Bangladesh Trade, Development & Economic Prospects in the Emerging Asian-European Supply Chain 2022
In May 2022, Asia Investment Research, a research organisation jointly set up by the investment finance firm China Investment Research and Dezan & Shira Associates, issued a special Economics and Trade feature titled “Bangladesh Trade, Development & Economic Prospects in the Emerging Asian-European Supply Chain”. The full report can be accessed at https://www.asiainvestmentresearch.org/issue/bangladesh-special-2022-investment-issue and is well worth analysing by all with a buisness interest in Bangladesh. The research data was primarily procured by senior financial analyst Henry Tillman, Founder of the China Investment Research and also a member of the International Advisory Committee of the Fudan Institute of Belt & Road Governance. Data analysis was provided by Chris Devonshire-Ellis, Chairman and Founding Partner of Dezan & Shira Associates, and Nurul Wahab, Partner at the Bangladeshi tax advisory firm A.Wahab & Co.
The purpose of this publication is to provide detailed data and analysis of Bangladesh’s current economic prospects, ongoing initiatives for development and trade diversification, and key challenges that both the nation’s stakeholders and foreign investors must consider and overcome. This newsletter divides the report’s findings into the following sections:
1) Bangladesh Profile Overview
2) Internally funded Infrastructure Projects and Multilateral Loans (2020/2021)
3) Investment Portfolio and Competitive Investment Climate
4) Potential for diversification amidst the shift in Regional Supply Chains
Bangladesh’s Profile Overview
Bangladesh is home to amongst the most youthful populations globally with 34% of citizens aged 15 and below. Over 65% of its 164,689,383 citizens (2020 estimates, World Bank) are of working age (15-64 years old) and 37% of this population lives in urban residences though this number is surely set to increase with the country’s annual urbanisation rate pegged at almost 3%. The country’s capital of Dahaka is amongst the most densely populated cities in the world, having a population of 9.5 million, and is emerging as a leading consumer capital of the region. Its Chittagong Port located in Patenga at the mouth river of the Karnaphuli river is not only Bangladesh’s most important seaport but is also crucial for countries reliant on trade that comes and goes from the Bay of Bengal.
From 2017 to 2019, the economy of Bangladesh saw a remarkable growth of 7.8% per annum. Major exports and imports for the year 2019 are displayed below:
|Top 10 Exports (96.1% of total shipments)||Top 10 Imports (59.7% of product purchases)|
|Knitted or crocheted clothing and accessories US$20.3 billion (44.5%)|
US$5.8 billion (11.5%)
|Clothing and accessories that are not knitted or crocheted US$19.4 billion (42.4%)||Cotton US$5.4 billion (10.8%)|
|Footwear US$1.1 billion (2.4%)|
Mineral fuels including oil
US$4.4 billion (8.7%)
Miscellaneous textiles and worn clothing
US$1 billion (2.2%)
Electrical machinery, equipment
US$3.2 billion (6.4%)
Paper yarn and woven fabric
US$603.3 million (1.3%)
|Iron, steel US$2.9 billion (5.8%)|
|Fish US$532.9 million (1.2%)|
Plastics, plastic articles
US$2.2 billion (4.4%)
Leather and animal gut articles
US$68.3 million (0.8%)
|Vehicles US$1.7 billion (3.5%)|
|Headgear US$332.6 million (0.7%)|
Manmade staple fibres
US$1.6 billion (3.2%)
Raw hides and leather
US$139.8 million (0.3%)
|Manmade filaments US$1.42 billion (2.8%)|
Plastics and plastic articles
US$113.2 million (0.2%)
|Knit or crochet fabric US$1.35 billion (2.7%)|
Despite the devastating impact of the COVID-19, Bangladesh was one of the handful of countries that saw a growth in their economy, pegged at a depleted 2.4%, and also ascended 8 ranks in the World Bank’s Ease of Doing Business Index 2020 to reach #168 out of 190. This rank, though improved, emphasises massive room for improvement, especially with regard to the inefficiency of Bangladesh’s bureaucracy and hidden costs which increased the costs of doing business consequently lowering investor interest. The 2019 World Economic Forum’s Global Competitiveness Index (GCI) knocked down Bangladesh 2 ranks to #105 out of 141, citing the previous mentions in addition to insufficient ICT adoption and macroeconomic stability and the lack of quality infrastructure. According to McKinsey, Bangladesh’s Ready-Made-Garments Industry, one of Dhaka’s central industries holding 6.7% of the 2019 global market share and 84% of the nation’s exports, saw a decline of 17% translating to an alarming loss of roughly US$5.6 billion. A trade agreement signed between the European Union (EU) and Vietnam could also further weaken Bangladesh’s RMG industry if proper policy changes are not made in time considering how Vietnam has also recently usurped Bangladesh as the United States’ prime source of RMG products which is now 2.5 times more in volume.
Aside from the effects of the pandemic, the reasons cited above have also resulted in stunted growth of the country’s foreign direct investment (FDI). Inbound FDI in 2020 was recorded to be US$2.56 billion, a direct 10.8% decline as compared to values in 2019. The 2020 amount is equal to 1% of Bangladesh’s GDP far below the target values of 10-15% targeted in its 5-year plan. It is also to be noted that US$1.6 billion of the 2020 FDI values came from reinvested earnings by US-led companies operating in Bangladesh already. These challenges notwithstanding, Bangladesh succeeded in securing a pipeline of future investments during the peak of the pandemic throughout 2020 and the start of 2021. These investment projects include:
|Government Body||Amount of investment attracted|
|Bangladesh Investment Development Authority (BIDA)|
2020: US$7.1 billion USD in investments (US$4.9 billion from local investors, US$2.26 of foreign/joint venture proposals)
2021: US$7.65 billion in proposals
(US$6.95 billion from local investors, US$806. million from foreign/JVs)
|Bangladesh Economic Zones Authority (BEZA)||2020/2021: US$5.0 billion|
|Bangladesh Export Processing Zones Authority (BEPZA)|
2020/2021: US$1.4 billion
Plans drafted to set up 539 industrial plots on 1,150 acres of land (Mirsarai, Chattogram)
78 companies (Domestic+International) have already applied for 250 plots.
Bangladesh is well-known for its readymade garments (RMG) sector which provides 80% of the nation’s total exports (as displayed above) amounting to a total value of US$27.9 billion in 2020. Within the categories of garments made in Bangladesh, 83% of all items consisted of articles of apparel and clothing accessories whilst textile yarn and related products made up 5 and leather and footwear made up 2%. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) states that of the approximately 500 RMG factories operating within the country, 91 have been certified as environmentally sustainable green garment factories for which they have been awarded the US Green Building Council’s Leadershing in Energy and Environmental Design (LEED) certification and that priority will be given to attracting foreign investment in the sustainable textile industry. Moreover, under BEPZA, Dhaka allows for 100% of FDI for high-value products, including jackets and protective outerwear and while investments are encouraged in primary textiles like fabric textiles, investment in the manufacturing of yarn and such raw materials will be discouraged.
Agribusiness is Bangladesh’s dominant domestic sector and is considered an indispensable pillar of the nation’s economy. Over 50% of the population is directly employed in agriculture; however, the sector’s productivity is severely lagging due to obsolete modes of production and the increasingly adverse effects of climate change. The government is focussing on harnessing investments in technology to develop environmentally sustainable means of production, especially for its fishing industry. According to governmental statistics, Bangladesh ranks in the global top 5 for the production of freshwater and inland fish, as well as rice.
Bangladesh requires foreign investment to tackle critical gaps in its infrastructure as well as to boost industrial growth and foster greater rates of urbanisation across the country. In order to do so, in 2018 the government overhauled its previous private-public partnership (PPP) policy framework to pave the way for more opportunities for large-scale infrastructure projects to be financed by foreign investors and offshore companies with particular incentives for projects looking into improving transport connectivity between Dhaka and more remote parts of the country. According to a study by The Economist Intelligence Unit, 10 major infrastructure projects are expected to be completed by 2025 that will significantly galvanise the nation’s transport and energy infrastructure; these include the Karnaphuli underwater tunnel, Rampal coal power plant, Padma multipurpose bridge, Padma Bridge Rail Link, Chattogram-Cox’s Bazar railway link, Dhaka elevated expressway, Dhaka-Chattogram express railway, Matarbari power plant, Dhaka metro rail, and the Roppur nuclear power plant. However, more environmentally sustainable projects are being sought for future projects and focus is now being put on the current dearth of development of Dhaka’s ICT and digital infrastructure.
Regional Developments with India
Bangladesh’s geographical position puts it right in the centre of a four billion people market; the nation shares its western border with India, its northern border with China, and is exposed to almost all Southeast Asian countries to the east. In light of the hampered growth in FDI, Dhaka is actively making efforts to harness investment from its neighbouring countries by encouraging foreign firms to set up their production infrastructure at competitively low costs in the nation to export their products to home markets, especially through the use of its Special Economic Zones (SEZs) And Hi-Tech Park Zones. For example, it has already offered three SEZs, located in Mongla, Bheramara and Mirsarai, to Indian companies invested in Bangladesh’s telecommunications, automotive, energy, pharmaceuticals and fast-moving manufactured goods sectors. Bangladesh enjoys good relations with its neighbour and fellow Commonwealth state, India, due to their proximity and thriving trade relationship that is reflected in their US$9.5 billion per annum bilateral trade. Both Bangladesh and India are signatories of the Asia-Pacific Trade Agreement (APTA), South Asian Free Trade Agreement (SAFTA), and SAARC Preferential Trading Arrangement (SAPTA) through which they mutually benefit from concessionary tariff regimes. Under SAFTA, Bangladesh has access to duty-free and quota-free access to all Indian merchandise with the exception of tobacco and alcohol products. In April of last year, India’s Director General of Trade Remedies and the Bangladesh Trade and Tariff Commission signed a Memorandum of Understanding (MoU) to increase collaboration in trade remedies, deter prejudiced trading practices and create binding rules for bilateral trading. In terms of cooperation in infrastructure, in March 2021 the construction of the “Maitri Setu”, a.k.a the Friendship Bridge, was completed thereby connecting the landlocked northeastern region of India’s Tripura state and Bangladesh’s regionally significant port of Chittagong. Several connectivity projects including the construction of railways, roads, waterways and aviation links are being negotiated with the inauguration of the Maitri Setu. To foster cultural ties and increase local trade, ten haats (marketplaces commonly found in the region) are being constructed along the India-Bangladesh border.
The ASEAN Potential
Bangladesh could also stand to benefit from the fusion of the Bangladesh-Myanmar-Thailand-India trilateral highway project as well as the Bangladesh-China-India-Myanmar (BCIM) Corridor as a transportation route for Bangladesh to penetrate the ASEAN market and vice versa. Especially since Dhaka is pursuing an FTA with ASEAN before its graduation from the LDC category to replace the preferential trade agreements to be annulled after. Bangladesh must also leverage the APTA and expedite the implementation of the proposed FTAs with Thailand and Malaysia with eventual consideration for FTAs with other ASEAN nations.
Internally funded Infrastructure Projects and Multilateral Loans (2020/2021)
1) Padma Bridge (Expected to open in June 2022)
The Padma Multipurpose Bridge was commissioned to begin construction in 2013 and spans 6.15 kilometres in length. The World Bank offered financing of US$1.2 billion for the construction when it was announced in April 2010; however, the organisation withdrew its financing pledge in 2012 citing concerns of “possible corruption risks”. Denying these allegations, the government of Bangladesh, including Prime Minister Sheikh Hasina, vowed to complete the projects solely but itself to disprove the corruption charges. Despite the cost of the bridge increasing to US$2.9 billion, construction began in December 2015 and the first span was officially installed in September 2017. All spans were successfully completed by November 2020 and in December 2021, Sheikh Hasina and her sister, Sheikh Rehana, visited the bridge to celebrate winning her challenge to the World Bank. As of now, the Bridge is scheduled to open for traffic by June 2022 although the railway lines will not be launched until the latter half of 2022.
2) Dhaka Bypass Expressway- Public-Private Partnership (Q1 2022)
The expansion of the two-lane Dhaka Bypass Road, also known as the Joydevpur- Debogram- Bhulta-Madanpur road, into a four-lane highway to streamline congested traffic from the Chattogram port and the country’s north-western districts has been a project of priority for the Bangladeshi Government since the early 2010s. Currently, the 48-kilometre road interlinks the Joydevpur-Tangail National Highway, the Dhaka-Chattogram National Highway, the Dhaka-Sylhet National Highway, the Dhaka-Mymensingh National Highway and several regional highways and district roads along the route. Due to the fact that the expressway bypasses Dhaka, the expansion into a four-lane highway would provide an exceptional route for vehicles to easily traverse from the northern and western cities to the eastern and southern parts without having to deal with the congestion in Dhaka.
In 2012, the Government agreed to commence the project on a public-private partnership (PPP) basis, a first for the nation. The land acquisition and leading resettlement matters were settled by 2016 and in 2018 a preliminary contract was signed by the Roads and Highways Department (RHD) and a consortium between the Bangladeshi companies Shamim Enterprise Pvt Ltd (30%), the UDC Corporation (10%) and Sichuan Road and Bridge Group Corporation Ltd of China. The consortium, officially known as the Dhaka Bypass Expressway Development Company Ltd., agreed to finance, build, operate, and conduct maintenance of the project for a concession period of 25 years. The project was set to begin within 9 months of the contract being signed and was expected to be completed and operational by 2022; however, the private consortium partner failed to secure adequate funding by April 2021 and the government of Bangladesh failed in acquiring the land bringing about an almost three-fold increase in the price of the land acquisition. Ultimately despite the delays, the project’s stone foundation was laid in December 2019 though operations ceased once more due to the COVID-19 pandemic.
In April 2021, the private partner penned a financing agreement with the China Development Bank (CBD) and the Bangladesh Infrastructure Finance Fund Limited (BIFFL) whereby the companies would provide financing of US$184 million and US$122 million, respectively. The Asian Development Bank also agreed to provide US$100 million in credit to the BIFFL for granting the loan to the private consortium. In January 2022, the Bangladeshi government and the consortium have decided to convert the highway into an expressway with the government providing US$138 million while the consortium will invest around US$230 million.
Bangladesh received US$2.51 billion in loans for the year 2021. 80% (US$2.0 billion) of these loans were provided as COVID-19 relief whilst the remaining 20% (US$0.51 billion) were for the development of the nation’s infrastructure. Of this investment, the Asian Infrastructure Investment Bank (AIIB) donated US$1.06 billion, the Asian Development Bank (ADB) donated US$0.9 billion, the Japan International Cooperation Agency (JICA) donated US$347 million, the Economic Development Cooperation Fund and the OPEC Fund for International Development donated US$100 million each. The loans division and description are detailed below:
|Loan Type and Date||Loan Provider and Amount||Purpose of Loan|
Infrastructure Loan and Grant
Mymensingh Kewatkhali Bridge Project financing
For the reduction of traffic congestion between Mymensingh and Shambhugonj
COVID- Related Loan
COVID-19 Emergency and Crisis Response Facility
To reduce liquidity constraints to SMEs and cottage industries affected by the pandemic.
Social Development Loan
|To help finance policy reforms aimed at increasing inclusiveness and responsiveness of the nation’s social development and resilience programme|
COVID- Related Loans
ADB and AIIB
US$250 million each
|Assisting Bangladesh’s economic recovery from the pandemic|
COVID- Related Loans
ADB and AIIB
US$250 million each
COVID-19 Emergency and Crisis Response Facility
Continuation of the programme with focus on enhancing fiscal space through better public financial management and to revive the growth of CMSMEs
|Financing for CMSMEs operated by youth, migrant workers and rural entrepreneurs (especially women)|
Investment Portfolio and Competitive Investment Climate
Bangladesh Market Entry Structure
Wholly owned subsidiaries (WOS)
A WOS is allowed for foreign equity ownership of up to 100 for all sectors except those reserved by the government of Bangladesh (arms and ammunition, forest plantation and extraction, nuclear energy production and security printing). These investments do not require prior approval from the government and investors may freely access the market as a private limited or public limited company. The process of registration is supervised by the Registrar of Joint Companies & Firms. For WOS entities, there is no minimum investment requirement unless they employ expatriates, in which case they must invest a minimum of US$50,000. Though regulatory approval is not required foreign companies must obtain a trade license and secure income tax and VAT registrations from BIDA and BEPZA. Depending on the nature of the business some cases may require additional permits such as no-objection certificates (NOCs) and import-export licenses. In Bangladesh, a one-person company is not yet permissible as a WOS.
Joint Venture Company
Foreign investors can incorporate a joint venture (JV) company either with a Bangladeshi subsidiary, a local investor, or another foreign company. It is suggested for foreigners to settle a joint venture agreement before being incorporated as a JV to fully understand the niche details involved in conducting business in Bangladesh. It is preferred that the JV involves a local investor or another foreign company that owns existing projects to minimise the risk to their assets. Often foreign investors opt for a special purpose vehicle (SPV) that focuses on investing in a particular project.
Acquisition of Shares
For a foreign company to enter the market through the acquisition of shares in a Bangladeshi company, a Share Purpose Agreement (SPA) must be drafted that comprehensively outlines the details of the share acquisition in the case where the investor wishes to acquire all shares. In the cases where the foreign investor does not want all shares, they may acquire a portion or inject capital into the company of interest as a share money deposit for the issuance of new shares. In either case, a shareholders’ agreement (SHA) must be signed and the articles of association of the Bangladeshi company must be promptly and accurately updated to showcase this.
Export Processing Zones
Export Processing Zones (EPZ) have been set up to attract foreign capital since the 1980s. The first-ever EPZ was the Chittagong Export Processing Zones (CEPZ) in 1983 followed by the Dhaka Export Processing Zone in 1993. Subsequently, more EPZs were set up in Mongla, Ishwardi, Comilla, Uttara, Adamjee and Karnaphuli. They were then classified into three classifications: Type A (100% foreign investment including overseas Bangladeshis), Type B (joint ventures between Bangladeshi and foreign enterprises) and Type C (100% local enterprises). All 8 locations for EPZs, Chittagong, Dhaka, Mongla, Ishwardi, Comilla, Uttara, Adamjee, and Karnaphuli, have these three types of EPZs and their operation details are listed below:
|Type of EPZ||No. of Operations||Investment (US$million)||Local Employees||Foreign Employees|
Tax Incentives for EPZs
As per Section 75 of the Income Tax Ordinance 1984, provided that companies submit their income tax returns and maintain books of accounts consistently, they are eligible for the following tax exemptions based on their location:
|Location||Year of Operations||% of tax-exempt income|
|Chittagong, Dhaka and Mymensingh (excluding the Bandarban, Khagrachari and Rangamati districts)||1 and 2||100|
|3 and 4||50|
Barisal, Khulna, Rajshahi, and Sylhet dividions, and the
Bandarban, Khagrachari and Rangamati districts
|1, 2 and 3||100|
|4, 5 and 6||50|
Venture Capital Investments
The Venture Capital ecosystem in Bangladesh is just over 5 years old and while there were VC and Private Equity (PE) funds investing in Bangladesh well before 2015, most of these funds were based in India, Singapore, and the US. From 2016 to 2017, there were 4 small VC capital raises; AVM-India invested US$2 million into the payment solutions company CloudWell, Innovate Japan invested US$1.3 million into the e-commerce app AkjerDeal, Razor Capital Bangladesh invested US$1.0 million into e-commerce company Direct Fresh and Go-Jek Indonesia invested US$2.0 million into Pathao. 2018 was a year wherein Bangladesh’s ecosystem saw a huge rise in investments with 2 strategic investments and 8 VC capital raises of which 3 were over the amount of US$5.0 million. In October of 2018, Bangladesh launched its first angel investment network called the Bangladesh Angels and Bangladesh based international development organisation, Brack Bank, in partnership with the US PE firm Osiris Group launched the Impact Fund Partnership. The 8 VC raise investments can be seen below:
|Investor||Amount invested||Bangladeshi Companies|
|Alibaba’s Ant Financial (China)||US$56 million for a 20% stake||bKash, Bangladesh’s largest FinTech group|
|Alibaba’s Ant Financial (China)||US$180 million for a controlling stake||Daraz, e-commerce company|
|Golden Gate Ventures (Singapore)||US$15 million||Shohoz, ride-sharing platform|
|Go-Jek (Indonesia)||US$10 million in equity||Pathao, logistics company|
|Open Space Ventures (Singapore)||US$13 million in loans||Pathao, logistics company|
|IFC (World Bank)||US$3 million||Chaldal, e-commerce group|
|IDLC Finance (Bangladesh)||US$2.5 million (in conjunction with Y Combinator)||Chaldal, e-commerce group|
|Y Combinator (USA)||US$2.5 million (in conjunction with IDLC Finance)||Chaldal, e-commerce group|
In 2019, Dhaka saw a decrease of VC equity capital raisings fall to 5 of which none exceeded US$5 million in value. The largest investment came from AVM-India (their 3rd investment into Bangladesh) which invested US$4.2 million into Sindabad.com, the nation’s largest B2B 3-commerce services platform. Go-Jek gave an additional US$4 million loan to Pathao and it was also noted that CDC (UK) gave a US$30 million loan to Brac Bank. For the year 2020, VC capital raising volume climbed to 6 however only 1 investment was over US$2 million. This investment however was the largest up to date for Bangladesh; US$22.5 million in Series A funding was raised for the B2B commerce platform ShopUp and the round was co-led by India’s Sequoia Capital and Flourish Ventures USA along with contributions from Lonsdale Capital Singapore, VEON Ventures Netherlands and Speedinvest Austria.
Due to the COVID-19 pandemic, over 50% of the previously VC funded startups saw their revenues drop by 50%, 25% ceased operations altogether and the majority saw their runways be shortened down to a few months. Thus, it became apparent just weeks into the pandemic that without government intervention and support, the startup ecosystem would be severely damaged and consequently negatively affect employment (around 1.5 million Bangladeshi citizens are employed in startups according to 2020 estimates) and economic growth for the crucial sector. To prevent this, the government launched its first and only flagship venture capital fund for the ICT Division, Startup Bangladesh LTD, in March 2021. Through this, they provided funding of 500 Crore Bangladesh Taka (BDT), approximately US$65 million, to the ecosystem. 2021 was a good rebounding year for VC capital investment in Bangladesh. All in all the year 2021 was a lucrative year for Bangladeshi startups; aside from the government support the startups also received record amounts of VC investments totalling 50 VC investments of nearly US$380 million in value. Bangladesh welcomed its first unicorn, bKash, through investments made by Softbank (headquartered in the UK) and along with bKash 5 other startups, namely ShopUp, Paperfly, Chaldal, Frontier Nutrition and Praava Health, also received funding upward of US$5 million. As such, the performance of the Bangladeshi startup ecosystem in 2021, despite the adverse conditions brought about by COVID-19, goes to show the vibrancy and potential of the ecosystem that is predicted to continue its upward progress.
Private Equity Expansion and the Dhaka Stock Exchange Ltd
The Dhaka Stock Exchange (DSE) saw exceptional growth in 2021 reaching the highest number of IPOs, a 25.1 increase in DSEX points (then at 6,756.7 points) and record volumes of money raised since 2011. Bangladesh witnessed 24 issuers raise funds from the primary market 14 of which are listed on the DSE, 5 on the SME exchange board which was launched in September 2021 and another 5 of which were debt issues. It was also the year of the launch of Bangladesh’s first-ever green bond business and its first green Sukuk (Shari’ah-compliant bond). It must be highlighted that though 2017 was the lowest point for the DSE in terms of IPOs and capital raises, there was growth in the subsequent years as Bangladesh also saw 14 IPOs in the year 2018. 2019 and 2020 were comparatively lagging in terms of IPOs raised, 8 in both cases. Still, aggregate amounts of capital raised increased especially in December 2020 when Robi Axiata, the Bangladeshi mobile network operator owned by Malaysia’s Axiata Group and Bharti Airtel (India), raised US$62 million whilst raising its IPO by selling 10% of the company. This IPO was the largest Bangladeshi IPO since energy corporation MJL Bangladesh’s IPO in 2011, an impressive feat showcasing the robustness of the Exchange that performed well despite the adverse effects of COVID-19.
There are several reasons for the gradual improvement in the DSE from 2017 to 2021. Aside from the rebound of Asian stock exchanges and Bangladesh’s estimated 6.8% GDP growth in 2021, several regulatory reforms have been undertaken by the Government of Bangladesh since 2017. Firstly, the Bangladesh SEC (BSEC) expedited the processing of pending deals to actual launch due to which the 11 fixed priced 2021 IPOs were able to be launched within the year. Secondly, the DSE implemented a new module whereby 15% shares of an IPO are to be reserved for employees without them having to deposit 20,000 BDT into their beneficiary owner’s accounts which is mandatory for general investors. The reasoning behind this policy is, according to the BSEC Executive Director, that “[D]ue to an increase in compliance and accountability when a company gets listed, employees often have a negative perception of listing in the capital market. Now, employees will encourage a company’s listing due to the 15% share allotment incentives”. This may also ensure the company’s continuity based on the 2-year lockup policy.
Thirdly, the BSEC and the Finance Ministry jointly pushed banks and insurance companies to list on the market as a condition of their regulatory obligations. Through this, they secured additional capital for the banks and insurance issuers and contributed to the development of the domestic institutional asset management businesses’ infrastructure. By early 2021, 3 of the 11 fixed price DSE IPOs were Bangladeshi banks; the 4th generation private commercial bank, NRB Commercial Bank, was the first private commercial bank in the past 12 years to be listed (after Security Islami Bank was listed in 2008). As part of the agreement, the Bank decided to use 110 crore BDT (US$12.5 million) to purchase government securities, 6 crore BDT (US$685 million) to acquire secondary market shares and the remainder of their IPO proceeds to pay off the IPO related expenses. In May 2021, the BSEC also approved the South Bangla Agriculture and Commerce (SBAC) Bank to raise 100 crore BDT (US$11.4 million) under the condition that the bank offers its shares to the public at a face value of 10 BDT each and also provided that the SBAC agrees to use the majority of the capital to buy government securities similar to the previous case. Union Bank was also authorised to raise 428 crore BDT (US$48.8 million) via the issuance of shares through a fixed price IPO under the condition that they invest 200 crore BDT (US$22.8 million) into the capital market within 2021.
In September 2020, the Finance Ministry declared that all unlisted insurance companies must go public in three months’ time or have their licenses revoked in a bid to expedite their stock market listing process. To facilitate their transition in the short time period the minimum IPO size and the post-IPO paid-up capital amounts to 15 crore BDT (US$1.7 million USD) and 75 crore BDT (US$8.5 million), respectively. By the end of 2020, 4 insurance companies were approved for IPO listing (26 others filed for exemptions) and in 2021 these companies, namely Express Insurance, Crystal Insurance, Desh General Insurance and Sonali Life, were involved in the 11 fixed price DSE IPOs. Similar to the case of the banks that were also involved in these fixed IPOs, these insurance companies were given the condition to invest the capital raised in the capital market, government treasury bonds and fixed deposit receipts (FDRs).
It is apparent that the Bangladeshi bond market, which is still miniature in size and stands at a value of less than US$20 billion, especially in comparison to the bond market sizes of other rapid-growth emerging countries including Malaysia (US$350 billion), Indonesia (US$250 billion) and Pakistan (US$65 billion), has been predominantly comprising of government debt securities and capital bonds that are issued by banks as well as Non-bank Financial Institutions (NBFIs). Banks require short-term deposits to manage their businesses and distribute long-term loans but if the bond market is not adequately diverse and large enough it increases the banks’ liquidity risks and the possibility for asset-liability mismatches which in turn delays the banks’ ability to attain Basel III capital requirements. To tackle these problems, the Bank of Bangladesh and the BSEC made the decision to increase the issuance of perpetual bonds. Perpetual bonds, which are fixed-income security with no maturity date, count as long term capital which could help galvanise the bank’s capital base. In June 2020, City Bank and Jamuna Bank were given the approval to issue 400 crore BDT (US$45.4 million) bonds the success of which led to the BSEC granting further permissions for issuing perpetual bonds to three other banks, First Security Islami Bank (US$68.2 million), City Bank (US$68.2 million) and Trust Bank (US$45.4 million), in December 2020. To further diversify the bond market the BSEC requested issuers to expedite the listing process of perpetual bonds on bourses and by September 2021, 11 banks had received approval from the BSEC to issue perpetual bonds worth 55 billion BDT (US$625 million). In December 2021, AIBL Mudaraba Perpetual Bond became the second-ever security to get listed on the Bangladesh exchanges after IBBL Mudaraba Perpetual Bond got listed in 2007.
Green Bond Issuance
In regard to bonds issuance, another noteworthy development in January 2021 was the decision of the central bank of Bangladesh, Bangladesh Bank, to mandate 2% of all loans issued by banks NBFIs to be devoted to green projects. Additionally, a revolving fund worth US$125 million was founded for the development of FinTech as well as the export promotion of renewable and sustainable products. In April 2021, Bangladesh approved its first-ever green bond for financing environmentally-friendly renewable projects. This US$12 million instrument was set up by the NGO SAJIDA Foundation, which is owned by Renata Ltd, an animal health pharmaceuticals company that branched out of Pfizer in 1993. Subsequently, on 8 July 2021, the BSEC authorised the Bangladesh Export Import Company (Beximco) to be the originator for the Beximco Green Sukuk Bond which is currently worth 30 billion BDT (US$341 million), 7.5 billion BDT (US$85.2 million) of which was raised via public markets. In January 2022, the Green Sukuk Bond made its debut on the DSE and the Chittagong Stock Exchange (CSE) in a bid to raise US$400 million to fund solar power generation projects. As of yet, the Beximco Group is using the capital raised to fund two solar-powered photovoltaic (PV) powerplants; the 200 MW Teesta Solar Limited Plant in the Rangpur district and the 30 MW Korotoa Technology Co. Plant in the Panchagarh district.
Considering the aim of the Bangladeshi government to have 40% of the nation’s total energy be powered by renewable energy by 2050 the promotion of green bond issuance is a step in the right direction.
Launch of the SME Platform
India’s Bombay and National Stock Exchange has helped raise capital for over 200 SMEs and have their shares traded on their bourses thus far. In 2021, the Beijing Stock Exchange (BSE) was announced by President Xi Jinping with a special focus on developing innovative SMEs and as of November 2021, 81 SMEs have begun trading stocks on the BSE. Taking inspiration from these success stories and other regional contenders, the DSE launched the DSE SME Platform on the 30th of September 2021 with six companies listed on it and one company on the CSE branch of the platform (inaugurated on June 10). The companies must grow to a value of at least 5 crore BDT (US$0.56 million) however once a company reaches the threshold of 30 crore BDT (US$3.4 million) or above it must transition to the main capital market. The platform is also exclusively eligible for qualified institutional and private investors who have invested a minimum value of 5 lakh BDT (US$0.57 million). For retail investors, there is a restrictive condition that they may only sell on the SME boards due to the market’s volatility caused by its low-cap nature and vastly fluctuating daily price deviations. An example of a successful listing is the case of the agricultural product manufacturing and marketing company Mamun Agro Products. The company was incorporated in 2003 and began trading shares on the DSE and CSE platforms on 15th February 2022 after receiving approval from the BSEC to raise 10 crore BDT (US$1.14 million) from the capital market with a Qualified Investor Offer (QIO). The company successfully raised the 10 crore BDT by issuing 10 million 10 BDT ordinary shares under the fixed price method. The company was also restricted from issuing bonus shares for three years after its listing on the SME platform.
Remaining Challenges and Recommendations
While these regulatory changes have made remarkable improvements to the private equity sector of Bangladesh many challenges remain. In January 2022, one of Bangladesh’s top think-tanks, The Centre for Policy Dialogue (CPD) released their analysis report called the Bangladesh Business Environment 2021 which was an empirical study of the country’s entrepreneurs’ perceptions and experiences from April to July 2021. The study involved interviews with 73 entrepreneurs from the cities of Dhaka, Chattogram, Narayanganj, Gazipur and Faridpur. Firstly, the results showcased that over 56% of participants were of the view that the IPO quality of the DSE and CSE has been poor. This finding was supplemented by a historical analysis of 91 prior IPOs have underperformed in the post-IPO phase. 53 participants said that the regulatory enforcement by authorities has been weak and inconsistent and half of the respondents’ noted irregularities in the financial reporting of the capital markets and asserted that suspicious trading in the secondary markets also poses a major challenge to the capital market’s reputation as a reliable market. Although not in the majority, 34% of the entrepreneurs stated that at times institutional investors “behave” like “small investors” due to which 30% also reported a problematic lack of due diligence of the DSE and CSE. Lastly, 23% reported a lack of transparency in the maintenance of Beneficiary Owner (BO) accounts.
In regard to Bangladesh’s low ranking on the World Economic Forum’s Global Competitive Index and World Bank’s Ease of Doing Business in 2020 (rankings mentioned in Section 1), a critical reason for such lackluster performance is the slow and inefficient bureaucracy in Bangladesh that lacks the ability to drive forward cooperation and policy frameworks in due time. To give an example of this red tape, in August 2020 Japan offered the Bangladeshi investment institutions a list of 27 issues that, if solved, could significantly help streamline foreign investment procedures in the nation. Despite the list reaching the Prime Minister’s Office directly only 3 issues have been sufficiently handled in over 15 months. While some issues have not been addressed due to their dependency on the completion of certain infrastructure projects, most of them pertained to the inter-agency communications that were crucial for the Japanese companies looking to relocate their factories to Bangladesh. If such inefficiencies are not effectively dealt with, Bangladesh could stand to lose out on the presence of foreign investors.
The report makes several recommendations to improve the foundation of Bangladesh’s capital markets. It highlights the need to conduct consistent and comprehensive market research on the corporate bond market; though it has already been studying for years as the repot itself acknowledges, it argues that it may not be comprehensive enough and that the hurdles faced by the corporate bond market are not yet understood so much remains to be done to figure out effective solutions. Research is also imperative to develop and construct a robust and decently sized derivatives market. In regard to upcoming IPOs- as it is believed that 3 VC/tech companies could be IPO candidates in the near future- the report recommends to study how these IPOs could significantly raise global attention to Bangladesh similar to how the IPOs of Kaspi and Ozon did for Kazakhstan and Russia, respectively.
Investments in the Renewable Energy Sector
Bangladesh is amongst the most densely populated nations in the world being over three times more so than its neighbour India. As a result, the global perception is that Bangladesh has been slow to adopt renewable energy. Whilst Bangladesh is not amongst the most renewable energy reliant nations, Dhaka has the largest off-grid solar power program across the globe. The government of Bangladesh began a campaign in 2003 to power 50,000 households solely through solar power which successfully provided 16% of the rural population with sufficient energy through the program. Despite a 4% compound increase in annual growth of renewable energy generation since 2018, the nation still has a long way to go. As of July 2021, the installed renewable energy is estimated to be 650.5 megawatts (MW) out of a total energy capacity of 11,500 MW, meaning a 6% share that is below the government’s endeavour for a 10% share by 2020. 416 MW of the renewable energy came from solar energy whilst the remaining 230 MW came from hydropower; wind power generation remains nil.
In the same month, Dhaka cancelled 10 coal-fired power plant projects that were in the works with regional partners partly due to funding issues and partly due to environmental concerns. At present, the state-owned enterprise, Electricity Generation Company Bangladesh (ECGB), which is currently developing a 50 MW solar energy generation project with funding from the World Bank, aims to add a further 100 MW solar energy generation capacity through a 50-50 JV program with the Marubeni Corporation Japan. During the MoU signing ceremony for the JV program in May 2021in Chittagong, a junior Power Minister spoke at length about the need to utilise technology and develop a means to generate quality solar modules in less surface area if Dhaka wishes to achieve its solar energy generation goal of approximately 2,277 MW by 2030.
Potential for diversification amidst the shift in Regional Supply Chains
Bangladesh’s competitive investment climate, youthful and low-costing labour market and sparse limitations on foreign equity participation are ideal for the cultivation of a greater role in global supply chains. The government has set ambitious goals for the development of its agribusiness, garment and textiles, energy, IT and infrastructure sectors and seeks to attract foreign companies looking to relocate from their home locations and diversify their investment footprints in Asia including Commonwealth member states India, Malaysia, Singapore etc. The country also offers a growing consumer economy; just last year (2021), Bangladesh surpassed India’s GDP per capita income levels after registering a 9% growth for the 2020-2021 Financial Year (FY).
Aside from this, the recent development of the Russia-Ukraine conflict has caused a drastic shift in Asia’s supply chains to and from Europe. The land ports and border transportation routes that were previously used to link the EU and China have been temporarily closed and supply chains have begun moving south and reliance has shifted from one supply chain route to several in case of any unexpected disruptions. Bangladesh has a trade Cooperation Agreement with the EU (signed in 2001), has FTAs with several South Asian nations (mentioned in Section 1), and is also in talks with China on signing an FTA though it is important to note that 97% of Bangladeshi products are allowed duty-free export to China already. As such, Dhaka can be considered a South Asian trading hub and has great potential to become a viable manufacturing and sourcing market. Regarding the possible supply chain route, Bangladesh can connect via shipping through the Persian Gulf using Iran’s Chabahar Port on the INTSC (also discussed in section 1) to reach the ports of Bulgaria and Romania. Although the corridor is currently experiencing bottlenecks these are expected to be removed by 2023 after which this route may be amongst the fastest and most economical supply chain routes. Therefore, export manufacturers and sourcing companies in both Asia and Europe should take a closer, critical look at Bangladesh as a China plus 1/2 acquisition for EU-focussed supply chains.
Download the full report at https://www.asiainvestmentresearch.org/issue/bangladesh-special-2022-investment-issue