Weak bond market adds to banking sector strain

While I was auditing Indonesia during the Asian financial meltdown, a senior colleague asked me if I had seen any branches of Goldman Sachs or Bankers Trust. I was curious about how they generate funds for financing if they do not have branches. His answer was that they raise money through issuing bonds.

Many would agree that one of the biggest weaknesses of the Bangladesh economy and the banking sector is rising non-performing loans (NPLs). It crossed 35 percent of the total outstanding loans in September last year. Irregularities and corruption in loan approval and disbursement have aggravated the situation. This crisis largely stems from an overly bank-dependent financing system.

Against this backdrop, it is urgent to move away from bank-centric financing. Alternative sources of financing must be ensured. Globally, bond markets and capital markets are the most common and popular sources of long-term financing. Here, the bond market can be that alternative.

For example, in the United States, Japan, and countries in the European Union, government and corporate bond markets are key indicators of economic stability. Even developing countries such as India, Malaysia, and Indonesia have built strong local bond markets over the past two decades, which have become major sources of financing for infrastructure and industrialisation for them. If we had an effective bond market, both the government and corporate entities could raise funds. This would reduce pressure on banks and lower the risk of NPLs.

However, the bond market here is constrained by multiple factors. At the end of September 2025, Bangladesh’s bond market stood at around $30 billion, which is smaller than that of most of its neighbouring and peer countries.

Several factors explain why our bond market has not expanded. First, the bond issuance process is complex and costly. Approvals, credit ratings, trustees, and listings together take a significant amount of time and impose costs for issuers.

Second, there is a lack of investor confidence. Past allegations of irregularities in interest or principal repayments on some corporate bonds have sent negative signals to the market. The absence of strict punitive measures for violations has further deepened this mistrust.

Third, there is a shortage of long-term institutional investors. In developed bond markets, pension funds, insurance companies, and mutual funds are the main investors. In Bangladesh, these sectors remain quite weak. High interest rates on government savings certificates pose a major obstacle to bond market development. As higher returns are available from investment in other instruments, this naturally makes investors less inclined to invest in bonds.

Now, with rising default loans, Bangladesh must move away from its long-standing policy of placing banks at the centre of the financial system. A diversified financing framework is essential, and achieving this goal without a strong bond market is difficult.

For this, the issuance process should be simplified and made cost-effective. Strict enforcement of regulations must be ensured so that investors’ rights are protected. Reforms in the pension and insurance sectors are necessary to build long-term institutional investors. Fourth, interest rates on savings certificates should be made market-based.

Despite these challenges, the bond market holds significant potential. New concepts such as sukuk, green bonds, and social bonds have gained popularity. If Bangladesh can develop a green or climate bond market by aligning with global agendas on climate finance and sustainable development, it could attract both domestic and foreign investment.

So, one could hope that the next elected government, along with the central bank, will take the necessary steps to develop an effective bond market for sustainable and long-term financing. If successfully implemented, it would reduce pressure on the banking sector and open up new horizons for investment.

The author is a banker and economic analyst