There is an old saying among traders that the stock market runs on stories and the bond market runs on arithmetic. It sounds like a joke, but it is one of the most useful ideas in finance, and it explains more about Bangladesh than most policy papers do.
Start with the difference. When you buy a share, you are buying a piece of a company’s future, and nobody knows what that future holds. So, the price of a share is really the price of a story: a story about growth, about management, about whether this bank or that pharmaceutical company will be bigger and more profitable in five years.
Optimism moves the price up; fear moves it down. This is why stock markets everywhere are emotional, and why they need strong disclosure rules, because a story can only be priced honestly if the facts behind it are public.
A bond is the opposite animal.
When you buy a bond, the company or the government promises you fixed payments on fixed dates. There is no story to imagine; there is only a question of trust.
Will the borrower pay?
The price of a bond is therefore built like a sum: the interest rate on government securities, which everyone treats as the risk-free floor, plus an extra premium for the risk that this particular borrower defaults, plus a little more for how long your money is locked up. Stock markets price imagination. Bond markets price trust and time.
Here is the crucial point: a bond market cannot function without three things that a stock market can. It needs a credible risk-free benchmark, meaning government securities that actually trade, so everyone knows the true price of money. It needs confidence that inflation will not quietly eat the fixed payments. And it needs courts that can enforce a contract when a borrower refuses to pay. Now hold that checklist up against Bangladesh.
Our risk-free benchmark exists on paper but not in practice. Banks buy treasury bonds to meet regulatory requirements and hold them until maturity. Treasury bonds were listed on the Dhaka Stock Exchange in 2022, yet trading remains negligible. At the retail end, Savings Certificate pays administered rates above the market, which means no company can issue a bond that competes with the government’s own subsidised product.
In earlier years, the 9/6 interest rate cap meant credit risk was not priced at all: the best borrower and the worst borrower paid nearly the same rate, so the very idea of a credit premium had nothing to stand on. The result is that our corporate bond market is a handful of bank instruments and sukuk, invisible to the ordinary saver.
The stock market tells a parallel story.
Our market capitalisation sits at roughly one tenth of GDP, while India’s exceeds its entire GDP.
The market is dominated by retail investors, and its history reads like a cautionary tale: the crash of 1996, the crash of 2010-11, the periodic frenzies in junk shares, and most recently, the floor price of 2022-24, which froze prices by decree and suspended the market’s one essential function, which is discovering what things are worth.
Meanwhile, the best family-owned companies in the country simply refuse to list. Why would they? Listing means full disclosure, taxes on real rather than reported profits, and sharing control with strangers.
So, we have a small, volatile stock market and an almost nonexistent bond market. It is tempting to treat these as two separate problems. They are not. They are two symptoms of the same condition, and the condition is that everything in Bangladesh flows through banks.
Consider how the pieces connect. A large company that should be issuing bonds borrows from its bank instead, partly because a bank loan can be quietly rescheduled when times are hard, while a bond cannot. And because recovering money through the courts takes the better part of a decade, the legal hardness that makes a bond valuable is illusory here anyway.
On the other hand, the household saver who should be holding safe bonds has nothing to buy except fixed deposits and sanchayapatra, so when he wants a higher return, he walks into the stock market with no ladder of safer options behind him.
Much of what we call stock market gambling is really the behaviour of savers who were never offered a bond market. And because companies borrow only from banks, all of the country’s corporate credit risk piles up on bank balance sheets as non-performing loans, which then depresses the share prices of the largest sector on the stock exchange, which happens to be the banks themselves. The weakness travels in a circle.
What can we infer about ourselves from all this? Quite a lot, and not all of it is comfortable.
From our corporate families, we learn that control is worth more than capital.
A business house will grow slowly on retained earnings and bank debt rather than raise cheaper money from the public, because the public asks questions. When the country’s finest companies calculate that opacity is more valuable than a lower cost of capital, that is a verdict on the environment, not on the companies.
From the state, for past governments, we learn that the government never needed a bond market because it had easier ways to take the nation’s savings: sanchayapatra at the retail counter and bank borrowing at the wholesale window.
A government that can pre-empt savings directly has little incentive to build the plumbing of a real debt market. And a system in which large loans are routinely rescheduled and willful defaulters walk free is not a system with weak creditor rights by accident. Soft credit has been a form of favour, and hard bond contracts do not permit favours.
From regulators in past years, we learn a preference for protecting prices over protecting processes. The floor price is the clearest example: faced with falling prices, the response was not to fix disclosure or governance but to outlaw the fall itself.
A regulator confident in its market lets prices move and punishes manipulation. A regulator that freezes prices is telling you it does not trust its own market, and investors hear that message clearly.
Of course, we hope that the current government and the current regulator are far wiser. Early signs do suggest this.
There is a deeper layer still, and it sits at the border of anthropology and finance, a border economists rarely visit.
Economics treats risk aversion as a number, a parameter to be plugged into a model. Anthropology knows it is a culture. Watch how the Bangladeshi household actually manages risk and you will find a sophisticated portfolio that appears on no brokerage statement: gold on the wrists of daughters, land in the ancestral village, and above all, an elaborate web of kinship obligations that works simultaneously as insurance, pension, and emergency credit line.
Economics treats risk aversion as a number, a parameter to be plugged into a model. Anthropology knows it is a culture. Watch how the Bangladeshi household actually manages risk and you will find a sophisticated portfolio that appears on no brokerage statement: gold on the wrists of daughters, land in the ancestral village, and above all an elaborate web of kinship obligations that works simultaneously as insurance, pension, and emergency credit line.
A cousin’s remittance is a hedge; a marriage is an alliance of balance sheets; the extended family is a mutual fund with mandatory membership. These are not primitive habits waiting to be modernised. They are entirely rational responses to a world in which formal institutions could not be trusted, and within their limits, they work beautifully. The limit is scale.
Kinship can ensure a family through a bad harvest; it cannot finance a power plant, a port, or a pension system for 170 million people. Financial development, seen this way, is not a technical upgrade. It is the slow migration of trust from people we know to institutions we do not, and no circular from any regulator can order that migration into existence.
To go further upstream from culture, geography wrote the first draft of this culture.
People who live on a restless delta, where the river can take the land and the flood can take the harvest, learn early that wealth should be portable, like gold, or social, like kin, rather than a paper promise from a distant institution.
Density sharpened the lesson: when so many people share so little land, land itself becomes the ultimate asset and the ultimate obsession, which is why household surplus in this country vanishes into plots and apartments rather than portfolios. And now demography is quietly rewriting the draft.
Bangladesh’s fertility rate has fallen from nearly seven children per woman in the early 1970s to around two today, one of the fastest transitions in recorded history.
For centuries, children were the pension. Within a generation, they will not be, because there will be fewer of them and they will be living in Dhaka, Dubai, and Toronto rather than in the family compound.
A society that can no longer store its old age in its children must learn to store it in financial assets, which means the demand for precisely the instruments we lack, meaning pensions, annuities, and long-term bonds, is about to be created by demography itself, whether or not our institutions are ready to meet it.
Underneath all of this sits a single measurement. A bond market measures a society’s capacity for impersonal trust: my willingness to lend to a stranger for 10 years because a contract and a court stand behind the promise. A stock market measures a related trust: my willingness to hand my surplus to managers I have never met because disclosure and audit stand behind the numbers.
Bangladesh runs low on both forms of impersonal trust, so our capital flows through the channels where personal trust still works: family, relationship banking, and the state. The size and quality of our two capital markets are not two different problems. They are the same institutional thermometer.
The encouraging corollary is that genuine reform will also show up in both places at once.
When treasury bonds begin to trade and a real yield curve emerges, when defaulters face consequences quickly, when good companies start choosing to list because disclosure has become normal rather than dangerous, we will not be watching two markets improve.
We will be watching one thing improve: the ability of Bangladeshis to trust institutions they cannot personally see. Demography has already started the clock. That, in the end, is what a capital market is. It is trust, quoted daily, with a price.
Dr Sajid Amit is an experienced development sector professional, academic and investment professional. He has received awards for his investment research from Morgan Stanley and BlackRock. He can be reached at [email protected].
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
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