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From Bank-Led Loans to Capital-Market Funding: Bangladesh's Financial Landscape in Transition

  //business-finance.news-articles.net/content/202 .. gladesh-s-financial-landscape-in-transition.html
  Published in Business and Finance on Tuesday, December 2nd 2025 at 15:06 GMT by The Daily Star

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From Bank‑Led Loans to Capital‑Market Funding: Bangladesh’s Financial Landscape in Transition

In the last decade, Bangladesh’s financial system has begun a profound transformation. What once was a predominantly bank‑centric model—where almost all corporate, SME and even government borrowing was channeled through the country’s commercial banks—is now gradually giving way to a more diversified funding structure that places the capital market at its core. The Daily Star’s round‑table piece “Transitioning Bank Finance to Capital‑Market Finance” (published March 2024) tracks this shift, exploring why it matters, how it is unfolding, and what obstacles still lie ahead.

1. The Drivers Behind the Shift

1.1 A Stagnant Banking Sector

Bangladesh Bank’s annual reports show that the banking sector has long struggled with a high degree of concentration. A handful of large banks account for a disproportionate share of total deposits and loans. This concentration, coupled with the sector’s legacy of high non‑performing loans (NPLs) and a historically low risk‑adjusted profitability, has sparked concerns among regulators and investors alike.

1.2 Growing Demand for Long‑Term Capital

On the other side of the equation, Bangladeshi corporates have been seeking longer‑term, lower‑cost financing to fund infrastructure projects, industrial upgrades and technology acquisitions. The typical term of a commercial bank loan—often 3–5 years—does not match the multi‑year horizon required for many projects. Capital market instruments such as bonds, sukuk and long‑dated equity offerings can better meet this demand.

1.3 Regulatory and Policy Reforms

After the 2008 global financial crisis, the Bangladeshi government and Bangladesh Bank implemented a series of prudential reforms: tightening the capital adequacy ratio, imposing stricter asset‑quality monitoring, and revamping the supervisory framework. These changes left banks with tighter capital buffers and, consequently, a reduced appetite for aggressive loan‑making. Capital markets, by contrast, were encouraged through the introduction of a unified stock‑exchange system (merging the Dhaka and Chittagong exchanges), incentives for issuers, and the creation of a bond‑market infrastructure.

2. Key Developments in the Capital Market

2.1 Bond Market Expansion

Bangladesh’s sovereign debt issuance has grown steadily, with the government borrowing approximately 2 % of GDP in 2022 alone. More importantly, the corporate bond market has seen a notable uptick. In 2023, the total value of newly issued corporate bonds reached BDT 250 billion—up 60 % from the previous year. These issuances were led by utilities, telecom operators and manufacturing firms that now view bonds as a more attractive alternative to bank loans.

2.2 Demutualization and Listing Reform

The Dhaka Stock Exchange’s 2022 demutualization act restructured the exchange into a corporate entity, enhancing governance and operational efficiency. Alongside this, the new listing rules lowered the threshold for listing, encouraging mid‑cap and SME companies to bring their businesses onto the public markets.

2.3 Rise of Alternative Investment Funds

To fill the financing gap for SMEs, the Capital Markets Division introduced a framework for alternative investment funds (AIFs). These funds are now allowed to invest in non‑bank entities, offering another channel for capital market funding.

2.4 Digital Platforms and FinTech

Digital brokerage platforms and mobile trading apps have lowered the barrier to entry for retail investors. FinTech startups, backed by the Asian Development Bank and the International Finance Corporation, are also offering bond‑crowdfunding services that reach previously untapped markets.

3. Perspectives From Key Stakeholders

• Ms. Jahanara Begum, Senior Economist, Bangladesh Bank: “The move towards capital‑market finance is inevitable. It aligns with our objective of diversifying the funding base and strengthening the resilience of our financial system.”
• Mr. Tanvir Hossain, CEO, Dhaka Stock Exchange: “Listing on a transparent, regulated platform not only provides access to capital but also enforces better corporate governance.”
• Dr. Rafiq Ahmed, Head of Corporate Finance, IFC Bangladesh: “Our analysis shows that capital‑market‑issued debt often carries lower borrowing costs than bank loans, especially for high‑credit‑rated issuers.”

4. Challenges That Must Be Overcome

4.1 Investor Base and Confidence

While the bond market is expanding, the investor base remains narrow. Most retail investors lack the requisite financial literacy to understand bond terms and risk profiles. Moreover, the relatively low liquidity of many issuances can deter institutional participation.

4.2 Regulatory Constraints

The current legal framework around securities still contains gaps, especially regarding the enforcement of corporate disclosures and the protection of minority shareholders. The Securities and Exchange Commission’s (SEC) regulatory lag can stifle market confidence.

4.3 Risk Management and Credit Quality

Many emerging issuers still operate in high‑risk sectors—such as agriculture and small‑scale manufacturing. Without robust credit assessment frameworks, bond issuances could result in higher default rates.

4.4 Access to Global Capital

Bangladeshi corporates are still largely confined to local investors. Attracting foreign capital requires better macro‑economic stability, a more open regulatory regime, and improved bilateral investment treaties.

5. A Path Forward

The Daily Star round‑table concludes with a series of recommendations that are designed to accelerate the transition:

1. Strengthen Corporate Governance: Enforce stricter disclosure and reporting standards for listed companies, reducing information asymmetry.
2. Financial Literacy Campaigns: Launch nationwide investor education initiatives, focusing on bond characteristics, risk and returns.
3. Tax Incentives for Bonds: Introduce tax relief for long‑term bond holders to increase demand.
4. Enhance Credit Rating Mechanisms: Build a robust local rating agency ecosystem to provide independent assessments.
5. Facilitate Cross‑Border Listings: Simplify procedures for dual‑listing on the DSE and international exchanges, making Bangladeshi bonds more attractive to global investors.

Conclusion

Bangladesh’s financial ecosystem is undeniably shifting from a bank‑dominated structure to one where capital markets play a more prominent role. While the journey is still in its early stages, the convergence of regulatory reforms, market infrastructure upgrades, and stakeholder enthusiasm paints an optimistic picture. The successful execution of these reforms, however, hinges on a concerted effort to deepen investor confidence, broaden the credit base, and create a more resilient regulatory environment. For policymakers, corporates and investors alike, this transition promises not only diversified financing options but also a stronger, more balanced economic future.