Significance of Capital Market for Economic Development

Signifi burn downce of majuscule trade for Economic DevelopmentAn Explotary Study On The Signifi batchce of jacket crown food foodstuff for Economic Development and Its Further Growth Potential In Context of BangladeshAbstractThis inquiry paper investigates whether the role of keen securities industry is constrictifi natest for the sparing out harvesting of Bangladesh. Literature suggests that well developed blood line commercialize bottom provide an extra impetus to stinting activity. quasi(prenominal) conclusions were alike drawn from the in-depth interviews. This paper to a fault reveals a well-s nookiened scenario of the goonital mart fall out highlighting its setbacks, underway weakness, recent improvements and its likely signboards of victimisation by which we flowerpot fore catch out whether the heavy(p) mart has except evolution potential or non. Thus the express bailiwick preserve likewise direct in providing substantial training that ce ase as well as be utilise for except look for.AbbreviationsADB- Asian Development BankCDBL- of import Depository of Bangladesh Limited CDS- aboriginal Depository SystemCSE- Chittagong deport substitutionDGEN- DSE command officeDSE- working enceinteital of Bangladesh origin switch overgross domestic product- gross domestic productIPO- initial in the man eye(predicate) offering sulfur- certification and change over commitment1.0 IntroductionThe financial food grocery store contri unlesses to the sparing growth and emergence by providing the adopted pay for homework of goods and services. The financial grocery consists of two division- monetary resource merchandise determineplace and uppercase commercialise. The nones grocery is basically entitled to supply finance on short basis to individuals, businesses, enterprises, government and their agencies. The cracking food merchandise, on the opposite hand, provides finance on medium to long-term basis to corporate bodies, government and their agencies (Al-Faki, 2006). chief city securities industry plays a crucial role in any modern saving as they allow investors fund to flow to the most promising opportunities, i.e., the pecuniary resource be mobilized and channeled goodly from savers to the users of cash in hand (Al-Faki, 2006 DSE, 2006 Hubbard and Thornton, 2006 Ahmed, 1997). In Bangladesh financial intermediation relies in universal on the savings fixing sector which hike resulted in lack of beauteousness support (Salahuddin Ahmed, 2007 Islam and Hassan 2002).Further more than out of 5 million urban-establish middle class hoi polloi scarce four hundred thousand argon participating in the securities merchandise and among them roughly hundred thousand argon active investors. A large portion is fluent ignorant of the nature and benefits of the crownwork securities industry (Abu Ahmed, 2006 DSE Review, 2006 Islam and Hassan, 2002).Developing more complet e and deeper gravid of the United States grocery would enhance a countries growth potential and innovation (Andritzky, 2007). The forces of globalization, technology, new forms of competition reserve perceptibly transformed capital mart worldwide (Hassan, 2004). The chief advisor Dr. Fakhruddin Ahmed tell that Only a vibrant and well-regulated capital commercialise can conduct sustainable stinting suppu ration in the country done devising the real sector capable of meeting the challenges of the competitive global stinting realities ( DSE Monthly Review, June 2007).Regardless of recent improvements, Bangladeshs capital securities industry dust underdeveloped as its surface is excuse very small in terms of grocery store cap (ADB, 2006 Salahuddin Ahmed, 2007 Islam and Hassan 2002). The securities industry cap re infixs just supra 9% of the gross domestic product (Dr. Fakhruddin Ahmed retrieved from DSE Review). As Bangladesh capital market is still rather small com p ared to different(a)(a) regional market and to the coat of it of its saving (CSE, 2006) in spite of its existence for a long time, this paper applies a framework for analyzing the deduction of capital market for sparing growth and breeding of Bangladesh, identifying its growth potentials through explo balancen.2.0 Problem StatementBangladeshs capital market is still underdeveloped, in spite of recent improvements. The size of the countrys capital market is quite an small mainly collectible to the excessive dependance of starring(p) corporate entities on the banks for financing. Moreover the overall transparence of market dealing is also low compared to international standards and generally there has been slow culture of the underlying market infrastructure.The government is qualification effort to develop the reliability and efficiency of memory board exchanges as enthronisation market. Compared to the other neighboring countries the come of participants are untold smaller in Bangladesh as investor lack confidence. at that place is a supply side constrains in the capital market as quality functions are lacking. For all this reason this question is done to search the importance of capital market in the sparing and what are the future sign of festering of the demarcation market.3.0 Purpose of the StudyThe purpose of the line of business is to explore a well scanned scenario of Bangladesh capital market, its deduction and its prospects. Although well-nigh explore has been conducted relating to this topic exclusively there is little empirical evidence nearly how inherent beginning market is to economic instruction of a country.A sound capital market prompts better economic base and limit its future growth and so it can encourage realize Bangladeshs growth potential. The capital market of Bangladesh is on the brink to play its ascribable role as a medium for financing investiture and thereby making a nonable parting t o economic growth, employment world and poverty alleviation.The capital market plays an important role in acceleration the abuse of economic development but the existing state of the capital market is under-developed and not in a position to ensure economic progress of the country. Hence this investigate will try to highlight the deduction of capital market for the nation and explore what are the probable signs of progress.4.0 investigate Timeline2007 SeptemberWriting inquiry Proposal2007 SeptemberDeveloping Literature Review2007 OctoberCollecting Data2007 October- NovemberData Analysis and indication of the Findings2007 NovemberPreparing Draft and Finalizing the Research Paper2007 DecemberSubmission of Research Paper5.0 Limitations of the studyDuring conducting the research I came across certain limitations and among them the foremost one is time constrain. Although I got the opportunity to work in an organization that is capital market establish but it was difficult to fin d spare time that could be utilize for the report. Moreover the interviewed person could not provide all necessary tuition due to lack of time.The research timeline also reveals that time constrain was genuinely a barrier as there was plenty to find more or less this research topic. As the research is conducted for the first time, I did not labor several(prenominal)(prenominal) support from previous research paper and notwithstanding research is suggested. A huge portion of the report is based on standby data collected through websites and so the depth of reliability varies as by the nature of website.6.0 Review of the Literature6.1 Financial Intermediationharmonize to Joseph Yam (2004) financial intermediation is channeling savings into investment species. Aziz and Duenwald (2002) referred that financial intermediation affects growth through the following channels (i) it can increase the marginal productivity of capital by collecting information to evaluate alternati ve investment projects and by risk sharing (ii) it can raise the proportion of savings channeled to investment through financial development. fit in to Conning and Kevane (2002) intermediation implies an intermediary. Gorton and Winton (2002) added that it is the pedestal institution in the saving investment process. They referred that financial intermediaries are firms that take up from those who have a bun in the oven excess cash, that is, the savers and lend the bills to companies that essential resources for investment.6.2 death penalty Indicators jibe to R. N. Agarwal (2000) the most comm sole(prenominal) used standard to measure the size of a countrys stock market is market capitalisation ratio, that is, the ratio of market value of stocks which are on-goingly listed on a bourse to Gross Domestic Product (gross domestic product). A small ratio of capitalisation to gross domestic product reveals the small size of a stock market. Alternatively, the size can be measured b y the number of listed companies on a stock market. The height of maturity of an deliverances financial system is ingrained for economic development.Bekeart et al., (2007), Hubard and Thornton (2006), Rosul (2002) all investigated the substance and relative of stock market development with the economic growth and their conclusion suggests that capital market development is positively correlated with long term economic growth and the capital market plays an important role in the economic development of any country. The size of the candour capital market has an optimistic effect on economic growth of the country, that is, much high market cap and turnover has a major positive modulate on the economy (Institute for Advanced Studies, IHS, 2006).It is follow throughn that the ratio of market cap to GDP in neighboring countries like India, Pakistan and Sri Lanka is comparatively much higher(prenominal), that is, more than 60% of their GDP (DSE, Kh. Asadul Islam, 2007 Dr. Fakhruddin Ahmed,2007). In Bangladesh the market cap is very small proportion of the countries GDP (Islam Hassan, 2002) and this is due to significant habituation on the banking sector (DSE Review, Fakhruddin Ahmed, June 2007). market capitalisation as a cope of GDP was around 2.5%-3.3% during 2001-2003 compared with 1.4-10.1% during 1993-1996 and 2- 4% during 1997-2000. However in the course of study 2004 market cap reached 6.8% reflecting the rise in the DSE superpower from 968 to 1,971 at the end of 2003 and 2004 independently (ADB, May 2005). The trend of market cap as percentage of GDP and other capital market indicators of DSE and CSE are shown through the athletic supporter of statistical data represented in the backchat section in tabulate 1.Despite the existence of the bourse from 1954, the capital market still exhibits features of an emerging fair-mindedness market (Islam Hassan, 2002). The finance sector is immensely bank-based (Salahuddin Ahmed, 2007) as resource milit arization for industrialization and economic development is made primarily through the tied(p) banking system (Islam Hassan, 2002).Borrowing requires fixed payments and over-reliance on banks can cause mention default risk. concord to (Mochammad Rosul, 2002) excessive reliance on bank acceptation results in a mismatch with long-term investments being financed with short bank loans. He added that such a risky situation can further yield to the economic crisis and so the job of the principal fund provider for business should be transferred from banking sector to the capital sector.6.3 Regulatory Bodies6.3.1. The surety and stand in delegation ( dry)The Security and Exchange Commission (SEC) exercises power under the Security and Exchange Commission Act 1993 and established on June 8, 1993. SEC, the sole great(p) Market Watchdog and Regulator, has been pursuing a vigorous capital market development process including amendments of its existing regulations, conduction of inves tor awareness programs, rigid observe and surveillance to exact in enhancer in the occupation tool (SEC, Annual Report 2003 -04).The responsibility of SEC includes the following regulate the functions of Stock ExchangesRegistering and regulating the business of stock brokers, sub broker, share transfer agents, underwriters, registrar, portfolio managers, investment advisors, and other middlemen related to security dealings.Registering, controlling, and observe of all types of mutual fundsControlling and monitor of all authorized self regulatory organizationsProhibiting double-faced and unfair practices related to securitiesPromoting investors education program and providing training of intermediaries rule substantial acquisition of shares and takeover of companiesSEC are detects market handling and also keeps constant vigil on the activities of stock exchanges to ensure dominance of the surveillance system.Conducts research and publishes information for above purposes(Sourc e Security Exchange Commission Website www.secbd.com)6.3.2 Stock Exchanges6.3.2.1 capital of Bangladesh Stock Exchange (DSE)On April 28, 1954 DSE was first coordinated as the East Pakistan Stock Exchange Association Limited. Formal trading began in 1956 with 196 securities listed on the DSE with a total paid up capital of to the highest degree Taka 4 billion. On June 23, 1962 it was renamed as Dhaka Stock Exchange (DSE) Limited.After 1971, the trading activities of the prime bourse remained suppresses until 1976 due to liberation war and economic policy pursued by the then government. Trading resumed at DSE in 1976 with only 9 companies listed having a paid up of Taka 137.52 million (Bashar et al., 2000 M Farid Ahmed, 1997). As of today there are 342 listed companies in the prime bourse with market cap exceeding 700,000 million (DSE, 2007).The reforms that DSE undertook recently for ensuring professionalism and transparency focused on the trading of securities. The measure were t aken to implement transparent trading system, in force(p) reporting of trade, real time delivery of information, strong surveillance and supervise over trade of securities and settlement of shares (Rahman,Uddin and Malik, 2006).6.3.2.2 The Chittagong Stock Exchange Limited (CSE)The CSE is the countries countenance bourse that started its operation from the socio-economic class 1995. It is also a self-regulatory non profit organization. Currently the total of listed securities are 223 of which the number of listed companies are 208, mutual funds 14, and one debenture.6.4 novel cracking Market Scenario of BangladeshAccording to Dr Fakhruddin Ahmed (DSE, 2007) semi governmental uncertainty, corruption and lack of transparency in all section of the social and economic fabric are some of the reasons for capital market deficiency. Bangladesh Governor Salehuddin Ahmed (2007) reveals that foremost problems include political instability, under developed infrastructure, poor port mana gement, short comings in levelheaded system and corruption (Financial Express Report).On the other hand DSE general share price advocator reached its pinnacle and crossed 3000 points (Newage www.newagebd.com). In feature the capital market witnessed a robust growth in the current form. Both turnover and market cap crossed new milestones at Tk 3000 million and Tk 700,000 million singly during the year (DSE, 2006 DSE, 2007, IDLCSL). new-madely our market cap crossed USD 10 billion that accounts for only 13% of its GDP which was only 8% a year back. (DSE Monthly Review, Oct 2007).Though the plowshare of capital market to GDP is still inadequate when compared to neighboring countries but still its increase is significant for the development of our economy. Comparison of indices and market cap among contrary countries is shown in bow 2 and Figure 2 in the backchat part. Entry of 12 new issues worth Tk 11,322.95 million helped raise the market cap.Some of the reason for the prog ress in capital market development is central depository system and the machine-controlled trading system (ADB, 2006 SEC, 2005). The DSE has upgraded its modify online trading system and investors are able to trade from antithetical move of the country (SEC Quarterly Report, April-June 2007 ADB, 2006). Another reason for the vigorous improvement of the faithfulness capital market is due to strenuous efforts taken by the SEC that further boosted investors confidence (DSE, 2007).7.0 Research Methodology7.1 Research DesignThe present study endeavored to explore importance of capital market for the economic development of Bangladesh and its future prospects. Exploratory research is selected as research design as little information exists close to the capital market of Bangladesh. The aim of wildcat research is mainly to gain enough information before doing more thorough research. We basically start by gathering as much information about the object as possible and with a isolated impression of what we should study (Cooper Schindler, 2003).7.2 Research InstrumentThe research was conducted using twain primary and routine-string data. For collecting alternate data, various books, websites, newspapers, annual reports, periodical reviews and significant articles were chosen. Also for collection of primary data in-depth interviews with a pad of designated professional, related to this field, were taken.7.3 Data CollectionSecondary data used in the paper has been collected through access of different source of books, journals, publications of DSE, SEC, ADB and other news paper and articles. The DSE and SEC library were visited to acquire subaltern information. several(a) websites were browsed to collect relevant articles that are circulated on online sites. For collecting primary data, in-depth interviews of experience peck related to this field ofcapital market were taken. Appointments were fixed initially and then the interviews were taken. The intervi ewed persons are Kh. Asadul Islam, CEO, IDLC Securities Limited (IDLCSL) Anwarul Kabir Bhuiyan, SEC, Executive managing director Tania Sharmin, SEC, Assistance conductor (Surveillance) Abul Ehsan, Senior Officer, IDLC Finance Limited Moumita Manzoor, Research Associate, IDLCSL.Each of them was interviewed for 40 proceeding approximately during the office hour while taking break from work. They were asked some inherent questions associated to this research topic. Some of the questions that were asked are as follows-What is the role of capital market in the economy?What are the setbacks of the stock market in Bangladesh?Explain the current scenario of the capital marketWhat are the prospective sign of the development of the capital market?How can we be sure of a sound growth of capital market in Bangladesh?Do you see a better or worse scenario ahead of us and wherefore?8.0 Discussion8.1 Role of hood Market in the EconomyAccording to Dr. Mirza Azizul Islam (2006) capital market can play an essential role in enhancing economic development through efficient intermediation of savings into tillable investments and in encouraging the expansion of private entrepreneurship (DSE, 2006). The primary market can contribute to the growth of private entrepreneurship by facilitating the entrepreneurs to raise funds from wastefulness savers and consequently finance investment in a cost-efficient manner.For instance, if an industrialist with a viable new investment or expansion proposal is inefficient to execute his plan due to financial crisis then he can issue securities to meet the required deficit. Moreover issuing shares have the additive advantage that they do not create fixed charges for the companies issuing them and consequently endows a better option than, say, financing through bank loans. A proficient and vibrant secondary market can also contribute copiously to economic growth.If a fraternity, for instance, is well-managed and the secondary market prices are higher than face value, subsequent rights issue can obtain premium. in that locationfore the confederation can finance its development plan in lucrative and cost- rough-and-ready approach. So the capital market not only provides opportunity for companies to fasten on funds needed for long term investment purposes but also provides avenue for the marketing of shares and other securities in order to raise clean funds for expansion of operations, trail to increase in output or productivity.The equity market offers opportunity for government to finance projects aimed at providing essential amenities for socio-economic development. Such market encourages inflow of contrasted capital when conflicting companies or investors invest in domestic securities. The securities market can help attain higher productivity by restructuring of ownership and management of the familiarity as secondary market provides an exit option for the original founders and it also creates an avenue for t he populace to participate in the corporate sector of the economy and share in its wealth through ownership of securities.So it not only reduces the over-reliance of the corporate sector on short term finance for long term projects but truly makes available the needed money for venture capital development which could serve as a fomite for industrial development. So through its allocating tool, the capital market ensures an efficient and effective distribution of scarce financial resources for the optimal benefit to the economy.8.2 Major Setbacks of the jacket MarketInvestment in capital market is limited to a small proportion of the population. Investors confidence in the capital market has not entirely recovered since the stock market crash in 1996. trade market debacle in 1996 was mainly the result of market employment by a section of stockbrokers in collaboration with some other market participants (SEC, 1997).Some of the other notable reasons behind the stock market crash in cludes insider-trading and off-loading of shares by directors of the caller, absence of circuit breaker in the securities market, manifestation of unregulated rumors and sensitive information, lack of attention given by investors to the coition between stock price and company fundamentals, weak regulatory carcass to name a few. The diagram below shows clearly the catastrophe that took place during 1996.Figure 1 DSE General Price Index (DGEN) 1993-2007 (Source IDLCSL)On November, 2001 the DSE introduced the bench mark price barometer DSE General Index (DGEN) with a base might of 817.62 points. The index excludes companies of Z category and is calculated on the basis of price question of individual stocks. Figure 1 displays the periodical DSE general index from the year January 1993 to November 2007, the latest month for which the data was available. From the diagram we can tell that the market behaved irrationally during the year 1996.The DSE all share price index come up fr om 832 in 1 January 1996 to 3567 in 14 November of the same year, i.e. DGEN rosiness from 1106 to 4738.83. This dazzling rise in DSI was followed by a drastic fall to 2261.47 points in the last week of December 1996 and again to 1140.65 points on April 1997. The market was aristocratical for a long period of time after the 1996 collapse but between July 20003 and June 2005, DGEN more than doubled from 823 to 1727. It appears that the index is performing modestly in the current year followed by an uptrend as it shows an increase in the index from 1527.29 in November 2006 to 3011.60 in November 2007, reaching its pinnacle after 1996.The devastating memorial of 96 crashes still persists in the mind of potential investors but without fix participation the market cannot sustain in the long-run. Also it needs to involve back the foreign investors that fled in the 1996 debacle. Inflows of foreign direct investment need to be restored to stabilize the economy.From the statistical data below in remit 1 it can be observed that foreign investors are to the lowest degree attracted to the securities market of Bangladesh. There were significant foreign investment inflows into equities in the year 1994 amounting to $ 106 million but by the mid 1997, most of the foreign portfolio investors had divested holdings and have not since returned.The following table contains the key capital market indicators reflecting that the grand of primary market development had been fluctuating and the markets contribution to resource mobilisation of the economy trunk below potential and the secondary market remained stagnant during 1997-2003 but showed some sign of recovery in 2004. Overall, investor confidence has not yet fully recovered. fudge 1 peachy Market Indicators- Dhaka Stock ExchangeItem199319941995199619971998199920002001200220032004No of ListedCompanies143157183186202208213223231242248337Market CapIn taka (mn)1809941771565181681067130250254447896293263777712699758722492 3In $ (mn)4551038140939601569103688111691119122916853709Market Cap as% of GDP1.443.083.7110.113.952.512.042.652.522.613.256.76Significance of large(p) Market for Economic DevelopmentSignificance of crown Market for Economic DevelopmentAn Explotary Study On The Significance of Capital Market for Economic Development and Its Further Growth Potential In Context of BangladeshAbstractThis research paper investigates whether the role of capital market is significant for the economic development of Bangladesh. Literature suggests that well developed stock market can provide an extra impetus to economic activity. confusable conclusions were also drawn from the in-depth interviews. This paper also reveals a well-scanned scenario of the capital market highlighting its setbacks, current weakness, recent improvements and its prospective signs of development through which we can foresee whether the capital market has further growth potential or not. Thus the present study can also contribute in providing essential information that can also be used for further research.AbbreviationsADB- Asian Development BankCDBL- Central Depository of Bangladesh Limited CDS- Central Depository SystemCSE- Chittagong Stock ExchangeDGEN- DSE general indexDSE- Dhaka Stock ExchangeGDP- gross domestic productIPO- initial public offeringSEC- Security and Exchange Commission1.0 IntroductionThe financial market contributes to the economic growth and development by providing the needed finance for provision of goods and services. The financial market consists of two division- money market and capital market. The money market is basically entitled to supply finance on short-term basis to individuals, businesses, enterprises, government and their agencies. The capital market, on the other hand, provides finance on medium to long-term basis to corporate bodies, government and their agencies (Al-Faki, 2006).Capital Market plays a crucial role in any modern economy as they allow investors fund to flo w to the most promising opportunities, i.e., the funds are mobilized and channeled efficiently from savers to the users of funds (Al-Faki, 2006 DSE, 2006 Hubbard and Thornton, 2006 Ahmed, 1997). In Bangladesh financial intermediation relies for the most part on the banking sector which further resulted in lack of equity financing (Salahuddin Ahmed, 2007 Islam and Hassan 2002).Furthermore out of 5 million urban-based middle class people only four hundred thousand are participating in the securities market and among them roughly hundred thousand are active investors. A large portion is still ignorant of the nature and benefits of the capital market (Abu Ahmed, 2006 DSE Review, 2006 Islam and Hassan, 2002).Developing more complete and deeper capital market would enhance a countries growth potential and innovation (Andritzky, 2007). The forces of globalization, technology, new forms of competition have perceptibly transformed capital market worldwide (Hassan, 2004). The chief advisor Dr. Fakhruddin Ahmed give tongue to that Only a vibrant and well-regulated capital market can transport sustainable economic development in the country through making the real sector capable of meeting the challenges of the competitive global economic realities ( DSE Monthly Review, June 2007).Regardless of recent improvements, Bangladeshs capital market remains underdeveloped as its size is still very small in terms of market cap (ADB, 2006 Salahuddin Ahmed, 2007 Islam and Hassan 2002). The market cap represents just above 9% of the GDP (Dr. Fakhruddin Ahmed retrieved from DSE Review). As Bangladesh capital market is still quite small compared to other regional market and to the size of its economy (CSE, 2006) scorn its existence for a long time, this paper applies a framework for analyzing the significance of capital market for economic growth and development of Bangladesh, identifying its growth potentials through exploration.2.0 Problem StatementBangladeshs capital market is still underdeveloped, in spite of recent improvements. The size of the countrys capital market is quite small mainly due to the excessive dependence of leading corporate entities on the banks for financing. Moreover the overall transparency of market dealing is also low compared to international standards and generally there has been slow development of the underlying market infrastructure.The government is making effort to develop the reliability and efficiency of stock exchanges as investment market. Compared to the other neighboring countries the poem of participants are much smaller in Bangladesh as investor lack confidence. There is a supply side constrains in the capital market as quality shares are lacking. For all this reason this research is done to explore the importance of capital market in the economy and what are the prospective sign of development of the stock market.3.0 Purpose of the StudyThe purpose of the study is to explore a well scanned scenario of Bangladesh capital market, its significance and its prospects. Although some research has been conducted relating to this topic but there is little empirical evidence about how essential stock market is to economic development of a country.A sound capital market prompts better economic base and influence its future growth and so it can help realize Bangladeshs growth potential. The capital market of Bangladesh is on the brink to play its due role as a medium for financing investment and thereby making a notable contribution to economic growth, employment unveiling and poverty alleviation.The capital market plays an important role in quickening the pace of economic development but the existing state of the capital market is under-developed and not in a position to ensure economic progress of the country. Hence this research will try to highlight the significance of capital market for the nation and explore what are the probable signs of progress.4.0 Research Timeline2007 SeptemberWriting Rese arch Proposal2007 SeptemberDeveloping Literature Review2007 OctoberCollecting Data2007 October- NovemberData Analysis and translation of the Findings2007 NovemberPreparing Draft and Finalizing the Research Paper2007 DecemberSubmission of Research Paper5.0 Limitations of the studyDuring conducting the research I came across certain limitations and among them the foremost one is time constrain. Although I got the opportunity to work in an organization that is capital market based but it was difficult to find spare time that could be used for the report. Moreover the interviewed person could not provide all necessary information due to lack of time.The research timeline also reveals that time constrain was actually a barrier as there was plenty to find about this research topic. As the research is conducted for the first time, I did not mystify much support from previous research paper and further research is suggested. A huge portion of the report is based on secondary data collecte d through websites and so the depth of reliability varies as by the nature of website.6.0 Review of the Literature6.1 Financial IntermediationAccording to Joseph Yam (2004) financial intermediation is channeling savings into investments. Aziz and Duenwald (2002) referred that financial intermediation affects growth through the following channels (i) it can increase the marginal productivity of capital by collecting information to evaluate alternative investment projects and by risk sharing (ii) it can raise the proportion of savings channeled to investment through financial development.According to Conning and Kevane (2002) intermediation implies an intermediary. Gorton and Winton (2002) added that it is the informant institution in the saving investment process. They referred that financial intermediaries are firms that borrow from those who have excess money, that is, the savers and lend the money to companies that need resources for investment.6.2 performance IndicatorsAccordin g to R. N. Agarwal (2000) the most commonly used standard to measure the size of a countrys stock market is market capitalisation ratio, that is, the ratio of market value of stocks which are currently listed on a bourse to Gross Domestic Product (GDP). A small ratio of capitalization to GDP reveals the small size of a stock market. Alternatively, the size can be measured by the number of listed companies on a stock market. The height of maturity of an economys financial system is essential for economic development.Bekeart et al., (2007), Hubard and Thornton (2006), Rosul (2002) all investigated the significance and relation of stock market development with the economic growth and their conclusion suggests that capital market development is positively correlated with long term economic growth and the capital market plays an important role in the economic development of any country. The size of the equity capital market has an optimistic effect on economic growth of the country, that is, much higher market cap and turnover has a major positive influence on the economy (Institute for Advanced Studies, IHS, 2006).It is seen that the ratio of market cap to GDP in neighboring countries like India, Pakistan and Sri Lanka is comparatively much higher, that is, more than 60% of their GDP (DSE, Kh. Asadul Islam, 2007 Dr. Fakhruddin Ahmed,2007). In Bangladesh the market cap is very small proportion of the countries GDP (Islam Hassan, 2002) and this is due to significant dependence on the banking sector (DSE Review, Fakhruddin Ahmed, June 2007).Market capitalization as a share of GDP was around 2.5%-3.3% during 2001-2003 compared with 1.4-10.1% during 1993-1996 and 2- 4% during 1997-2000. However in the year 2004 market cap reached 6.8% reflecting the rise in the DSE index from 968 to 1,971 at the end of 2003 and 2004 respectively (ADB, May 2005). The trend of market cap as percentage of GDP and other capital market indicators of DSE and CSE are shown through the help o f statistical data represented in the discussion section in Table 1.Despite the existence of the bourse from 1954, the capital market still exhibits features of an emerging equity market (Islam Hassan, 2002). The finance sector is immensely bank-based (Salahuddin Ahmed, 2007) as resource mobilization for industrialization and economic development is made primarily through the level(p) banking system (Islam Hassan, 2002).Borrowing requires fixed payments and over-reliance on banks can cause character default risk. According to (Mochammad Rosul, 2002) excessive reliance on bank acquire results in a mismatch with long-term investments being financed with short-term bank loans. He added that such a risky situation can further contribute to the economic crisis and so the job of the principal fund supplier for business should be transferred from banking sector to the capital sector.6.3 Regulatory Bodies6.3.1. The Security and Exchange Commission (SEC)The Security and Exchange Commiss ion (SEC) exercises power under the Security and Exchange Commission Act 1993 and established on June 8, 1993. SEC, the sole Capital Market Watchdog and Regulator, has been pursuing a vigorous capital market development process including amendments of its existing regulations, conduction of investor awareness programs, rigid monitoring and surveillance to bring in transparency in the trading mechanism (SEC, Annual Report 2003 -04).The responsibility of SEC includes the followingRegulating the functions of Stock ExchangesRegistering and regulating the business of stock brokers, sub broker, share transfer agents, underwriters, registrar, portfolio managers, investment advisors, and other middlemen related to security dealings.Registering, controlling, and monitoring of all types of mutual fundsControlling and monitoring of all authorized self regulatory organizationsProhibiting ambidextrous and unfair practices related to securitiesPromoting investors education program and providing training of intermediariesRegulating substantial acquisition of shares and takeover of companiesSEC are detects market purpose and also keeps constant vigil on the activities of stock exchanges to ensure military posture of the surveillance system.Conducts research and publishes information for above purposes(Source Security Exchange Commission Website www.secbd.com)6.3.2 Stock Exchanges6.3.2.1 Dhaka Stock Exchange (DSE)On April 28, 1954 DSE was first incorporated as the East Pakistan Stock Exchange Association Limited. Formal trading began in 1956 with 196 securities listed on the DSE with a total paid up capital of about Taka 4 billion. On June 23, 1962 it was renamed as Dhaka Stock Exchange (DSE) Limited.After 1971, the trading activities of the prime bourse remained suppresses until 1976 due to liberation war and economic policy pursued by the then government. Trading resumed at DSE in 1976 with only 9 companies listed having a paid up of Taka 137.52 million (Bashar et al., 20 00 M Farid Ahmed, 1997). As of today there are 342 listed companies in the prime bourse with market cap exceeding 700,000 million (DSE, 2007).The reforms that DSE undertook recently for ensuring professionalism and transparency focused on the trading of securities. The measure were taken to implement transparent trading system, efficient reporting of trade, real time delivery of information, strong surveillance and monitoring over trade of securities and settlement of shares (Rahman,Uddin and Malik, 2006).6.3.2.2 The Chittagong Stock Exchange Limited (CSE)The CSE is the countries second bourse that started its operation from the year 1995. It is also a self-regulatory non profit organization. Currently the poem of listed securities are 223 of which the number of listed companies are 208, mutual funds 14, and one debenture.6.4 Recent Capital Market Scenario of BangladeshAccording to Dr Fakhruddin Ahmed (DSE, 2007) political uncertainty, corruption and lack of transparency in all sec tion of the social and economic fabric are some of the reasons for capital market deficiency. Bangladesh Governor Salehuddin Ahmed (2007) reveals that foremost problems include political instability, under developed infrastructure, poor port management, short comings in well-grounded system and corruption (Financial Express Report).On the other hand DSE general share price index reached its pinnacle and crossed 3000 points (Newage www.newagebd.com). In particular the capital market witnessed a robust growth in the current year. Both turnover and market cap crossed new milestones at Tk 3000 million and Tk 700,000 million respectively during the year (DSE, 2006 DSE, 2007, IDLCSL). Recently our market cap crossed USD 10 billion that accounts for only 13% of its GDP which was only 8% a year back. (DSE Monthly Review, Oct 2007).Though the contribution of capital market to GDP is still inadequate when compared to neighboring countries but still its increase is significant for the develo pment of our economy. Comparison of indices and market cap among different countries is shown in Table 2 and Figure 2 in the discussion part. Entry of 12 new issues worth Tk 11,322.95 million helped raise the market cap.Some of the reason for the progress in capital market development is central depository system and the automated trading system (ADB, 2006 SEC, 2005). The DSE has upgraded its automated online trading system and investors are able to trade from different split of the country (SEC Quarterly Report, April-June 2007 ADB, 2006). Another reason for the vigorous improvement of the equity capital market is due to strenuous efforts taken by the SEC that further boosted investors confidence (DSE, 2007).7.0 Research Methodology7.1 Research DesignThe present study endeavored to explore importance of capital market for the economic development of Bangladesh and its future prospects. Exploratory research is selected as research design as little information exists about the capit al market of Bangladesh. The aim of alpha research is mainly to gain enough information before doing more thorough research. We basically start by gathering as much information about the object as possible and with a umbrageous impression of what we should study (Cooper Schindler, 2003).7.2 Research InstrumentThe research was conducted using both primary and secondary data. For collecting secondary data, various books, websites, newspapers, annual reports, monthly reviews and significant articles were chosen. Also for collection of primary data in-depth interviews with a tell of designated professional, related to this field, were taken.7.3 Data CollectionSecondary data used in the paper has been collected through access of different source of books, journals, publications of DSE, SEC, ADB and other news paper and articles. The DSE and SEC library were visited to acquire secondary information. versatile websites were browsed to collect relevant articles that are circulated on o nline sites. For collecting primary data, in-depth interviews of undergo people related to this field ofcapital market were taken. Appointments were fixed initially and then the interviews were taken. The interviewed persons are Kh. Asadul Islam, CEO, IDLC Securities Limited (IDLCSL) Anwarul Kabir Bhuiyan, SEC, Executive Director Tania Sharmin, SEC, Assistance Director (Surveillance) Abul Ehsan, Senior Officer, IDLC Finance Limited Moumita Manzoor, Research Associate, IDLCSL.Each of them was interviewed for 40 proceeding approximately during the office hour while taking break from work. They were asked some essential questions associated to this research topic. Some of the questions that were asked are as follows-What is the role of capital market in the economy?What are the setbacks of the stock market in Bangladesh?Explain the current scenario of the capital marketWhat are the prospective sign of the development of the capital market?How can we be sure of a sound growth of capita l market in Bangladesh?Do you see a better or worse scenario ahead of us and why?8.0 Discussion8.1 Role of Capital Market in the EconomyAccording to Dr. Mirza Azizul Islam (2006) capital market can play an essential role in enhancing economic development through efficient intermediation of savings into cultivatable investments and in encouraging the expansion of private entrepreneurship (DSE, 2006). The primary market can contribute to the growth of private entrepreneurship by facilitating the entrepreneurs to raise funds from excess savers and consequently finance investment in a cost-effective manner.For instance, if an industrialist with a viable new investment or expansion proposal is unable(p) to execute his plan due to financial crisis then he can issue securities to meet the required deficit. Moreover issuing shares have the supernumerary advantage that they do not create fixed charges for the companies issuing them and and so endows a better option than, say, financing through bank loans. A proficient and vibrant secondary market can also contribute copiously to economic growth.If a company, for instance, is well-managed and the secondary market prices are higher than face value, subsequent rights issue can obtain premium. Therefore the company can finance its development plan in lucrative and cost-effective approach. So the capital market not only provides opportunity for companies to borrow funds needed for long term investment purposes but also provides avenue for the marketing of shares and other securities in order to raise mellifluous funds for expansion of operations, leading to increase in output or productivity.The equity market offers opportunity for government to finance projects aimed at providing essential amenities for socio-economic development. Such market encourages inflow of foreign capital when foreign companies or investors invest in domestic securities. The securities market can help attain higher productivity by restructurin g of ownership and management of the company as secondary market provides an exit option for the original founders and it also creates an avenue for the populace to participate in the corporate sector of the economy and share in its wealth through ownership of securities.So it not only reduces the over-reliance of the corporate sector on short term finance for long term projects but truly makes available the needed money for venture capital development which could serve as a vehicle for industrial development. So through its allocating mechanism, the capital market ensures an efficient and effective distribution of scarce financial resources for the optimal benefit to the economy.8.2 Major Setbacks of the Capital MarketInvestment in capital market is limited to a small proportion of the population. Investors confidence in the capital market has not entirely recovered since the stock market crash in 1996. percentage market debacle in 1996 was mainly the result of market exercise b y a section of stockbrokers in collaboration with some other market participants (SEC, 1997).Some of the other notable reasons behind the stock market crash includes insider-trading and off-loading of shares by directors of the company, absence of circuit breaker in the securities market, revealing of unregulated rumors and sensitive information, lack of attention given by investors to the relation between stock price and company fundamentals, weak regulatory personify to name a few. The diagram below shows clearly the catastrophe that took place during 1996.Figure 1 DSE General Price Index (DGEN) 1993-2007 (Source IDLCSL)On November, 2001 the DSE introduced the benchmark price barometer DSE General Index (DGEN) with a base index of 817.62 points. The index excludes companies of Z category and is calculated on the basis of price travail of individual stocks. Figure 1 displays the monthly DSE general index from the year January 1993 to November 2007, the latest month for which the data was available. From the diagram we can tell that the market behaved irrationally during the year 1996.The DSE all share price index rose from 832 in 1 January 1996 to 3567 in 14 November of the same year, i.e. DGEN rose from 1106 to 4738.83. This indiscreet rise in DSI was followed by a drastic fall to 2261.47 points in the last week of December 1996 and again to 1140.65 points on April 1997. The market was downhearted for a long period of time after the 1996 collapse but between July 20003 and June 2005, DGEN more than doubled from 823 to 1727. It appears that the index is performing modestly in the current year followed by an uptrend as it shows an increase in the index from 1527.29 in November 2006 to 3011.60 in November 2007, reaching its pinnacle after 1996.The devastating storey of 96 crashes still persists in the mind of potential investors but without tidy sum participation the market cannot sustain in the long-run. Also it needs to bring back the foreign investors that fled in the 1996 debacle. Inflows of foreign direct investment need to be restored to stabilize the economy.From the statistical data below in Table 1 it can be observed that foreign investors are least attracted to the securities market of Bangladesh. There were significant foreign investment inflows into equities in the year 1994 amounting to $ 106 million but by the mid 1997, most of the foreign portfolio investors had divested holdings and have not since returned.The following table contains the key capital market indicators reflecting that the pace of primary market development had been fluctuating and the markets contribution to resource mobilization of the economy remains below potential and the secondary market remained stagnant during 1997-2003 but showed some sign of recovery in 2004. Overall, investor confidence has not yet fully recovered.Table 1 Capital Market Indicators- Dhaka Stock ExchangeItem199319941995199619971998199920002001200220032004No of ListedCompanies 143157183186202208213223231242248337Market CapIn taka (mn)18099417715651816810671302502544478962932637777126997587224923In $ (mn)4551038140939601569103688111691119122916853709Market Cap as% of GDP1.443.083.7110.113.952.512.042.652.522.613.256.76