‘Mess in banking sector responsible for share market slump’

Fakhrul Islam | Update:

AB Mirza Md Azizul IslamFormer advisor to the caretaker government, AB Mirza Md Azizul Islam had at one time been the chairman of the Bangladesh Securities and Exchange Commission (BSEC). In a recent interview with Prothom Alo, he spoke at length about the recent share market slump and the banking sector.
Prothom Alo: How is the share market faring?
Mirza Azizul: It is undoubtedly alarming. There are reasons for this. The chaos in the banking sector is responsible for the share market slump. The steadily increasing default loans have led to a liquidity crisis in the banks. The people are even doubtful about the financial basis of the banks. So the bank shares fell. The banking sector occupies a large chunk of share market. So naturally this has had a negative impact on the overall market index.
Prothom Alo: But how is the share market slump linked to loan default and the liquidity crisis?
Mirza Azizul: According to Bangladesh Bank, default loans till 1 September last year totalled Tk 1.16 trillion. This does not include separately managed accounts (SMA), written-off loans and loans held up due to court injunctions. If the international benchmark is followed, then the default loans will be double. According to the World Bank and the International Monetary Fund (IMF), default loans in the country total Tk 2.4 trillion.

In the meantime, the facility to pay a 2 per cent down payment and repay the remaining loan amount over a span of 10 years has raised ethical questions in the banking sector. For example, the good borrowers have taken loans at 12 to 13 per cent interest rates and have been repaying these within 2 to 3 years, but this facility encourages them to default on their loan repayment. And then there is the overall lack of good governance in the banking sector. So naturally all this has a negative impact on the share market.

Prothom Alo: Any other reasons for this predicament of the share market?
Mirza Azizul: Yes, and here too the banking sector comes to the forefront. Many of the investors take loans from the banks and invest this in the share market. But the loans have lessened due to the liquidity crisis in the banking sector. The growth of loans in July-November of the current fiscal was only 2.5 per cent.
Then the friction between Bangladesh Telecommunications Regulatory Commission (BTRC) and Grameenphone also has a detrimental impact on the market.

Prothom Alo: And what about the investors?
Mirza Azizul: They are responsible for this situation too. They have unwarranted apprehensions. They are easily swayed and influenced. Problems do arise, but this is nothing new. There are still many good companies in the market with strong PE ratio where investments can be made. But the investors panic instead of turning to these companies.

Prothom Alo: But do the investors have confidence in the market?
Mirza Azizul: The rapid slump in the market erodes their confidence.

Prothom Alo: Can’t Bangladesh Securities and Exchange Commission (BSEC) play a role in restoring investors’ confidence?
Mirza Azizul: The task of BSEC is to prevent insider trading and irregularities in transactions. BSEC cannot control share prices. But many organised share markets crash too. The investors’ behaviour must also change.

Prothom Alo: What sort of behavioural change should be investors undergo?
Mirza Azizul: The very strategy of the investors here is wrong. They do not seem to realise that they shouldn’t invest their entire savings or possible investments in the share market. They should invest 35 to 40 per cent of their total funds. Then there are investors who buy shares and want to sell these after just two days. But one should buy shares and hold on to them. Then one will eventually see returns on their investment or earn capital gains. In one of my studies it was revealed that if one holds on to the shares for an extended time, one will get more profit than from any other investment.

Prothom Alo: There was demutualisation of the stock exchange after the 2010 crash, rules and regulations were changed and strategic investors from China were also included. Won’t this have a positive impact on the share market?
Mirza Azizul: There may have been an impact on the legal structure, but no positive impact on the index. When strategic investors were taken in, it was thought that there would be an increase in foreign investment. That didn’t happen. On the contrary, this decreased. The fall in foreign investment is another reason for the present debacle.

Prothom Alo: Finance minister AHM Mustafa Kamal has held several meetings with various concerned quarters, but this hasn’t made any difference. Another meeting is scheduled for 20 January.
Mirza Azizul: First of all the banking sector must improve. Meetings won’t make a difference. Action must be taken. Former finance minister AMA Muhit about four to five years ago had identified 26 government organisations to be enlisted in the share market. I had told him then, simply identifying these organisations is not enough, you must keep up the pressure or they will not come forward. And they did not come forward. No new multinational company has entered the market either. Only smaller companies have entered. Government organisations do not enter the market as they want to stay as far away as possible from any form of accountability.

Prothom Alo: In developed countries, investors turn to the share market rather than the banking sector for larger and longer term funding. When will this happen here?
Mirza Azizul: It will happen here. It must happen here. A time will soon come when the banks will only provide running capital. From the investors’ side, taking money from the share market is safe from risk. If money is borrowed from a bank to form a company, whether the company makes a profit or a loss, the bank has to be repaid. The government can consider compulsory enlistment in order to take pressure off the banks and to activate the share market.

Prothom Alo: Do you believe the government will do this?
Mirza Azizul: I want to believe it. The government should meet all concerned quarters and think about this constructively. Even if we don’t take global examples into cognizance, in the South Asian context too Bangladesh is still weak. I am hopeful. I believe that in the next few years we will be able to see a bright ray of hope.

* This interview appeared in the print edition of Prothom Alo and has been rewritten in English by Ayesha Kabir

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