One prerequisite of having a healthy investment climate in an economy is the availability of financing facility for the existing and potential borrowers. The two major sources of finance in any country are the banks and the capital market. However, the proportion of bank-based financing and stock market-based financing differs from country to country and it also changes within a country in different time periods. Historically, Bangladesh’s private sector distinctly depends on banks for finance. Equity financing from capital markets through the issue of shares is lenient whereas debt financing through issuing corporate bonds is almost nonexistent. Bank financing was around 94 per cent of total finance while equity financing accounted for the remaining 6 per cent in 2007. This is expected in Bangladesh insofar as banks’ loan typically precedes equity and bond financing as the important source of financing when a country’s economy evolves from agrarian and becomes more industrial and services oriented. Barth et al. (2006) shows that high income countries own 91 per cent of the world debt securities, followed by middle income countries (7 per cent) and low income countries (around 2 per cent).
These limitations of the banking sector of Bangladesh increase the importance of having a sound and organized capital market for fulfilling the needs of financing business activities.
Well-functioning capital markets including equity and corporate debt markets are one of the most important factors needed to attract investors, both local and foreign. Greater emphasis on generating competitive and strong capital markets would ensure a sustainable flow of sufficient funds and efficient mechanisms for financing the private sector. An increasing amount of literature in this regard favors the development of the capital market for long-run growth. The capital market encourages specialization as well as acquisition and dissemination of information, thereby reducing... [continues]
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