In a dimly-lit office on the fifth floor of the Dhaka Stock Exchange (DSE) building, a musty warren of brokerage firms in the Bangladeshi capital, Nikhil Chandra Bosu sits at a computer terminal waiting for the 11 a.m. opening bell. A few investors, cradling cups of tea, watch on, hoping for the graphs to spike and for their slim stock portfolios to gain in value.
But Bosu, a trader at the Kurshid & Co. stock brokerage firm, says he has never seen the market in such a sick state. In December 2010, a massive crash rocked the DSE, eating up the life savings of hundreds of thousands of small investors. Before the bubble burst, Bosu says he was trading 15 million takas ($196,500) worth of stocks per day, taking a 0.5 percent commission on buy and sell orders. Today, with the market continuing to flat-line, his firm’s daily trading volume has slumped to just 5 million ($65,500). “The general investor lost confidence because of the crash,” he says. “There’s nothing left to do but wait and see.”
Mainul Islam is one of those who lost out. The 30-year-old says he invested a 1 million taka ($13,100) gift from his parents in banking stocks, hoping to make enough cash to fund a trip to Europe. “I was sitting idly and thought it was easy to invest money and make some quick bucks, but I didn’t expect the price to fall so quickly,” he says.His portfolio has since lost around 70 percent of its value.
Islam, like many small Bangladeshi traders who fell victim to the crash, pins the blame on “insiders” at the DSE and at the Bangladesh Central Bank, who he says manipulated the market for personal gain. “The big investors lured people to invest in the stock market and then sold every stock,” he says. “Some share prices went up from 50 to 2,500 takas. Now they’re back at 50.”
From 2007 until the crash, as Western markets were being rocked by the global financial crisis, Bangladeshi investors were making hay. The DSE’s index leapt from 2,450 in February 2009 to an unprecedented 8,600 by the end of 2010, and the number of investors in the market doubled from 1.5 to more than 3.3 million. Asif Anwar, an independent financial analyst based in Dhaka, sayseasy access to credit and the expansion of brokerage houses outside the capital fueled an epidemic of “pure, uncontrolled greed” and drew hundreds of thousands of ignorant investors into the market.
“There was a mania that gripped the country,” Anwar says. “Everybody was talking about the stock market. Everybody became an analyst overnight.” Few of these new investors, however, understood the risks of stock trading, a situation that was compounded by a lack of government oversight and, some say, rampant manipulation by large firms and merchant banks.
The inevitable bust came after interest rates spiked and the central bank enforced regulations governing capital exposure limits, triggering a massive flight of capital from the stock market. As banks and company directors quickly sold out to avoid losses, reaping massive profits, more than a million small investors were left holding relatively worthless stocks. “The main beneficiaries of this game were the commercial banks…They played with the small investors and took money from them,” says Mohammad Shakil Rizvi, the president of Dhaka Stock Exchange Ltd.
For many small investors, shock quickly turned to anger. Hundreds swarmed into the streets to protest against corporate greed and the manipulation of the market by “big shots” in the financial services industry. On January 10, after the market lost 9.25 percent of its value in less than an hour and trading was suspended, protestors clashed with police, smashing cars and burning tires.
Overall, 2010 was a healthy year for so-called “frontier markets”: Bangladesh’s DSE gained 80 percent over the course of the year, while Mongolia’s securities market was the world’s best performing, its benchmark Top 20 Index gaining 138 percent. But Bangladesh’s market crisis demonstrates that such gains, in countries lacking robust regulatory frameworks, can often be illusory—or simply unsustainable.
In the DSE’s case, some argue, government regulators did little to reign in predatory behavior and encourage sustainable growth.Abu Ahmed, an economist at the University of Dhaka, says the SEC—poorly staffed and closely linked to the financial industry—should have vetoed the expansion of the brokerage houses. It also should have been more vigilant about financial manipulation by listed companies, who often made initial stock offerings at set rather than market prices, and engineered bogus bonus share issues to cash in on investor enthusiasm.
“If you want to apportion the blame, I would say 90 percent should go to the SEC,” he says.
Despite the recent establishment of a 50 billion taka ($655 million) rescue fund to lure investors back into the market, frustrated traders continue to agitate for more direct government action. Mizanur Rashid Chowdhury, president of Bangladesh Sharemarket Investors Unity Council, announced last week that another public rally will be held on December 7. He also warned protestors would lay siege to financial institutions in the capital, including the SEC.
However, Rizvi dismissed accusations that the crash was a result of regulatory failures, instead blaming the irrational exuberance of the common investor. “When the market was going up, the greed factor was working for individuals,” he says. “The brokerage houses expanded on the demand of the public.”
Either way, if a similar crash in 1996 is any indication, Bangladeshi investors are in for more short-term pain. Anwar says there was little the government could do to “force” the market to regain its value. “The same thing happened (in 1996) and a lot of people lost their shirts. It took about ten years for the market to recover in a natural way,” he says.
Until then, there’s little for many to do but wait. Inside the exchange building, and at tea stands in the street outside, dozens of investors continue to maintain their mournful vigil. Amir Rezaul Karim, a 41-year-old former cosmetics retailer who lost 300,000 taka ($3,930) in the crash, says he comes to the bourse each day to monitor the state of the market. “The loss is too much for me, so I have to wait for the price to go up,” he says.
Another investor, Mominur Rahman, 42, who lost 1.3 million takas ($17,030) in trades, summed up the powerlessness and increasing desperation of Dhaka’s investors, victims of a mass financial slaughter. “I don’t support vandalism and arson, but what can we do? Our backs are against the wall.”
Sebastian Strangio is a freelance foreign correspondent and former deputy news editor for the Phnom Penh Post. His reporting has appeared in more than 25 publications, including Foreign Policy, The Christian Science Monitor, Global Post andThe Economist.