Bangladesh

6. Financial Sector

Capital Markets and Portfolio Investment

Capital markets in Bangladesh are still developing and the financial sector remains highly dependent on bank lending.  Current government policy inhibits the creation of reliable benchmarks for long-term bonds and prevents the development of a tradable bond market.  

Bangladesh is home to the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE).  The Bangladesh Securities and Exchange Commission (BSEC), a statutory body formed in 1993 and attached to the Ministry of Finance, regulates both.  As of March 2019, the DSE market capitalization stood at USD 48.6 billion.

Although the GOB has a positive attitude towards foreign portfolio investors, participation remains low due to limited liquidity and the lack of publicly available and reliable company information.  The DSE has attracted some foreign portfolio investors to the country’s capital market; however, the volume of foreign investment in Bangladesh remains a small fraction of total market capitalization.  As a result, foreign portfolio investment has had limited influence on market trends and Bangladesh’s capital markets have been largely insulated from the volatility of international financial markets. Bangladeshi markets continue to rely primarily on domestic investors and Bangladeshi firms increasingly rely on capital markets to finance investment projects.  In March 2017, the government relaxed investment rules making it possible for foreign investors to use local currency to invest directly in local companies through the purchase of corporate shares.

BSEC has formed separate committees to establish a central clearing and settlement company, allow venture capital and private equity firms, launch derivatives products, and activate the bond market.  In December 2013, BSEC became a full signatory of International Organization of Securities Commissions (IOSCO) Memorandum of Understanding.

BSEC has taken steps to improve regulatory oversight, including installing a modern surveillance system, the “Instant Market Watch,” that provides real time connectivity with exchanges and depository institutions.  As a result, the market abuse detection capabilities of BSEC have improved significantly. A new mandatory Corporate Governance Code for listed companies was introduced in August 2012. Demutualization of both the DSE and CSE was completed in November 2013 to separate ownership of the exchanges from trading rights. A majority of the members of the Demutualization Board, including the Chairman, are independent directors. Apart from this, a separate tribunal has been established to resolve capital market-related criminal cases expeditiously.  All these reforms target a disciplined market with better infrastructure so that entrepreneurs can raise capital and attract foreign investors.

The Demutualization Act 2013 also directed DSE to pursue a strategic investor who would acquire a 25 percent stake in the bourse.  DSE opened bids for a strategic partner in February 2018 and, in September 2018, the Chinese consortium of Shenzhen and Shanghai stock exchanges became DSE’s strategic partner after buying a 25 percent share of DSE for taka 9.47 billion (USD 112.7 million).  

According to the International Monetary Fund (IMF), Bangladesh is an Article VIII member and maintains restrictions on the unapproved exchange, conversion, and/or transfer of proceeds of international transactions into non-resident taka-denominated accounts.  Since 2015, authorities have relaxed restrictions by allowing some debits of balances in such accounts for outward remittances, but there is currently no established timetable for the complete removal of the restrictions.

Money and Banking System

The Bangladesh Bank (BB) acts as the central bank of Bangladesh.  It was established on December 16, 1971 through the enactment of the Bangladesh Bank Order-1972.  General supervision and strategic direction of BB has been entrusted to a nine-member Board of Directors, which is headed by the BB Governor.  BB has 45 departments and 10 branch offices.

According to the BB, four types of banks operate in the formal financial system: State Owned Commercial Banks (SOCBs), Specialized Banks, Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs).  Some 59 “scheduled” banks in Bangladesh operate under the full control and supervision of the center as per the Bangladesh Bank Order 1972. The scheduled banks including six SOCBs, three specialized government banks established for specific objectives like agricultural or industrial development, 41 PCBs, and nine FCBs as of March 2019.  The scheduled banks are licensed to operate under Bank Company Act 1991 (Amended 2013). There are also five non-scheduled banks in Bangladesh, established for special and definite objectives and operating under Acts that are enacted for meeting up those objectives.

Currently, 34 non-bank financial institutions (FIs) are operating in Bangladesh.  They are regulated under the Financial Institution Act, 1993 and controlled by the BB.  Out of the total, two are fully government owned, one is a subsidiary of an SOCB, 15 are private domestic initiatives, and 15 are joint venture initiatives.  Major sources of funds of these financial institutions are term deposits (at least three months tenure), credit facilities from banks and other financial institutions, call money, as well as bonds and securitization.

The major difference between banks and FIs are as follows:

FIs cannot issue checks, pay-orders, or demand drafts,

FIs cannot receive demand deposits,

FIs cannot be involved in foreign exchange financing,

FIs can employ diversified financing modes like syndicated financing, bridge financing, lease financing, securitization instruments, private placement of equity etc.

Microfinance institutions (MFIs) remain the dominant players in rural financial markets.  According to the Bangladesh Microcredit Regulatory Authority, as of June 2017, there were 783 licensed micro-finance institutions operating a network of 17,120 branches with 29.2 million members.  A 2014 Institute of Microfinance survey study showed that around 40 percent of the adult population and 75 percent of households had access to financial services in Bangladesh.

The banking sector has had a mixed record of performance over the past several years, but the sector has maintained overall healthy growth.  Total assets in the banking sector stood at 62.5 percent of gross domestic product at end of September 2018. The gross non-performing loan (NPL) ratio was 11.45 percent at end of September 2018.

On December 26, 2017, the BB issued a circular warning citizens and financial institutions about the risks associated with cryptocurrencies.  The circular noted that using cryptocurrencies may violate existing money laundering and terrorist financing regulations and that users may incur financial losses.  According to the BB, the circular did not constitute a ban. Bangladesh foreign exchange regulations, which limit outward payments, largely prevent the use of cryptocurrencies in Bangladesh.  The BB issued similar warnings against cryptocurrencies in 2014.

Foreign Exchange and Remittances

Foreign Exchange Policies

Free repatriation of profits is legally allowed for registered companies and profits are generally fully convertible.  However, companies report that the procedures for repatriation of foreign currency are lengthy and cumbersome. The Foreign Investment Act guarantees the right of repatriation of invested capital, profits, capital gains, post-tax dividends, and approved royalties and fees for businesses.  The central bank’s exchange control regulations and the U.S.-Bangladesh Bilateral Investment Treaty (in force since 1989) provide similar investment transfer guarantees. The Bangladesh Investment Development Authority may need to approve repatriation of royalties and other fees.

Since 2013, Bangladesh has tried to manage its exchange rate vis-à-vis the U.S. dollar within a fairly narrow range.  Until 2017, the Bangladesh taka traded between 76 and 78.8 taka to the dollar. The taka has depreciated relative to the dollar since October 2017 reaching 84.25 taka per dollar as of March 2019, despite ongoing interventions from the Bangladesh Bank.  The Bangladesh currency, the taka, is approaching full convertibility for current account transactions, such as imports and travel, but not for capital account transactions, such as investing, currency speculation, or e-commerce.

Remittance Policies

There are no set time limitations or waiting periods for remitting all types of investment returns.  Remitting dividends, returns on investments, interest, and payments on private foreign debts do not require approval from the central bank and transfers are done within one to two weeks.  For repatriating lease payments, royalties and management fees, some central bank approval is required, and this process can take between two and three-weeks. If a company fails to submit all the proper documents for remitting, it may take up to 60 days.  Foreign investors have reported difficulties transferring funds to overseas affiliates and making payments for certain technical fees without the government’s prior approval to do so. Additionally, some regulatory agencies have reportedly blocked the repatriation of profits due to sector-specific regulations.  The U.S. Embassy also received complaints of American citizens not being able to transfer the proceeds of sales of their properties. There is no mechanism in place for foreign investors to repatriate through government bonds issued in lieu of foreign currency payments. Bangladesh is not involved in currency manipulation tactics.

The Financial Action Task Force (FATF) notes that Bangladesh has established the legal and regulatory framework to meet its Anti-Money Laundering/Counterterrorism Finance (AML/CTF) commitments.  The Asia/Pacific Group on Money Laundering (APG), an independent and collaborative international organization based in Bangkok, conducted its mutual evaluation of Bangladesh’s AML/CTF regime in September 2018 and found that Bangladesh had made significant progress since the last Mutual Evaluation Report (MER) in 2009, but that Bangladesh still faces significant money laundering and terrorism financing risks.  The APG reports are available online: http://www.fatf-gafi.org/countries/#Bangladesh  .

Sovereign Wealth Funds

The Bangladesh Finance Ministry first announced in 2015 that it is exploring the possibility of establishing a sovereign wealth fund for the purposes of investing a portion of Bangladesh’s foreign currency reserves.  In February 2017, the Cabinet initially approved a USD 10 billion “Bangladesh Sovereign Wealth Fund,” (BSWF) that will be created with funds from excess foreign exchange reserves. The government claims the BSWF will be used to invest in “public interest” projects.  Bangladesh does not currently follow the Santiago Principles, a voluntary set of 24 principles and practices designed to promote transparency, good governance, accountability, and prudent investment practices while encouraging a more open dialogue and deeper understanding of sovereign wealth fund activities.

Kenya

6. Financial Sector

Capital Markets and Portfolio Investment

Though relatively small by Western standards, Kenya’s capital markets are the deepest and most sophisticated in East Africa.  The Kenyan capital market has grown rapidly in recent years and has also exhibited strong capital raising capacity. The bond market is underdeveloped and dominated by trading in government debt securities.  The government domestic debt market, however, is deep and liquid. Long-term corporate bond issuances are uncommon, leading to a lack of long-term investment capital.

Foreign investors can obtain credit on the local market; however, the number of available credit instruments is relatively small and the government’s interest rate cap since 2016 continues to constrain the availability of credit.  Legal, regulatory, and accounting systems are generally aligned with international norms. The Kenyan National Treasury has launched its mobile money platform government bond to retail investors locally. The name of the product is M-Akiba, through which local Kenyans are able to purchase bonds as small as USD 30 on their mobile phones.  The product was enthusiastically received and generated 400,000 new accounts in the first two weeks of its issuance. The GOK expects to issue USD 10 million over this platform in 2019 in an effort to deepen financial inclusion and financial literacy.

The Central Bank of Kenya (CBK) is working with regulators in EAC member states through the Capital Market Development Committee (CMDC) and East African Securities Regulatory Authorities (EASRA) on a regional integration initiative and has successfully introduced cross-listing of equity shares.  The combined use of both the Central Depository System (CDS) and an automated trading system has moved the Kenyan securities market to globally accepted standards. Kenya is a full (ordinary) member of the International Organization of Securities Commissions Money and Banking System.

Money and Banking System

The Kenyan banking sector in 2018 included 47 commercial banks, one mortgage finance company, 14 microfinance banks, eight representative offices of foreign banks, 74 foreign exchange bureaus, 18 money remittance providers, and three credit reference bureaus.  Kenya also has 12 deposit-taking microfinance institutions. Of Kenya’s 47 banking institutions, 28 are locally owned and 13 are foreign owned. Major international banks operating in Kenya include Citibank, Barclays, Bank of India, Standard Bank (South Africa), and Standard Chartered.

In March, 2017, CBK lifted its moratorium on licensing new banks, issued in November 2015 following the collapse of Imperial Bank and Dubai Bank.  The CBK’s decision to restart licensing signaled a return of stability in the Kenyan banking sector. JPMorgan Chase has expressed interest in setting up a representative office in Nairobi and Qatari National Bank (QNB) is interested in arranging a Sukuk (sovereign bond) for Kenya. In 2018, Societé Generale (France) also set up a representative office in Nairobi.

In August 2016, President Kenyatta signed into law the Banking Act (2016), which caps the maximum interest rate banks can charge on loans at four percent above the CBK’s benchmark lending rate.  It further provides a floor for the deposit rate held in interest earning accounts to at least 70 percent of the CBK benchmark rate. The cap has hurt the GOK’s ability to raise funds in the local debt market.  The cap also has slowed the consumer and small and medium business credit market. The International Monetary Fund and other observers have warned that the restrictions will result in a continuing contraction in the availability of credit.  In March 2019, the Supreme Court found the interest rate cap to be unconstitutional, but suspended its ruling for 12 months to provide Parliament an opportunity to review the cap.

In the ongoing land registry digitization process, the Kenyan Government is working on a database, known as the single source of truth (SSOT), to eliminate fake title deeds in the Ministry of Lands.  The SSOT database development plan is premised on blockchain technology – distributed ledger technology – as the primary reference for all land transactions. The SSOT database would help the land transaction process to be efficient, open, and transparent.

The percentage of Kenya’s total population with access to financial services through conventional or mobile banking platforms is approximately 80 percent.  According to the World Bank, M-Pesa, Kenya’s largest mobile banking platform, processes more transactions within Kenya each year than Western Union does globally.  In September 2018, 30 million Kenyans were using mobile phone platforms to transfer money, according to the Communication Authority of Kenya. The 2017 National ICT Masterplan envisages the sector contributing at least 10 percent of GDP, up from 4.7 percent in 2015.  Several mobile money platform have achieved international interoperability, allowing the Kenyan diaspora to conduct financial transactions in Kenya from abroad.

Foreign Exchange and Remittances

Foreign Exchange Policies

Kenya has no restrictions on converting or transferring funds associated with investment.  Kenyan law requires the declaration to customs of amounts greater than KSH 1,000,000 (approximately USD 10,000) or the equivalent in foreign currencies for non-residents as a formal check against money laundering.  Kenya is an open economy with a liberalized capital account and a floating exchange rate. The CBK engages in volatility controls aimed exclusively at smoothing temporary market fluctuations. Between June 2015 and June 2016, the Kenyan shilling declined 3.5 percent after a sharp decline of 15 percent during the same period in 2014/2015.  In 2018, foreign exchange reserves remained relatively steady. The average inflation rate was between 3.7-5.7 percent in 2018 and the average rate on 91-day treasury bills had fallen to 7.75 percent in 2018. According to CBK figures, the average exchange rate was KSH 101.3to USD 1.00 in 2018.

Remittance Policies

Kenya’s Foreign Investment Protection Act (FIPA) guarantees capital repatriation and remittance of dividends and interest to foreign investors, who are free to convert and repatriate profits including un-capitalized retained profits (proceeds of an investment after payment of the relevant taxes and the principal and interest associated with any loan).

Foreign currency is readily available from commercial banks and foreign exchange bureaus and can be freely bought and sold by local and foreign investors.  The Central Bank of Kenya Act (2014), however, states that all foreign exchange dealers are required to obtain and retain appropriate documents for all transactions above the equivalent of KSH 1,000,000 (approximately USD 10,000).  As of March 2018, the CBK has licensed 18 money remittance providers following the operationalization of the Money Remittance Regulations in April 2013.

Kenya is listed as a country of primary concern for money laundering and financial crime by the State Department’s Bureau of International Narcotics and Law Enforcement.  Kenya was removed from the inter-governmental Financial Action Task Force (FATF) Watchlist in 2014 following progress in creating the legal and institutional framework to combat money laundering and terrorism financing.

Sovereign Wealth Funds

Kenya is in the process of establishing a sovereign wealth fund under the Kenya National Sovereign Wealth Fund Bill (2014).  The fund would receive income from any future privatization proceeds, dividends from state corporations, oil and gas, and minerals revenues due to the national government, revenue from other natural resources, and funds from any other source.  The bill remains under internal review and stakeholder consultations.

The Kenya Information and Communications Act (2009) provides for the establishment of a Universal Service Fund (USF).  The purpose of the USF is to fund national projects that have significant impact on the availability and accessibility of ICT services in rural, remote, and poor urban areas.  The USF has amassed sizeable assets, but to date, the fund and its managing committee have not been able to mobilize it for use on any project.

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