Express (July 24, 2011)
Merchant banks in Bangladesh are mainly engaged in lending as they hardly offer any discretionary portfolio management services to their clients, exposing the vast majority of stock investors to unwanted risks and market manipulation.
Experts and investors made the allegations on Saturday, stressing that the merchant banks' role in the recent stock crash needs reassessment in the light of the jobs done by similar financial institutions in the developed markets.
"Local merchant banks tend to make profit without shouldering investment responsibilities on behalf of their clients," said Salahuddin Ahmed Khan, a professor of finance at the Dhaka University.
"During the bull runs they made big profit by lending recklessly to their clients. But most did not extend proper advise to their clients, as required under the SEC rules. It led to unbridled speculative trading, which is one of the reasons for the market crash," he said.
Bangladesh has 33 merchant banks, most of which were set up in the past three-four years during the unprecedented bull run that ended in December 2010.
But some 90 per cent of the banks offer only non-discretionary portfolio management, meaning a client can't get any advice from portfolio managers for the investment they make through the merchant bank.
But across the globe, discretionary portfolio management is more popular. Under the system, a client entrusts a merchant bank to manage his portfolio and make investment decision on behalf of the investor.
Khan said local merchant banks are reluctant to carry out discretionary portfolio management as they are mainly busy with the management of their own portfolios.
One of the three activities involved in discretionary portfolio management is the identification of assets or securities, allocation of investment and also identifying the classes of assets for the purpose of investment.
Investment through such management reduce market volatility as the portfolio managers have to decide major weights, proportion of different assets in the portfolio by taking into consideration the related risk factors.
According to merchant bankers, for non-discretionary portfolio management, the banks impose 1.25 per cent charges on clients' equity. The charges are deducted on quarterly basis.
Among the Bangladeshi banks, only three --- AB Bank, Prime Investment and IDLC --- offer limited discretionary portfolio management services.
A top official at the Securities and Exchange Commission (SEC) said the regulator has repeatedly asked the merchant banks to bring more investors under discretionary portfolio management in an effort to stabilise the market.
"But unfortunately, most merchant banks hardly bother about such services. They find non-discretionary management services more lucrative, hassle-free and cost effective," he told the FE.
"It is an unhealthy development in our stock market. We've tried several times to address the situation. But we can't compel any merchant bank to introduce discretionary services," he said.
Merchant bankers rejected the allegation, saying the investors in Bangladesh don't allow banks to meddle with their fund; rather they want to make their own investment decision.
"The practical problem is that our clients want to conduct buy-sell in accordance with their own market intelligence," Mohammad A Hafiz, vice president of Bangladesh Merchant Bankers Association, told the FE.
"That's why some banks, which launched the discretionary portfolio management services in the past few years, have lost interest. They rolled back the services because of very poor response," he said.
Hafiz said a Bangladeshi investor would rather incur loss by making investment on his own than see his fund being invested by a portfolio manager.
But talking to the FE, a number of investors said they had sought discretionary services from their merchant banks, but were bluntly refused.
"It's not true that clients have no interest in discretionary portfolio management services. The fact is that merchant banks never showed serious intention to maximise clients' return," said Himal Ahmed, an investor.
Ahmed said he has seen hugely popular similar services in India and in markets in almost all the rich nations.
"If the banks seriously promote discretionary portfolio management and show that they can ensure sizable return to the clients, I think most investors will clamour for such services. It will give the investors worry-free sleep," he said.
M. Fazlur Rahman, additional managing director of AB Bank, said the SEC should shoulder some blames for lack of discretionary services in the market.
"The SEC should have brought discretionary portfolio management under regulatory initiatives a long time ago. Unfortunately, portfolio management system is out of fashion here as the regulator is yet to fix up the jobs of merchant banks," he said.
"The merchant banks mainly run after lending business because that's best way to make money in the Bangladeshi market," Mr. Rahman told the FE.
Prof. Khan of DU said an absence of derivative market means the scope of fund management hasn't taken off in the country.
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