BMBA for excluding MF, bond from bank’s exposure to stock market

The merchant bankers demanded that banks' investments in bonds and mutual funds be excluded from their exposure to the stock markets.

The Bangladesh Merchant Bankers Association of Bangladesh (BMBA) wrote to the Bangladesh Bank to consider its demand to help further the money supply to the market.

“To encourage long-term investment and ensure the sustainable development of the capital market, the demand needs to be taken into account,” said the letter signed by BMBA President Sayadur Rahman to Bangladesh Bank Governor Abdur Rouf Talukder on August 21.

The demand came weeks after the central bank allowed banks and nonbank financial institutions to calculate their stock market exposures at cost prices instead of market prices.

A bank or financial institution can calculate its stock market exposure at cost prices instead of the market prices of shares, corporate bonds, and mutual funds, according to the BB.

According to the BMBA’s letter, different banks have sponsored a few mutual funds and bonds in the past. These institutions are now showing a lack of interest in sponsoring mutual funds and bonds.

So, the inclusion of investment in mutual funds and bonds by banks and NBFIs in exposure calculation is hindering the development and growth of the capital market in Bangladesh,” it said.

The amended Bank Company Act 1991 allows a bank’s stock market exposure to up to 25 per cent of its capital, which includes paid-up capital, share premium, statutory reserve, and retained earnings.

The BMBA president said that mutual funds are professionally managed and investments in mutual funds are relatively safer as the price fluctuation of mutual funds is considerably less than stocks.

“Mutual funds are suitable for investors who have no or little investment knowledge and want to avoid market volatility. So, if we want to increase participation from investors who have limited investment knowledge, we need to promote mutual fund investment,” he said.

According to the letter, the flow of institutional funds and mutual fund participation has been very low in our country compared to other peer countries.

In India, for example, the overall size of the mutual fund industry increased more than fivefold between 2012 and 2022, and mutual fund investment accounts for nearly 9.4% of Indian household savings.

"If we can also increase the flow of institutional funds into our capital market and mutual fund participation, the market will act more rationally, market volatility will be reduced, and retail investors will benefit significantly," BMBA president said.

On the other hand, he said bonds provide a fixed income and these investment tools are suitable for investors who want stable cash flow.

Besides, companies can raise long-term funds to make capital investments by issuing bonds. So, if we can popularize bonds, both the investors and the issuers will be greatly benefited, said Rahman.

As per the Company Act, all sorts of investments by banks in shares, corporate bonds, debentures, mutual funds, and other capital market instruments are included in the capital market exposure of banks.