Introduction Financial system is a system which tones up the savings-investment process of a country. Financial system plays a significant role in the economic development of a country. The importance of an efficient financial sector lies in the fact that, it ensures domestic resources mobilization, generation of savings, and investments in productive sectors. In fact, it is the system by which a country’s most profitable and efficient projects are systematically and continuously directed to the most productive sources of future growth. The financial system not only transfers funds from savers to investors, it also selects projects which will yield the highest returns, accumulates sufficient quantities of capital to fund the range of investment projects across economic activities, accounts for price risks across assets, monitor performance, and enforce contracts. According to the McKinnon- Shaw hypothesis (1973), the conventional wisdom is that flexibility and efficiency of the financial system are crucial to the growth and development of a market economy. A comprehensive study by King and Levine (1993) from across 119 developed and developing countries over the 1960-1989 period provides compelling evidence that economic growth is dramatically dependent on the size of financial sector, credit to private sector and enterprises and interest rates. The larger the financial sector in the context of the overall economy, the greater the share of lending by depository rather than central banks, and the greater the share of credit to private sector rather than public sector, the greater is the rate of economic growth. A healthy, transparent and dynamically evolving financial system helps mobilize savings and allocate resources, ensure safe and efficient payment and settlement arrangements and ease financial crisis management. Efforts continued in FY08 to establish a healthy and transparent financial system in the country. In addition to the challenges emanating from the internal and external shocks that affected the real sector, there were signs of strain both in the interbank call market and forex market. Volatility in these two markets was tamed through repo operation and intervention by the Bangladesh Bank.
Overview of Financial system of Bangladesh 1) Formal Sector, 2) Semi-Formal Sector, 3 ) Informal Sector. The sectors have been categorized in accordance with their degree of regulation. The formal sector includes all regulated institutions like Banks, Non-Bank Financial Institutions (FIs), Insurance Companies, Capital Market Intermediaries like Brokerage Houses, Merchant Banks etc.; Micro Finance Institutions (MFIs). 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. 1
The informal sector includes private intermediaries which are completely unregulated.
The financial system of Bangladesh is comprised of three broad fragmented sectors: Financial System Of Bangladesh Semi Formal Sector
Formal Sector
Financial Market
Money Market (Banks, NBFIs,Primary Dealers)
Capital Market (Investment banks, Stock Exchanges, Credit Rating Companies etc.) Foreign Exchange Market (Authorized Dealers)
Informal Sector
Specialized Financial
Regulators & Institutions
Institutions
Bangladesh Bank (Central Bank)
House Building Financial Corporation(H BFC)
Banks 47 scheduled &
Palli Karma Sahayak
4 non-scheduled banks
Foundation(PKS F) NBFIs 31 NBFIs Samabay Bank Insurance Development & Regulatory Authority
Grameen Bank
Insurance Companies 18 Life and 44 Non-Life Insurance Companies Securities & Exchange Commission (Regulatory of capital market Intermediaries ) Stock Exchanges, Stock Dealers Brokers, Merchants Banks, AMC s, Credit Rating Agencies etc. Microcredit Regulatory Authority (MFI Authority) Micro Finance Institutions 599 MFIs
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The purpose of financial market Financial assets exist in an economy because the saving of various individuals, corporations and governments during a period of time differ from their investment in real assets. By real assets we mean such things as houses, buildings, equipment, inventories and durable goods. A financial asset is created only when the investment of an economic unit in real assets exceeds its saving, and it finances this excess by borrowing and issuing stock. Of course, another economic unit must be willing to lend. In the economy as a whole saving surplus units (those whose savings exceed their investment in real assets) provide funds saving deficit units (those whose investment in real assets exceed their saving). This exchange of funds is evidenced by investment instruments or securities representing financial assets to the holders and liabilities to the issuers. The purpose of financial markets in economy is to allocate savings efficiently to ultimate users. If those economic units that saved were the same as those that engaged in capital formation, an economy could prosper without financial markets.
The purpose of financial institutions institutions A bank or financial institution is a company that conducts banking business commercially. Financial institutions are in the business of managing payments, taking receipt of interest bearing deposits, supply of credit, underwriting and settlement of investment banking among other activities. They also manage the balance between investment and borrowing requirements and thus act as a financial intermediary. They facilitate in the transferring transferrin g of funds from investors to firms, and their presence greatly fosters the flow of money in an economy. In this savings are drawn upon to mitigate the risk involved in the provision of loans. In the event that the yield curve turns inverse, institutional players in this domain often resort to offering supplementary fee generating services such as securities underwriting, and prime brokerage. The business conduct of these institutions of fortune is closely supervised by the banking supervision authorities, which exist in almost every country, and in some cases it is carried out by the central bank. The central bank ordinarily exists for an assortment of legal and operational responsibilities. It enjoys the exclusive right to issue banknotes, and can be referred to as the bank of banks, and it is the state bank.
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Financial market in Bangladesh
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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.
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Capital market: The primary segment of capital market is operated through private and 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 Exchange Commission (SEC).
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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.
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Regulators of the Financial System 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 and direction of the affairs and business of BB have been entrusted to a 9 members' Board of Directors which is headed by the Governor who is the Chief Executive Officer of this institution as well. BB has 40 departments and 9 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 and financial sector supervision to maintain price stability and financial system robustness, supporting rapid broad based inclusive economic growth, employment generation and poverty in Bangladesh”. eradication The main functions of BB are (Secti on 7A of BB Order, 1972) -to formulate and implement monetary policy; 1. to formulate and implement intervention policies in the foreign exchange market; 2. 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; 3. to hold and manage the official foreign reserves of Bangladesh; 4.
to promote, regulate and ensure a secure and efficient payment system, including the issue of bank notes;
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to regulate and supervise banking companies and financial institutions
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Core Policies of Central Bank Monetary policy
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The main objectives of monetary policy of Bangladesh Bank are:
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Price stability both internal & external
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Sustainable growth & development
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High employment
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Economic and efficient use of resources
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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).
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. 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 /Financial Institutes) and Lending Lending (Bank /Financial /Financial Institutes) Institutes) rates rates other other than Export Export Credit. At present, present, except Pre-shipmen Pre-shipmentt export credit and agricultural lending, there is no interest rate cap on lending for banks. Yet,
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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. 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.
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.
Insurance Authority:
Insurance Development and Regulatory Authority (IDRA) was instituted on January 26, 2011 as the regulator of insurance industry being empowered by Insurance Development and Regulatory Act, 2010 by replacing its predecessor, Chief Controller of Insurance. This institution is operated 7
under Ministry of Finance and a 4 member executive body headed by Chairman is responsible for its general supervision and 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.
Securities and Exchange Commission (SEC) performs the functions to regulate the capital market intermediaries and issuance of capital and financial instruments by public limited companies. It was established on June 8, 1993 under the Securities and Exchange Commission Act, 1993. A 5 member commission headed by a Chairman has the overall responsibility to administer securities legislation and 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: •
Regulating the business of the Stock Exchanges or any other securities market.
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Registering and 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.
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Registering, monitoring and regulating of collective investment scheme including all forms of mutual funds.
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Monitoring and regulating all authorized self regulatory organizations in the securities market.
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Prohibiting fraudulent and unfair trade practices in any securities market.
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Promoting investors’ education and providing training for intermediaries of the securities market.
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Prohibiting insider trading in securities.
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Regulating the substantial acquisition of shares and take-over of companies.
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Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of securities, the Stock Exchanges and intermediaries and any self regulatory organization in the securities market.
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 Au gust 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 and accountability of microfinance operations of NGONGOMFIs 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: •
To formulate as well as implement the policies to ensure good governance and transparent financial systems of MFIs.
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To conduct in-depth research on critical microfinance issues and provide policy inputs to the government consistent with the national strategy for poverty eradication.
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To provide training of NGO-MFIs and linking them with the broader financial market to facilitate sustainable resources and efficient management.
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To assist the government to build up an inclusive financial market for economic development of the country.
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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 three primary functions that will need to be carried out, namely: Licensing of MFIs with explicit legal powers Supervision of MFIs to ensure that they continue to comply with the licensing requirements; and Enforcement of sanctions in the event of any MFI failing to meet the licensing and ongoing supervisory requirements.
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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:
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Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended in 2003) are termed as Scheduled Banks.
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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.
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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 and Bank Company Act, 1991. Scheduled Banks are classified into following types:
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State Owned Commercial Banks (SOCBs): There are 4 SOCBs which are fully or majorly owned by the Government of Bangladesh.
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Specialized Banks (SDBs): 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.
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Private Commercial Banks (PCBs): There are 30 private commercial banks which are majorly owned by the private entities. PCBs can be categorized into two groups:
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Conventional PCBs: 23 conventional PCBs are now operating in the industry. They perform the banking functions in conventional fashion i.e interest based operations.
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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. .
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Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks which are incorporated in abroad.
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There are now 4 non-scheduled banks in Bangladesh which are:
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Ansar VDP Unnayan Bank,
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Karmashangosthan Bank,
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Probashi Kollyan Bank,
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Jubilee Bank
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:
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FIs cannot issue cheques, pay-orders or demand drafts.
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FIs cannot receive demand deposits,
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FIs cannot be involved in foreign exchange financing,
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FIs can conduct their business operations with diversified financing modes like syndicated financing, bridge financing, lease financing, securitization instruments, private placement of equity etc.
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Money Market in Bangladesh Money Market is an integral part of the financial market of a country. It provides a medium for the redistribution of short term loanable funds among financial institutions, which perform this function by selling deposits of various types, certificate of deposits and discounting of bills, TREASURY BILLs etc. The participants in the money market are: the central bank, commercial banks, the government, finance companies, contractual saving institutions like the pension funds, insurance companies, savings and loan associations etc. The instruments that are generally traded in the money market constitute: treasury bills, short-term central bank and government bonds, negotiable certificates of deposits, bankers acceptances and commercial papers like the bills of exchange and promissory notes, mutual funds etc.
The money market in Bangladesh is in its transitional stage. The various constituent parts of it are in the process of formation, while continuous efforts are being made to develop appropriate and adequate instruments to be traded in the market. At present, government treasury bills of varying maturity, Bangladesh Bank Bills and Certificates of Deposits etc in limited supply are available for trading in the market. However, the short-term CREDIT market of the banking sector experienced a tremendous growth since liberation. In 1999, a total of about 6000 branches of the scheduled banks provided short-term credit throughout the country in the form of cash credit, overdraft and demand loan. The rates of interest are determined by the individual banks and as such the market is quite competitive. Each bank maintains its liquidity and supply of fund is arranged throughout the country with the help of an interconnected network of branches. BANGLADESH BANK as central bank of the country exercises its role in this market through the use of instruments such as bank rate, open market operations and changes in statutory liquidity requirements. The money market of Bangladesh reached its present phase through a series of changes and evolution. Initially, after liberation, money market was the major constituent part of the financial market of the country. Capital market, its other segment was a relatively smaller part. All financial institutions of the country were nationalised after liberation. The growth and evolution of money market in the country took place during the period from 1971 to the early eighties under various sets of interventionist rules and regulations of the government and as such it could hardly reflect the actual market conditions. However, in this period a vast financial superstructure with large network of commercial bank branches was established in the country. Simultaneously, specialised financial institutions under government sector also emerged with the objective of mobilising financial resources and channelling them for short, medium and long term credit and investments. The market participants had to operate in an environment of directed lending and loan disbursement goals, and predetermined rates of interest fixed by the authority. However, rate of interest in the call market was flexible but due to prevalence of liberal refinance facility at concessional rates from Bangladesh Bank, the activities of call money market remained insignificant. In the beginning of the 1980s, money market in Bangladesh entered a new era with the denationalisation of two nationalised banks and establishment of some private banks. With this development money market assumed the characteristics of a competitive market in the country. However, the administered interest rate structure and the government's policy of priority sector 12
lending continued to operate as factors that deterred the development of a liberalised money market in the country. Constituents of money market Structurally, money market in Bangladesh is composed of two broad groups of institutions: formal and informal. The formal institutions (up to 1999) include the Bangladesh Bank at the apex, 4 natioanlised commercial banks, 27 domestic and 12 foreign private commercial banks, 9 specialised (development) banks, 24 NON-BANK FINANCIAL INSTITUTIONs, a number of non-scheduled banks. Informal institutions comprised mainly the moneylenders and small co-operative organisations, which are not under the control of the central bank. The three distinct components of organised segment of money market of Bangladesh are the inter-bank market, call money market and bill market.
The year 1990 may be treated as a landmark in the evolution of money market in Bangladesh. This year a comprehensive Financial Sector Reform Programme (FSRP) was undertaken to establish a market oriented financial structure in the country. The objectives of FSRP were to deregulate lending activities, replace the refinance facilities with rediscount facility, and abolish the administered interest rate regime. Subsequently, introduction of new money market instruments such as certificate of deposits (CDs), Bangladesh Bank bills of 91-days and 30-days maturity and some new government treasury bills were introduced to accelerate the pace of development of money market in the country. Inter-bank market operates within a limited scale in the form of inter bank deposits and borrowings and has virtually no fixed price fixing mechanism. Traditionally, scheduled commercial banks lend to each other when they are in need of temporary funds. Sometimes, banks also keep a part of their resources to other banks as deposits and borrow as and when needed against the lien of those deposits. Small banks usually keep their funds as deposits with large banks for safety.
Non-bank financial institutions also take part in inter-bank market operations in Bangladesh by way of lending their fund to the deficit banks. The inter-bank transactions are concentrated mainly in Dhaka city but may also be found in other parts of the country. As part of fund management, branch offices of banks, which can not send their surplus funds to their respective head offices, usually keep them in their nearest big branch or in other banks and draw the funds back as and when needed. Inter-bank transactions, although constitute an integral part of money market, comprise a small portion of total banking activities. Inter-bank deposits as percent of total deposits varied between 2 and 5 percent during 1986-99. This indicator was between 1.6 and 2.5 percent during the FSRP period of 1990-96. Historically, there appears to be a positive correlation between growth of inter-bank deposits and excess cash reverses of the banking system. Total inter-bank deposits increased from Tk 3.4 billion in June 1986 to Tk 25 billion in December 1998. Excess cash reverses increased during this period from Tk 1.3 billion to Tk 21.5 billion. The deposit resources of banks registered an increase of Tk 122.6 billion or an yearly average growth of 22% during the period between June 1986 to June 1991 and 18% during June 1991-
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June 1998. That the money market is not much developed in Bangladesh is depicted from the growth pattern of deposits of the country. Certificate of deposit was introduced as a money market instrument in Bangladesh in 1983. Its objective was to strengthen the money market and bring idle funds, including those arising from black money and unearned incomes, within the fold of the banking system. The Bearer of Certificate of Deposits (BCD) with a fixed maturity is issued by and payable at the bank to Bangladeshi nationals, firms and companies. The certificate does not contain the name of the purchaser or holder. The interest rate is not fixed as in the case of other deposit resources accepted by the banks at present. The interest is determined on the date of issue of CDs based on the demand and supply of funds in the money market. The difference between the face value of CDs and the prepaid interest is received by the bank from the purchaser of CDs at the time of issue. The bearer of CDs can sell the same to another purchaser. The bank maintains no record other than the Certificate No., rate of interest allowed, and the date of sale and encashment. A bank does not issue certificate of deposits for the value exceeding the limit prescribed for it by the Bangladesh Bank. The outstanding amount of CDs was about Tk 1.05 billion in June 1988 and increased to Tk 2.91 billion in June 1992 and further, to Tk 3.44 billion in December 1998. The amount of resources mobilised through issue of CDs was only 0.58 percent of total deposits at the end of December 1998. Call money market is the most sensitive part of money market, in which a good number of players from the banking as well as the non-bank financial sector actively participate on a regular basis. Initially, this market developed as an inter-bank market where the banks in temporary deficit of cash resorted to borrowing from other banks having surplus funds. As banks were in the public sector until the beginning of the 1980s, the Bangladesh Bank provided them with liberal refinance facilities at concessional rates. There was hardly any need for raising funds from the call money market during this period. Moreover, administered interest rate regime, easy availability of borrowing from central bank and its directive to provide credit to priority sectors were the major impediments in development of a call money market in the country. Notwithstanding the fact, banks participated in a limited scale in the call money market mainly to wipe out the temporary mismatch in their assets and liabilities.
A turning point was the denationalisation of Uttara and Pubali Bank in 1983 and 1984 respectively and the government decision to allow private banks to operate in the country. Formation of private banks during the 1980s provided new opportunities to develop this segment of money market. In 1985, two investment companies and in 1989, one leasing company were allowed to participate in the call money market. At present, all banks including specialised ones and non-bank financial institutions are allowed to participate in this market. Basic features The transactions of call money market are mainly Dhaka based. Since, the head offices of all banks and financial institutions are located in Dhaka, the branches of the banks and financial institutions from all over the country remit their excess funds to their respective head offices at Dhaka for investment. The head offices, after meeting their usual liquidity requirement invest the surplus funds in the call money market. 14
As there is no brokerage house or intermediary organisation, the transactions in call money market usually take place on the basis of bilateral negotiations. Since call loans are made on clean basis, ie, without any security, lending institutions/banks are always cautious in the selection of borrowing banks/institutions. Foreign banks are the main source of liquidity in the call money market. Cost of funds for foreign banks are very low as compared to the indigenous banks and as such they can hold a substantial amount of excess liquidity for lending in the call money market. In case of borrowing they are also at a very advantageous situation as compared to the local banks. Foreign banks have in their portfolio lower amount of non-performing loans compared to domestic private banks and nationalised banks. Local private banks appear to be the regular borrowers in the call money market. Information systems of banks in Bangladesh are outdated. Market players therefore, do not know much about the demand for and supply of fund. Banks and financial institutions having surplus funds take advantage of the market imperfection of domestic deficit banks. Bangladesh Bank has circulated some guidelines to the lending and borrowing banks and financial institutions regarding operations in the call money market. Although it is not compulsory for banks to participate in the call market, they are advised to provide call loans considering liquidity, solvency and sources of repayment of borrowings by the borrowing institutions. The demand for and supply of funds in the call market remains volatile throughout the year with some occasional turbulence. The transactions and the rate of interest are largely linked with government treasury bill market, seasonality in demand for bank loans, central bank's monetary policy, variation in discount rate, open market operations, changes in statutory reserve requirements, excess liquidity position of the banks etc. The transactions and the variations of the rate of interest in call money market normally remains high during November to April and as such the rate of interest during this period also goes up. The underdeveloped nature of the inter-bank market in Bangladesh is evident from the large spread between the highest and lowest rates in the call money market. The lowest call money market rate always remained higher than the Bank Rate during the period from September 1985 to June 1992. One notable feature of the call money market is that the spread between lowest and highest call money market rate has been larger during the reform period. It is because of the fact that with the implementation of FSRP, the need for funds of banks other than the Bangladesh Bank increased with abolition of easy refinance facility from the central bank. Thereafter, the lowest inter-bank call money rate remained lower than the bank rate. The inter-bank call money rate varied with rise in excess cash reserves of banks. Experience suggests that when there was sufficient excess reserves with banks, the inter-bank rate came down but the rate denoted increase with the accentuation of short-fall in reserves position of banks. Compared to nationalised banks and domestic private banks, the foreign banks in general, and Islami banks in particular, held higher excess reserves with them. Foreign banks are the major sources of supplier of funds to the inter-bank market in recent years. Before the 15
introduction of financial sector reforms, foreign banks preferred preserving excess liquidity to lending to inter-bank market partly because of lack of confidence and partly because of instructions from their head office. In addition, the information gap between borrowing and lending banks also discouraged transactions in the inter-bank market. The rate of interest in the inter-bank call money market reached a maximum of 21% in November 1997. During the first half of 1998, there was a tremendous pressure in the call money market of the country. The rate of interest reached 27% in February 1998. A large number of domestic private and foreign banks borrowed at the rates of 20% and above up to April 1998. During 1997-98, Bangladesh Bank followed a restrictive monetary policy. In view of expansion of domestic credit, bank rate was raised to 8% from 7.5% in November 1997 and tightened the discount window for the banks. The government also borrowed substantial amount of funds from the banking sector to meet its budgetary shortfall in the second half of 1997-98. Total outstanding treasury bill holding by the scheduled banks which was only Tk 11.48 billion at the end of June 1997, reached the level of Tk 25.11 billion at the end of January 1998, and further to Tk 27.94 billion at the end of June 1998. However, during 1998-99, the pressure in call money market eased substantially. The rates of interest amidst fluctuations reached a maximum of 17% during 1998-99. Due to prolonged and devastating floods at the beginning of 1998-99, the country's monetary policy was relaxed to enable banks to provide necessary credit for early recovery of economic activities. Easy access of the scheduled banks to the discount window of the Bangladesh Bank helped them holding liquidity position at a comfortable level. The banks borrowed an amount of Tk 9.15 billion from the Bangladesh Bank during 1998-99 as compared to a much lower amount of Tk 1.13 billion during 1997-98. Moreover, excess reserve position of the banks increased by Tk 4.96 billion during 1998-99 as compared to an increase of Tk 9.78 billion in the preceding year. As a result, the call money market witnessed a lower pressure during 1998-99. Bill market is restricted to buying and selling of government treasury bills. In the past, it was basically concentrated in transaction of government treasury bills of 3-month maturity at predetermined rates. Commercial banks were obliged to buy these bills as approved security to meet their statutory liquidity requirement (SLR) under the Banking Companies Act. Moreover, these instruments were being used to mop up excess cash from the banking sector and help government to borrow money from banks to meet its budgetary shortfall. In fact it was a guiltedged market where both the principal and interest was guaranteed by the government. Bangladesh Bank, on behalf of the government, was entirely responsible for arranging buying and selling of treasury bills. However, the availability of the government treasury bills depended only on the fiscal consideration of the government. Bangladesh Bank had no scope of its own to increase or decrease their supply. Besides, interest rates were not market based and were fixed arbitrarily by the government from time to time. In addition to the commercial banks, Bangladesh Bank also had to hold a portion of government treasury bills.
The commercial bill market remained very narrow in the country largely due to a low level of industrialisation and a slow growth of trade and commerce. Banks traditionally financed two broad categories of commercial bills viz. inland bills and export bills. These bills are marketable papers and can be resold in the market at a competitive rate. Usually, the holders of these bills 16
sell them for cash to the banks, which pays the holder the face value of the bills less collection charges and the interest for the remaining period of the bill. Prevalence of cash credit system of the banks is a major hindrance in the way of the development of an active commercial bill market in the country. Stamp duty, procedural difficulties and reluctance of the drawees of bills to undertake the additional paper work involved in handling documents etc hindered the development of commercial bill market. With the introduction of FSRP, the commercial bill market is gradually developing in the country. The amount of commercial bill financing by the Deposit Money Bank (DMB) was only Tk 8.60 billion at the end of January 1991. This rose to Tk 36.20 billion at the end of December 1998. Bangladesh Bank introduced its own security, the 91-day Bangladesh Bank Bill in December 1990. This added a new dimension in the bill market of Bangladesh. The bill was issued at a discount at par value of Tk 100 through monthly auctions held at the Bangladesh Bank. Banks, financial institutions and others including individuals, firms, companies and corporate bodies were eligible to invest in the Bangladesh Bank Bill. The bill was introduced primarily to control liquidity of the banking system in accordance with the requirement of monetary policy. The ultimate objective was the development of a workable secondary market for successful open market operations by the Bangladesh Bank. Later, Bangladesh Bank introduced 30-day Bangladesh Bank Bills. The frequency of auctions of these bills was also increased. Despite regular auction of Bangladesh Bank Bills, government treasury bills continued its normal transaction in the market. However, following the declaration of Bangladesh Bank Bills as approved securities for the SLR purposes, the effectiveness of the bills weakened as an instrument of monetary control. The auctions of Bangladesh Bank Bills were, therefore, suspended from March 1997. On the other hand, the auctions of the four categories of government treasury Bills ie, 30-day, 90-day, 180-day and 1-Year Bills were held on weekly basis regularly up to August 1998. These treasury bills were replaced later by the newly introduced 28-day, 91-day, 182-day, 364-day, 2-year and 5-year government treasury bills since September 6 1998. The main features of the bill market are as follows: It is still a captive market. Banks and financial institutions having SLR obligation are the only participants in this market. Financial institutions having no obligation of SLR, corporate or noncorporate firms, semi-government or autonomous bodies having temporary surplus funds do not invest in government treasury bills. Bangladesh Bank is the main holder of treasury bills. These are sold to the banks and financial institutions on the basis of requirement through auctions. The rates of interest of treasury bills are now competitive and flexible. Treasury bill rates largely influence the market rate in the other segment of the money market, particularly, the rate of interest in the call money market. There is no secondary market for trading of these bills. However, in case of need of funds the holders of bills can get them rediscounted with the Bangladesh Bank. 17
The sale of treasury bills depends on the budgetary requirements of the government. Moreover, due to SLR obligations banks are compelled to hold a certain amount of treasury bills. As a result, treasury bill market of Bangladesh turned to be a non-liquid market. The holdings of treasury bills by the deposit money banks (DMB) were only Tk 0.94 billion on 30 June 1973 and the rate of interest was 6%. Amidst fluctuations, the volume went up to Tk 9.54 billion at the end of June 1986. The rates of interest went up to 9% at that time. Although the rate of interest declined to 8% at the beginning of 1987, the treasury bill holdings by the DMBs went up substantially to Tk 12.51 billion at the end of June 1987. The treasury bill holdings reached a peak of Tk 45.12 billion at the end of June 1993 and thereafter, it declined to Tk 0.46 billion at the end of June 1995. However, the treasury bill holdings shoot up to Tk 49.73 billion by May 1999. It may be assumed that lower treasury rate as compared to higher yield on Bangladesh Bank Bill might have induced the banks to shift their portfolio investments in favour of the latter. However, due to suspension of auctioning of Bangladesh Bank Bills government treasury bills, other than the commercial bill segment, have become the only instruments in the bill market.
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Capital Market in Bangladesh Definition Capital market can be termed as the engine of raising capital, which accelerates industrialization and the process of privatization. In other words, capital market means the share and stock markets of the country. It is a market for long term fund. With the emergence of the need for infrastructural development projects, for setting up of new industries for entrepreneurial attempts-now there are more frequent needs of funds. Participants in the capital markets are many. They include the commercial banks, saving and loan associations, credit unions, mutual saving banks, finance houses, finance companies, merchant bankers, discount houses, venture capital companies, leasing companies, investment banks & companies, investment clubs, pension funds, stock exchanges, security companies, underwriters, portfolio-managers, and insurance companies.
Functions The functioning of an efficient capital market may ensure smooth floatation of funds from the savers to the investors. When banking system cannot meet up the total need for funds to the market economy, capital market stands up to supplement. To put it in a single sentence, we can therefore say that the increased need for funds in the business sector has created an immense need for an effective and efficient capital market. It facilitates an efficient transfer of resources from savers to investors and becomes conduits for channeling investment funds from investors to borrowers. The capital market is required to meet at least two basic requirements: (a) it should support industrialization through savings mobilization, investment fund allocation and maturity transformation and (b) it must be safe and efficient in discharging the aforesaid function. It has two segments, namely, securities segments and non-securities segments.
Classification Classification of companies The SEC classified firms in terms of A, B, G, N and Z categories that had not only guided retail investors to know weak shares but also helped reducing netting and gambling done by a few hidden consortia. ■ “A” Category Companies: Companies which are regular in holding the Annual General Meetings (AGM) and have declared dividend at the rate of 10 percent or more in a calendar year. (Mutual fund, debentures and bonds are being traded in this category). ■ “B” Category Companies: Companies which are regular in holding the AGM but have failed to declare dividend at least at the rate of 10 percent in a calendar year. ■ “G’ Category Companies: Greenfield companies. ■ “N’ Category Companies: All newly listed companies except Greenfield companies will be placed in this category and their settlement system would be like B-Category companies. ■ “Z’ Category Companies: Companies which have failed to hold the AGM or failed to declare any dividend or which are not in operation continuously for more than six months or whose
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accumulated loss after adjustment of revenue reserve, if any is negative and exceeded its paid up capital.
Importance of Capital Market in the economy
The capital market is the market for long-term loans and equity capital. Developing countries in fact, view capital market as the engine for future growth through mobilizing of surplus fund to the deficit group. An efficient capital market may perform as an alternative to many other financing sources as being the least cost capital source. Especially in a country like ours, where savings is minimal, and capital market can no wonder be a lucrative source of finance. The securities market provides a linkage between the savings and the preferred investment across the business entities and other economic units, specially the general households that in aggregate form the surplus savings units. It offers alternative investment windows to the surplus savings units by mobilizing their savings and channelizes them through securities into optimal destinations. The stock market enables all individuals, irrespective of their means, to share the increased wealth provided by competitive enterprises. Moreover, the stock market also provides a market system for purchase and sale of listed securities and thereby ensures liquidity (transferability of securities), which is the basis for the joint stock enterprise system. (The existence of the stock market makes it possible to satisfy simultaneously the needs of the firms for capital and of investors for liquidity.) Especially at times when the banking sector of the country is facing the challenge of bringing down the advance-deposit ratio to sustainable level, the economy of the country is unfolding newer horizon of opportunities. Due to over-exposure level of the financial system the securities market could play a very positive role, had there been no market debacle. Due to the last market crash and follow through events, it will be difficult to utilize the primary market to raise significant volume of funds. Thus the greatest economic importance of securities market at this point can be understood from the opportunities being lost. Bangladesh having its target to become a middle income country must have significant level of rise in investment, which at the present state of banking system cannot be met. The securities market could play the key role in meeting these huge investment demands if the secondary market would remain stable. The capital market also helps increase savings and investment, which are essential for economic development. An equity market, by allowing diversification across a variety of assets, helps reduce the risk the investors must bear, thus reducing the cost of capital, which in turn spurs investment and economic growth. However, volatility and market efficiency are two important features which will ultimately determine the effectiveness of the stock market in economic development. If a stock market is inefficient due to insufficient informational supply, investors face difficulty in choosing the optimal investment as information on corporate performance is slow or less available. The resulting uncertainty may induce investors either to withdraw from the market until this uncertainty is resolved or discourage them to invest funds for long term. Moreover, if investors are not rewarded for taking on higher risk by investing in the stock market, or if excess volatility weakens investor’s confidence, they will not invest their savings in the stock market, and hence deter economic growth. The emerging stock markets offer an opportunity to examine the evolution of stock return distributions and stochastic processes in response to economic and political changes in these emerging economies.
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Structure of the Capital Market in Bangladesh
Bangladesh capital market is one of the smallest in Asia but within the south Asian region, it is the third largest one. It has two full-fledged automated stock exchanges namely Dhaka Stock Exchange(DSE),Chittagong Stock Exchange(CSE ) and an OTC exchange operated by CSE. It also consists of a dedicated regulator, the Securities and Exchange Commission (SEC), since, it implements rules and regulations, monitors their implications to operate and develop the capital. It consists of Central Depository Bangladesh Limited (CDBL), the only Central Deptory in Bangladesh that provides facilities for the settlement of transactions of dematerialized securities in CSE market and DSE.
Capital Market of Bangladesh
Dhaka Stock Exchange(DSE)
Chittagong Stock Exchange(CSE)
Securities and Exchange Commission (SEC)
Others
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Bangladesh Stock Market Amid all the formidable obstacles momentum. Even in the backdrop of Global Financial Crisis 2008 when the stock markets in almost all the developed and developing countries crashed and Governments of those countries spent thousands of dollars to rescue the markets. Both depth and dimension in Bangladesh capital market has been becoming gradually strong and securties market registered significant growth at the initial stage and later market fell a little bit. The reason is might be that the amount of foreign portfolio in Bangladesh securities market is more or less only two percent. But lack of supply of fundamentally sound shares has been causing overheating situation and circumstance like overpricing has been a common phenomenon here in recent times. Transaction has risen from a daily Tk. of 250 crore two years ago to tk 2500 crore now and General Index has risen to record 8918 from 2400 two years back.
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Insurance Insurance sector in Bangladesh emerged after independence with 2 nationalized insurance companies- 1 Life & 1 General; and 1 foreign insurance company. In mid 80s, private sector insurance companies started to enter in the industry and 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,
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44 General Insurance Companies including 1 state-owned company. Insurance companies in Bangladesh provide following services:
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Life insurance,
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General Insurance,
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Reinsurance,
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Micro-insurance,
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Takaful or Islami insurance.
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.
Micro Finance 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.
Credit services of this sector can be categorized into six broad groups:
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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.
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Concluding remarks: Today, almost everyone agrees that the financial system is essential for development of a country. Improving the financial system can lead to higher growth and reduce the likelihood and severity of crises. While Bangladesh has achieved relatively high economic growth over the past years with a distorted financial system and in spite of its governance problems, crosscountry experience has shown the importance of financial and institutional development to sustain longterm economic growth. Faster GDP growth consistent with the poverty reduction goals cannot be met unless the extent and quality of financial intermediation in Bangladesh advances significantly. In particular, this would require more competitive banking and nonbanking financial sectors capable of reaching out to all sections of the community, rural & urban, catering to all types of marketable financial service. The pro-active measures taken in the financial sector in recent years have put salutary impact on the financial system. Hopefully, the on-going reform process in the financial system of Bangladesh will bring more stability and transparency. In this regard, proper care should be taken in the reform process so that reforms in the financial sector embrace the socio- economic realities in Bangladesh .
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Bibliography: Bangladesh Bank’s website and its various publications: http://www.bangladeshbank. org/ , www.bangladesh-bank.org/pub/annual/anreport/ar0405/chap5.pdf • Financial Sector Reforms in Bangladesh: The Next Round – Debapriya – Debapriya Bhattacharya, Toufic A Chowdhury: http://www.cpd-bangladesh.org/publications/op/op22.pdf • The Financial Express website: http://www.thefinancialexpressbd. com/more.php?news_id=90159 • Small and Medium Enterprise Foundation’s website: www.smef.org.bd/ • “The Road Map to Financial System Standards for Middle Income Bangladesh” – Dr. – Dr. Salehudden Ahmed, former Governer, Bangladesh Bank. • “Performance evaluation of SMEs of Bangladesh” – Kashfia – Kashfia Ahmed & Tanvir Ahmed chowdhury.
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