What impact investors really want from Bangladesh

Singapore in June is all glass and humidity. During a rainy Singapore Water Week, as its halls filled with the people who move development capital around the world, I went to meet them. I came home more hopeful than the headlines allow, but the hope arrives with a caution, so let me share that first.

The concern, fairly read

Almost every investor told me the same story. For several years the news out of Bangladesh has been less than rosy, and a banking sector with troubled asset quality has dominated every briefing. None of this is invented. Of course, I am well aware of how the asset quality situation at large for the sector is, but I was surprised at how indiscriminately it may be applied. 

Bangladesh has roughly 60 banks, and the asset-quality problem sits mostly with the weaker ones. The top 10 operate in a different universe, and The Business Standard recently showed that the strongest among them carry non-performing loans below 5 percent, a figure that would pass for healthy in most frontier markets.

The real trouble is the order in which investors read the data. An impact investor, and for that matter, many international investors, reads a country before it reads a company, moving from the macroeconomy to the sector and only then to the borrower, so when the sector light is flashing red, the best names are painted with the same brush as the worst. 

Some of this is simply the country-risk premium, and that premium is what it is: Bangladesh is a frontier market, frontier markets cost more to borrow in, and even the government pays well into the double digits to borrow in its own currency, so no private borrower, however strong, escapes the surcharge entirely. 

The premium is not the grievance. The grievance is that it gets applied as a blanket, when the whole purpose of good credit work is to charge the weak names more and the strong names less.

Investors need research

The most practical lesson from Singapore is that these impact investors do not receive research. When I worked in equity research, I serviced foreign equity investors continuously, sending company, sector, macro, and thematic notes as events warranted. That flow simply does not exist on the debt side of the impact market, and into the vacuum rush rumor and headline, so that a move in numbers or a misunderstood circular travels abroad as a worry rather than as a fact carefully weighed.

Price is where the gap becomes expensive, and it cuts both ways. Most foreign loans are priced off a global benchmark, SOFR, plus a margin: a leading Bangladeshi bank can already raise money from its established partners at a relatively thin margin, while an impact investor pricing in country risk needs one a good deal wider, and when the two cannot meet, the deal does not happen. 

Sometimes the investor asks too much for the risk; just as often, in candor, the bank plays hard to get, confident it can fund itself more cheaply elsewhere. Both positions are rational, and both leave the country worse off: a deal that does not close is dollars that do not arrive, and a strong borrower treated as a generic risk pays for a perception rather than a fact, which is exactly what good research exists to correct.

The premium is not the grievance. The grievance is that it gets applied as a blanket, when the whole purpose of good credit work is to charge the weak names more and the strong names less.

Why foreign investment matters

Step back from any single transaction and the larger case is hard to argue with. Bangladesh attracts very little foreign direct investment relative to the size of its economy, among the lowest in the region, and the shortfall is not only a financing gap but a knowledge gap. I would even say it's a communication gap. I don't think relevant industries invest enough in the right kind of communication that is critical to draw in foreign capital. So, it is a case for not just research but how to present that research in ways that enable effective deals.

Foreign impact capital is smart capital: it arrives with governance expectations, reporting discipline, and benchmarks drawn from many other markets, and when a serious investor underwrites a Bangladeshi institution, the due diligence and covenants enforce a discipline on risk and disclosure that the institution eventually makes its own.

Then there is the plainest reason of all: the country needs the dollars. A foreign loan is hard currency entering the economy and supporting reserves at a moment when reserves matter a great deal, and it does not compete with local depositors for scarce liquidity. The scale is larger than people assume. A single organization such as Water.org deploys on the order of $200 million a year in Bangladesh, and raising even a quarter of that abroad would bring in $50 million of fresh external capital, roughly what an entire niche export category earns in a year. 

This is why Bangladesh Bank should not merely permit foreign impact investment but actively promote it: these flows bring non-inflationary dollars into the reserve pool, they lengthen the tenor of funding in a market chronically short of long money, and they build a track record that draws more commercial capital in behind it. Every loan made, serviced, and repaid improves the country's reputation, which is the only thing that brings a risk premium down over time.

This is largely true for many frontier and emerging markets, as borne out by conversations with investors, but particularly true for Bangladesh, where research and communication of research are lacking.

What has to change

There was also a clear signal about instruments. Impact investors like bonds, and much of that appetite can be met today through private placements, quick to arrange between parties who already know each other. But over a longer horizon there is a strong case for the Bangladesh Securities and Exchange Commission to nurture a market in listed bonds, which bring price discovery, secondary liquidity, a transparent cost-of-capital benchmark, and a wider pool of holders, and which let thematic issuance, green, blue, or social, be verified in public. With only 16 corporate bonds listed today, the runway is long, and whoever moves first will set the standard.

The remaining friction is regulatory, and regulation can be changed. Investors raised, again and again, the ceiling on the rate a foreign lender may charge, a cap meant to protect borrowers that in practice repels the very investors most willing to lend to higher-impact institutions. 

The repatriation problem is sharper still: one investor that had put money into a local microfinance institution found, when it tried to take its capital home, that there was no clear pathway for repatriating an investment into an NGO-MFI, and the exit dragged on for the better part of a year, by which time taka depreciation had raised the effective cost for the local institution. Capital made to wait that long prices the uncertainty into every deal that follows.

The opportunity sits at three levels. 

1. Banks that want impact money must get ready for it, with a real pitch deck, an investor-relations function that works the debt side as deliberately as the equity side, and a clear account of how their lending aligns with what investors are mandated to fund. 
2. Bangladesh Bank can build a time-bound pathway for foreign money to enter and leave a microfinance institution, revisit the rate cap, and put its own weight behind attracting these flows. 
3. And intermediaries ought to step up and produce company, sector, macro, and thematic research that does not yet exist, convening corporate access and CFO-connect calls, and opening a channel to the independent think tanks that investors rarely see.

Bangladesh should care for the simplest of reasons: the appetite is real. The investors I met in Singapore like this country, respect its leading banks, and understand that a troubled sector can still hold world-class institutions. What they lack is credible information and a regulatory environment that does not punish patience. Close those two gaps, and the capital will follow.

Sketch: TBS

Dr Sajid Amit is an experienced development sector professional, academic and investments professional, with work experience in Morgan Stanley and BRAC EPL. He has received awards for his investment research from Morgan Stanley and BlackRock. He can be reached at sh2367@caa.columbia.edu.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.