Diversification of Islamic Financial Instruments
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was stable over the years, market capitalization growth was volatile. The overall weighted
average price-earnings (P/E) ratio of the DSE was 14.3 in December 2016, which was 90 bps
lower than that of the previous year. The P/E ratio has been decreasing since September 2014.
The market for fixed income securities in Bangladesh still needs substantial development. It
remained mostly dominated by government securities. In spite of several efforts of the
regulators, bourses and market participants, a thriving market has not yet been established.
Trading of bonds is important as it increases the efficiency and competitiveness of the financial
system. This market also enhances the stability of the system by creating an alternative to
bank finance and, of course, acts as a vehicle of transfer of information from credit market
(including plausible benchmark interest rates) to policy makers and market participants. In
2016, long-term treasury bonds worth BDT 187.4 billion were issued, which was 21.6 percent
higher than that of 2015. Out of the total issuance, 5, 10 and 2 years treasury bonds held 31
percent (BDT 57.7 billion), 24 percent (BDT 45.2 billion) and 21 percent (BDT 39.4 billion)
share respectively.
Overall, the financial markets in Bangladesh were mostly stable in 2016 with adequate
liquidity in the money market along with stable bond market as well as stock market. The low
level of repo operations with BB during 2016 implies that the banking system enjoyed
sufficient liquidity, which is also evident from a falling inter-bank repo rate and call money
rate. As short-term interest rates came down along with decreased lending and deposit rates of
banks, it is expected that long-term rates would also come down thereby facilitating potential
long-term investments. In order to avoid any inflationary pressure stemming from liquidity
perspective, BB remained vigilant throughout the year mopping up excess liquidity using BB
bills heavily. Government borrowing from the financial system also did not create any pressure
on private sector as indicated by declining sales of treasury securities. Besides, as no
mandatory devolvement of treasury securities auction was made on PDs and non-PDs during
the review year, the liquidity position of the financial system did not come under any
unanticipated pressure. Stock market activities hinted growing investors' confidence reflected
through an increase in market capitalization and DSE broad index (DSEX). However, lack of a
thriving bond market continued to hurt businesses as they have to rely on costlier source of
financing in the form of bank borrowing. As a whole, the Bangladesh financial markets
remained well-positioned to absorb any liquidity shocks.
There is an expectation that the capital market of the country has already started to move
upwards and the outlook for the next few years are quite optimistic. This will help NBFIs
income both through capital gain from direct investment and provision savings from margin
lending. The financially sound Islamic NBFIs with good asset quality and the ones with strong
presence in the capital market through direct investment and/or capital market subsidiaries
pose profitable investment opportunities for the investors in the coming years. But the
regulatory framework for the Islamic NBFIs may also be in place for facilitating their activities
at the desired level.
Capital Market plays a vital role in attracting savings and channeling them for productive
purposes. Both primary and secondary markets are important in this regard. The issue of
development of Islamic capital market is not separate from the issue of development of capital
market in general. While the primary market directly effects the supply of funds for
investment, the secondary market does the same indirectly. The capital market provides long-
term capital through a series of short-term contracts. The subject of development of Islamic
capital markets is very broad. It can include a variety of aspects such as: the state of regulatory