DSE 2017

DHAKA STOCK EXCHANGE IN 2017

Buoyant but not resilient
Sharjil Haque

With the year 2017 drawing to a close, we are left with both positive and not-so-positive observations from the country's stock market. We all know that after the crash in 2010, the market has been in the doldrums for several years. To be sure, there were occasional rallies. But they fizzled out pretty quickly. There was hardly any real or discernable upward trend in the general market index for a long time.

Then again, to some extent, 2017 was different. We observed perhaps the longest rally in recent times, which eventually catapulted the benchmark market index (DSEX) over the psychologically-vital threshold of 6,000. The DSEX kicked off the year at 5,083, and climbed to a lofty height of 6,186 as of December 27. Apart from one notable correction in April, the market index sustained a predominantly upward trajectory. The index gained by around 21 percent, and if we take into account disbursement of cash dividends, total return will exceed 25 percent. Not bad for an economy where one-year risk-free rate is only 4.5 percent.

If anyone is keeping count, the average volume of trading activities and market capitalisation increased by around 40 and 22 percent respectively in 2017 compared to last year. So there's no doubt that we saw an unprecedented increase in participation and injection of fresh funds this year. Is this a favourable sign of a more resilient market performance?

For the most part, the recent rally was driven by the banking sector, which holds just over 21 percent of total market capitalisation (total value of all shares trading in the market). A banking-sector index, constructed in the same spirit as the general market index, showed us that the sector generated more than 50 percent return this year. Similar sector-specific indices reveal that non-bank financial institutions, pharmaceuticals and telecommunication gained handsomely as well. So at least arithmetically, the source of the overall rally is understood easily enough. After all, these three sectors constitute another 40 percent of total market capitalisation.

The economics of the rally, however, is less straight-forward. No doubt the prevailing political calm and low interest-rate conditions laid the foundations for market buoyancy. What is perplexing though is the sharp increase in turnover in bank stocks. At a time when the country's banking sector is in shambles, there is little economic justification for rapid inflow of money into this sector. No one needs reminding that bank balance sheets continue to deteriorate, with the central bank's ability to autonomously regulate the sector severely constrained. And to make things worse, a parliamentary body recently recommended passing the Bank Companies (Amendment) Act-2017 allowing greater number of directors from a single family in a bank's board as well as increasing their tenure. Common sense dictates that such regulatory changes will worsen the perennial problem of non-performing loans.

While we can see a logical case for sponsor-directors of banks to invest heavily in the market as they expected the amendment to the Bank Companies Act, we are less convinced of the motives driving small investors to the party. We suspect small investors simply followed the big ones (sponsor-directors), while low price-to-book values and speculation on dividend expectations added fuel to the fire.

It is also possible that investors felt the government will try to prop up the stock market before elections by bullying the central bank into easing monetary conditions. If history is any guide, this is a fairly reasonable expectation. Those of us following the market also hear reports that a section of investors is taking personal loans from banks and pumping it into stocks. And of course the market has long been a haven for so-called gamblers and/or some unscrupulous individuals to park black money.

Almost characteristic of our stock market, we observed episodes of unusual price hikes of certain manufacturing companies that are fundamentally even weaker than some banks. So much so that companies with face value of Tk 10 traded at prices several times higher than that. To make matter worse, some “Z” category shares (think of these as junk companies) displayed similar price movements. Herein lies the need for greater regulatory support so that we can weed out opportunistic gamblers looking to make quick profits.

The less said about regulatory support the better. We are yet to see the Securities and Exchange Commission strengthen its monitoring and enforcement system adequately enough to reduce malpractice and improve corporate governance. That 2017 saw the lowest number of Initial Public Offerings (IPO) was essentially due to new rules which lowered financial incentives for companies and made the IPO approval process even more tedious. Data from Dhaka Stock Exchange shows us that this is the only year during the 2009-2017 period when the number of IPOs fell below double-digits: it was seven to be specific. So much for encouraging companies to rely on the capital market to raise funds instead of just banks.

Another area where regulators made little progress in 2017 was bringing more quality stocks to the market. Attracting multinationals to the market must be at the top of regulator's priority list since it will build confidence of genuine investors, raise market liquidity, attract foreign investment and reduce influence of gamblers. We see the obvious disconnect between stock price movements and economic conditions and remain convinced that listing multinationals from sectors like Telecommunication, Financials, Energy and Packaged Consumer Goods will help mitigate this problem. We must remember that these foreign firms are here because there is a growing and profitable market here. But as long as they restrict their profits to a hand-full of employees and owners, they end up contributing to income inequality. Only when they offload 15-20 percent of their shares in the market will the common people enjoy some of their hefty profits.

So what does all this mean for the year 2018? While this year's rally appeared more buoyant than those seen in previous years, it still lacks resilience. Specifically, it remains delinked from economic fundamentals and vulnerable to short-term traders and corrupt individuals looking to make quick money at the expense of genuine or uninformed investors. The upshot is that investors should certainly not get used to the idea of 20+ percent return from the market every year. True, if the government does try to artificially prop up stock prices, the market might still have some way to go. But the scenario can change quickly if and when interest rates rise for some reason. And those who ingenuously took debt to invest in stocks without carefully looking at company financials, business model and management integrity might be the first to count losses.

 

Sharjil M Haque is a Doctoral student in Economics at the University of North Carolina, and former Research Analyst at the International Monetary Fund in Washington DC.

Finance-Growth or Finance-Greed? How fragile banking sector can destroy the economy?

Bangladesh is one of the fastest growing south Asian countries with a CAGR of 5.6% in the last ten years and has the vision to reach upper-middle-income country status by 2021. This growth was accompanied by a significant decline in poverty, an increase in employment, greater access to health and education, and improved basic infrastructure. As a result, the once poor country is now considered middle income[1]. The existing finance-growth literature shows the relative importance of finance on economic growth. Banking sector dominates the financial sector development as capital market has not yet developed (Beck and Levine, 2004; Levine, 2005). Bangladesh has experienced tremendous growth in banking industries after financial liberalization policy in 1990s[2]. Domestic credits to the private sector by banks have increased from 2.61% of GDP in 1974 to 44.26% in 2016. After economic reform and financial liberalization in the nineties1the economy has started to grow even faster[3].

Figure 1: Finance and economic growth of Bangladesh

The financial sector of Bangladesh has been experiencing a period of stagnation due to macroeconomic and political instability.  The non-performing loans (NPL) in the banking sector increased by Tk11,237 crore in the first three months of the current year. At the end of March, the total NPL stood at Tk73,409 crore which is 10.53% of total outstanding loans. Excess liquidity in the banks stood at Tk1,22,073 crore at the end of 2016 while it was Tk1,20,679 crore in 2015[4]. Declining non-interest income[5] indicates banking sectors heavy reliance on interest income. Consequently, interest rate spread (IRS) has started increasing since 2013. On top of that, the recent Banking Companies (Amendment) Act-2017 could add insult to injury[6].

A gloomy scenario banking sector stability in Bangladesh 

	2012	2013	2014	2015	2016
Bank capital to assets ratio (%)	5.42	6.04	5.85	5.43	---
Bank nonperforming loans to total gross loans (%)	9.73	8.64	9.37	8.40	9.20
Bank liquid reserves to bank assets ratio (%)	11.69	12.49	11.17	14.47	15.40
Net Interest Margin	4.54	3.73	2.29	2.34	---

Source: World Bank IBRD-IDA, GFD and Bangladesh Bank Financial Stability Assessment Report

On top of the above given scenario, we argue that changes in bank corporate governance structure could lead to the family-dominated board of directors who would definitely work for their own interest. This may increase huge ownership concentration risk as well preferential credit disbursements for directors’ favorite and own business group. On top of that, this new practice could trigger an even significant increase in NPL which would ultimately lead to capital erosion[7] and banking failure. Moreover, decreasing interest rate, excessive liquidity, unfair competition and market saturation could trigger massive banks’ failure which would affect not only financial sector but also the real sector of the economy. In the current macroeconomic situation, this is not a very unlikely scenario. Banks are currently sufferings excess liquidity risk due to lack of investment opportunities and political stability.

This is only the asset side risk. There is liability side risk as well. Due to lower inflationary expectation, the Central Bank has adopted the expansionary monetary policy to boost investment activities to stimulate output. Consequently, public and private commercial banks have already reduced their deposit interest rates which lead to deposit outflow from commercial banks to government's savings certificate where the interest rate is still significantly higher. Political pressure and upcoming election are the main two reasons of this policy inconsistency.  In the short run, banks may not face any problems due to already excess liquidity situation but gradual decline in term deposits due to lower interest rate and lack of public confidence accompanied by the increase in NPL would significantly reduce bank lending capabilities and bank stability. One of the potential consequences in this dire scenario is increasing bank M & A[8].  Therefore, it is recommended that financial regulators must take proactive measures in order to prevent the financial distress in the first place by imposing strict regulatory control and improving corporate governance. Furthermore, in the current economic situation, if the central bank issues new license to open more banks under political consideration, it will be detrimental to the overall economy. 

Since financial liberalization began, Bangladesh has not experienced any major banking crises but it does not mean that it is not going to happen forever. We have seen the havoc of banking crisis all over the world which destroyed the poor and made rich more richer. Fractional reserve banking, in simple language greed of rich, and unregulated banking industry are two main causes of the banking crisis. When the bank gives money as a credit that it actually does not have, then situations arise when it cannot pay the demands that are made upon it. Finally, I would like to conclude by quoting a prominent economist Dr. Asad Zaman:

"If we look at the benefits from banking, and compare them to the costs, it is very clear that on the whole the Western world has come to a great deal of harm as a result of this banking system." 

---

[1] Asian Development Bank, Bangladesh: Challenges and Opportunities in Moving to Upper Middle Income Status. Retrieved on 26^th November, 2017 from https://www.adb.org/news/features/bangladesh-challenges-and-opportunities-moving-upper-middle-income-status

[2] Financial Sector Reform Program (FSRP)

[3] Bangladesh enjoys a CAGR of 4.8% and 5.6% from 2000 to 2016 and from 2007 to 2016 respectively

[4] Bangladesh Bank Financial Stability Assessment Report April-June, 2017

[5] Non-interest income is bank and creditor income derived primarily from fees including deposit and transaction fees, insufficient funds (NSF) fees, annual fees, monthly account service charges, inactivity fees, check and deposit slip fees, and so on.

[6] The proposed amendment allows the doubling of the number of directors (currently 2 members are allowed to seat on the board from the same family) in a bank's board from a single family and extends the tenure of directors (As per the proposed legislation, the tenure of bank directors would be extended to nine years from the current six years).    

[7] Nine banks, including four state owned commercial banks, have faced serious capital shortage due to high NPLs. Retrieved on 5^th December, 2017 from https://thefinancialexpress.com.bd/economy/bangladesh/nine-banks-capital-shortfall-swells-to-tk-177b-in-q3-1512326793

[8] In a very recent public gather Finance Minister turning down the notion of a messy situation in banking sector riddled with irregularities and lacking good governance,. He said the banks failing to operate properly will go for merger. Retrieved on 28^th November, 2017 from http://www.thedailystar.net/country/bangladesh-three-new-banks-get-licenses-government-finance-minister-ama-muhith-1497235

Government for the people or for the corporate?

On the backdrop of American civil war Abraham Lincoln, one of the greatest proponents of democracy,  portrayed the fundamental of functional democracy by saying:

"Government of the people, by the people, for the people, shall not perish from the Earth."

Even after two centuries, the role of democracy in economic prosperity and equitable distribution of wealth is obvious. But when the corporate world starts dominating the democratic process, the government becomes more interested in protecting the rights of the business group rather than common people. 

In almost all national dailies reported that a parliamentary body today recommended for passing the Banking Companies (Amendment) Act-2017, which allows the doubling of the number of directors (currently 2 members are allowed to seat on the board from the same family) in a bank's board from a single family and extends the tenure of directors (As per the proposed legislation, the tenure of bank directors would be extended to nine years from the current six years).

Many scholars, policymakers, and prominent economists have already expressed their views by criticising this Act arguing it could prove detrimental to already fragile banking industry. We have seen rampant irregularities and malpractices while only two members of the same family are on the board. What will happen when there are four members of the same family. In brief, the interest of millions of depositors will be at stake. 

In the recent past, we have seen some unprecedented actions in the banking industry like hostile takeover of the boards of several banks by a Chittagong base powerful group when government and the regulator surprisingly remained silent.

It is argued that changes in bank corporate governance structure could lead to the family-dominated board of directors who would definitely work for their own interest. This may increase huge ownership concentration risk as well preferential credit disbursements for directors favourite and own business group. The non-performing loan has already exceeded the threshold for the last couple of years. On top of that, this new practice could trigger an even significant increase in NPL which would ultimately lead to capital erosion and massive bank failure. 

In the current macroeconomic situation, this is not a very unlikely scenario. Banks are currently sufferings excess liquidity risk due to lack of investment opportunities and political stability. This is only the asset side risk. While there is liability side risk as well. Due to lower inflationary expectation, the Central Bank has adopted the expansionary monetary policy to boost investment activities to stimulate output. Consequently, public and private commercial banks have already reduced their deposit interest rates which lead to deposit outflow from commercial banks to government's savings certificate where the interest rate is still significantly higher. Political pressure and upcoming election are the main two reasons of this policy inconsistency.  In the short run banks may not face any problems due to already excess liquidity situation but gradual decline in term deposits accompanied by the increase in NPL would significantly reduce bank lending capabilities and bank instability.

The government seems to be indifferent in spite of the clear financial disaster the Banking Companies (Amendment) Act-2017 can create in the near future. So, we as common folk ask: is the government for the people or for the corporate?

Poverty and inequality in Muslim countries

Among 57 OIC countries, there are 7 high-income OIC countries namely, Bahrain, Brunei, Oman, Qatar, Kuwait, Saudi Arabia, UAE for which no poverty and inequality data are available currently from WorldBank WDI. From remaining 50 countries data are available for the only handful of countries. More obviously these data are not up-to-date. By collecting base data available for all countries it is observed that only few countries have latest data, therefore, the latest available values are taken for showing the latest poverty and inequality situations in Muslim countries.

The graph shows a comparative picture of poverty in selected OIC countries. It is evident that at the lower threshold most of these countries seem to do well except Nigeria. However, with a higher threshold, almost all countries have more than  5% of the total population living below the poverty line except Kazakhstan, Malaysia and Turkey. For Bangladesh, Tajikistan, and Nigeria it is well above 15%.

 Gini coefficient, an accepted standard to measure inequality in literature. From the above graph we have seen a contrasting scenario from the poverty. Even though Kazakstan, Malaysia and Turkey have shown significant progress in terms of poverty reduction but the inequality remains a major concern. Kazakhstan is still better than other Muslim countries in terms of wealth redistribution  More striking is the case of Malaysia. For other countries, inequality coexisting with poverty.

The inequality situation is grave - class conflict now seems inevitable in many Muslim countries. We have already seen the first wave (Westerner call it Arab Spring) of a tsunami rapidly gaining momentum. The tremendous growth which many Muslim countries have enjoyed for the last two decades or so in spite of socio-econo-political instability is actually hijacked by the powerful elites. So even though we are singing the song of economic growth, in reality, we are bleeding slowly to death.

Notes: All data used in this blog are collected from World Bank WDI.

Why are Muslim countries lagging behind?

In the twenty-first century, innovation is the key to sustainable growth. The more innovative nations are likely to maintain their economic growth in the long run. The latest Global Innovation Index shows dire situations of Muslim countries across the continents. There is not even a single Muslim country at the top 30 of Global Innovation Index.

Malaysia, the top performer is placed at number 37. Turkey and Qatar are currently holding 43rd and 49th position in the league table. Not surprisingly the most populated Muslim countries are almost at the bottom of the index. This clearly shows why Muslim countries are suffering lower productivity growth which is reflected in overall economic growth. 

My selected research works on Economics, Educational Psychology, Distance Education Technology and ESL

Journal Articles

Uddin, M. A., Ali, M. H., & Masih, M. (2017). Political stability and growth: An application of dynamic GMM and quantile regression. Economic Modelling. (Indexed in ISI and SCOPUS)

Uddin, M.A. (2014). Personal and Motivational Aspects of Students Studying in Traditional Face-to-Face System and Distance Education System. Психология и Психотехника (Psychology and Psycho-technique). - № 2. - pp. 192-200. DOI: 10.7256/2070-8955.2014.2.10932 (Indexed in ERIH PLUS, Ulrich, VAK and RISC)

Уддин, М.А. Индивидуальные различия студентов, обучающихся по программе дистанционного образования (обзор зарубежных источников) / М. А. Уддин [Электронный ресурс] // Современная зарубежная психология. 2013. №3. URL: http://psyjournals.ru/jmfp/2013/n3/63513.shtml (дата обращения: 15.12.2013). (Indexed in RISC and DOAJ)

[Translation: Uddin, M.A., Individual differences of students in distance education (A review of foreign literature)// Journal of Modern Foreign Psychology. 2013. No.3]

      

Uddin, M. A. (2013).  Psychological Impact of Distance Education Technologies in Student's Personal Development. International Journal of Developmental and Educational Psychology, No.1, Vol. 2. pp. 203–212. (Indexed in Psicodoc, Ulrich, Redalyc, Miar, ISOC, Dialnet, DICE and Sherpa-Romeo)

Айсмонтас  Б.Б., Уддин  M.А. Сравнительный анализ личностных особенностей студентов  очного и дистанционного обучения (на примере студентов-психологов) [Электронный ресурс] // Психологическая наука и образование psyedu.ru. 2013. №4. URL: http://psyedu.ru/journal/2013/4/Aismontas_Ahter.phtml (дата обращения: 09.08.2016) (Indexed in ERIH PLUS, EVSCO, VAK, DOAJ and RISC)

[Translation: Aysmontas, B.B., Uddin M.A. Comparative analysis of personal attributes of students studying face-to-face and distance (psychology students perspective)// Psychological Science and Education psyedu.ru. 2013. No.4.]

Уддин, М. А. Психолого-педагогические особенности дистанционного обучения и личностные особенности студентов, обучающихся наоснове дистанционных технологий // Психологическая наука и образование. – 2012. – №5. – C. 38–49.  (Indexed in ISI, Web of Science ESCI, EBSCO, ERIH PLUS, VAK, DOAJ and RISC)

[Translation: Uddin, M.A. Psycho-pedagogical traits of distance education and personal attributes of students studying with the help of distance education technology//Psychological Science and Education. 2012. No.5 pp.38-49]

      

Book's Chapter

Aysmontas, B., & Uddin, M. A. (2016). The Modern Problem of Psychological and Pedagogical Foundations of Russian E-Learning Systems: The Possible Solutions and the Future Challenges of Psychology and Pedagogy. In Special and Gifted Education: Concepts, Methodologies, Tools, and Applications (pp. 2100-2118). Hershey, PA: Information Science Reference. doi:10.4018/978-1-5225-0034-6.ch091

Mkrttchian, V., Aysmontas, B., Uddin, M. A., Andreev, A., & Vorovchenko, N. (2015). The Academic Views from Moscow Universities on the Future of DEE at Russia and Ukraine. In G. Eby, & T. Yuzer (Eds.) Identification, Evaluation, and Perceptions of Distance Education Experts (pp. 32-45). Hershey, PA: Information Science Reference. doi:10.4018/978-1-4666-8119-4.ch003

Monograph (in Russian)

Айсмонтас Б.Б., Уддин М.А. Личностные и мотивационные особенности студентов очного и дистанционного обучения (сравнительный анализ)/ Московский городской психолого-педагогический университет, М., 2014. 222 с.

[Translation: Aysmontas, B.B., Uddin M.A. Personal and motivational aspects of student studying face to face and distance (comparative analysis)/Moscow State University of Psychology and Education, Moscow., 2014. (Total page 222)]