Bangladesh Bank cuts interest rate on stock investment fund

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Bangladesh Bank has reduced the interest rate on borrowing from its special investment fund, aimed at helping the country’s lenders increase their stock investment capacity. “The interest rate was 5 per cent when the special investment fund was announced but it has been reduced to 4.75 per cent now,” the central bank said in a circular yesterday.

On February 10, it was announced that local banks could set up a Tk 200 crore fund using repurchase agreements (repo), which refers to a system of short-term financing mainly through the purchase of government securities. After the current repo tenure comes to an end, a new and lower repo rate will be introduced, it added. Under the existing repo programme, the repayment duration is between 1 to 28 days as per Bangladesh Bank regulations.

On the day the package was rolled out, Tk 340 crore worth of shares were traded at the Dhaka Stock Exchange (DSE) while DSEX, the benchmark index of the country’s premier bourse, was far lower than usual at 4,385 points. In order to boost Bangladesh’s ailing stock market, the central bank issued the special investment fund with a credit tenure of up to February 2025 and besides, the Tk 200 crore fund will not be counted as market exposure.

Within six day of the announcement, the DSE’s average daily turnover rose to Tk 1,021 crore while the index jumped up to 4,740 points. Around 15 banks to advantage of the special package, forming a collective fund of about Tk 1,700 crore to invest in the stock market.

Apart from listed stocks, the banks are allowed to invest the fund in all kinds of bills and bonds, such as corporate, debenture, government and even asset-based or Sukuk, a shariah-compliant bond-like instrument used in Islamic finance. However, the coupon or interest rate for any listed corporate bond or debenture needs to be at least 10 per cent, the central bank said.

But if a bank invests in an asset-based or Sukuk bond, then it should have coupons or profits of at least 8 per cent, it added. This announcement comes at a time when the DSEX is undergoing corrections. Though the benchmark index rose by 8 points in the last two days, it has witnessed a 146-point fall in the four days prior.

“This reduction of the repo rate will give a relief to the banks who formed the special funds because it reduces the overall cost,” said the head of treasury at a listed bank, which formed the fund. However, this move should have come sooner, when the central bank reduced the rate in this year’s monetary policy, the banker added.

The government decided to cut the repo rate for the remaining half of the current year in a bid to help bank smoothly secure funds amid the ongoing coronavirus pandemic. The repo rate was cut 50 basis points to 4.75 per cent when it was unveiled in the monetary policy last July.