The fund can be built up from a bank’s own source or by taking money through repo from the central bank at 5 percent rate
Banks can invest up to Tk200 crore each in the stock market beyond their regulatory limit for the next five years.
The Bangladesh Bank issued a circular on Monday in this regard, allowing the banks to invest this excess amount which will not be calculated with the regulatory limit of 25 percent of their capital.
The decision was taken to increase liquidity supply in the stock market through banks' investment.
The banks were also given exemption from maintaining provisioning against the investment, according to the circular.
The initiative has opened up an opportunity to bring fresh investment of Tk12,000 crore from all 59 banks in the country.
The investment opportunity will remain open until January 13, 2025, according to the circular.
This move comes after the prime minister's instruction to take long and short-term measures to boost the stock market.
As of December last year, banks' individual exposure to the stock market was 11 percent on average, far lower than the regulatory limit of 25 percent, according to the Bangladesh Bank.
According to the circular, the banks can build up the fund from their own source or take the money from the central bank through repo at 5 percent rate.
They can lend this money to their subsidiaries such as merchant banks and brokerage houses at 7 percent interest rate.
The tenure of this kind of loans will end on February 9, 2025.
Such loans will be not considered with the banks' Advance Deposit Ratio.
The central bank also imposed some conditions about which kind of shares the banks can invest the money on.
They are not allowed to purchase shares of their own company with this money. They can purchase shares not more than 2 percent of other banks and financial institutions and 10 percent of other companies.
Furthermore, the banks cannot purchase more than 10 percent units of a closed-end mutual fund and 15 percent of an open-end mutual fund.
They can invest only in companies and mutual funds which have been making profits for the last three years.
Earlier in September 2019, the central bank offered liquidity support to the banks at only 6 percent interest to invest in shares.
The Bangladesh Bank issued a circular to temporarily increase the supply of liquidity in the capital market for six months. The liquidity support would also be provided through repo.
Despite this lucrative offer, response was poor as only one bank has taken Tk50 crore liquidity support from the central bank to invest in shares.
In 2010, the banks' overexposure contributed to a boom in price indices in the capital market. And the banks were allowed to invest 10 percent of their liabilities.
Later, the government amended the Bank Company Act in 2013, limiting the banks' exposure to 25 percent.
The banks got three years to limit their overexposure until July 2016. Since then, banks' investment in the stock market continued to decline, reducing their share to total market capitalisation – the market value of a publicly-traded company's outstanding shares.
"Liquidity is definitely a factor, but it is more important to restore the confidence of investors," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank and former chairman of the Association of Bankers, Bangladesh.
Foreign investors are cutting their investment as they are not relying on the market mechanism. They are raising the issue of governance, he said.
Liquidity support can help the capital market for a short time. But restoring investors' confidence is the solution for healing the market in the long run, he added.
Appreciating the central bank's move, Bangladesh Merchant Bankers' Association president Sayadur Rahman said it will help this market turn around.
The Dhaka Stock Exchange (DSE) ended in red on Monday, with its broad index losing 3 points as investors are still sceptical about whether the fund will really come into the market.