Shaidul Kazi
People walk past Dhaka Stock Exchange in Motijheel. Analysts suggest the government take steps to encourage companies to raise funds from stockmarket. Photo: STAR
Own money, the more the best. This traditional approach to financing business is not anymore so popular and realistic. Establishing a company and its growth requires outside finance, which can be divided into two macro groups -- debt financing and equity financing.
Debt financing means a firm raises money by selling bonds, bills, or notes to individuals and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.
In addition, borrowing money from the bank by a company is also part of debt financing. In debt financing, the borrower must pay back the borrowed amount and the promised rate of interest, irrespective of the financial condition of the company.
On the other hand, equity financing is the act of raising money by selling company shares to individuals or institutional investors. In return, shareholders receive ownership interests in the company.
In equity financing, shareholders share both losses and gains of the company, which means that when the company profits, shareholders get dividends out of that profit. In the case of negative cash flow, shareholders do not get dividends, and moreover, share price slides down.
In Bangladesh, debt financing has traditionally been the strongest source of business financing, where bank borrowing is the vital one. This bank borrowing has made the banking sector very strong and at the same time has given birth to a large number of loan defaulters -- both are negative for the dedicated business community and economic development of Bangladesh.
The dominance of the banking sector in Bangladesh has favoured urban-centred, large and medium-sized companies to secure finances. But small entrepreneurial firms, which are the lifeblood of the economy, have virtually remained beyond the reach of the banking sector.
Consequently, for finance, small firms depend on their own money or finance from informal sectors, like relatives, friends and high interest loans provided by the NGOs, which have made business operations uncertain and growth quite impossible.
In this case, the government could immediately formulate a banking regulation, making it obligatory for the nationalised and private banks to expand their activities up to the union and village levels, focusing on small firms.
Alternatively, strengthening the equity market paves the way for participation of more people to business activities -- directly and indirectly.
Directly, equity financing helps companies collect money from the market by selling company shares.
Indirectly, equity financing encourages general investors to invest in their chosen companies through share purchase. The root of strengthening the equity market is a stronger stock exchange.
A stock exchange is a market for shares issued by companies. Companies interested in collecting money from the market through selling shares proceeds as follows -- first, the shares are offered for sale directly to the public or to investing institutions. Once the sale has been completed, the company may be able to get the shares quoted on a stock exchange. This means that these shares may be bought and sold through the stock exchange.
The crucial way to strengthen the stock exchange is to encourage large, reputed, emerging and innovate companies to collect finance from the equity market by selling company shares to the public and thereby, get quoted to the stock exchange.
Bangladesh is an emerging economy, which has a bright economic future. Therefore, our government should take immediate steps to encourage companies to collect finance from the public through the sale of company shares.
This process may soon make the Bangladeshi economy entrepreneurial, risk-taking and stronger at home and abroad.
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