Prolonged fall in prices and Trade
DSE and CSE Share markets didn’t recover from a record fall the previous days which had prompted angry investors to protest in the streets.
Hundreds of discontent investors went on the rush wildly outside the Dhaka Stock Exchange after the index shed 6.7 percent. The central bank had raised banks` cash requirement ratio from 5.5 percent to 6 percent, effective Dec. 15, to rein in inflation.
The measure was also intended to curb runaway credit flow; especially to the volatile capital market. Call money market rates also hit a record high. The rate at which banks lend to each other climbed as much as 180 percent, dropping to between 45 and 55 percent.
Some banks invested 75 percent of their deposit in the stock market against a ceiling of 10 percent and had been told to get back under the limit by Dec. 30. This has now been extended to Jan. 15. "The money market will be stable within a few days," central bank governor Atiur Rahman said.
"The central bank is injecting more money to the banking system than it absorbs via the cash reserves ratio (CRR)." 20.76 billion taka was drained from the system due to the increase in the CRR while the central bank provided 60.55 billion taka on Dec. 15.
Measures imposed by the stock exchange regulator such as providing share credit on a net asset value basis were removed, and the margin loan ratio was increased.
Role of Central Bank to remove from the crash
Did Bangladesh Bank play role when share market was crashed? Should the central bank play some role in bursting asset bubbles? This is a contentious issue that has been discussed for a long time. Some argue in favor of the view that central banks should burst bubbles.
But, in their view, monetary policy should respond to asset bubbles in a cautious and moderate manner in order to avoid economic distortions. Some others argue against the role of central bank in bursting bubbles.
However, the central bank is at the centre point in this debate. The recent crash in the stock market in Bangladesh is also associated with some policies of the central bank.
The aim of this article is to analyse the following two aspects: whether the monetary policy response was appropriate to the rise and the recent collapse of the bubble, and whether the behaviour of financial institutions was optimal to the policy response. Commercial banks have been involved heavily in the stock market business in the last few years.
Allowing merchant banking has exaggerated the situation. Undoubtedly, any policies to control banks` exposure to the stock market could have significant impact on the capital market.
Monetary easing during last two or more years money supply was more than 22 percent during the period could have helped stock market remain buoyant during these days.
Perhaps, Bangladesh Bank was not much aware about banks` exposure to the stock market. Because, surprisingly, banks profit from share business seemed to be negligible according to their income statement or balance sheet although there is a wide perception that banks are making handsome profits from investing in shares and debentures.
In the circumstances, almost all policies to minimise the exposure of banks were taken in the second-half of 2010, when the stock index had reached an alarming level.
For example, the situation worsened when it was made mandatory for all banks to maintain their investment in the stock market equivalent to 10 percent of their total deposit and to comply by December, 2010, when in reality, the ratio was much higher than this level. Increasing the cash reserve ratio was a double debacle for the banks.
Naturally, big players had to sell huge volumes of shares due to liquidity constraints, which caused share prices to decline. Withdrawal of banks` large investments from the stock market appears to be the main reason for the recent crash in the capital market in Bangladesh.
Now the question is, whether BB had any good reason to stop banks from substantially investing in the share market this time? There might have been a few reasons behind the decisions, such as (i) to contain inflation, (ii) to channel more credit to the real sector, and (iii) to protect the interest of the bank depositors by limiting them from risky investments.
If BB did so to control the supply of money due to rising inflation trends, I would rather say that the issue was not analysed properly. The money that was running behind stocks had some multiplier effect in accumulating more stocks. Thus, it appears not to contribute to inflation to that extent, as it was not channeled directly to food prices or other non-food prices -that are the main components of inflation.
Whether investing in the capital market crowds out private investment in the real sector is also not clear - perhaps this is also not a very strong reason.
The third one might be reasonable, but this does not require any hard measure like the one that has been undertaken. It is now important for Bangladesh to investigate the degree of involvement of commercial banks in the stock market before and during the crash as well as synchronisation of BB`s policies.
Investigation committee finds massive manipulation at Share Market
Investigation committee finds massive manipulation at Share Market crash. A high-powered committee investigating the debacle at Capital Market early last year has found heavy manipulation in the stock market and has blamed the market regulator for failing to oversee the situation. Constituted 10 weeks back, the three-member panel has made a series of recommendations for a major overhaul of the regulatory SEC, including the replacement of its current chairman.
"All the institutions that have anything to do with the stock market were responsible for the debacle," former central banker Khondkar Ibrahim Khaled, who led the committee, told newsmen after submitting the report to finance minister AMA Muhith.
He added that bad decisions and failure to oversee the situation by the SEC was largely responsible for the debacle. Briefing the newsmen later at his office, Muhith said the inquiry report would be made public in 10 to 12 days but initially no name of individuals would be published as the probe committee "did not get enough time to go into the details".
The minister, however, acknowledged that the committee named some people after getting "some indications" about their role in creating the crisis. "I don`t want to make individuals` names public without being sure of it.
If I am convinced about the sustainability of the allegations made in the report, I will publish it," he said. He said the committee pointed out 15 case studies showing how the market was "heavily manipulated" by some people who took illegal advantage using their relations with influential quarters in the government."But I don`t think there was any political role behind the market debacle," he said.
The former Bangladesh Bank deputy governor and currently the chairman of the state-owned Krishi Bank, Khaled said, they did not find the total figure but have identified that some money has gone to private pockets.
But he estimated around Tk 4,000 to 5,000 crore to be going to private pockets through direct listing. DSE was closed for several days in December 2010 and January 2011 for crashes that caused fund losses of millions of small investors as the benchmark Dhaka Stock Exchange general index fell nearly 1,800 points.
Government starts rescue fund
Government has taken more initiate the public sale of units in its long-touted multi-million dollar "Bangladesh Fund", a mutual fund backed largely by local banks aimed at encouraging institutions and millions of local investors back into the stock market.
The 50 billion taka open-ended mutual fund, to be managed by state-run ICB, has already pumped around 15 billion taka into the stock market. That cash was provided by four state-owned banks insurance companies Sadharan Bima Corp and Jiban Bima Corp, and Bangladesh Development Bank, besides ICB. Government officials hope the fund launch will rekindle the interest of more than 3.5 million market investors burnt by a dismal share performance this year. Inauspiciously, the DSE Index tumbled 2.58% after the launch.
It slipped about 0.03%. The benchmark is down 33% this year. The purpose of the fund appears to be at least three function:
“The first is to encourage institutional and small investors to start believing they can make money again in the stock market and the second is specifically to persuade them to put their trust in mutual funds and the third is to create a store of cash that can support the market”. "Institutional investment in the market is very low, at around 10% to 20% of total investment, and mutual funds comprise only 1%," We can see that "In neighboring India, mutual funds hold 40% of the total investment. In other countries, institutional investment is even higher."
That was the entry price for two earlier ICB-backed mutual funds, but "this fund will have less risk for investors than the ICB AMCL Unit Fund, which we launched in 2003, and the ICB AMCL Pension Holders` Unit Fund in 2004," Units of ICB AMCL Unit Fund are now worth 268 takes and of AMCL Pension Holders Unit Fund 241 taka.
To spread the net of potential investors, "non-resident Bangladeshis can buy shares of the fund from overseas branches of the fund`s sponsors", the ICB said. "We have also provided a 35% dividend to our shareholders and hence the Bangladesh Fund could very well taste success." There is no limit on the fund as it is open-ended.
Hence although we started with 50 billion taka, there is an option to increase its size in future." The Bangladeshi share market has had a torrid year after surging 62% in 2009 and 83% in 2010.
The benchmark General Index slumped 9.7% in January and a further 30.5% in February, according to Bloomberg. ICB announced on March 6 the creation of a 50 billion taka syndicated fund as part of measures to stabilize the share market.
The chances of the new fund "stabilizing" the market are considered remote by some critics. "The Bangladesh Fund will not stabilize the ailing capital market."
As of October 10, the market capitalization, including equity, mutual fund and debt securities, of the Dhaka and Chittagong stock markets was 2.68 trillion taka, with 494 companies listed and 254 of these trading in time.
Banks start investment money in the share market
The market stabilization fund was conceived by the Bangladesh Association of Banks in late October 2011 as a method to increase liquidity in the market and increase share prices, worth BDT 50 billion. Banks have reportedly kept buying shares despite suffering from liquidity crises themselves, and not selling any shares. However, share indices kept plummeting throughout the time period.
A platform of top bank executives has told the SEC, the banks are continuing to invest in the market. "Top executives of 30 banks have told the SEC that the market is now ripe for investment and assured them that the banks have good and utmost intention to invest,"
Association of Bankers, Bangladesh president told journalists after a meeting with the capital market regulators. "We are investing daily in the capital market despite suffering from liquidity crisis.
We have stopped selling shares and are only buying," the chief executive officer of City Bank, added. "Every bank is suffering from liquidity crisis. The banks have to operate by borrowing money from the call money market. So they cannot make big investments even if they want to." "So we have suggested that the SEC take steps to persuade the central bank to lower Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) and address this problem." If the SEC and the central bank assure us, we can move for that." The SEC had earlier sat with the ABB in the wake of plummeting market and the ABB promised to increase bank investments.
The Bangladesh Bank also took initiatives to increase bank investments in the market. The SEC urged institutional investors, including banks, brokers and dealers, to play a more active role in the market.
Some Suggestions for market improvement
Publishing investigation report was a decision of high court. So, the regulators and government will work according to the report and its recommendations were a great expectation of all stake-holders of the market. There was another investigation report in stock market crash of Bangladesh in 1996.
But it was blamed that steps were not taken according to the report. So, the answer of this question reveals usefulness of the report and effectiveness of it by the regulators and government.
According to the respondents developed rules and Regulations are following: Margin loan decision would be taken by broker houses and merchant banks not SEC. Sponsor director mandatory holds individually 2% and all together 30% shares Book building method in IPO has been developed. Bangladesh Bank imposed limitations on Bank & financial institutions about their exposure in the market should there be more development of market regulations, directives or surveillance by the regulators Respondents mentioned that there should be more development of rules and regulations.
Adoption of Software and surveillance team to monitor overall trading activities, Trustworthy IPO approval process, and Actual book building process should be introduced, offloading government shares, Margin loan decision should be taken by broker houses and merchant banks not SEC, Insider trading would be strictly prohibited, Suggesting tools that should regulators adopt to prevent this kind of crash in future.
Most of the respondents of both sample groups provided accurate and clear answer for the question.
Regulators should perform their job honestly and sincerely -SEC needs honest officials, Insider trading should be prohibited, Omnibus should be converted to BO account, Effective steps that government took to improve the market condition after the crash.
The effective steps taken by the government to improve the market condition are following: Opportunity to whiten the black money by investing in stock market-Appointing new chairman and members in SEC. Establishment of law division -Actions taken by the government sufficient to handle the situation or not with suggestion of Bangladesh government are sufficient to tackle the condition of the stock market after the crash.
In addition, some respondents also suggest implementing the actions taken by the government. Only two respondents did not agree with them and recommended following actions that should the government take to handle the situation: Government should announces incentives through SEC to attract companies to the capital market Government should take long term actions for the market.
Actions should be taken against those who were involved in this recent stock market crash, Improving security laws and penalty for breaking those, balancing of demand and supply of shares, Follow-up the market and protect against any kind of manipulation.
I conducted the study to provide knowledge to different stake holders of the market especially general investors to be aware of factors that might lead future stock market crash.
It also tries to suggest regulatory organizations to follow the recommendation made by respondents of self-administered questionnaire, investigation report of Khondkar Ibrahim Khaled and different market analysts as well.
Though many causes were identified, few factors emerged stronger in the recent stock market crash as those are pointed by majority of respondents. The causes includes over exposure of banks and financial institutions, poor monitoring of regulators, corrupted employees of regulatory organizations, margin loan, direct listing, insider trading, book building, lack of general investor´s knowledge, imbalance of share and intervention of Bangladesh Bank. Other reasons, mentioned in discussion section were also liable for the crash.
The regulators and government have developed role and functions since the crash. But they need to develop more and introduce new tools, strategies, directives, rules and regulations for market development and to prevent this kind of stock market crash in future.
Developing faulty accounting practices and methods, recruiting honest officials, providing education on the stock market to the general investors and taking strict actions against manipulators can improve the situation and prevent this kind of crash.
The writer is Senior Executive of the Premier Bank Limited, O R Nizam Road, Chittagong.
BDST: 2010 HRS, SEP 19, 2012
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