Mone
Market
At a glance of Money Market: The Bangladesh economy is the most growing economy in the world. With the changing of the world world financi financial al market market the Domest Domestic ic as well well as intern internati ational onal policy policy for Bangla Banglades desh h upgrading gradually. Actually financial system mainly developed though the development of domestic and foreign capital and the money market. For functioning the economic system money market wellfunctioning perimeter is very important. For meeting short term li!uidate demand demand "y lending and "orrowing of the participants within the financial system is the mechanism of money market. T"ill is the largest component of the money market in Bangladesh. #apital markets are essentially a"out matching the needs of investors with those that need capital for development. De"t markets are an e$tremely effective mechanism for matching the long term needs of savers with those of entrepreneur entrepreneurs. s. %ike emerging emerging market market countries countries around the world& Bangladesh Bangladesh could "enefit "enefit from having a localcurr localcurrency ency&& fi$ed income income securitie securitiess market. market. At present& its main fi$ed income financial products are "ank deposits& "ank loans& government savings certificates& treasury "ills& and government "onds and corporate d e"t etc.
Background of Bangladesh Money Market: The money market of Bangladesh reached its present phase through a series of changes and evolution. 'nitially& after li"eration& money market was the ma(or constituent part of the financial market of the country. #apital market& its other segment was a relatively smaller part. All financial institutions of the country were nationali)ed after li"eration. The growth and evolution of money market in the country took place during the period from *+,* to the early eighties under various sets of interventionist rules and regulations of the government and as such it could hard hardly ly refl reflec ectt the the actu actual al mark market et cond condit itio ions ns.. -owe -owever ver&& in this this peri period od a vast vast fina financ ncia iall superstructure with large network of commercial "ank "ranches was esta"lished in the country. imultaneously& speciali)ed financial institutions under government sector also emerged with the o"(ective of mo"ili)ing financial resources and channeling them for short& medium and long term term credit credit and invest investmen ments. ts. The market market partic participa ipants nts had to operat operatee in an environm environment ent of directed lending and loan dis"ursement goals& and predetermined rates of interest fi$ed "y the 16
authority. authority. -owever& rate of interest in the call market was fle$i"le "ut due to prevalence of li"eral refina refinance nce facili facility ty at concess concession ional al rates rates from from Bangla Banglades desh h Bank& Bank& the activi activitie tiess of call call mon money ey market remained insignificant. 'n the the "egi "eginn nnin ing g of the the *+/0s *+/0s&& mo money ney mark market et in Bangl Banglade adesh sh ente entere red d a new era era with with the the denationali)ation of two nationali)ed "anks and esta"lishment of some private "anks. With this development money market assumed the characteristics of a competitive market in the country. -owever& the administered interest rate structure and the government1s policy of priority sector lending continued to operate as factors that deterred the development of a li"erali)ed money market in the country. cou ntry.
Money market securities:
De"t securities having maturity one year or less is call money market securities. Money markets securities are relatively high degree of li!uidate. Money market securities tend to have a low e$pected return "ut also a low degree of risk. 2arious types of money market securities are listed "elow.
Money-Market securities
Issuer
Treasury bill
Federal 3overnment
Common Investors
Maturities
Secondary Market Existence
-ouseholds& firms *4 weeks& 56 and financial weeks or * 7ear institutions
* year -igh
etail certificates Banks and saving institute of de!osit "C#s$
-ouseholds
, Days to 8 7ears or %ong
9one$istent
%egotiable %arge Banks and certificates aving 'nstitutions of de!osit "%C#s$
Firms
5 Week to *7ear
Moderate
Firms
*Days to 5,0 Days
%ow
Commercial !a!er
Bank holding #ompanies & Finance #ompanies and thers
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authority. authority. -owever& rate of interest in the call market was fle$i"le "ut due to prevalence of li"eral refina refinance nce facili facility ty at concess concession ional al rates rates from from Bangla Banglades desh h Bank& Bank& the activi activitie tiess of call call mon money ey market remained insignificant. 'n the the "egi "eginn nnin ing g of the the *+/0s *+/0s&& mo money ney mark market et in Bangl Banglade adesh sh ente entere red d a new era era with with the the denationali)ation of two nationali)ed "anks and esta"lishment of some private "anks. With this development money market assumed the characteristics of a competitive market in the country. -owever& the administered interest rate structure and the government1s policy of priority sector lending continued to operate as factors that deterred the development of a li"erali)ed money market in the country. cou ntry.
Money market securities:
De"t securities having maturity one year or less is call money market securities. Money markets securities are relatively high degree of li!uidate. Money market securities tend to have a low e$pected return "ut also a low degree of risk. 2arious types of money market securities are listed "elow.
Money-Market securities
Issuer
Treasury bill
Federal 3overnment
Common Investors
Maturities
Secondary Market Existence
-ouseholds& firms *4 weeks& 56 and financial weeks or * 7ear institutions
* year -igh
etail certificates Banks and saving institute of de!osit "C#s$
-ouseholds
, Days to 8 7ears or %ong
9one$istent
%egotiable %arge Banks and certificates aving 'nstitutions of de!osit "%C#s$
Firms
5 Week to *7ear
Moderate
Firms
*Days to 5,0 Days
%ow
Commercial !a!er
Bank holding #ompanies & Finance #ompanies and thers
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Eurodollar #e!osit
Foreign Bank
Firms and 3overnment
* Da Days to to * 7ear
9one$istent
Banker&s acce!tances
Bank;<$porting firm can sell the acceptance at a discount o"tain funds=
Firms
40 Days to 5,0 Days
-igh
'ederal 'unds
Depository institutions
Depository 'nstitutions
* Da Days to to , Days
9one$istent
e!urchase agreements
Firm and Financial 'nstitutions
Firms and Financial 'ntuitions
* Days to *8 Days
9one$is $istent
Treasury-Bill (rogress in Bangladesh Issuer:
The central "ank of Bangladesh ;Bangladesh Bank= operates throughout the country with its nine "ranches. 3overnment receipts and payments are overseen and managed "y the central "ank. Different "ranches of onali Bank ;B= are assigned to take part in these transactions on "ehalf of the central central "ank& where there is no Bangladesh Bangladesh Bank "ranch. "ranch. These "ranches "ranches are known as 1#hest Branches1. 'n a district& there may "e one chest and some su"chests. Bangladesh Bank has has dire direct ctly ly mo moni nito tors rs #hest #hest "ran "ranche ches. s. Th This is func functi tion on is call called ed >Fee >Feed? d?.. Th Thee Bang Bangla lades desh h gover governm nmen entt fina financ nces es its its e$pe e$pendi nditu ture ress in e$ce e$cess ss of ta$ ta$ rece receip ipts ts thro throug ugh h the the sale sale of de"t de"t o"ligations. #urrently& the total par value of outstanding Treasury "ills stood at a"out Taka
[email protected] core up to uly 50*4 while in une& 50*5 it was *@,./ core;ource: Bangladesh "ank =.
Ty!es:
Treasury "ills are divided with its maturity "y the num"er of days. There are si$ types of T "ills found in Bangladesh. These are a= 40 days T"ill "= +* days T"ill T"ill c= */5 days T"ill d= 46@ days T"ill 16
e= 5 years T"ill f= 8 years T"ill
(artici!ants:
The market for Bangladesh Treasury "ills has a comple$ structure with numerous participants. They are Ministry of Finance& Bangladesh Bank& government securities dealers and "rokers& and other holders of Treasury securities. Banks usually "uy three kinds of T"ills tenures of which range "etween +*day to 46@day and four kinds of T"onds tenures of which range "etween 8year to 50year from the Bangladesh Bank. 3enerally& the participants in money market are: *=
individual
5=
Business and
4=
3overnment
More s!ecifically )e can identify different !artici!ants as:
*= 3overnment Treasury Department C They are the only demander of fund 5= #entral Bank C They are "oth supplier and demander of fund 4= #ommercial Bank C They are "oth supplier and demander of fund @= Business C They are also "oth supplier and demander of fund 8= 'nvestment and ecurities Firm a. 'nvestment #ompaniesBank ". Finance #ompanies c. 'nsurance #ompanies
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*ho and +o) Can Invest:
There was no secondary market for treasury securities until 5004&. Any investor ;institution or individual=& with a current account with Bangladesh Bank& can invest in T"ills through primary market auctions. Auction is held on every unday at ** a.m. at the Moti(heel Branch of BB. 'f unday is a holiday& then the last working day "efore unday will "e chosen. All the investors su"mit their "id unless otherwise pension or provident fund. After receiving the "id& the auction committee decides how much T"ills will "e off loaded. There is a highpowered committee to oversee the treasury functions ;which includes seven mem"ers=. Schedule for Issuance:
Treasury securities are issued through regularly scheduled auctions in the primary market. The process importantly involves the Bangladesh Bank& which serve as conduits for the auctions. Selling System:
Treasury "ills are not listed at the Bangladesh tock <$change. T Bills are sold on a discount "asis& with a terms means that we have to pay for the "ills less the interest receiva"le during the term of the "ill and receive the face value of the "ill at the end of the period. 'f one wanted to e$it "efore maturity& rediscounting isn1t possi"le at the #entral Bank& rather he or she may go for Eepo auction. Secondary Market for T-Bill:
'n 5004& government had decided to introduce the secondary T"ill market with a vision of "roadening the government securities market. World1s leading financial institution #itigroup1s su"sidiary #iti"ank& 9.A. and local rime Bank %imited had taken part in the first secondary transaction of T"ills in Bangladesh that year. #iti"ank& 9.A. had sold a T"ill of 5 years maturity "earing Taka 4 crore of face value to rime "ank. Bangladesh Bank had taken necessary steps to assist this transaction. This was regarded the first secondary T"ill transaction in the country. Bangladesh Bank has selected eight "anks and one non"ank financial institution as primary dealers ;Ds= to handle secondary transactions of T"ills and other government "onds. The eight "anks are onali Bank& anata Bank& Agrani Bank& rime Bank %td& Gttara Bank %td& outh
(rocedure to allot T-bills:
The Treasury issues securities consistently and predicta"ly through a regular schedule of auctions. 'n Bangladesh& Multipleunits Auction Model 's followed. Two types of "ids may "e su"mitted at the auction: a= #ompetitive "ids I "= 9oncompetitive "ids #ompetitive "ids specify "oth the !uantity of the security sought and a yield. 'f the specified yield is within the range accepted at the auction& the "idder is awarded the entire !uantity sought ;unless the specified yield is the highest rate accepted& in which case the "idder is awarded a prorated portion of the "id. 9oncompetitive "ids specify only the !uantity of the security sought. %et us discuss the procedure that BA93%AD<- BA9J follows to allot T"ills to competitive and noncompetitive "idders through T"ill auctions. 'n Bangladesh& T"ills are !uoted on a 46@day discount "asis. We define the "ank discount rate ;BDE= as BDE K DM L 46@t& where it is the num"er of days from settlement to maturity& and D is the discount from par& D K M & M "eing the par or maturity value& and "eing the price. -ence the discount from par is given "y DK BDE $ M $ t46@& while K M D. <$ample: The W on Monday& Fe" ,& *++@ gives the ask !uote on the May 08& 1+@ T"ill as 4.5*. ;'f we were to "uy the "ill& we would "uy at order. The !uote is for Friday& Fe"ruary @. The market convention used in the W is that two days are needed for settlementN under this convention settlement would take place on Tuesday& Fe" @.There are /, days "etween Fe" @ and May 5. The discount on a O*0&000 par "ill is D K 4.5* $*0& 000 $,846@ K 6,.@*& and the price is K *0& 000 C 6,.@* K ++45.8+. #onversely& assume the price of the T"ill were O+&/00. The discount amounts to D K *0& 000 +&/00 K 500& and the "ankdiscount rate e!uals BDE K*00*0000 L 46@,8 K @./8.
,ield:
The values of Treasury securities are often summari)ed "y the yield curve& which plots the yields of all noncalla"le securities against their maturities. An e$ample of the yield curve on uly5@& 50*4 ;Auction no P58/= is given "elow. This curve has an upwardsloping& concave shape. ecurities having maturities of less than five years are highly concentrated& "ecause shorterterm securities are auctioned more fre!uently and "ecause many previously issued longerterm securities fall in that maturity range. 7ield 2olatility of T"ills in Bangladesh ;As of 5@0650*4 Auction no.58+=
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T-Bill ,ield
40 days
,.60
+* days
/.@* 0.6/
*/5 days
*0.*6
0.64 0.64
46@ days
*0.@5
0.6* 0.6* 0.6*
5 years
*0.+0
0./6 0./6 0./6 0./6
8 years
**.80
0.0, 0.0, 0.0,0.0, 0.0,
ource: Bangladesh "ank + uly& 50*4;totalK* core ;*0 million==
This is an upward sloping yield curve or normal yield curve which indicates that the higher the maturity& the higher the yield. That means& yield of +*dayu T"ill is higher than that of 40day T"ill and so on. -ere the yield spread "etween the +*day T"ills and 40day T"ills is *.6/& which is the ma$imum than those of others. The reason is that the demand of T"ills gradually decreases with term to maturity.
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-ere shows how the curve of time going upward with the yield.
Call Money ate:
The interest rate "anks charge a "roker for the funding of loans to investors who "uy on margin is called call money rate or "roker loan rate. 'n the call money market& participants enter in to lending and "orrowing for overnight. The transaction takes place due to immediate li!uidity need. This may arise from various sources like temporary ina"ility to meet the mandatory @cash reserve re!uirement ;#EE= demanded "y the central "ank& sudden shortage of fund to meet the lia"ilities like any prescheduled repayment etc. free from any specific regulation the participants determine the call money rate on a negotiated manner. The call money rate is a volatile rate in our country. 't is !uite affected "y certain seasonality. During the
The volume of transactions and weighted average interest rates in the call money market showed mi$ed trend during F706 ;Ta"le *= reflecting some noise in the activities of money market. The call money rates witnessed some degree of fluctuations in the last two !uarters of F706 resulting from the recent pressure in the foreign
mostly sta"le "ut "ecame somewhat volatile in the third !uarter. At the "eginning of the last !uarter of F706& the weighted average call money rate stood at 5*.8 percent& su"stantially higher than 8.@ percent recorded in the "eginning of the first !uarter.
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#ifference )ith the basic definition:
'n Bangladesh& two and five year securities are also regarded as T"ills known as )ero coupon securities.
E(:
The commitment of the seller to the "uyer to "uy "ack the instrument as and when the "uyer intends to sell is called Eepo. This is an agreement "etween seller and "uyer. Before& there was a premature encashment facility for the investors of T"ills. remature encashment facility is a procedure of "uying "ack the security when cash is needed giving amount and accrued interest. This is also called discounting the T"ills. #urrently& instead of Discounting Window& Eepo facility is opened for the investors. -ere instrument isn1t re!uired& rather it is lined. 'nvestors can "orrow either full or partial amount against the "ill. 'f an investor "orrows *00 against the "ill& then ma$imum +8 discounted value will "e provided. There is also a Eepo auction that is held side "y side of the T"ill auction. The yield rate of Eepo is determined through "id received and "id acceptance& and this yield is higher than the yield of T"ill. For e$ample& let us assume that& T"ill yield K ,& Eepo yield K /& then& 9et yield K *. To whom Eepo facility will "e provided is dependent upon the li!uidity in the market. Eepo auctions held for * and , days tenure. #urrent special Eepo with Bangladesh out of total 5 "ids received amount ;*@5 cr= and accepted amount ;*08 cr= with the range of rate *0.58 ; ource BB + uly& 50*4= everse e!o:
When commercial "ank has e$cess li!uidity& it can deposit it to Bangladesh "ank. This procedure is fre!uently known as Eeverse Eepo. There is also a Eeverse Eepo auction which held with the time of the T"ill auction. Eeverse Eepo auction is also held for * and , days tenure. #urrent special Eepo with Bangladesh out of total 5 "ids range of rate 8.58 ; ource BB , uly& 50*4= #evelo!ment:
#ertificate of deposit was introduced as a money market instrument in Bangladesh in *+/4. 'ts o"(ective was to strengthen the money market and "ring idle funds& including those arising from "lack money and unearned incomes& within the fold of the "anking system. The Bearer of #ertificate of Deposits ;B#D= with a fi$ed maturity is issued "y and paya"le at the "ank to Bangladeshi nationals& firms and companies. The certificate does not contain the name of the purchaser or holder. The interest rate is not fi$ed as in the case of other deposit resources accepted "y the "anks at present. 16
The interest is determined on the date of issue of #Ds "ased on the demand and supply of funds in the money market. The difference "etween the face value of #Ds and the prepaid interest is received "y the "ank from the purchaser of #Ds at the time of issue. The "earer of #Ds can sell the same to another purchaser. The "ank maintains no record other than the #ertificate 9o.& rate of interest allowed& and the date of sale and encashment. A "ank does not issue certificate of deposits for the value e$ceeding the limit prescri"ed for it "y the Bangladesh Bank. The outstanding amount of #Ds was a"out Tk *.08 "illion in une *+// and increased to Tk 5.+* "illion in une *++5 and further& to Tk 4.@@ "illion in Decem"er *++/. The amount of resources mo"ili)ed through issue of #Ds was only 0.8/ percent of total deposits at the end of Decem"er *++/. A turning point was the denationali)ation of Gttara and u"ali Bank in *+/4 and *+/@ respectively and the government decision to allow private "anks to operate in the country. Formation of private "anks during the *+/0s provided new opportunities to develop this segment of money market. 'n *+/8& two investment companies and in *+/+& one leasing company were allowed to participate in the call money market. At present& all "anks including speciali)ed ones and non"ank financial institutions are allowed to participate in this market. The holdings of treasury "ills "y the deposit money "anks ;DMB= were only Tk 0.+@ "illion on 40 une *+,4 and the rate of interest was 6. Amidst fluctuations& the volume went up to Tk +.8@ "illion at the end of une *+/6. The rates of interest went up to + at that time. Although the rate of interest declined to / at the "eginning of *+/,& the treasury "ill holdings "y the DMBs went up su"stantially to Tk *5.8* "illion at the end of une *+/,. The treasury "ill holdings reached a peak of Tk @8.*5 "illion at the end of une *++4 and thereafter& it declined to Tk 0.@6 "illion at the end of une *++8. -owever& the treasury "ill holdings shoot up to Tk @+.,4 "illion "y May *+++. 't may "e assumed that lower treasury rate as compared to higher yield on Bangladesh Bank Bill might have induced the "anks to shift their portfolio investments in favour of the latter. -owever& due to suspension of auctioning of Bangladesh Bank Bills government treasury "ills& other than the commercial "ill segment& have "ecome the only instruments in the "ill market.
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(roblems:
The online"ased trader work station introduced "y the Bangladesh Bank has so far failed to make the secondary "ond market vi"rant as clients are reluctant to invest in the treasury "ills and treasury "onds through the system. A good num"er of sales orders through the TW every day "ut clients were unwilling to participate in the system last 50*4 auction. -ence& the ma(ority of the clients including corporate "usiness houses had not so far thought much a"out the secondary government securities market where their provident funds could "e invested with proper security.
ecommendation:
9ew instruments will create ade!uate opportunity for investment of shortterm. The e$cess fund will increase li!uidity and further reduce dependency on the call money market. 'ntroducing *8 Days TBill& a new maturity "ill will give the investors greater li!uidity preference in the short term. And give an out let for earning return on ideal e$cess fund. The commercial "anks should take campaign programs to gear up the "ond market and can give the knowledge more a"out online eTender system and its "enefits.
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Ca ital Market At a glance of #apital Market: #apital Market mainly refers to the tock and hare market of the country. When& "anking system cannot totally meet up the need for funds to the market economy& capital market stands up to supplement it. #ompanies and the government can raise funds for longterm investments via the capital market. The capital market includes the stock market& the "ond market& and the primary market. ecurities trading on organi)ed capital markets are monitored "y the government& new issues are approved "y authorities of financial supervision and monitored "y participating "anks. Thus& organi)ed capital markets are a"le to guarantee sound investment opportunities. This paper reveals the various aspects of the #apital Market in Bangladesh
#efinition: #apital market can "e termed as the engine of raising capital& which accelerates industriali)ation and the process of privati)ation. 'n other words& capital market means the share and stock markets of the country. 't is a market for long term fund. With the emergence of the need for infrastructural development pro(ects& for setting up of new industries for entrepreneurial attempts now there are more fre!uent needs of funds. (artici!ants in the ca!ital markets are many. They include the:
#ommercial "anks avings and loan associations #redit unions Mutual saving "anks Finance houses Finance companies Merchant "ankers Discount houses 2enture capital companies
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%easing companies 'nvestment "anks I companies 'nvestment clu"s ension funds tock e$changes ecurity companies Gnderwriters ortfoliomanagers 'nsurance companies
Ty!es of 'inancial Market
/. (rimary Market:
The primary market is where securities are created. 't1s in this market that firms sell ;float= new stocks and "onds to the pu"lic for the first time. For our purposes& you can think of the primary market as "eing synonymous with an initial pu"lic offering ;'=. imply put& an ' occurs when a private company sells stocks to the pu"lic for the first time.
's can "e very complicated "ecause many different rules and regulations dictate the processes of institutions& "ut they all follow a general pattern:
i.
A company contacts an underwriting firm to determine the legal and financial details of the pu"lic offering.
ii.
A preliminary registration statement& detailing the company1s interests and prospects and the specifics of the issue& is filed with the appropriate authorities. Jnown as a preliminary prospectus& or red herring& this document is neither finali)ed nor is it a solicitation "y the company issuing the new shares. 't is simply an information pamphlet and a letter descri"ing the company1s intent.
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The appropriate governing "odies must approve the finali)ed statement as well as a
iii.
final prospectus& which details the issue1s price& restrictions and "enefits and is issued to those who purchase the securities. This final prospectus is legally "inding for the company.
0. Secondary Market:
The secondary market is what people are talking a"out when they refer to the Qstock marketQ. The defining characteristic of the secondary market is that investor?s trade amongst themselves. That is& in the secondary market& investors trade previouslyissued securities without the involvement of the issuing companies. For e$ample& if you go to "uy Microsoft stock& you are dealing only with another investor who owns shares in Microsoft. Microsoft ;the company= is in no way involved with the transaction.
Stock Bangladesh capital market is one of the smallest in Asia "ut the third largest in the south Asia region. 't has two fullfledged automated stock e$changes namely #haka Stock Exchange "#SE$ and Chittagong Stock Exchange "CSE$ and an overthe counter e$change operated "y
#<.
Securities and Exchange Commission: #apital market plays a significant role in the economy as a source of long term financing. A fair& efficient and transparent capital market is essential for a country for its industriali)ation and economic development. To develop such a fair& efficient and transparent capital market& the ecurities and <$change #ommission was esta"lished as a regulator through enactment of the ecurities and <$change #ommission Act& *++4 in une *++4& with the following mission: R rotecting the interest of investors in securities R Developing the capital and securities markets& and R Framing of securities rules concerning a"ove. 16
The #ommission frames rules and regulations under the relevant laws ensure control of the capital market through compliance of duties and responsi"ilities of the issuer& stock e$change and market intermediaries. The #ommission consists of a chairman and four full time mem"ers who are appointed "y the government for a period of three years as per law& and terms of their service is determined "y the government. The #hairman is the chief e$ecutive officer of the #ommission.
The #haka Stock Exchange "#SE$: Dhaka tock <$change %td ;D<= is the oldest and largest stock e$change in Bangladesh. Though D< was esta"lished in 5/ April *+8@ "ut its commercial operation started in *+8 6. The "oard of directors consisting of 5@ mem"ers directs the activities of D<. ut of them& *5 directors are elected "y direct votes of D< mem"ers and other *5 directors are nominated "y the elected mem"ers from nonD< mem"ers upon approval of the #ommission. At present& there are 54/ mem"ers in D< of which 55 mem"ers are registered "y the #ommission for conducting securities "usiness. D< has e$panded its online trading network to many district towns like 3a)ipur& 9arayangan(& #omilla& Feni& -a"igan(& Maulvi"a)ar& Mymensingh& #hittagong& Jhulna& ylhet& Jushtia& Barisal& Ea(shahi and Bogra including the divisional towns. As on 40 une 50** total num"er of listings in D< was @+0 against this issued capital wasTk. /06/4.+0 crore and the market capitali)ation was Tk. 5/84/+.55 crore.
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The Chittagong Stock Exchange "CSE$: The #hittagong tock <$change %td ;#<=& the second stock e$change& was esta"lished in *++8. The "oard of directors consisting of 5@ mem"ers directs the activities of #<. ut of them& *5 directors are elected "y direct votes of #< mem"ers and other *5 directors are nominated "y the elected mem"ers from non#< mem"ers upon approval of the #ommission. 9ow there are *48 mem"ers in #< of which *50 mem"ers are registered "y the #ommission for conducting securities "usiness. As on une 40& 50** total num"er of securities in #< was 5*8 against which issued capita was Tk. 506,,.4+ crore and market capitali)ation was Tk. 558+,/.00 crore.
ver -the-Counter Market or TC Market: ecurities are traded without intermediaries through mutual understanding in the T# market& which are outside the stock e$changes. 'n #< stock e$change?s T# market& there are opportunities of securities trading. Gnder ecurities and <$change #ommission ;verthe #ounter= Eules& 500*& T# market was esta"lished in #<. ecurities delisted from the e$changes and securities not listed with the e$changes "ut issued o"taining consent from the #ommission can "e traded in the T# market. Dhaka tock <$changes %td started T# market in line with the direction of the #ommission on 6th eptem"er& 500+. ettlement procedure of cthe T# market is like the pu"lic market. The list of the companies trading in D< T# market as on 40 une 50** is furnished.
1ision of the stock exchange: •
Eegulating the market structure through proper rules and strict compliance "y mem"ers.
•
<$pansion of #< trading network to cover 80@ Thanas.
•
'ntroduce Book Building system in Bangladesh capital market.
•
'ntroducing derivative market.
•
#ontinuous promotion of stock investment throughout the country.
•
#reate opportunity to cross "order trading with AF< countries.
•
'ntroduce glo"al depository receipts ;3DE=.
Mission:
To create an efficient and transparent market facilitating entrepreneurs to raise capital so that it accelerates industrial growth for overall "enefit of the economy o f the country. b2ectives: •
Develop a strong platform for entrepreneurs for raising capitalN
•
rovide an investment opportunity for small and large investorsN
•
Develop a transparent market ensuring investor?s interestN
•
rovide a fully automated trading system with most modern amenities to ensure: !uick easy& accurate transactions and easily accessi"le to allN
•
Attract nonresident Bangladeshis to invest in Bangladesh stock marketN
•
Attract foreign institutional investors to invest in BangladeshN
•
#ollect& preserve& disseminate date and information on stock e$change.
Scenario of #haka Stock Exchange: 1. MARKET CAPITALIZATION
The market capitali)ation refers the sum that derived from the current stock price per share times the total num"er of shares outstanding. Although the market capitali)ation of a company is an indication of the value of the company& it is only a temporary metric "ased on the current stock market. Market capitali)ation ratio e!uals the value of listed shares divided "y 3D. This ratio are often using as a measure of stock market si)e. 'n terms of economic significance& the assumption "ehind market capitali)ation is that market si)e is positively correlated with the a"ility to mo"ili)e capital and diversify risk on an economy wide "asis. o market capitali)ation to 3D ratio can "e used as an indicator of market development. 'n F7 *++8+6& total market capitali)ation of D< was Tk. ,+46.*, crore while in F7 500504& it increased at Tk.,5*6.4 crore. 'n this time interval& the market capitali)ation remained at appro$imately a constant level. But in F7 50040@& the market capitali)ation increased rapidly and stood at Tk.*@*/8.* crore& a"out +6.4 percent larger than that of the previous fiscal year. This increasing trend has continued and finally reached at Tk. 545,0*.6 crore in F7 50*0**. 'n the last five years& the market capitali)ation increased significantly. The turning year was in F7 500+*0& in this year& the market capitali)ation increased "y *5,.4* percent than that of the previous fiscal year and reached from Tk. *00*@4.4 crore to Tk. 55,6@0./ crore.
2. TURNOVER
Turnover e!uals the value of total shares traded divided "y market capitali)ation. -igh turnover is often used as an indicator of high level of li!uidity. Turnover also can "e used as complements of total value traded ratio. While total value traded and 3D ratio capture trading compared with the si)e of the economy& turnover measures trading relative to the si)e of the stock market. Therefore a small& li!uid market may have a high turnover ratio "ut with a small total value traded and 3D ratio.
Figure 4: Turnover of DSE during FY 1995-9 to FY !"1"-11
'n F7 *++8+6& the turnover of D< was Tk. /*+.+* crore while in F7 *++6+,& it reached at Tk. 68@*.48 crore. >Fake? demand mechanism during this period has led the general inde$ price to move vertically and hence increased the li!uidity of capital market. But the following year in F7 *++,+/& the turn over reduced at a significant rate and a total of Tk. 85,+.66 crore fell short
from the previous fiscal year and the turn over "ecame Tk. *56*.6+ crore. 'n F7 500806& the turnover was Tk. @8++.46 crore. 'n F7 500+*0& the turnover again increased dramatically and reached at Tk. 586484.88 crore.
3. CAPITAL MARKET VOLATILITY
2olatility is a measure of the degree of price movements of a stock. 't shows how active a stock price typically is over a certain period of time. 'n general& the volatility of stock return is determined "y the fluctuations in stock inde$. Fluctuation in the stock inde$ also depends on the demand and supply of securities traded in the stock e$change. The market estimate of volatility can "e used as the "arometer of the vulnera"ility of the stock market. tock return volatility represents the varia"ility of daytoday stock price changes over a period of time& which is taken as a measure of risk "y the relevant agents. -igh volatility& unaccompanied "y any change in the real situation& may lead to a general erosion of investors? confidence in the market and redirect the flow of capital away from the stock market. The e$cessive level of volatility also reduces the usefulness of stock price as a reflector of the real worth of the firm.
Figure : DSE general inde# during !""4 to !"11
The volatility in stock return in D< seems to follow clustering at particular pointsN there are periods of high volatility followed "y periods of low volatility. Many events and random shocks are responsi"le for the inde$ price fluctuations. For e$ample declaration of lucrative incentives in F7 50040@ national "udget& floatation of shares of some profita"le companies through 'nitial u"lic ffer ;'= along with several important reform measures initiated "y the ecurities and <$change #ommission ;<#= helped regain investor?s confidence "ack to the capital market. The downward drive of capital market in *++6 was created "y fake demand mechanism resulting to short term price volatility in the capital market. 'n F7 50*0**& the >game plan? is different from *++6 and the inde$ volatility has a similar shape for a sudden time ;a"out one year= "efore the downturn of the market. 4. CAPITAL MARKET SIZE
ne of the important indicators of the capital market is the num"er of listed companies. The rationale of including this measure is that as the num"er of listed company increases& availa"le securities and trading volume also increases. 'n "asis of the properties of the companies& the companies are divided into five groupsN A& B& 3& 9 and S. The properties of these companies are shown in the ta"le "elow:
Com!any
(ro!erties
%umber of Com!anies ', 03/3-03//
-olding Annual Meetings ;A3M= and have 4
declared dividend at the rate *0 percent or more
548
in a calendar year -olding Annual Meetings ;A3M= and have B
declared dividend less at the rate *0 percent or
,
5
more in a calendar year 3reenfield companies. All new listed companies e$cept 3reenfield
0
%
6
companies. -ave failed to hold the A3M or fail to declare any dividend or which are not in operation continuously.
8
50
Capital Market Co$pany Category and C%ara&teri'ti&'
The num"er of listed companies has grown from *@+ to 56/ with an average annual growth rate of 5.++ and a standard deviation of @4.4+ from fiscal year *++0+* to F750*0**. 'n F7 *++0+* the num"er of listed companies of D< was *@+ while in F7 500*05& the num"er of listed companies was increased to 5@/ and finally in F7 50*0**& the listed companies of D< stood at 56/.
T ot
al
nu$(er of DSE li'ted &o$panie'
#erivatives:
Derivative products are necessary for reducing the risk of investors through creating alternative investment opportunities in the capital market. At present there e$ists no rule for trading of derivative products and knowledge a"out derivatives are also limited among the intermediaries and investors. #< is imparting training on derivative products. The #ommission is now looking at the legal issues related to this matter so that it can frame necessary rules for introducing this instrument.
5. SECTOR WISE PERFORMANCE
'n F7 50*0**& there was an upward trend in terms of sector wise performanceN all sectors e$perienced an upward trend with a few e$ception. n the "asis of market capitali)ation of ordinary shares of companies listed with D<& total market capitali)ation of "anking sector in F7 50*0** was Tk. 6/06*.+ crore which was 8.6, percent higher than that of previous fiscal year. 'n this fiscal year total market capitali)ation of mutual fund was Tk. 48+8.8 croreN 45 percent higher than that of previous fiscal year. 'n general the investment in mutual fund is normally assumed to safe investment due to volatility in capital market "ut the market capitali)ation of mutual fund was compara"ly lower than other sector. 'n F7 50*0** the market capitali)ation of fuel and power sector was Tk. 5/+4*.@ crore which was @ percent lower than that of previous fiscal year on the other hand the market capitali)ation growth of insurance sector accumulated 45.5/ percent in terms of previous fiscal year. But real sector components of economy such as (ute industry although gained a positive market capitali)ation growth "ut the total market capitali)ation were lower and in last fiscal year it was only Tk. ,+ crore. Telecommunication sector started it activities in capital market in F7 500+*0 with a total market capitali)ation of Tk. 4*/56.6 crore. But in the following fiscal year& the market capitali)ation of this sector dropped down a"out 40.@6 percent and "ecame Tk. 55*4*.@ crore.
Se&tor-)i'e &ontri(ution in $arket &apitali*ation +FY 1995-9 to FY !"1"11,
The financial market contri"ution in capital market in terms of market capitali)ation has increased significantly in F7 50*0**. 'n this year the "anks& insurance including mutual funds have (ointly contri"uted 84 percent of market capitali)ation whereas pharmaceuticals and chemicals& te$tile industries& food and allied products and engineering have (ointly contri"uted 5* percent of total market capitali)ation. The short term larger profit of financial sector has induced the investors to make a larger investment in financial sector than those of real sectors. Therefore in short run the profit has "een ma$imi)ed "ut in the long run it can make a distur"ing effect on the economy which has already "een o"served through capital market downward trend and )ero recovery in the capital market in this year.
Se&tor i'e .erfor$an&e in FY !"11-1!
6. TREND OF GENERAL INDEX
The trend of general inde$ of D< during uly 500+ to August 50*0 shows that the general inde$ of D< has increased smoothly. 'n uly 500+ the general inde$ of D< was 5+*@.84 while in April 50*0 it increased to 868@.//. During this time period& there was an increasing trend of general inde$. 'n August 50*0 the general inde$ of D< stood at 668,.+, and finally in 9ovem"er 50*0& it reached the peak and "ecame /605.@@. After this general inde$ has started to fall down and in Fe"ruary 50** it reached to 8504.0/.
T%e trend of general inde# of DSE during &apital $arket do)nturn in !"11 (articulars 8isted Securities #SE 5eneral Index "#5E%$ pening 'nde$ #losing 'nde$ of change +ighest 'nde$ %owest 'nde$
0337
03/3
03//
03/0
@*8
@@8
80*
8*8
5&/0,.6* @&848.84 6*.8@ @&848.84 5&@0/.6,
@&848.84 /&5+0.@* /5.,+ /&+*/.8* @&86/.@0
/&5+0.@* 8&58,.6* ;46.8/= /[email protected]+ @&6@+.44
8&58,.6* @&5*+.4* ;*+.,8= 8&805.40 4&6*6.5@
Current Scenario of Bangladesh Ca!ital Market
Bangladesh capital market has e$perienced "ullish ride during 500,50*0 e$cept a slight deviation in the last half of 500/. 'n 50*0& D< 3eneral 'nde$ rose "y almost +0 from 8000 /+00. -owever from "eginning of 50** market went into correction mode and fallen sharply and came down to 8000 level "y the end of 50**. Gnlike normal falling market& the "earish mode of 50** was !uite different. During the fall !uite a num"er of times market e$perienced *858 fluctuations. nly very few num"er of institutions and individuals can gain positively from those fluctuations. At present market is continuing with that "earish trend with the same "umpy fluctuations now and then.
Following ta"le shows the key statistics of Dhaka tock <$change %td. ;D<= for last three years:
0337
03/3
BDT 1,903
BDT 3,508
Billion BDT 1,475
Billion BDT 4,009
Billion
Billion
Total 8isted Securities
415
445
494
Total 8isted Com!anies
236
218
231
I(
18 Securities
15 Securities
12 Securities
Total (aid u! Ca!ital of I(
BDT 8.3 billion
BDT 6.5 billion
BDT 15.38 billion
%e) Mutual funds floated
7
12
7
Total Market Ca!ital Total Turnover
03// "u! to 03 %ov$ BDT 2,639 Billion BDT 1,456 Billion
Bond Bond Market: A "ond is de"t instrument issued for a specific period for the purpose of raising capital "y "orrowing. A "ond is a longterm o"ligation. 3enerally& a "ond is fi$ed interest financial instrument issued "y 3overnment& #orporate& and other large entities. 'n other words& a "ond is an agreement to repay the principal along with the interest or coupon. There are some "onds which carry a )ero coupon or interest "ut have fi$ed term. These "onds are called as )ero coupon "ond or deep discount "ond "onds. These "onds are sold at a price which will "e far "elow the face value of the "ond depending on the risk characteristics and prevailing interest rates in the market. Bonds are trada"le and "asically the price of a "ond depends on the e$isting interest rates in the market for a e!ually risky instrument and the coupon on the "ond. A "ond market has the role to facilitate the flow of longterm funds from surplus units to deficit units. Thus "ond acts as a loan where the "uyer or holder of the "ond is the lender or creditor& the issuer is the "orrower or de"tor and the coupon is the interest.
Ty!es of Bonds: A simple way to classify "onds is "ased on the different kind of the issuers. The three main issuers are government& governmental agencies& and corporations.
T-Bonds "More than /3-year$
Bonds
Issued by 5overnmen t Munici!al Bonds Cor!orate Bonds
T-%otes "More than /-year 9 8ess than /3-year$
T-Bills "8ess than /-year$
I.
5overnment Bonds:
According to the length of duration& government "onds can "e classified into three main categories. They are as follows. Bills: de"t securities whose maturity period is less than one year. %otes: de"t securities whose maturity period is * to *0 years. Bonds: de"t securities whose maturity period is more than *0 years.
II.
Munici!al Bonds:
These are called governmental agency "onds. These "onds are not issued directly "y the government "ut with the "acking of the government. 'n most countries& the returns from municipal "ond are free from government ta$. Because of this ta$ advantage& the interest on a municipal "ond is normally lower than that of a ta$a"le "ond. Thus& a municipal "ond can "e a great investment opportunity on an afterta$ "asis.
III.
Cor!orate Bonds:
A company can issue "onds like stocks. #orporate have many options to increase its capital from the market& the perimeter is whatever the market will "ear. #orporate may issue shortterm ;less than 8 years=& mediumterm ;8 to *0 years= and longterm ;more than *0 years= "onds. #orporate "ond may "e converti"le i.e. the holder can convert it into stock. 't can "e calla"le also& which allows the company to redeem an issue prior to maturity. There are some other types of "onds such as lottery "ond& war "ond& serial "ond& revenue "ond& climate "ond etc. The capital market of Bangladesh is predominantly an e!uity "ased securities market. 9um"er of "onds and other de"t instruments are insignificant. At present& there is Tk *@0 million of de"entures of / companies listed in the stock e$changes. 'n order to populari)e the government "ond and to increase the depth of market& trading of government treasury "onds have "een introduced in stock e$changes with effect from * anuary 5008.
As on 40 une 50**& 5*5 government treasury "onds& 4 corporate "ond& / de"entures were listed in D< whose market capitali)ation was Tk 4+@0*.40 crore. But "onds are not yet popular.
Finance DivisionMinistry of Finance& Bangladesh Bank& ecurities and <$change #ommission and 9ational Board of Eevenue are working together for development of the "ond market.
Issue of Cor!orate #ebt Securities in Bangladesh
S8
Securities
* 5 4 @ 8 6 , / + *0 ** *5 *4 *@ *8 *6 *,
*, Ba$imco harma De"enture *, Ba$imco limited De"enture *, Ba$imco 'nfusion De"enture *, Bangladesh #hemical De"enture *, Ba$imco ynthetic De"enture *, Ba$imco Jnitting De"enture *, Ba$imco Fisheries De"enture *8
,ear of issue
*+// *+/+ *++5 *++4 *++4 *++@ *++@ *++@ *++8 *++8 *++8 *++6 *++/ *+++ 500, 50*0 50**
'eatures
50 #onverti"le
50 #onverti"le 50 #onverti"le *0 #onverti"le 50 #onverti"le 50 #onverti"le 50 #onverti"le rofit haring 50 #onverti"le 58 #onverti"le
Sie"B#T million$
@0 60 @8 50 4,8 5@0 *50 /00 580 @0 400 *80 **0 50 4&000 *&0,0 4&000
%ote: marked de"entures are not availa"le at present. Source: <#& D< and #< report.
5overnment #ebt Market in Bangladesh Bangladesh Bank rder*+,5& article 50 and Treasury rules*++/ ;Appendi$*& ection4= empowers Bangladesh Bank for the issue and management of 3overnment securities. As per the a"ove mentioned laws and regulations& Bangladesh Bank ;BB= acts as the "anker and de"t manager to 3overnment of Bangladesh ;3B=. Ta$ is the main source of government?s revenue.
3overnment meets its deficit through sale of de"t securities when e$penditures e$ceed its ta$ receipts. 'n the past the financing of "udget deficit for 3overnment of Bangladesh was "eing done through issuance of >ad hoc? Treasury Bills. Bangladesh Bank su"se!uently partially offloads these >ad hoc? Treasury Bills through the issuance of Treasury Bills and Bonds to the market& leaving the 3overnment?s cash position unaffected. >Ad hoc? Treasury Bills were thus accessed "oth to meet cash mismatches as well as for financing the "udget deficit. 'ssuance of >ad hoc? Treasury Bills has "een discontinued now. Financing "udget deficit for 3overnment of Bangladesh takes place through the issuance of ;i= pecial "onds& ;ii= Bangladesh 3overnment Treasury Bonds ;B3TBs=& and ;iii= savings instruments ;9D=. -owever& for small deficit& Bangladesh Bank maintains a pretty cash account named >Ways and Means Advance? ;WMA=. 9ormally& government "orrows from WMA first and then through Treasury Bills. For this advance a floating interest rate ;"ank rate U *= is charged. At present the "ank rate is 8.
Cor!orate #ebt Market in Bangladesh Bank loans are the main source of finance for corporate ;Ta"le4.4=. The corporate "ond market in Bangladesh is very small in si)e. Banking sector is dominating corporate finance since other sources of corporate de"t instrument are underdeveloped. Alternative sources of finance other than "ank loans should "e developed "y diversifying the de"t instruments in order to esta"lish sound financial market in Bangladesh. A complete set of guidelines on "onds and de"entures must "e developed to promote the corporate "ond market. The government has to reduce the interest rate on national savings certificates in order to a favora"le environment for developing corporate "onds.
Ta"le: 4.4 'nstruments Availa"le in Bangladesh Instruments
Deposits Bank %oans Term loans ;as of une 50**=
%ominal 4mount"Billions of B#T$ @045 480* *444
elative sie ;
4,.50 45.40 *5.40
3overnment saving certificates 3overnment "onds Treasury "ills
+68 84@ 5,* *+5 9ot pu"licly availa"le **
/.+0 @.+4 5.80 *.,, 0.*0
(roblems The sluggish growth of the "ond market in Bangladesh has "een recogni)ed due to a num"er of factors. They are discussed "elow.
8imited number of investor: nly limited num"er of investors compared to total
population is interested in investing in "ond or stock market.
Ca!ital gain: 'mpact of cliental effect& most of the investors in Bangladesh look for
capital gain rather than fi$ed flow of income while making their investment decision. 'n case of "ond chance of capital gain is limited.
+igh return in risk free government bond: Eate of return in case of risk free
government "ond is too highs so corporate "onds have to offer even higher rate for covering additional risk to the investors which make the rate nonvia"le for the issuers.
4lternative sources of debt financing: ther sources of de"t financing& especially
"orrowings from commercial "ank are very easy and widely used in Bangladesh. The charged "y "ank is less than "orrowing rate through "ond issuance. Besides these& "orrowing from "ank is fle$i"le and !uick. o& issuers don?t have to depend on "ond issue only to design their capital structure and to generate ta$ "enefit from use of de"t.
8imited !rivate management of !ension fund: 'n Bangladesh private management of
longterm pension fund is very limited. tate owned "odies I government organi)ations do not raise fund through issue of de"t instrument. They depend on deficit financing I printing money from central "ank for financing their pro(ects. o& all these factors make secondary market for "onds very illi!uid I discourage issuance of Bond.
*eak regulations and market infrastructure: %aws I regulations regarding
governance of "ond market are inade!uate. Market failure is common scenario in Bangladesh. Eisk free investors (ust prefer government "onds while risk takers go for investment in stock market. There are not enough investors for corporate "ond market.
can "e evaded through unfair means ;"ri"e and other means=. o& ta$ incentive for issuing "onds is not very high which causes underdeveloped corporate "ond market.
Illi=uid secondary market: 'lli!uidity in secondary market of government de"t
securities makes constraints on determining proper pricing of the treasury "onds in the primary market.
+igh interest rate: 'ndividual savings are attracted "y national saving scheme due to its
high interest rate ;Ta"le4.5=. 9ational saving certificates are risk free though its interest rate is highN conse!uently other saving products are crowded out from the market. Thus a company has to propose a higher coupon rate to attract investors which might "ecome unvia"le for the corporate.
+igh transaction cost of bind issuance: The high transaction cost of "ond issuance is
considered as constraint. articularly& the registration fees& stamp duties& ancillary charges and annual trustee fees on outstanding amount put forth to diminish the "ond issue.
Chea! syndicated loans: 't is a common phenomenon that a syndicate is formed "y a
num"er of "anks to finance large pro(ect. yndicated loan is cheap as well custommade and fle$i"le which makes "onds nonattractive to the corporate issuers.
#efault on interest !ayment: 'n early *++0s& the interest payments of some corporate
de"enture were defaulted. 'n the +0s& the regulations of financial market were not ade!uate and credit rating was not mandatory. Besides& investors? confidence was eroded due to the failure of trustees to protect the de"enture holders? rights which makes the investors averse to invest in corporate "onds.
