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BRM at the meeting with DSE

Speech by Hua Du
Country Director, Bangladesh Resident Mission

28 August 2006

President, Senior Vice President, Vice President, Directors, and Chief Executive Officer of the Dhaka Stock Exchange Ltd.

It is indeed my privilege to meet the distinguished members of the Dhaka Stock Exchange. I am very much impressed by DSE’s efforts to stimulate the capital market in Bangladesh.

Mr. President, the capital market in Bangladesh is still emerging. The country needs an efficient capital market to help mobilize domestic resources for the large investment needs in infrastructure and other fields.

I am keenly aware of developments in the capital market in recent years: the operation of the central depository system and the automated trading system; a substantial increase in the minimum capital requirement of banks and nonbank financial institutions; and a surge in overseas workers’ remittances. Despite the improvements, Bangladesh’s capital market remains underdeveloped. Market capitalization was only 5.2% of GDP at end June 2006.

Investor confidence remains low and has not been able to fully recover since the 1996 stock market crisis. Despite attempts at reform, the capital market continues to suffer from inadequate market supervision. There has been limited investment interest and the supply of capital market instruments remains inadequate. Overall transparency in market transactions is low compared with international standards and generally there has been slow development of the underlying market infrastructure.

While the demand for blue chips and bank shares is robust, few good companies list their shares on the exchanges. The shortage of high-quality equity on the exchanges results from delays in state-owned enterprise (SOE) privatization; high listing costs; predominance of closely-held and family-managed firms; and few initial public offerings by both domestic and foreign firms.

Traditionally, the World Bank has led in helping Bangladesh develop the banking system, while ADB has concentrated on promoting and reforming the capital market. We provided a Capital Market Development Program (CMDP) and associated TA grants in 1997 following the equity market collapse in 1996. We have also supported the central depository system. The CMDP helped strengthen market regulation and supervision, and helped develop the capital market infrastructure and support facilities. A clear lesson from CMDP is that the readiness of the Government, together with other stakeholders, to proceed with reforms is a prerequisite for the success and sustainability of a program in this sector.

ADB’s financial sector strategy for Bangladesh in the new country strategy and program for 2006-2010, results from lessons ADB learned in previous financial sector interventions, and from coordination with other development partners. According to the strategy, ADB will assist in developing the capital market when the Government demonstrates its strong commitment to meaningful reform with capacity-building measures to strengthen the SEC’s regulatory and supervisory capacity; and assist in improving the governance of market intermediaries. ADB will continue assisting Bangladesh to promote good governance and expand its focus to cover other financial subsectors without being limited to the capital market.

Early this year ADB approved the Improvement of Capital Market and Insurance Governance TA Loan to improve good governance practices in the capital market and the insurance sector. A key component of the TA loan is to strengthen the capacity of management and governance of the stock exchanges including DSE and CSE, by training stock exchange staff and strengthening the exchanges’ governance structure.

We look forward to working closely with DSE in implementing our assistance program for the capital market development. We will welcome your suggestions for spearheading reforms for the capital market development. Thank you.