Like all other nations, capital market plays a vital role in the economy of Bangladesh as a source of long-term financing. It’s important that a fair and efficient capital market exists for industrialization and economic development. Bangladesh Securities and Exchange Commission (BSEC) was established in 1993. It’s objectives are protecting investor interests, developing the securities market and generating necessary rules where needed. Dhaka Stock Exchange (DSE) is the oldest and largest stock exchange in Bangladesh, established in 1954. In 1995, the second stock exchange Chittagong Stock Exchange (CSE) was established. The capital market of Bangladesh has around 3 million investors but there are financial literacy issues among them.
What is financial literacy
Financial literacy is the ability to understand and effectively use various financial skills. It includes personal financial management, budgeting and investing. People who are financially literate are less vulnerable to financial frauds. A strong foundation of financial literacy can help support activities like running a business, saving for the future, better debt management, et cetera. It gives consumers the necessary knowledge to assess the suitability of various financial products and investment opportunities in the financial market. Building a strong foundational relationship with money is more important than ever. Financial markets are more complicated now. There is information gap between markets and investors which leads to difficulties in making correct financial decisions.
Current situation in Bangladesh
There are around 3 million investors in Bangladesh’s capital market. But the problem is most of these investors are marginal. They start conducting their businesses with little to no financial literacy. They probably won’t be able to answer some basic financial terms if questioned. This contributes to the financial illiteracy of Bangladesh. These investors make decisions primarily on intuitions, emotions and rumors in the capital market. This is due to their inability to interpret disclosed information on financial statements and other sources. This further contributes to the asymmetrical information in the market.
Asymmetrical information weakens the capital market. Investors are unable to access services at the right price and can’t take good investment decisions. Many investors are unaware of their rights, responsibilities, financial risks involved and other relevant information. So the financially literate investors can work their way through the system while the rest remains in the dark.
These investors with limited literacy also rely on the activities of some big shot investors for investment decisions. It gives manipulators the opportunity to prey on mass investors and get away with it. Making impulsive investment decisions not only jeopardizes investors’ financial health but also stability of an already vulnerable capital market of Bangladesh. It also impacts the overall economic growth of the country.
In developed countries like the US and UK, the media plays an important role in generating awareness about the importance of financial literacy. Due to the importance, many schools in developed countries have included financial literacy as part of their curricula. So there are nearly half of all US households involved somehow in the US stock exchanges. But the scenario is different in developed countries like Bangladesh. Only a select number students start learning about basic finance from school level and there are issues with the curricula. There aren’t enough trained teachers and many investors don’t seem to be willing to self-learn.
Even though there are many business graduates that come out every year, they are a small portion of the investors. Even a lot of them don’t use their knowledge in making savvy decisions and act on impulse. The media role in raising awareness about financial literacy is meager. Poverty is also another reason why people are who are in need on a daily basis don’t even consider financial planning.
Bangladesh has no national policy on financial literacy. There is a policy statement in Bangladesh Bank’s website which stresses the need for people having financial access and disseminating financial information for prudent financial decisions. It also encourages banks to develop services for financially marginalized people. Bangladesh Bank itself has taken several steps to ensure financial inclusion like school banking, targeted credit programs for insolvent households, taka 10 bank account scheme, dissemination of sensitive financial information via print and electronic media, et cetera. While these steps contributed in more financial inclusivity, it didn’t necessarily do the same for financial literacy.
Initiatives from BSEC
Bangladesh’s financial market mostly consists of retail investors. So financial literacy is integral for the development of the market. In 2012, BSEC prepared a 10-year master plan for the capital market which mentions the need of including basic financial education from school level via a national policy.
BSEC has formed the institutional framework for implementing the master plan in Steering and Technical committee structures with widespread participation. There are 10 sub-committees and a number of working groups under the Technical Committee for actual implementation of the plan.
The plan has three stages; Short term, midterm and long term. The short term covered the years 2016-17 and the target groups were existing investors, employees of stakeholders, teachers, defense officers, lawyers and journalists. The midterm covered the years 2018-19 and the target groups were students from all levels, public servants, private sector officials, physicians, engineers and other professionals from the middle income group. The long term covered the years 2020-21 and the target groups were homemakers, retired personnel, businessmen, workers and other members of the general public.
Due to the asymmetrical nature of information in the financial markets of Bangladesh, employers, especially from large companies can take steps to encourage financial literacy and responsible behavior. Some of these steps are
- Extinguishing a costly credit card debit
- Taking out a life insurance policy strong enough to protect dependents and loved ones
- Accumulating rainy day fund. This means expenses worth 6 months to serve as a buffer against periods of unemployment or financial distress.
- The investor paying back consumer loans as equated monthly installment (EMI)
Investors also should be careful when purchasing individual shares of companies. There should be no room for impulsiveness or irrationality when making capital market decisions. Investors should put safe bets on –
- Funds run by professional money managers who care about their reputations
- Diversified funds i.e funds comprising of many different scripts
- Funds with justified prices
- Where there are expected flow of dividends
If there isn’t substantial financial literacy, there will not be enough investors who can take good decisions. Even if someone does their business with little to no literacy, there is every possibility they will face problems. So it’s high time attention should be given on making investors more financially literate. Scams will decrease, information will be more symmetrical and investors don’t have to make impulsive decisions. All of this will contribute to a stable and efficient capital market. Hence financial literacy is more important than ever in the development of the market.