Financial Markets: A system comprised of individuals & institutions, instruments, & procedures that bring together borrowers & savers. Flow of Funds: Provides the ability to transfer income through time Borrowing sacrifices future income to increase current income. Saving, or investing, sacrifices current income in exchange for greater expected income in the future. 1. Direct Transfer -business sells its stock directly to investors 2. Indirect Transfer through Investment Bankers -investment banker acts as middleman & facilitates issuance of securities by reselling the securities to savers 3. Indirect Transfer through financial intermediary- bank or mutual fund obtains funds from savers & uses the money to lend or purchase securities Types of Financial Markets -Money Markets- instruments traded mature in one year or less -Capital Markets- includes instruments with maturities greater than one year -Debt Markets: a market in which loans are traded. Treasury, corporate, mortgage-backed, money market, municipal, etc -Equity Markets: a market in which corporate stock are traded. Stock markets Primary- corporations raise funds by issuing new securities. Secondary- securities are traded among investors after they have been issued Derivatives Markets: Options, futures & swaps are securities whose value is determined, or derived directly from other assets. These can be used to manage risk or to speculate Overview of Financial system of Bangladesh: 1. Formal Sector: The formal sector includes all regulated institutions like Banks, NonBank Financial Institutions (FIs), Insurance Companies, Capital Market Intermediaries like Brokerage Houses, Merchant Banks etc.; Micro Finance Institutions (MFIs). 2. Semi-Formal Sector: The semi formal sector includes those institutions which are regulated otherwise but do not fall under the jurisdiction of Central Bank, Insurance Authority, Securities and Exchange Commission or any other enacted financial regulator. This sector is mainly represented by Specialized Financial Institutions like House Building Finance Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank etc., Non Governmental Organizations (NGOs and discrete government programs. 3. Informal Sector: The informal sector includes private intermediaries which are completely unregulated. The financial market in Bangladesh is mainly of following types: 1. Money Market: The primary money market is comprised of banks, FIs and primary dealers as intermediaries and savings & lending instruments, treasury bills as instruments. There are currently 15 primary dealers (12 banks and 3 FIs) in Bangladesh. The only active secondary market is overnight call money market which is participated by the scheduled banks and FIs. The money market in Bangladesh is regulated by Bangladesh Bank (BB), the Central Bank of Bangladesh. 2. Capital market: The primary segment of capital market is operated through private & public offering of equity and bond instruments. The secondary segment of capital market is institutionalized by two (02) stock exchanges-Dhaka Stock Exchange and Chittagong Stock Exchange. The instruments in these exchanges are equity securities (shares), debentures, corporate bonds and treasury bonds. The capital market in Bangladesh is governed by Securities and Commission (SEC). 3. Foreign Exchange Market: Towards liberalization of foreign exchange transactions, a number of measures were adopted since 1990s. Bangladeshi currency, the taka, was declared convertible on current account transactions (as on 24 March 1994), in terms of Article VIII of IMF Article of Agreement (1994). As Taka is not convertible in capital account, resident owned capital is not freely transferable abroad. Repatriation of profits or disinvestment proceeds on non-resident FDI and portfolio investment inflows are permitted
freely. Direct investments of non-residents in the industrial sector and portfolio investments of non-residents through stock exchanges are repatriable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly. Bangladesh adopted Floating Exchange Rate regime since 31 May 2003. Under the regime, BB does not interfere in the determination of exchange rate, but operates the monetary policy prudently for minimizing extreme swings in exchange rate to avoid adverse repercussion on the domestic economy. The exchange rate is being determined in the market on the basis of market demand and supply forces of the respective currencies. In the forex market banks are free to buy and sale foreign currency in the spot and also in the forward markets. However, to avoid any unusual volatility in the exchange rate, Bangladesh Bank, the regulator of foreign exchange market remains vigilant over the developments in the foreign exchange market and intervenes by buying and selling foreign currencies whenever it deems necessary to maintain stability in the foreign exchange market. Regulators of the Financial System 1. Central Bank: Banking and non banking institutions. 2. Insurance Development and Regulatory Authority (IDRA) 3. Regulator of Capital Market Intermediaries: SEC 4. Microcredit Regulatory Authority 1. Central Bank Bangladesh Bank acts as the Central Bank of Bangladesh which was established on December 16, 1972 through the enactment of Bangladesh Bank Order 1972- President’s Order No. 127 of 1972 (Amended in 2003). The general superintendence & direction of the affairs & business of BB have been entrusted to a 9 members' Board of Directors which is headed by the Governor who is the CEO of this institution as well. BB has 40 departments & 10 branch offices. In Strategic Plan (2010-2014), the vision of BB has been stated as, “To develop continually as a forward looking central bank with competent and committed professionals of high ethical standards, conducting monetary management & financial sector supervision to maintain price stability and financial system robustness, supporting rapid broad based inclusive economic growth, employment generation and poverty eradication in Bangladesh”. The main functions of BB are (Section 7A of BB Order, 1972) 1. to formulate and implement monetary policy; 2. to formulate and implement intervention policies in the foreign exchange market; 3. to give advice to the Government on the interaction of monetary policy with fiscal and exchange rate policy, on the impact of various policy measures on the economy and to propose legislative measures it considers necessary or appropriate to attain its objectives and perform its functions; 4. to hold and manage the official foreign reserves of Bangladesh; 5. to promote, regulate and ensure a secure and efficient payment system, including the issue of bank notes; 6. to regulate and supervise banking companies and financial institutions. Core Policies of Central Bank A. Monetary policy: The main objectives of monetary policy of Bangladesh Bank are: • Price stability both internal & external • Sustainable growth & development • High employment • Economic and efficient use of resources • Stability of financial & payment system Bangladesh Bank declares the monetary policy by issuing Monetary Policy Statement (MPS) twice (January and July) in a year. The tools and instruments for implementation of monetary policy in Bangladesh are Bank Rate, Open Market Operations (OMO), Repurchase agreements (Repo) & Reverse Repo, Statutory Reserve Requirements (SLR & CRR). B. Reserve Management Strategy
Bangladesh Bank maintains the foreign exchange reserve of the country in different currencies to minimize the risk emerging from widespread fluctuation in exchange rate of major currencies and very irregular movement in interest rates in the global money market. BB has established Nostro account arrangements with different Central Banks. Funds accumulated in these accounts are invested in Treasury bills, repos and other government papers in the respective currencies. It also makes investment in the form of short term deposits with different high rated and reputed commercial banks and purchase of high rated sovereign/supranational/corporate bonds. A separate department of BB performs the operational functions regarding investment which is guided by investment policy set by the BB's Investment Committee headed by a Deputy Governor. The underlying principle of the investment policy is to ensure the optimum return on investment with minimum market risk. C. Interest Rate Policy Under the Financial sector reform program, a flexible interest policy was formulated. According to that, banks are free to charge/fix their deposit (Bank /Financial Institutes) and Lending (Bank /Financial Institutes) rates other than Export Credit. At present, except Preshipment export credit and agricultural lending, there is no interest rate cap on lending for banks. Yet, banks can differentiate interest rate up to 3% considering comparative risk elements involved among borrowers in same lending category. With progressive deregulation of interest rates, banks have been advised to announce the mid-rate of the limit (if any) for different sectors and the banks may change interest 1.5% more or less than the announced mid-rate on the basis of the comparative credit risk. Banks upload their deposit and lending interest rate in their respective website. D. Capital Adequacy for Banks and FIs: With a view to strengthening the capital base of banks & FIs, Basel-II Accord has been introduced in both of these sectors. For banks, full implementation of Basel-II was started in January 01, 2010 (Guidelines on Risk Based Capital Adequacy for banks). Now, scheduled banks in Bangladesh are required to maintain Tk. 4 billion or 10% of Total Risk Weighted Assets as capital, whichever is higher. For FIs, full implementation of Basel-II has been started in January 01, 2012 (Prudential Guidelines on Capital Adequacy and Market Discipline (CAMD) for Financial Institutions). Now, FIs in Bangladesh are required to maintain Tk. 1 billion or 10% of Total Risk Weighted Assets as capital, whichever is higher. E. Deposit Insurance The deposit insurance scheme (DIS) was introduced in Bangladesh in August 1984 to act as a safety net for the depositors. All the scheduled banks Bangladesh are the member of this scheme Bank Deposit Insurance Act 2000. The purpose of DIS is to help to increase market discipline, reduce moral hazard in the financial sector and provide safety nets at the minimum cost to the public in the event of bank failure. A Deposit Insurance Trust Fund (DITF) has also been created for providing limited protection (not exceeding Taka 0.01 million) to a small depositor in case of winding up of any bank. The Board of Directors of BB is the Trustee Board for the DITF. BB has adopted a system of risk based deposit insurance premium rates applicable for all scheduled banks effective from January - June 2007. According to new instruction regarding premium rates, problem banks are required to pay 0.09 percent and private banks other than the problem banks and state owned commercial banks are required to pay 0.07 percent where the percent coverage of the deposits is taka one hundred thousand per depositor per bank. With this end in view, BB has already advised the banks for bringing DIS into the notice of the public through displaying the same in their display board. 2. Insurance Development and Regulatory Authority (IDRA) IDRA was instituted on January 26, 2011 as the regulator of insurance industry being empowered by Insurance Development & Regulatory Act, 2010 by replacing its predecessor, Chief Controller of Insurance. This institution is operated under Ministry of Finance and a 4 member executive body headed by Chairman is responsible for its general supervision & direction of business.
IDRA has been established to make the insurance industry as the premier financial service provider in the country by structuring on an efficient corporate environment, by securing embryonic aspiration of society and by penetrating deep into all segments for high economic growth. The mission of IDRA is to protect the interest of the policy holders and other stakeholders under insurance policy, supervise and regulate the insurance industry effectively, ensure orderly and systematic growth of the insurance industry and for matters connected therewith or incidental thereto. 3. Regulator of Capital Market Intermediaries: SEC Bangladesh Securities & Exchange Commission (BSEC) perform the f ns to regulate the capital market intermediaries & issuance of capital & financial instruments by public limited companies. It was established on June 8, 1993 under the Securities & Exchange Commission Act, 1993. A 5 member commission headed by a Chairman has the overall responsibility to administer securities legislation & the Commission is attached to the Ministry of Finance. The mission of SEC is to protect the interests of securities investors, to develop and maintain fair, transparent and efficient securities markets and to ensure proper issuance of securities and compliance with securities laws. The main functions of SEC are: 1. Regulating the business of the Stock Exchanges or any other securities market. 2. Registering & regulating the business of stock-brokers, sub-brokers, share transfer agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of an issue, underwriters, portfolio managers, investment advisers and other intermediaries in the securities market. 3. Registering, monitoring & regulating of collective investment scheme including all forms of mutual funds. 4. Monitoring & regulating all authorized self regulatory organizations in the securities market. 5. Prohibiting fraudulent & unfair trade practices in any securities market. 6. Promoting investors’ education and providing training for intermediaries of the securities market. 7. Prohibiting insider trading in securities. 8. Regulating the substantial acquisition of shares and take-over of companies. 9. Undertaking investigation & inspection, inquiries & audit of any issuer or dealer of securities, the Stock Exchanges & intermediaries & any self regulatory org n in the securities market. 10. Conducting research and publishing information. 4. Regulator of Micro Finance Institutions To bring Non-government Microfinance Institutions (NGO-MFIs) under a regulatory framework, the Government of Bangladesh enacted "Microcredit Regulatory Authority Act, 2006’" (Act no. 32 of 2006) which came into effect from August 27, 2006. Under this Act, the Government established Microcredit Regulatory Authority (MRA) with a view to ensuring transparency and accountability of microcredit activities of the NGO-MFIs in the country. The Authority is empowered and responsible to implement the said act and to bring the microcredit sector of the country under a full-fledged regulatory framework. MRA’s mission is to ensure transparency & accountability of microfinance operations of NGOMFIs as well as foster sustainable growth of this sector. In order to achieve its mission, MRA has set itself the task to attain the following goals: 1. To formulate as well as implement the policies to ensure good governance & transparent financial systems of MFIs. 2. To conduct in-depth research on critical microfinance issues & provide policy inputs to the government consistent with the national strategy for poverty eradication. 3. To provide training of NGO-MFIs & linking them with the broader financial market to facilitate sustainable resources and efficient management. 4. To assist the government to build up an inclusive financial market for economic development of the country.
To identify the priorities in the microfinance sector for policy guidance and dissemination of information to attain the MRA’s social responsibility. According to the Act, the MRA will be responsible for the 3 primary f ns that will need to be carried out, namely: 1. Licensing of MFIs with explicit legal powers; 2. Supervision of MFIs to ensure that they continue to comply with the licensing requirements; and 3. Enforcement of sanctions in the event of any MFI failing to meet the licensing & ongoing supervisory requirements. Structure of Financial Institutions • Bank: » Scheduled: NCB, Specialized Bank, PCB (Conventional and Islamic), Foreign Commercial Banks » Non-scheduled • NBFI: 31 NBFIs. Mainly leasing company. • Insurance: 62 (18 Life Insurance + 44 General Insurance) • Microfinance Institutions (MFIs) Banks After the independence, banking industry in Bangladesh started its journey with 6 Nationalized commercialized banks, 2 State owned Specialized banks and 3 Foreign Banks. In the 1980's banking industry achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types: • Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended in 2003) are termed as Scheduled Banks. There are 47 scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 & Bank Company Act, 1991. Scheduled Banks are classified into following types: • State Owned Commercial Banks (SOCBs): 4 SOCBs which are fully or majorly owned by the Govt of BD. Nationalised Commercial Bank: 1. Sonali Bank 2. Rupali Bank 3. Agrani Bank 4. Janata Bank • Specialized Banks (SDBs): 4 specialized banks are now operating which were established for specific objectives like agricultural or industrial development. Also fully or majorly owned by the Govt of Bangladesh. 4 specialized banks are now operating which were established for specific objectives like agricultural or industrial development. These banks are also fully or majorly owned by the Government of Bangladesh. 1. Bangladesh Krishi Bank 2. Rajshahi Krishi Unnayan Bank 3. Bangladesh Development Bank Ltd 4. BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited) • Private Commercial Banks (PCBs) are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products. There are 30 private commercial banks which are majorly owned by the private entities. PCBs can be categorized into two groups: 1. United Commercial Bank 11. The City Bank Limited 21. Trust Bank Limited Ltd 12. NCC Bank Limited 22. Jamuna Bank Limited 2. Mutual Trust Bank Limited 13. Mercantile Bank Limited 23. AB Bank 3. BRAC Bank Limited 14. Prime Bank Limited 24. Exim Bank Limited 4. Eastern Bank Limited 15. Southeast Bank Limited 25. Union Bank** 5. Dutch-Bangla Bank 16. Standard Bank Limited 26. NRB Commercial Bank** Limited 17. One Bank Limited 27. NRB Bank** 6. Dhaka Bank Limited 18. Bangladesh Commerce 28. Meghna Bank** 5.
7. Uttara Bank Limited 8. Pubali Bank Limited 9. IFIC Bank Limited 10. National Bank Limited • Conventional PCBs: 23
Bank Ltd 19. The Premier Bank 20. Bank Asia Limited
29. South
Limited
Bangla Agriculture & Commerce Bank**
conventional PCBs are now operating in the industry. They perform the banking functions in conventional fashion i.e interest based operations. • Islami Shariah based PCBs: There are 7 Islami Shariah based PCBs in Bangladesh and they execute banking activities according to Islami Shariah based principles i.e. ProfitLoss Sharing (PLS) mode. . 1. Islami Bank Bangladesh Ltd 5. Al-Arafah Islami Bank Limited 2. Shahjalal Islami Bank Limited 6. Social Islami Bank Limited 3. First Security Islami Bank Limited 7. ICB Islamic Bank 4. Exim bank Ltd. • Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks which are incorporated in abroad. 1. Citibank 6. Habib Bank Limited 2. HSBC 7. National Bank of Pakistan 3. Standard Chartered Bank 8. Woori Bank 4. Commercial Bank of Ceylon 9. Bank Alfalah 5. State Bank of India • Non-Scheduled Banks: The banks which are established for special and definite objective and operate under the acts that are enacted for meeting up those objectives, are termed as Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks. There are now 4 non-scheduled banks in Bangladesh which are: 1. Ansar VDP Unnayan Bank, 2. Karmashangosthan Bank, 3. Probashi Kollyan Bank, 4. Jubilee Bank Non Bank Financial Institutions (FIs) Non Bank Financial Institutions (FIs) are those types of financial institutions which are regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 31 FIs are operating in Bangladesh while the maiden one was established in 1981. Out of the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 13 were initiated by private domestic initiative and 15 were initiated by joint venture initiative. Major sources of funds of FIs are Term Deposit (at least six months tenure), Credit Facility from Banks and other FIs, Call Money as well as Bond and Securitization. The major difference between banks and FIs are as follows: • FIs cannot issue cheques, pay-orders or demand drafts. • FIs cannot receive demand deposits, • FIs cannot be involved in foreign exchange financing, • FIs can conduct their business operations with diversified financing modes like syndicated financing, bridge financing, lease financing, securitization instruments, private placement of equity etc. 1. Uttara Finance and Investments 17. Infrastructure Development Company Limited Limited (IDCOL) 2. United Leasing Company Limited 18. Industrial Promotion & Development (ULCL) Company of Bangladesh Limited(IPDC) 3. Union Capital Limited 19. Industrial & Infrastructure Development 4. The UAE-Bangladesh Investment Co. Finance Company (IIDFC) Limited Ltd 20. IDLC Finance Limited 5. Saudi-Bangladesh Industrial & 21. Hajj Finance Company Limited Agricultural Investment Company 22. GSP Finance Company (Bangladesh) Limited (SABINCO) Limited (GSPB)
Reliance Finance Limited Prime Finance & Investment Ltd Premier Leasing & Finance Limited Phoenix Finance and Investments Limited 10. People's Leasing and Financial Services Ltd 11. National Housing Finance & Investments Limited 12. National Finance Ltd 13. MIDAS Financing Ltd. (MFL) 14. LankaBangla Finance Ltd. 15. Islamic Finance and Investment Limited 16. International Leasing & Financial Services Ltd 6. 7. 8. 9.
23. First Lease Finance & Investment Ltd. 24. FAS Finance & Investment Limited 25. Fareast Finance & Investment Limited 26. Delta Brac Housing Finance Corporation
Ltd. (DBH) 27. Bay Leasing & Investment Limited 28. Bangladesh Industrial Finance Company Ltd (BIFC) 29. Bangladesh Finance & Investment Co. Ltd. 30. Agrani SME Fianance Co. Ltd.
Capital Market: After the independence, establishment of Dhaka Stock Exchange (formerly East Pakistan Stock Exchange) initiated the pathway of capital market intermediaries in Bangladesh. In 1976, formation of Investment Corporation of Bangladesh opened the door of professional portfolio management in institutional form. In last two decades, capital market witnessed number of institutional and regulatory advancements which has resulted diversified capital market intermediaries. At present, capital market intermediaries are of following types: 1. Stock Exchanges: Apart from Dhaka Stock Exchange, there is another stock exchange in Bangladesh that is Chittagong Stock Exchange established in 1995. 2. Central Depository: The only depository system for the transaction and settlement of financial securities, Central Depository Bangladesh Ltd (CDBL) was formed in 2000 which conducts its operations under Depositories Act 1999, Depositories Regulations 2000, Depository (User) Regulations 2003, and the CDBL by-laws. 3. Stock Dealer/Sock Broker: Under SEC (Stock Dealer, Stock Broker & Authorized Representative) Rules 2000, these entities are licensed and they are bound to be a member of any of the two stock exchanges. At present, DSE and CSE have 238 and 136 members respectively. 4. Merchant Banker & Portfolio Manager: These institutions are licensed to operate under SEC (Merchant Banker & Portfolio Manager Rules) 1996 and 45 institutions have been licensed by SEC under this rules so far. 5. Asset Management Companies (AMCs): AMCs are authorized to act as issue and portfolio manager of the mutual funds which are issued under SEC (Mutual Fund) Rules 2001. There are 15 AMCs in Bangladesh at present. 6. Credit Rating Companies (CRCs): CRCs in Bangladesh are licensed under Credit Rating Companies Rules, 1996 and now, 5 CRCs have been accredited by SEC. 7. Trustees/Custodians: According to rules, all asset backed securitizations and mutual funds must have an accredited trusty and security custodian. For that purpose, SEC has licensed 9 institutions as Trustees and 9 institutions as custodians. 8. Investment Corporation of Bangladesh (ICB): ICB is a specialized capital market intermediary which was established in 1976 through the ordainment of The Investment Corporation of Bangladesh Ordinance 1976. This ordinance has empowered ICB to perform all types of capital market intermediation that fall under jurisdiction of SEC. ICB has three subsidiaries: 8.1. ICB Capital Management Ltd., 8.2. ICB Asset Management Company Ltd., 8.3. ICB Securities Trading Company Ltd. Types of Stock Market Transactions
1. Secondary market: trading existing stocks 2. Primary market: existing firm issues additional shares 3. Initial Public Offering (IPO): privately held company offers stock to the public for 1st time called “going public” The Stock Exchanges: Organized security exchanges tangible physical entities (Dhaka Stock Exchange (DSE) & Chittagong Stock Exchange (CSE)) Over-the-Counter Market (OTC) • Collection of brokers and dealers connected electronically • Provides for trading in securities not listed on the organized exchanges Insurance Insurance sector in Bangladesh emerged after independence with 2 nationalized insurance companies- 1 Life & 1 General; & 1 foreign insurance company. In mid 80s, private sector insurance companies started to enter in the industry & it got expanded. Now days, 62 companies are operating under Insurance Act 2010. Out of them• 18 are Life Insurance Companies including 1 foreign company and 1 is state-owned company, • 44 General Insurance Companies including 1 state-owned company. Insurance companies in Bangladesh provide following services: 1. Life insurance, 2. General Insurance, 3. Reinsurance, 4. Micro-insurance, 5. Takaful or Islami insurance. Microfinance Institutions (MFIs) The member-based Microfinance Institutions (MFIs) constitute a rapidly growing segment of the Rural Financial Market (RFM) in Bangladesh. Microcredit programs (MCP) in Bangladesh are implemented by various formal financial institutions (nationalized commercial banks and specialized banks), specialized government organizations and Non-Government Organizations (NGOs). The growth in the MFI sector, in terms of the number of MFI as well as total membership, was phenomenal during the 1990s and continues till today. Despite the fact that more than a thousand of institutions are operating microcredit programs, but only 10 large Microcredit Institutions (MFIs) and Grameen Bank represent 87% of total savings of the sector and 81% of total outstanding loan of the sector. Through the financial services of microcredit, the poor people are engaging themselves in various income generating activities and around 30 million poor people are directly benefited from microcredit programs. Credit services of this sector can be categorized into six broad groups: i) general microcredit for small-scale self employment based activities, ii) microenterprise loans, iii) loans for ultra poor, iv) agricultural loans, v) seasonal loans, and vi) loans for disaster management. Currently, 599 institutions (as of October 10 2011) have been licensed by MRA to operate Micro Credit Programs. But, Grameen Bank is out of the jurisdiction of MRA as it is operated under a distinct legislation- Grameen Bank Ordinance, 1983.
