Private investment in Bangladesh is largely financed by domestic savings.
Since domestic savings has remained constant at around 21-22% of GDP over the last decade, private investment as a share of GDP has changed little over the same period.
But the government is able to utilise foreign savings, mainly international remittance, to finance its public investment. So why can’t the private sector do the same?
Maybe there is a supply-side problem, after all.
The inability of businesses to access remittance savings to finance private investment is entirely a supply-side problem involving the banks.
Very little of the remittance sent by Bangladeshis working abroad is saved by recipients in banks.
Moreover, when remittance recipients do look to save, they tend to buy national savings certificates issued by the government.
In the fiscal year 2014-15, the government initially aimed to borrow Tk26,500 crore through the sale of national savings certificates, but ended up borrowing close to Tk35,000cr (approximately 2.5% of GDP).
National savings certificates are financial instruments that allow the government to access and borrow funds without going through the banking system.
Since there is no functional corporate bond market in Bangladesh, private businesses have no comparable avenue of bypassing the banking sector, other than the stock market.
This explains why the government is able to access remittance savings to finance its public investment while the private sector is limited to utilising domestic savings intermediated through the banking sector to finance its investment.
Bangladeshi banks are a one-trick pony
Even if remittance recipients saved their money in banks, private businesses would struggle to access those savings because banks do not lend without holding collateral against their loans.
Data from the Bangladesh Bank indicates that 57.5% of all loans provided by banks in 2015 were secured against real estate held as collateral.
Publicly available data on the Bangladeshi real estate industry is hard to find but there is plenty of anecdotal evidence to suggest that real estate prices have fallen notably in recent years.
In the final analysis, it is not too difficult to conclude that Bangladeshi businesses face significant challenges in accessing adequate funds to invest. There are greater problems on the supply side than there are on the demand side
With real estate prices down, it should come as no surprise if banks are unwilling to lend to private businesses for long-term investment.
It is difficult for banks to justify higher lending when the value of the primary underlying asset used to securitise loans has depreciated significantly, and may continue to do so.
In situations like that, businesses face a credit crunch, similar to what was witnessed during the global financial crisis.
In the case of Bangladesh, the situation is made worse by the repeated occurrence of large lending fraud and default which has led banks to tighten credit standards significantly.
Even as lending interest rates have fallen markedly in recent years, tightening credit standards have made it difficult for businesses to borrow money from banks.
Developing a bond market can be a suitable supply-side solution
In the final analysis, it is not too difficult to conclude that Bangladeshi businesses face significant challenges in accessing adequate funds to invest. There are greater problems on the supply side than there are on the demand side.
An effective solution to this supply-side problem may involve the government taking policy and regulatory action to encourage the development of a corporate bond market.
This may require the government to enact strong bankruptcy laws, establish dispute resolution mechanisms, and develop regulations for liquidation of assets.
Such initiatives to develop a strong corporate bond market would enable businesses to borrow directly from savers without having to rely on the banking sector, while also providing adequate protection for creditors and investors.
An even simpler first step may involve enabling the secondary trading of government bonds, the national saving certificates mentioned earlier.
It would help to establish a transparent benchmark price for bonds which is essential to the development of a vibrant and liquid corporate bond market.