Capital Market

Bangladesh has had its share of stock market booms and busts. Following a bull run during most of 2010, the Dhaka Stock Exchange (DSE) crashed in early December 2010 and by March 2011 the index had fallen by half from its all-time high.

The market correction wiped out $27 billion in market capitalization and with it bankruptcies, savings, and jobs, triggering a wave of social discontent. The ensuing liquidity crunch led to heightened solvency risks. Indeed, given the interconnectedness between banks and equity markets, there was a grave concern that a perfect storm could result in a negative feedback loop from the financial sector to the real economy and potentially bringing the economy to a grinding halt.

The 2010 crisis was a case of deja vu and brought back memories of 1996 when kerb trading led to another large sell-off and brought the economy to the brink of a financial meltdown.

The encouraging news is that this time around the authorities did not let a crisis go to waste.

A high-level probe was established to examine the deficiencies that led to the crash. As part of the probe's findings, important lessons were identified, which have placed financial markets in a much stronger position. To begin with, policy-makers recognized that capital markets have played a limited role in supporting the development of the economy and that this had to change.

If Bangladesh is to increase its Gross domestic product (GDP) growth and attain its annual target of 10% growth by fiscal year (FY) 2021, the government was cognizant that it had to address structural deficiencies in the capital markets by deregulating the financial system to promote private sector investment and better support the real economy.

In addition, it recognized that given the changes taking place across financial markets, the regulatory bodies and other supporting institutions had to be given the necessary resources to ensure market development and stability. Finally, it recognized that given the...