation and the level of economic development. In case of Bangladesh, the capital market's movement is not only important for economic development but it is also important in the context of maintaining social harmony and ensuring a healthy political atmosphere.
Since joining in May 2011, the present Bangladesh Securities and Exchange Commission (BSEC) has been laying emphasis on restoring investors' confidence, bringing stability in the capital market and promoting its development. A 5-dimensional approach was followed in this regard. The approaches are:
* Conducting awareness raising programs
* Enacting and amending rules and regulations
* Ensuring better governance
* Adopting appropriate technology, and
* Arranging regular coordination meeting with the ministry, Bangladesh Bank, stock exchanges and relevant stakeholders.

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Illustration: Internet

During the last few years, a number of reform programs were undertaken by the BSEC with a view to bringing stability in the market and making Bangladesh's capital market the main source of long term financing of industrial and infrastructural projects. In this regard, based on short- mid- and long-term goals, BSEC has prepared a 10-year master plan for capital market development. It is expected that the fundamental problems of the market would be removed and its stability and depth would be increased in the long run with the progress of implementation of the master plan.
A number of awareness programs for investors, journalists and different types of stakeholders were organised by the Bangladesh Securities and Exchange Commission, stock exchanges and Bangladesh Institute of Capital Market (BICM). Besides, different merchant banks, brokerage houses and listed companies also arranged some training programs on the fundamentals of capital markets, where BSEC officials participated as resource persons. BSEC also disseminated important information through its website for helping investors in making informed investment decisions. All activities pertaining to amendment and enactment of various rules and regulations were also disseminated to investors. In all cases, investors' interest was given priority. This partly helped restore their confidence.
The commission, with the support received from the government, has already amended the Securities and Exchange Ordinance, 1969 and Bangladesh Securities and Exchange Commission Act, 1993. The main objective behind this amendment was to empower the BSEC in terms of enhancing organisational capacity and operational efficiency, providing financial independence and ensuring accountability of all working in the commission.
Stock exchanges were demutualised in accordance with the Demutualisation Act, 2013, passed by the parliament. Bangladesh Securities and Exchange Commission also passed the Scheme of Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited. Both the exchanges became demutualised on November 21, 2013. As a result, changes took place in the governance structure of the stock exchanges and management and ownership of both the stock exchanges became legally separated from trading rights. Majority of board members inclusive of the chairman of the board belong to the independent directors category. Demutualisation has also uplifted stock exchange's operation to the world standard and increased transparency, accountability, and confidence in it. Demutualisation also helped in improving speed and flexibility in decision making and adopting new benchmarking technology. It may be mentioned here that, with firm determination of the government and BSEC, and with active cooperation of the members of the stock exchanges, the demutualisation in Bangladesh stock exchanges could be completed faster than elsewhere in the world. The demutualisation process, based on privileges and obligations of the shareholders as well as transparency and accountability to be maintained in operational activities of the DSE and CSE, can emerge as a role model for other exchanges of the world.
BSEC in line with the present government's goal of digitalisation has installed a state of the art surveillance system with online integration.  DSE has also installed the same surveillance system. CSE has already established modern trading system with internet based trading option and is also connected with BSEC's surveillance system. As a result, different types of manipulation are being detected when they occur and proper enforcement and regulatory actions are being taken based on the gravity of the offence. Central Depository Bangladesh Ltd (CDBL) with its IT facilities maintains records on BO accounts, shareholding position of different companies and preserve all types of records on daily transaction.  With the launching of DSE's Next Generation Automated Trading System the capital market will move faster, more efficiently and more transparently. Efforts are also being made by BSEC for full automation of activities related to monitoring, supervision and operations of required activities in the capital market.
Bangladesh Securities and Exchange Commission complied with all conditions required by the International Organisation of Securities Commissions (IOSCO) to become its full signatory to Multilateral Memorandum of Understanding (MMoU), i.e, 'A' category member and became listed in Appendix-A, and  signed the MoU on December 22, 2013. As a result, the status of BSEC has been upgraded worldwide and achieved the capability for contributing in IOSCO working committees. Through this achievement, the image of the country has been elevated in the international arena. It may be mentioned that, after inclusion of BSEC in the A category of IOSCO, foreign investors have started considering the Bangladesh capital market as a disciplined one and their confidence in the market has increased significantly; this is evident from the contribution of foreign investment to the daily turnover of DSE.
With a view to ensuring good governance in the listed companies, Corporate Governance Guideline (CGG) has been amended making it compulsory to "comply" for all listed companies. As a result, the number of independent directors has been raised to 20% of the total board size for all listed companies. The chairman of the Audit Committee must be an independent director. CGG has raised the responsibility and accountability of the directors and management, which has also helped enhance the confidence of all stakeholders as well as investors in financial disclosure of the listed entities.
One of the major problems for investors and all stakeholders was misrepresentation of the DGEN Index on share price movement. On one hand, the construction methodology of the Index was wrong, on the other hand, the data based on which indices were calculated were not at par international standard. In one day, after listing Grameenphone on DSE, DGEN jumped by 764 points. This was the outcome of inappropriate methodology and construction of DGEN Index. BSEC instructed DSE to eliminate these inconsistencies with the affiliation of an international reputed firm, Standard & Poor's. Accordingly, DSE developed new indices of international standard which reflect the real movement of share prices.
For speedy disposal of capital market related cases, the government has established a special tribunal on January 7, 2014 and appointed a District and Session Judge as the Judge of the Tribunal on February 24, 2014. This also increased investors' confidence and helped restore discipline in the capital market.
As per commitment of the honourable Prime Minister to the small investors, government has declared an incentive package for protecting the interest of the small investors, which has been implemented very successfully.
To avoid manipulation, the commission has converted the face value of all the listed shares and mutual funds to Tk10 on the same date. This has helped to control the unusual price hike of different securities by declaring the stock split on different dates.
Coordination meetings of BSEC with Bangladesh Bank and other stakeholders are being organised on a regular basis for smooth operation of the capital market.Currently BSEC is making a feasibility study for establishing an automated data storage and retrieval system in its office along with the facilities of risk based supervision. The commission is also working on having a central Clearing & Settlement Company, launching financial derivatives product and a commodity market.
All efforts of the commission have been directed towards enhancing the efficiency and transparency in the operations of the stock exchanges, protecting the interest of investors and bringing the Bangladesh capital market to the mainstream of development of the country.
Considering a number of parameters like contribution of market capitalisation to the GDP, fund supply from capital market for industrialisation and infrastructural development and extent of foreign investment in Bangladesh capital market and finally, comparing these indicators with those of neighbouring countries and other developed markets, there remains a huge opportunity for Bangladesh economy to develop faster, if the full potential of the capital market is utilised.

The writer is Chairman, Bangladesh Securities and Exchange Commission.

Published: 12:00 am Tuesday, March 10, 2015

Last modified: 11:53 pm Monday, March 09, 2015

Stocktaking of stock market By Faruq Ahmad Siddiqi

Dhaka stock market started functioning in 1956. Sixty years have passed since then. But the Bangladesh stock market remained immature and failed to be an important force in shaping the economy of the country. The predominant source of funding for the private sector investments has always been the banking sector and contribution of the stock market has been marginal.Investments in recent years have been sluggish. Private sector credit growth has remained stagnant for some time. Many banks have started investing their surplus funds in government securities following lower demand for private sector credit. Due to the slow growth of private sector investment, access to long-term bank credit has been easy. This is one of the reasons why entrepreneurs prefer bank credit instead of raising funds from the capital market, notwithstanding the higher cost of funds from banks. Stock markets mobilise household savings and idle funds and can influence economic activity though the creation of liquidity. However this becomes complicated when the banking sector has enough liquidity to offer long-term financing. Therefore we cannot perhaps expect rapid development of the stock market unless private sector investments pick up to a level where banks cannot afford long-term loan with short-term borrowing.

In spite of these limitations, stock markets have the potential to grow increasingly with time. Stock market funding has certain advantages. It offers lower cost of fund without the obligation of repayment. It also helps reduce financial expenses of the corporate sector, making it more competitive. It dilutes ownership concentration and contributes to improved corporate governance practice.We need to grow an effective stock market to mobilise savings, provide relatively low cost funding, improve transparency of companies, and advance corporate governance in the interest of long-term development of commerce and industry.
Stock markets function in a regulatory regime and it is important that the regulators are professional, efficient and transparent. Bangladesh Securities and Exchange Commission (BSEC) is the apex regulator for the stock market. It was formed in 1993. More than twenty years after its formation, BSEC is yet to develop as an efficient watchdog competent to discharge its most important responsibility of protecting the interest of investors. The debacle of 2011 was basically a massive regulatory failure. BSEC lacks quality professional manpower, competent accountants, financial analysts and legal experts. Instead of developing as a highly professional organisation, it has grown into more of a bureaucratic body.
There is also a persistent lack of co-ordination between the Ministry of Finance, Bangladesh Bank, Securities and Exchange Commission, Insurance Development and Regulatory Authority,National Board of Revenue and other related organisations. This isolation of BSEC was, perhaps, a crucial factor for the regulatory failure in 2011. Close understanding and coordination between Bangladesh Bank and the Securities and Exchange Commission is particularly important because the money market often has an impact on the capital market. Besides, Bangladesh Bank regulates banks and financial institutions. At present there are 30 banks and 23 financial institutions listed on the stock exchanges. These organisations represent a very large part of market capitalisation. These organisations, together with insurance companies, have substantial investment in the stock market. Therefore BSEC needs a close liaison with their regulators for stability of the market.
Some constructive reforms were undertaken after the market collapse of 2011. Most important of these reforms was the demutualisation of the exchanges. Demutualisation is likely to bring a long-term qualitative change in the management of the exchanges. But implementation of the demutualisation process seems to be slow. Separation of the traders (brokerage house owners) from the owners (shareholders) is the basic requirement of demutualisation. That has not happened yet. Traders still remain as the only owners. 60 percent of blocked shares are required to be transferred to strategic partners, institutional and general investors. There is no visible progress of the process and shareholders (former members) still remain owners of the blocked shares. The only positive progress in the demutualisation process has been the formation of the new boards of directors in the exchanges. But demutualisation cannot have a meaningful impact without transfer of the blocked shares. Collaboration with strategic investors by transfer of shares to them is important for the purpose of importing international skills and capabilities to the domestic market. Transfer of shares to strategic investors can accelerate development of technology related infrastructure and promote global integration of the market. Similarly, transfer of the remaining portion of blocked shares to domestic institutional and general investors can dilute the concentration of ownership and reduce the influence of the vested groups leading to improved management of the exchanges.
The stock market should now be poised for development. There are several encouraging factors. Nearly four years after the market collapse, the stock market has regained stability to an extent. Investors may consider this to be a favorable time for long-term investment because, at the current level of price, this is an investable market. Banks have enough liquidity as well as low demand for private sector credit. Therefore, fund transfer from the money market to the capital market is probable. Bank interest on deposits is low and prudent investment in the stock market is likely to be more rewarding than fixed deposits in the banking sector, notwithstanding the risk factor.
But in spite of these positive aspects, participation in the secondary market does not appear to be as encouraging. This is evident from the low turnover in both the exchanges. This is possibly an indication that market confidence is yet to be restored to a reasonable level. Our market is dominated by traders who expect short-term profit. But the current market is not tha tpositivefor short-term investments. A considerable segment of these investors have been victims of market manipulations that seem to have been taking place in recent times. Some companies have been listed in recent years whose credibility is not beyond question.  The price of shares of some of these companies rose to an abnormally high level after trading began and soon dropped rapidly to a much lower level.  In the process, inexperienced investors lost their money. It appears from the pattern of price movement of these companies that manipulators were very likely at work. This dampened the interest of some investors.

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There could be other reasons for dull trading in the market. The exposure limit of banks to the capital market has been decreased by amending the concerned law. This has probably been done in the interest of protecting the depositors. In the long run, such measures are likely to protect the safety of bank deposits and persuade the banks to focuson their core business. This is also likely to reduce volatility in the stock market and help improve its stability. However, in the short-term, this may have an adverse impact on the activities of the stock market. The other important factor is the cash flow problem of the merchant banks and brokerage houses that offered generous margin loans to their clients in 2010. Due to the abrupt plunge of the price level, balance of many of these accounts has turned negative and a huge amount of fund has been trapped. This is affecting the operational capacity of these institutions. The government's rescue package in this regard has been delayed and poorly structured and, consequently, of little help to overcome the situation.
Ideally mutual funds ought to be the most important institutional investors in the market. Inexperienced investors should invest through mutual funds for professional management of their funds. There are 40 mutual funds operating in the market but their contribution to market performance is extremely limited. Many of these funds were established in 2010 when the price level was very high and these funds probably wanted to take advantage of the rapidly rising stock price. But in the process they were trapped by the market crash and have not recover from this yet. This is apparent from the fact that the market price of 27 of these funds is below the issue price. Many of these funds lack professional expertise and failed to generate confidence among the investors. As a result, mutual funds can hardly stimulate activities in the market.
Bangladesh's stock market lacks depth. Equity is the only product traded in the market. Number of listed companies is inadequate and companies with excellent track record are fewer still. We need more listed companies with good fundamentals. But the listing of new companies is slow and good companies are not coming forward for various reasons. The progress of listing public sector enterprises has been extremely slow due to the lack of firm political commitment to withstand bureaucratic resistance. Derivative products and the bond market have not developed at all. There is practically only one corporate bond traded in the market. The Bangladesh bond market is dominated by treasury debt securities, which are not traded in the exchanges. Thus, the equity market is limited as there are particularly no other products in the market. Supply side constraint can lead to market instability when there is excess liquidity in the market and demand goes up. In 2010, money flowed to the stock market from banking and other sources while hundreds of branches of brokerage houses were allowed to be opened throughout the country, pushing the demand up and ultimately leading to the market collapse.  This supply side constraint is a persistent limitation of our exchanges.
Sometimes, it is said that the price movement of many shares is not rational in the Bangladesh market and investment decisions on the basis of financial analysis may not bring the best results. This may be so in the short-term because the market is dominated by retail investors, most of whom lack experience and are driven by rumors. Therefore, investors' education is very important and more attention is required to educate the investors. However, there may be other cogent reasons that make considered investment decisions difficult. Credible financial reporting is vital for appropriate investment decisions. Auditors are required to examine data, statements, accounts, records, performance and operation of the company, and record their independent opinion. Auditors, in turn, should be provided with reliable information by the management. In Bangladesh, management reporting may not always be the true reflection of the affairs of the company due to the intervention of the board, while in many cases the quality of audit may be far from satisfactory. Under such conditions, investment decisions on the basis of disclosures alone may be hazardous in some cases. This vital problem is known to everybody but the government has seemed to be indecisive for many years, presumably due to the influence of various pressure groups. Appropriate corporate governance practice is also essential for generating credible financial disclosure. In this area, we've just begun and it may take years to establish such practice.
It is unfortunate that since the establishment of the Securities and Exchange Commission in 1993, the stock market has crashed twice. On both occasions, thousands of small and inexperienced investors lost everything they had. Stock market crash is not something unique and it happened in many other countries. But market collapses in other countries were normally linked to some internal or external economic shock or global recession. In case of Bangladesh, it has not been so. Bangladesh stock market is isolated and is not globally integrated. Foreign investment is insignificant. Both the crashes were neither due to external economic factors nor internal economic malfunctions. These crashes were the results of poor governance, unbridled manipulations, undue influences and unlimited greed. Let us hope that this does not happen again.

The writer is the former Chairman of the Securities Exchange Commission.

Published: 12:00 am Tuesday, March 10, 2015

Last modified: 11:57 pm Monday, March 09, 2015