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Financial System of Bangladesh
Sunjida Hossain

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Financial System of Bangladesh

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Financial
markets
Financial markets
facilitate the flow
of funds in order
to finance
investments by
governments,corp
orations, and
individuals. It
transfers funds
from those who
have excess funds
(surplus units)to
those who need
funds(deficit
units).Financial
markets facilitate:


 
The raising
of capital(in
thecapital
markets) 


 
The transfer
of risk (in
thederivatives
markets) 


 
Price discovery


 
Global
transactions with
integration of
financial markets


 
The transfer
of liquidity(in
themoney
markets) 


 
International
trade(in
thecurrency
markets)  And are
used to match
those who want
capital to those
who have
it.Typically a
borrower issues
areceiptto the
lender promising
to pay back the
capital.
Thesereceipts
aresecuritieswhich
may be freely
bought or sold. In
return for lending
money to
the borrower, the
lender will expect
some
compensation in
the form
of interestor divide
nds.This return on
investment is a
necessary part of
markets to ensure
that funds are
supplied to
them.Financial
markets attract
funds from
investors and
channel them to
corporations
 — 
they thusallow
corporations to
finance their
operations and
achieve growth.
Money markets
allow firms
to borrow funds on
a short term basis,
while capital
markets allow
corporations to
gain long-
termfunding to
support
expansion.Without
financial markets,
borrowers would
have difficulty
finding lenders
themselves.Interm
ediaries such
asbanks,Investmen
t
Banks,andBoutiqu
e Investment
Bankscan help in
this  process.
Banks take
deposits from
those who
havemoneyto save.
They can then lend
moneyfrom this
pool of deposited
money to those
who seek to
borrow. Banks
popularly lend
money inthe form
of loansandmortga
ges.  More
complex
transactions than a
simple bank
deposit require
markets where
lenders and
their agents can
meet borrowers
and their agents,
and where existing
borrowing or
lendingcommitme
nts can be sold on
to other parties. A
good example of a
financial market is
astock exchange.A
company can raise
money by
sellingsharestoinve
storsand its
existing shares can
be bought or sold.
 

The following
table illustrates
where financial
markets fit in the
relationship
between lenders
and borrowers:
Relationship
between lenders
and borrowers
 
LendersFinancial
Intermediaries
 
Financial Markets
Borrowers
IndividualsCompa
niesBanksInsuranc
e
CompaniesPension
FundsMutual
FundsInterbank St
ock
ExchangeMoney
MarketBond
MarketForeign
ExchangeIndividu
alsCompaniesCent
ral
GovernmentMunic
ipalitiesPublic
Corporations
Role of Financial
markets in the
economy
One of the
important requisite
for the accelerated
development of an
economy is the
existence of a
dynamic financial
market. A
financial market
helps the economy
in the following
manner.


 
Saving
mobilization
: Obtaining funds
from the savers or
surplus units such
as
householdindividu
als, business firms,
public sector units,
central
government, state
governmentsetc. is
an important role
played by financial
markets.


 
Investment
: Financial markets
play a crucial role
in arranging to
invest funds
thuscollected in
those units which
are in need of the
same.


 
National Growth
: An important
role played by
financial market is
that, they
contributedto a
nations growth by
ensuring
unfettered flow of
surplus funds to
deficit units. Flow
of funds for
productive
purposes is also
made possible.


 
Entrepreneurship
growth
: Financial market
contribute to the
development of
theentrepreneurial
claw by making
available the
necessary financial
resources.


 
Industrial
development
: The different
components of
financial markets
help anaccelerated
growth of
industrial and
economic
development of a
country,
thuscontributing to
raising the
standard of living
and the society of
well-being.

 
Functions of
Financial Markets


 
Intermediary
Functions
: The intermediary
functions of a
financial markets
include
thefollowing:
o

 
Transfer of
Resources
: Financial markets
facilitate the
transfer of real
economicresources
from lenders to
ultimate
borrowers.
o

 
Enhancing income
: Financial markets
allow lenders to
earn interest or
dividendon their
surplus invisible
funds, thus
contributing to the
enhancement of
theindividual and
the national
income.
o

 
Productive usage
: Financial markets
allow for the
productive use of
the
funds borrowed.
The enhancing the
income and the
gross national
production.
o

 
Capital Formation
: Financial markets
provide a channel
through which
newsavings flow
to aid capital
formation of a
country.
o

 
Price determination
: Financial markets
allow for the
determination of
price of the traded
financial assets
through the
interaction of
buyers and sellers.
They provide a
sign for the
allocation of funds
in the economy
based on the
demandand supply
through the
mechanism called
price discovery
process.
o

 
Sale Mechanism
: Financial markets
provide a
mechanism for
selling of
afinancial asset by
an investor so as to
offer the benefit of
marketability
andliquidity of
such assets.
o

 
Information
: The activities of
the participants in
the financial
market result in
thegeneration and
the consequent
dissemination of
information to the
varioussegments
of the market. So
as to reduce the
cost of transaction
of financial assets.


 
Financial Functions
 
o

 
Providing the
borrower with
funds so as to
enable them to
carry out
their investment
plans.
o

 
Providing the
lenders with
earning assets so
as to enable them
to earn wealth
bydeploying the
assets in
production
debentures.
o

 
Providing liquidity
in the market so as
to facilitate trading
of funds.
Constituents of
Financial
MarketBased on
market levels


 
Primary market
: Primary market
is a market for
new issues or new
financial claims.
Hence it’s also
called new issue
market. The
primary market
deals with those
securities
which are issued
to the public for
the first time.
 


 
Secondary market
: It’s a market for
secondary sale of
secu
rities. In other
words,securities
which have
already passed
through the new
issue market are
traded in
thismarket.
Generally, such
securities are
quoted in the stock
exchange and it
provides
acontinuous and
regular market for
buying and selling
of securities.
Based on security
types


 
Money market
: Money market is
a market for
dealing with
financial assets
and
securities which
have a maturity
period of up to one
year. In other
words, it’s a
market
for purely short
term funds.


 
Capital market
: A capital market
is a market for
financial assets
which have a long
or indefinite
maturity.
Generally it deals
with long term
securities which
have a
maturity period of
above one year.
Capital market
may be further
divided in to: (a)
industrialsecurities
market (b) Govt.
securities market
and (c) long term
loans market.
o

 
Equity markets
: A market where
ownership of
securities are
issued
andsubscribed is
known as equity
market. An
example of a
secondary equity
marketfor shares is
the Bombay stock
exchange.
o

 
Debt market
: The market
where funds are
borrowed and lent
is known as
debtmarket.
Arrangements are
made in such a
way that the
borrowers agree to
pay thelender the
original amount of
the loan plus some
specified amount
of interest.


 
Derivative markets
: Derivative
securities are
financial contracts
whose values
arederived from
the underlying
assets. And
derivative markets
are Markets that
allow for  buying
& selling of
derivative
securities.

 
Financial service
market
: A market that
comprises
participants such
as
commercial banks
that provide
various financial
services like
ATM. Credit
cards. Credit
rating,
stock  broking etc.
is known as
financial service
market.
Individuals and
firms use
financialservices
markets, to
purchase services
that enhance the
working of debt
and equitymarkets.

 
Depository markets
: A depository
market consist of
depository
institutions that
acceptdeposit from
individuals and
firms and uses
these funds to
participate in the
debt market, by
giving loans or
purchasing other
debt instruments
such as treasure
bills.

 
Non-Depository
market
: Non-depository
market carry out
various functions
in
financialmarkets
ranging from
financial
intermediary to
selling, insurance
etc. The
variousconstituenc
y in non-
depositary markets
are mutual funds,
insurance
companies,
pensionfunds,
brokerage firms
etc.
 

The financial
market in
Bangladesh is
mainly of
following types:1.
 
Money Market
: The primary
money market is
comprised of
banks, FIs and
primarydealers as
intermediaries and
savings & lending
instruments,
treasury bills as
instruments.There
are currently 15
primary dealers
(12 banks and 3
FIs) in
Bangladesh. The
onlyactive
secondary market
is overnight call
money market
which is
participated by
thescheduled
banks and FIs. The
money market in
Bangladesh is
regulated by
BangladeshBank
(BB), the Central
Bank of
Bangladesh.2.
 
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 marketis
institutionalized
by two (02) stock
exchanges-Dhaka
Stock Exchange
and
ChittagongStock
Exchange. The
instruments in
these exchanges
are equity
securities
(shares),debenture
s, corporate bonds
and treasury
bonds. The capital
market in
Bangladesh
isgoverned by
Securities and
Commission
(SEC).3.
 
Foreign Exchange
Market
: Towards
liberalization of
foreign exchange
transactions,
anumber of
measures were
adopted since
1990s.
Bangladeshi
currency, the taka,
wasdeclared
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
capitalaccount,
resident owned
capital is not
freely transferable
abroad.
Repatriation of
profitsor
disinvestment
proceeds on non-
resident FDI and
portfolio
investment inflows
are permitted
freely. Direct
investments of
non-residents in
the industrial
sector and
portfolioinvestmen
ts of non-residents
through stock
exchanges are
repatriable abroad,
as also arecapital
gains and
profits/dividends
thereon.
Investment abroad
of resident-owned
capitalis subject to
prior Bangladesh
Bank approval,
which is allowed
only
sparingly.Banglad
esh adopted
Floating Exchange
Rate regime since
31 May 2003.
Under theregime,
BB does not
interfere in the
determination of
exchange rate, but
operates
themonetary
policy prudently
for minimizing
extreme swings in
exchange rate to
avoidadverse
repercussion on
the domestic
economy. The
exchange rate is
being determined
inthe 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
inthe forward
markets. However,
to avoid any
unusual volatility
in the exchange
rate,Bangladesh
Bank, the
regulator of
foreign exchange
market remains
vigilant over
thedevelopments
in the foreign
exchange market
and intervenes by
buying and
sellingforeign
currencies
whenever it deems
necessary to
maintain stability
in the
foreignexchange
market.
 

Money market
& its
instruments
The money market
is used by a wide
array of
participants, from
a company raising
money byselling
commercial paper
into the market to
an investor
purchasing CDs as
a safe place to
park money in the
short term. The
money market is
typically seen as a
safe place to put
money due
thehighly liquid
nature of the
securities and
short maturities,
but there are risks
in the market
thatany investor
needs to be aware
of including the
risk of default on
securities such as
commercial paper.
The primary
money market is
comprised of
banks, FIs and
primary dealers
asintermediaries
and savings &
lending
instruments,
treasury bills as
instruments. There
arecurrently 15
primary dealers
(12 banks and 3
FIs) in
Bangladesh. The
only active
secondarymarket
is overnight call
money market
which is
participated by the
scheduled banks
and FIs.
Themoney market
in Bangladesh is
regulated by
Bangladesh Bank
(BB), the Central
Bank
of Bangladesh.The
developed money
market has the
following
characteristics:(i)
Existence of
Central Bank,
(ii)
Highly organized
commercial
Banking System
(iii)
Existence of sub-
markets
(iv)
Healthy
competition in
sub-markets
(v)
Integrated
structure of money
market(vi)
Availability of
proper credit
instruments.(vii)
Adequacy and
Elasticity of
funds(viii)
International
attraction(ix)
Uniformity of
interest rates(x)
Stability of prices
and(xi) Highly
developed
Industrial system
Related Papers
EMERGING EQUITY MARKET AND ECONOMIC DEVELOPMENT: BANGLADE…
By Dr Haradhan K U M A R Mohajan
READ PAPER

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