It said investors' confidence in the capital market is low due to absence of good governance, weak capacity of major market players and inadequate market infrastructure.

"The stock market is still at an emerging stage and continues to suffer from low investors' confidence," the ADB said in its recent report, prepared on the basis of findings by a mission, who visited Bangladesh between July 11 and 17 this year.

A four-member ADB mission, led by VT Velasco, senior financial economist of the Bank, visited Bangladesh.

The team advocated strengthening the enforcement capability of the Securities and Exchange Commission (SEC), enabling the watchdog to impose penalties and take administrative measures to address wrongdoing in the financial markets.

Terming Bangladesh's banking system 'weak and ineffective', the report underscored the need for resource mobilisation by non-banking financial institutions and institutional investors.

The capital market lacks investment grade equities and debt instruments. The long-term debt market is underdeveloped, with a non-existent secondary market for debt securities, the report pointed out.

Regarding regulatory role of the SEC, the ADB said the regulators are unable to attract experienced professionals due to its low pay scales.

It recommended establishment of the SEC as an autonomous regulator free from external interference.

"There is a perception that governance structures are inadequate, generally favor majority shareholders and work to the detriment of minority interest," the report said. "Informed market participants point to recurring violations of securities law and regulations, some of which partake of a criminal nature."

The ADB said the loan defaulters continue to have access to the capital market, although they are barred for securing loans form other banks.

It's a practice that allows them to bypass the banking embargo on loan defaulters, the report said.

It said of the 29 merchant banks, licensed by the SEC lack skilled manpower.

On the issue of poor corporate governance in capital market, the report said the Investment Corporation of Bangladesh (ICB) is a prime example of the very low nature of corporate governance in the Bangladesh financial system.

Elaborating, the report said the ICB is owner, operator and regulator -- all rolled into one with inherent conflict of interests.

"Financial disaster as a result of such structure and practices are clear lessons that the government needs to recognise as soon as possible," the ADB underscored.