Major reforms needed to attract foreign capital to stock market
Bangladesh needs major structural reforms in its capital market to attract foreign investment and ensure the country's growing economy is represented adequately in the stock market, experts and market stakeholders said.
They said introducing quality companies to the market, enhancing corporate governance, increasing transparency and disclosure, promoting liquidity, ensuring policy continuity and making the inflow and repatriation of foreign funds easier are some of the key reforms needed to turn Bangladesh's capital market into a competitive destination for international investors.
Despite the significant expansion of Bangladesh's economy over the past two decades, Bangladesh's stock market is small compared with the size of the economy. Market capitalisation is equivalent to only 6 percent of GDP, while the ratio was 125 percent in India in 2025 and more than 50 percent in Vietnam. Turkey's ratio is also several times higher than Bangladesh's.
The performance of the benchmark stock index also highlights the gap. Over about the past decade, Bangladesh's benchmark index has risen by about 30 percent. During the same period, Vietnam's index rose about 134 percent, India's nearly 300 percent and Turkey's around 1,300 percent.
Analysts say these figures suggest that Bangladesh's economic growth has not been sufficient to develop a deep capital market.
They said international investors are unlikely to be attracted simply by a higher stock index or overseas roadshows. Instead, they first evaluate whether a market offers enough quality and investable companies, whether corporate financial statements are reliable, whether funds can be brought into and taken out of the country easily, and whether rules and policies are likely to remain stable for years.
Foreign investors' recent activities also illustrate the challenge. In 2025, foreign investors sold shares worth about Tk2,095 crore against purchases of about Tk1,825 crore, resulting in net sales of about Tk270 crore.
Although total foreign trading in FY2025-26 rose by about 25 percent from the previous fiscal year to the highest level in four years, analysts cautioned that higher turnover should not necessarily be interpreted as an increase in new foreign capital. Much of the activity involved buying and selling within the market.
Foreign trading rose as a result of the national election in February, reaching about Tk663 crore that month-the highest level in 13 months-but activity dropped sharply in subsequent months. In April alone, foreign investors withdrew about Tk124 crore.
The trend suggests that foreign investors have not lost complete interest in Bangladesh but have been unable to build strong long-term confidence in the market.
Structural reforms needed
Finance Minister Amir Khosru Mahmud Chowdhury has also cautioned against judging the health of the capital market by simply looking at the movement of the stock index.
According to him, the recent rise in the index was largely confidence-driven while cosmetic measures would not affect the capital market fundamentally. He has stressed the need for structural reforms to ensure long-term stability.
The finance minister said the government would make necessary changes to the laws and regulatory framework governing the capital market. He also said the Bangladesh Securities and Exchange Commission (BSEC) would be made more effective, transparency would be increased, and a zero-tolerance policy towards irregularities would be adopted.
BSEC Chairman Masud Khan said Bangladesh has many large domestic and multinational companies but the market would not develop as expected unless those companies were introduced to the stock market.
He said the BSEC has set a target of introducing several large and important companies to the market within the next six months to one year.
According to Masud Khan, large companies would initially be encouraged to list voluntarily. If they do not come forward, there is also an option to enforce the law in the public interest.
He also mentioned plans to introduce direct listing and hybrid listing mechanisms to facilitate the entry of large companies into the capital market.
Large companies remain outside market
Sakif Shamim, chairman of the Center for Strategic and Economic Research (CSER) and managing director of Labaid Hospital Group, said Bangladesh's capital market has failed to catch up with the pace at which the country's economy has expanded over the past two decades.
As a result, a large portion of the economy remains outside the stock market, he said.
Sakif Shamim said many large and profitable companies remain under family ownership. Since these companies have relatively easy access to bank loans, they are reluctant to accept the transparency, accountability and regulatory responsibilities associated with listing on the stock exchange.
This has decreased the number of quality companies available to both domestic and foreign investors, he said.
He argued that the lack of foreign investment cannot be attributed to political or economic uncertainty. Rather, the lack of good companies, weak corporate governance, inadequate reliable information, low liquidity and a lack of policy continuity are collectively responsible.
According to CSER's analysis, the DSE benchmark index stood at about 4,056 points in January 2014 and reached about 5,280 points after a decade, representing an increase of barely 30 percent.
By comparison, Vietnam's stock market index rose about 134 percent, India's about 300 percent and Turkey's about 1,300 percent during the same period.
The disparity becomes more significant when the size of the economies is considered. Bangladesh and Vietnam had roughly similar-sized economies in 2023, but Vietnam has developed a deeper capital market and has been more successful in attracting international investors.
Market capitalisation as a share of GDP was about 60 percent in Vietnam and about 40 percent in Turkey, compared with only 6 percent in Bangladesh as of June 2025. The figure for Bangladesh had fallen from about 7.3 percent a year earlier.
Lessons from Vietnam
Sakif Shamim proposed that Bangladesh follow Vietnam's example by introducing state-owned enterprises, large domestic industrial groups and multinational companies to the market under a long-term plan.
He also called for expanding institutional investors such as pension funds, insurance companies and mutual funds.
At the same time, he said Bangladesh should develop markets beyond equities, including bonds, sukuk and derivatives.
Vietnam's experience shows the potential benefits of a coordinated, long-term capital market strategy. In 2000, only four securities were listed on the Ho Chi Minh City Stock Exchange. Within two decades, the number of listed securities, including shares, bonds, derivatives and ETFs, reached around 1,200.
Experts say Vietnam's success was not just the result of one policy, but the expansion of listed securities, greater institutional participation, liquidity growth, state-owned enterprise reforms and opportunities for foreign ownership.
They said Bangladesh could learn from this approach instead of viewing capital market reform as a one- or two-year initiative.
Liquidity and infrastructure
Nujhat Anwar, managing director of the Dhaka Stock Exchange, said reforms are also needed in liquidity and market infrastructure.
She said some of the reform proposals put forward by the DSE at a meeting with Bangladesh Bank in May included reducing the settlement period from T+2 to T+1, extending the operating hours of the real-time gross settlement system and simplifying the process through which non-resident investors bring money into and take money out of Bangladesh.
The DSE is also taking initiatives to expand the markets for bonds, sukuk and alternative financial products.
The objective, she said, is not merely to increase trading but to transform the stock market into a comprehensive system for long-term financing.
Analysts said Bangladesh's limited foreign participation is linked to perceptions of corruption, inadequate reliable corporate information and low liquidity. A report by the US Department of State recently identified these factors as reasons for limited foreign participation in Bangladesh's capital market.
High interest rates and tight monetary policy have placed pressure on market liquidity and private investment. Several brokerage firms and merchant banks continue to have negative equity, weakening the margin-lending system. Weak coordination between the money market and capital market has also prolonged the liquidity crisis.
Policy stability crucial
Another major concern is policy continuity.
Following political changes in recent years, there have been changes in the leadership and policy priorities of regulatory institutions. Analysts said foreign institutional investors generally pay more importance to long-term policy stability than short-term fluctuations in stock prices.
Frequent changes in leadership and policy can therefore create additional risk perceptions among international investors.
However, some recent initiatives have created grounds for optimism.
The proposed direct-listing framework could encourage multinational corporations, state-owned companies and large local industrial groups to list. Tax incentives and simplified tax administration for listed companies could also make stock market listing more attractive.
Budget measures such as tax exemptions on zero-coupon bonds and reductions in the tax burden on inter-company dividends could strengthen alternative financing mechanisms. A proposed legal framework for the Capital Market Stabilization Fund could also protect investors' rights.
Bangladesh Bank has taken steps to simplify procedures for foreign investors. A consolidated master circular bringing together guidelines on the sale of shares and repatriation of profits by non-resident investors could make the process more predictable.
Experts said investment opportunities alone are not enough to attract foreign investors. They also need assurance that their funds can enter Bangladesh, profits can be received and money can be repatriated quickly and transparently.
In 2025, foreign investors reinvested about $2.56 billion and repatriated approximately $1.78 billion in profits, resulting in net reinvestment of about $780 million, about 26 percent higher than the previous year. However, analysts cautioned that this should not be confused with long-term foreign portfolio investment in the stock market, as the nature and decision-making processes of the two forms of investment are different.
Seven priorities for reform
Experts have identified several priorities for making Bangladesh's capital market more attractive to international investors.
First, corporate governance and disclosure standards need to be brought closer to international levels. Strict compliance with international accounting standards, genuine empowerment of independent directors, stronger auditing and timely publication of quarterly and annual financial reports are essential for building investor confidence.
Second, Bangladesh needs to develop a comprehensive capital market, rather than relying on equities. A deeper market should include bonds, sukuk, derivatives and other financial instruments.
Third, the process of introducing foreign funds to Bangladesh and repatriating profits should be made easier. Bangladesh Bank's master circular is seen as a useful starting point but experts have called for an online, rapid and automated repatriation system through custodian banks.
Fourth, tax policy must become more predictable. Clear guidelines are needed on capital gains taxes and the use of double-taxation avoidance agreements. Investors, analysts said, often value predictability and stability more than a lower tax rate.
Fifth, market infrastructure must be more technology-driven. A T+1 settlement system, an effective legal framework for derivatives and real-time market surveillance are essential for an internationally competitive market.
Sixth, institutional investors need to be expanded to provide stable, long-term sources of capital.
Finally, Bangladesh needs to combine domestic reforms with international engagement. Regular roadshows and investor conferences, and direct engagement with institutional investors in financial centres such as Singapore, London and Dubai, could help communicate Bangladesh's investment opportunities. However, analysts stressed that promotion alone will not attract sustainable foreign capital. Bangladesh's investment story must be supported by market depth, quality companies, transparent information, policy stability, adequate liquidity and reliable mechanisms for repatriating funds.
The need for reform is becoming more urgent as Bangladesh moves into its next phase of economic development. Following graduation from the LDC category, the country will face greater competition in international markets and will need larger investments in technology, productivity, infrastructure and energy.
A significant portion of those financing needs cannot be met solely through bank borrowing.
In this context, experts said the capital market should no longer be viewed merely as a platform for buying and selling shares. It needs to become a major bridge between Bangladesh's economy and global capital. The central challenge, therefore, is no longer how to raise the stock index, but how to build a large, deep, transparent and internationally investable market that matches the size and ambitions of Bangladesh's economy.
For Bangladesh, they said, a credible capital market built around quality companies, strong governance and transparent information could become one of the country's most important sources of long-term domestic and foreign financing.