61031789 the Role of Financial Market and Institution in the Economic Development of Bangladesh

Term Paper On

Role of the Capital Market in economic development of Bangladesh

Term Paper On

The role of Financial Market in the Economic Development of Bangladesh

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Role of the Capital Market in economic development of Bangladesh

(This Internship Report Is Submitted For the Partial Fulfillment of the Degree of

Bachelor of Business of Administration with a Major in Finance)

Submitted To

Tanbina TabassumLecturer

Faculty of Business StudiesPremier University

Prepared By

Name: Anik DeyStudent ID# 0818112670

Semester: 8th

Batch:18thProgram: BBA

Major in finance

Submission Date:26th December,2013

PREMIER UNIVERSITY, CHITTAGONG


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Letter of Transmittal

Date: 26th December, 2013

ToThe Supervisor Tanbina TabassumLecturerFaculty of Business StudiesPremier University Chittagong, Bangladesh

Subject: - Submission of Term Paper on “Role of the Capital Market in economic development of Bangladesh.”

Dear Madam

I have the gratification to inform you that I have accomplished my term paper on. “Role of the Capital Market in economic development of Bangladesh.” I want to submit the term paper as partial fulfillment of the BBA degree requirement. I am very much grateful to my supervisor for giving me the scope.I pray and hope that you would be kind enough to accept this report and oblige thereby.

Yours sincerely,

( )Name: Anik DeyStudent ID# 0818112670Semester: 8th

Batch: 18thProgram: BBAMajor in finance


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ACKNOWLEDGEMENT

First of all I pay a special thanks to my Almighty, who made me able to complete this report. It is very difficult to express my feelings that helped me in completion of this report. But I think there is no other word except thanks, which can compliment my sentiments. I pay gratitude to the Supervisor of my report, Mrs. Tanbina Tabasum, lecture of faculty of Business Studies, Premier University Chittagong.

I am also grateful to the officials of stock market whose support helps me to complete the report. Finally, I would like to thank my entire course teacher of Finance Department for their proper guidance and care to complete the report.


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Executive Summary

Capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the Bangladesh Financial Services Authority or the Bangladesh Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.

The Bangladesh capital market till today is not broad or deep enough. Issuers do not use the full potential of the market for raising equity capital by issuing shares or for borrowing funds by issuing corporate bonds. Moreover, savers feel uncomfortable in investing in Bangladesh capital market instruments. Rather, they feel more comfortable in maintaining their savings with banks as Fixed Deposit Receipt (FDRs) and Savings Certificates. It seems that regulators fail to adequately address the problems faced by both the issuers and the investors. In this perspective, the following are needed in order to enable the capital market to play its due role in creating a friendly investment climate in Bangladesh: knowing the bank-based financing systems, examining the structure of organized capital market, sorting out and addressing the problems of issuers and investors. This study aims to address these issues with a view to creating a healthy investment climate in Bangladesh.


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Chapter: 1Introduction


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1.1 Introduction

The development of economy of any country depends mostly on the establishment of

sound, effective and efficient financial system in that country. A well-developed financial

system plays an important role in accelerating economic growth by mobilizing savings

and facilitating investment in an efficient manner (Mu, 2007). Financial market is

composed of different markets- Money Market, Capital Market, Derivative Market etc. All

the markets play an interactive role for the development of economy by formation of

capital through mobilizing funds, industrialization of economy through supplying adequate

funds, providing services, linking investors to the industrial entrepreneurs etc. Besides,

this requires sound regulatory framework, sound and investment sensitive administrative

infrastructure, fiscal supports for making their role effective for economic development.

The financial sector of Bangladesh is characterized by the dominating presence of

commercial banks, especially the Nationalized Commercial Banks (NCBs). Although, a

paradigm shift in the degree of dominance has been observed of late with the emergence

of private commercial banks-traditional and shariah based banking. Banking sector

accounted for about 75 percent of the total financial system. Most of the available funds

go to the NCBs in the form of deposits and channeled into lending. However, the NCBs

had substantial nonperforming loan (NPL) portfolios. Both insurance and mutual funds

industries are very small.

1.2 objectives and scope of the study:

To provide a useful basis for building a sustainable capital market with a view to creating a healthy investment climate in Bangladesh.

To analyze limitations and examine opportunities of the capital market of Bangladesh covering both equity and debt markets in creating a congenial investment climate.

To sort out the problems associated with our capital market. To suggest some practicable solutions to these problems.


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1.3Methodology of the studyTo prepare the report of internship, I have collected all kinds of related data from the primary and secondary sources.ž Primary data:There are several ways to collect primary data. Among others important one is interview. For collecting primary data I did follow interview method.There are several types of interview method. I used only personal interview method.

1 The primary data were collected through face-to-face interview with the DSE officials.2 The primary data wee collected through participation and discussion during the trading session.3 I had also collected information through interview with the DSE members.4 I had collected information through interview by the questionnaire with the investors by visiting various brokerage firms.žSecondary data: the study also used secondary data. For this purpose we collect information from various sources such as various publications of DSE.1 Various publications of Dhaka stock exchange and Chittagong Stock exchange..2 Trade journal.3 Research reports connected with the stock exchange.4 Different web site.


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1.5Limitations of the study

Maximum effort was given to make the study a successful one, but it suffers from some

limitation those were apparently unavoidably. The major ones were: Shortage of time period: The major limitation faced to carry out this project was

mainly time constraints. It hindered the course of vast area and time for preparing a report within the mentioned period is really difficult.

Secrecy of Management: The authority of the organizations did not disclose much information for keeping the organization confidential. So, some data could not been collected for confidentiality or secrecy of management.

Busy working environment: The officials had some times been unable to provide

information because of their huge routine work. So, I could not gather vast knowledge.


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Chapter: 2

Literature review


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Financial market

Financial market is created to satisfy particular preferences of market participants. Financial markets transfer funds from those who have excess funs to those who need funds. That is they facilitate the transfer of funds from surplus unit to deficit unit. Because funding needs vary among deficit units, various financial markets have been established. The primary market allows for the issuance of new securities, while the secondary market allows for the sale of short term securities, while capital markets facilitate the sale of long term securities.The main participants of financial market can be classified as households, businesses and government agencies. Those participants who provide funds to the financial markets are called surplus unit. Households are the main type of surplus unit. Participants who use financial markets to obtain the funds are called the deficit unit.

Financial market can be classified into two categories they are given below-

Financial market

Money market

Capital market

Ideas about these two markets are as follows

Money market:


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Money market an integral part of the financial market of a country. It provides a medium for the redistribution of short term loan able 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.

Capital market:

Capital Market the market, or realistically, the group of interrelated markets, in which capital in financial form is lent or borrowed for medium and long term and, in cases such as equities, for unspecified periods.

The capital markets, in distinction from other parts of the financial market that is, the money markets, are those for long-term government securities, corporate bonds, stocks, municipal bonds issued by state and local government units, and mortgages. Industry and commerce as well as government and local authorities raise capital from the capital market which performs several important functions in the process of economic development. Most important among them are the promotion of savings and investment and efficient allocation of funds among competing uses. 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, investment companies, investment clubs, pension funds, stock exchanges, security companies, underwriters, portfolio-managers, and insurance companies.

Role financial market in economic development:

Role of depository institutions:

A major type of financial intermediary is the depository institutions, which accepts deposits from surplus units and provides credit to deficit units through loans and purchases of securities. Depository institutions are popular financial institutions for the following reasons:


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They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.

They repackage funds received from deposits to provide loans of the size and maturity desired by the deficit units.

They accept the risk on loan provided. They have more expertise than individual surplus units in evaluating the

creditworthiness of deficit units. They diversify their loans among numerous deficit units and therefore can absorb

defaulted loans better than individual surplus units could.The depository institutions and there roles are given below

Bank:

The financial system of Bangladesh consists of Bangladesh Bank (BB), the central bank, 4 nationalized commercial banks (NCB), 5 government owned specialized banks, 30 domestic private banks, 10 foreign banks and 28 non-bank financial institutions. The financial system also includes insurance companies, stock exchanges and co-operative banks. As the central bank, Bangladesh Bank has legal authority to supervise and regulate all the banks. Although the financial system includes other players like insurance companies, stock exchanges and co-operative banks, but Bangladesh Bank doesn’t regulate these institutions. Each of the institution is regulated by different authorities. The insurance companies are regulated by Ministry of Commerce; Stock exchanges are regulated by Securities and Exchange Commission (SEC) and Cooperative banks are regulated by Ministry of Local Government, Rural Development and Co-operatives.

Financial markets allow the transformation of claims on multi-year illiquid investment projects into liquid tradable securities. Financial institutions acquire and process


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Bangladesh Bank

Banks

♦ Nationalized commercialbanks♦ Private banks ♦ Foreign banks ♦ Specialized banks

information about investment projects on behalf of their depositors, while prices in financial markets reflect different information and opinions on new ideas and projects. While market participants have developed techniques to overcome market frictions, the government has an active role to play in providing the “infrastructure” for financial service provision, i.e. the rules within which firms and household contract with each other and perform financial transactions.

Chapter: 3


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The banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75 percent of total advances.The government's encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from 13 percent to 53 percent.

List of banks in Bangladesh:

The commercial banking system dominates Bangladesh's financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking system consists of four nationalized commercial Banks, around forty private commercial banks, nine foreign multinational banks and some specialized banks. The Nobel-prize winning Grameen Bank is a specialized micro-finance institution, which revolutionized the concept of micro-credit and contributed greatly towards poverty reduction and the empowerment of women in Bangladesh.


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Central Bank Nationalized Commercial Banks Private Commercial Banks Foreign Banks Specialized Banks References External links

Central Bank: Bangladesh Bank Persuant to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank with retrospective effect from 16 December, 1971.

Nationalized Commercial Banks:The banking system of Bangladesh is dominated by the 4 Nationalized Commercial Banks , which together controlled more than 54% of deposits and operated 3388 branches (54% of the total) as of December 31, 2004[1]. The nationalized commercial banks are:

Sonali Bank Janata Bank Agrani Bank Rupali Bank

Private Commercial Banks:Private banks are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products.

AB Bank Limited BRAC Bank Limited Eastern Bank Limited Dutch Bangla Bank Limited Dhaka Bank Limited Islami Bank Bangladesh Ltd Pubali Bank Limited Uttara Bank Limited IFIC Bank Limited National Bank Limited The City Bank Limited United Commercial Bank Limited NCC Bank Limited


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Prime Bank Limited SouthEast Bank Limited Al-Arafah Islami Bank Limited Social Investment Bank Limited Standard Bank Limited One Bank Limited Exim Bank Limited Mercantile Bank Limited Bangladesh Commerce Bank Limited Mutual Trust Bank Limited First Security Bank Limited The Premier Bank Limited Bank Asia Limited Trust Bank Limited Shahjalal Bank Limited Jamuna Bank Limited Foreign Banks Citigroup HSBC Standard Chartered Bank Commercial Bank of Ceylon State Bank of India Habib Bank National Bank of Pakistan Woori Bank Bank Alfalah ICB Islami Bank

Specialized Banks:Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sector while the other two ( Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) are for extending term loans to the industrial sector[1]. The Specialized banks are:

Grameen Bank Bangladesh Krishi Bank Bangladesh Shilpa Bank Rajshahi Krishi Unnayan Bank Bangladesh Shilpa Rin Sangstha Basic Bank Ltd (Bank of Small Industries and Commerce) Bangladesh Somobay Bank Limited(Cooperative Bank) The Dhaka Mercantile Co-op


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The financial market in Bangladesh is mainly of following types:

1. Money Market : The primary money market is comprised of banks, FIs and primary dealers as intermediaries and savings & lending instruments, treasury bills as instruments. There are currently 15 primary dealers (12 banks and 3 FIs) in Bangladesh. The only active secondary market is overnight call money market which is participated by the scheduled banks and FIs. The money market in Bangladesh is regulated by Bangladesh Bank (BB), the Central Bank of Bangladesh.

2. Capital market: The primary segment of capital market is operated through private 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 Commission (SEC).

3. Foreign Exchange Market : Towards liberalization of foreign exchange transactions, a number of measures were adopted since 1990s. Bangladeshi currency, the taka, was declared convertible on current account transactions (as on 24 March 1994), in terms of Article VIII of IMF Article of Agreement (1994). As Taka is not convertible in capital account, resident owned capital is not freely transferable abroad. Repatriation of profits or disinvestment proceeds on non-resident FDI and portfolio investment inflows are permitted freely. Direct investments of non-residents in the industrial sector and portfolio investments of non-residents through stock exchanges are repatriable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly. Bangladesh adopted Floating Exchange Rate regime since 31 May 2003. Under the regime, BB does not interfere in the determination of exchange rate, but operates the monetary policy prudently for minimizing extreme swings in exchange rate to avoid adverse repercussion on the domestic economy. The exchange rate is being determined in the market on the basis of market demand and supply forces of the respective currencies. In the forex market banks are free to buy and sale foreign currency in the spot and also in the forward markets. However, to avoid any unusual volatility in the exchange rate, Bangladesh Bank,


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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.

Roles of the Regulatory institutions in the Capital Market of Bangladesh: In order to stimulate rapid economic growth of a country particularly through industrialization and mobilization of domestic savings, appropriate institutions in the capital market are essential. The capital market in Bangladesh is governed by the following institutions.

The Security and Exchange Commission (SEC): Security and Exchange Commission (SEC) was formed to supervise the securities market of Bangladesh in June 09, 1993. SEC is a dynamic body regulating the activities of capital market on the basis of introducing regulatory measures from time to time. SEC has been set up not only to control the capital market but also to give protection to investors. Capital market is regulated by the Security and Exchange organization Act 1993 and Companies Act 1994 and rules and regulation trade there under.

The major Function and Responsibilities of the SEC are: Regulating the business of stock market determination and regulation of the

business of brokers, sub-brokers, share-transfer agents, and manager/brokers to the issues, underwriters, portfolio managers, investment consultants and other middlemen related to security dealings.

Registration, control and management of mutual funds of joint fund schemes. Development monitoring and control of self regulated bodies related to security

dealings. Prohibition of insider’s fraudulent deals treated to securities of security markets. Prohibition of unauthorized trading. Takeovers and management of companies and shares or stock. Spreading investment education Calling information from and inspection, investigation or audit of security issues,

stock exchanges and related parties.


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Carrying out research into and publication of information on security related matters.

Stock Exchange:

Dhaka Stock Exchange (DSE): Dhaka Stock Exchange (DSE), the first bourse of the country was established in 1954. It is regulations and run by its own Board comprising of nine elected councilors and three councilors nominated by the government.

The Major Functions of DSE: Providing listing rules to give assurance that the issuance of a company’s

securities has conformed to legal requirements. Providing disclosure rules. Publication of monthly journal, showing performance of the market as well as

listed companies. Provide floor for transaction. Ensure adequate volume of trade leading to liquidity. Provide reasonable level of fairness in deal making and trading. Registering, monitoring security prices. Provide adequate instruments and technical aids for prompt and smooth trading.

Chittagong Stock Exchange (CSE): Bangladesh government approved Chittagong Stock Exchange s a second bourse of the country on February 12,1995, in order to accelerate industrial growth for overall benefit of the economy. Chittagong Stock Exchange was incorporated as public limited company on April 1, 1995. Since then, it has accomplished some innovative functions.

The Role of Chittagong Stock Exchange: the major role of Chittagong Stock Exchange is to create an effective, efficient and transparent market of international standard to save and invest in Bangladesh in order to facilitate the competent entrepreneurs to raise capital.

Other roles are: Seek explanation from the listed company(s) on any reasonable ground, Delist any company for some specific reasons. Extend time schedule for AGM/EGM. Observe AGM/EGM time schedule. It can take any legal action against the listed companies for violation of listing

regulations or for not fulfilling the continuous listing requirements.

The Investment Corporation of Bangladesh: one of the dominant players of the financial market in Bangladesh is Investment Corporation of Bangladesh, the establishment of Investment Corporation of Bangladesh (ICB) on October 1,1976, was a


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major step in a series of measures undertaken by the government to accelerate the pace of industrialization and develop a well organized and vibrant capital market.

The Major Activities of ICB are: Act as a catalytic agent to encourage and broaden the base of investors. Development the capital market through mobilizing savings. Provide financial assistance in the form of underwriting, issue of securities, IPO

placement, and trustee to debenture issue of IPO facilities over industrial project/ companies.

ICB provides investment counsel to issuers and investors. Participate I government dis-investment programme. Finance joint venture project. Provide credit facilities to invest in IPO and in listed securities. Manage eight close-end mutual funds and an open-end (unit fund) to mob savings

and to support the stock market. CB is also playing a leading role in the stock exchanges. Since inception, ICB

has been playing a dominant role to ensure a healthy and well organized secondary market.

Insurance Companies:Insurance a system of spreading the risk of one to the shoulders of many. It is a contract whereby the insurers, on receipt of a consideration known as premium, agree to indemnify the insured against losses arising out of certain specified unforeseen contingencies or perils insured against. Thus insurance companies provide insurance policies to individuals and firms that reduce the financial burden associated with death, illness and damages to property. They charges premiums in exchange for the insurance that they provide. They invest the funds that are received as premium in different sectors until the funds are needed to cover the insurance claims. Thus through investing the funds in different sectors, they serve as important financial intermediaries.Insurance is not a new business in Bangladesh. Almost a century back, during British rule in India, some insurance companies started transacting business, both life and general, in Bengal. Insurance business gained momentum in East Pakistan during 1947-1971, when 49 insurance companies transacted both life and general insurance schemes. But after the liberation, the government of Bangladesh nationalized insurance industry in 1972 by the Bangladesh Insurance (Nationalization) Order 1972. Through this process all 49 insurance companies and organizations transacting insurance business in the country were placed in the public sector under five corporations. These corporations were: the Jatiya Bima Corporation, Tista Bima Corporation, Karnafuli Bima Corporation, Rupsa Jiban Bima Corporation, and Surma Jiban Bima Corporation. The Jatiya Bima Corporation was an apex corporation only to supervise and control the activities of the other insurance corporations, which were responsible for underwriting. Tista and Karnafuli Bima Corporations were for general insurance and Rupsa and Surma for life insurance. The specialist life companies or the life portion of a composite company joined the Rupsa and Surma corporations while specialist general insurance companies or the general portion of a composite company joined the Tista and Karnafuli corporations. Consequently, on 14 May 1973, a restructuring was made under the Insurance


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Corporations Act 1973. Following the Act, in place of five corporations the government formed two: the Sadharan Bima Corporation for general business, and Jiban Bima Corporation for life business.Up to 2000, the government has given permission to 19 general insurance companies and 10 life insurance companies in the private sector. Insurers of the country now conduct almost all types of general and life insurance, except crop insurance and export credit guarantee insurance, which are available only with the Sadharan Bima Corporation. Some of the insurance companies that are working in Bangladesh are:

General Insurance Company National Insurance Company Bangladesh Co-operative Insurance Ltd. American Life Insurance Company Ltd. (ALICO) United Insurance Company etc.

Role of Insurance Company:Insurance companies are working as important financial intermediaries in the economic development of the country. Some of the role performs by the insurance companies’ are-

They financially supports individuals and firms in case of any financial burden. Reinsure the ins

Leasing Companies:Lease Financing Lease is a contract between the owner and the user of assets for a certain time period during which the second party uses an asset in exchange of making periodic rental payments to the first party without purchasing it. Under lease financing, the lessee regularly pays the fixed lease rent over a period of time at the beginning or at the end of a month, 3 months, 6 months or a year. At the end of the lease contract the asset reverts to the real owner. Legally, a leasing company is defined as one having the business of hiring plants or equipment or of financing their hire by others. The International Finance Corporation promotes leasing as a method of financing industrial development in the developing countries as a part of its capital market development strategies.

The functions of a lease business include lease financing, short-term financing, house building financing, and merchant banking and corporate financing. The leasing business in Bangladesh moved away from regular leasing activities and is now involved in stock-market related activities such as issue management, underwriting, trust management, private placement, portfolio management, and mutual fund operation. Broad capital market operations of the lease financing institutions include bridge financing, corporate counseling, mergers and acquisition, capital restructuring, financial engineering, and lease syndication.

The leasing companies now operating in the country are-


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Industrial Development Leasing Company of Bangladesh United Leasing Company GSP Finance Company (Bangladesh) Uttara Finance and Investments Bay Leasing and Investment Phoenix Leasing Company Prime Finance and Investment International Leasing and Financial Services Union Capital Vanik Bangladesh Peoples Leasing and Financial Services Bangladesh Industrial Finance Company UAE-Bangladesh Investment Company Bangladesh Finance and Investment Company and First Lease International.

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 nationalized 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, specialized financial institutions under government sector also emerged with the objective of mobilizing financial resources and channeling them for short, medium and long-term credit and investments. The market participants had to operate in an


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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.

The growth of capital market in Bangladesh was very slow because of the highly regulated economic regime and market imperfections. Long-term funds required by industrial enterprises were generally provided by government-owned development finance institutions (DFIs) at concessional and directed interest rates. The DFIs are the Bangladesh Shilpa Bank, Bangladesh Shilpa Rin Sangstha, Bangladesh Krishi Bank and the rajshahi krishi unnayan bank. The Bangladesh Small & Cottage Industries Corporation (BSIC) is another institution that provides medium and long-term loans to small industries either directly or through a consortium of commercial banks. Bangladesh house building Finance Corporation provides long-term loans for construction of residential houses. DFIs generate their investible funds through allocations from government sources, credit from international financial institutions, and borrowings from the Bangladesh bank. Co-operative banks in the country provide medium and long-term credit for purchase of land and agricultural equipment.


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61031789 the Role of Financial Market and Institution in the Economic Development of Bangladesh

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Transcript of 61031789 the Role of Financial Market and Institution in the Economic Development of Bangladesh