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The role of Financial Market and Institution in the Economic Development of BangladeshFinancial marketF i n a n c i a l m a r k e t i s c r e a t e d t o s a t i s f y p a r t i c u l a r p r e f e r e n c e s o f m a r k e t p a r t i c i p a n t s . Financial markets transfer funds from those who have excess funs to those who needfunds. That is they facilitate the transfer of funds fromsurplus unittodeficit unit.Because funding needs vary among deficit units, various financial markets have beenestablished. The primary market allows for the issuance of new securities, while thes e c o n d a r y m a r k e t a l l o w s f o r t h e s a l e o f s h o r t t e r m s e c u r i t i e s , w h i l e c a p i t a l m a r k e t s facilitate the sale of long term securities.The main participants of financial market can be classified as households, businesses andgovernment agencies. Those participants who provide funds to the financial markets arecalledsurplus unit. Households are the main type of surplus unit. Participants who usefinancial markets to obtain the funds are called thedeficit unit.

Money market:Money market an integral part of the financial market of a country. It provides a mediumfor the redistribution of short term loan able funds among financial institutions, which perform this function by selling deposits of various types, certificate of deposits anddiscounting of bills, treasury bills etc. The participants in the money market are: thecentral bank, commercial banks, the government, finance companies, contractual savinginstitutions like the pension funds, insurance companies, savings and loan associationsetc. 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 promissorynotes, mutual funds etc.The money market in Bangladesh is in its transitional stage. The various constituent partsof it are in the process of formation, while continuous efforts are being made to developappropriate and adequate instruments to be traded in the market. At present, governmenttreasury bills of

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varying maturity, Bangladesh Bank Bills and Certificates of Deposits etcin limited supply are available for trading in the market. However, the short-term credit1

  The role of Financial Market and Institution in the Economic Development of Bangladeshmarket of the banking sector experienced a tremendous growth since liberation. In 1999,a t o t a l o f a b o u t 6 0 0 0 b r a n c h e s o f t h e s c h e d u l e d b a n k s p r o v i d e d s h o r t - t e r m c r e d i t throughout the country in the form of cash credit, overdraft and demand loan. The rateso f i n t e r e s t a r e d e t e r m i n e d b y t h e i n d i v i d u a l b a n k s a n d a s s u c h t h e m a r k e t i s q u i t e competitive. Each bank maintains its liquidity and supply of fund is arranged throughoutthe country with the help of an interconnected network of branches. Bangladesh bank ascentral bank of the country exercises its role in this market through the use of instrumentss u c h a s b a n k r a t e , o p e n m a r k e t o p e r a t i o n s a n d c h a n g e s i n s t a t u t o r y l i q u i d i t y r e q u i r e m e n t s . T h e m o n e y m a r k e t o f B a n g l a d e s h r e a c h e d i t s p r e s e n t p h a s e t h r o u g h 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 segmentwas a relatively smaller part. All financial institutions of the country were nationalizedafter liberation. The growth and evolution of money market in the country took placeduring the period from 1971 to the early eighties under various sets of interventionistrules and regulations of the government and as such it could hardly reflect the actualmarket conditions. However, in this period a vast financial superstructure with largenetwork of commercial bank branches was established in the country. Simultaneously,s p e c i a l i z e d f i n a n c i a l i n s t i t u t i o n s u n d e r g o v e r n m e n t s e c t o r a l s o e m e r g e d w i t h t h e objective of mobilizing financial resources and channeling them for short, medium andl o n g - t e r m c r e d i t a n d i n v e s t m e n t s . T h e m a r k e t p a r t i c i p a n t s h a d t o o p e r a t e i n a n 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 BangladeshBank, the activities of call money market remained insignificant.Capital market:Capital Market the market, or realistically, the group of interrelated markets, in whichcapital in financial form is lent or borrowed for medium and

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long term and, in cases suchas equities, for unspecified periods.The capital markets, in distinction from other parts of the financial market that is, themoney markets, are those for long-term government securities, corporate bonds, stocks,municipal bonds issued by state and local government units, and mortgages. Industry andc o m m e r c e a s w e l l a s g o v e r n m e n t a n d l o c a l a u t h o r i t i e s r a i s e c a p i t a l f r o m t h e c a p i t a l m a r k e t w h i c h p e r f o r m s s e v e r a l i m p o r t a n t f u n c t i o n s i n t h e p r o c e s s o f e c o n o m i c development. Most important among them are the promotion of savings and investmenta n d e f f i c i e n t a l l o c a t i o n o f f u n d s a m o n g c o m p e t i n g u s e s . P a r t i c i p a n t s i n t h e c a p i t a l markets are many. They include the commercial banks, saving and loan associations,c r e d i t u n i o n s , m u t u a l s a v i n g b a n k s , f i n a n c e h o u s e s , f i n a n c e c o m p a n i e s , m e r c h a n t  bankers, discount houses, venture capital companies, leasing companies, investment banks, investment companies, investment clubs, pension funds, stock exchanges, securitycompanies, underwriters, portfolio-managers, and insurance companies

T h e g r o w t h o f c a p i t a l m a r k e t i n B a n g l a d e s h w a s v e r y s l o w b e c a u s e o f t h e h i g h l y r e g u l a t e d e c o n o m i c r e g i m e a n d m a r k e t i m p e r f e c t i o n s . L o n g - t e r m f u n d s r e q u i r e d b y i n d u s t r i a l e n t e r p r i s e s w e r e g e n e r a l l y p r o v i d e d b y g o v e r n m e n t - o w n e d d e v e l o p m e n t finance institutions (DFIs) at concessional and directed interest rates. The DFIs are theBangladesh Shilpa Bank, Bangladesh Shilpa Rin Sangstha, Bangladesh Krishi Bank andt h e r a j s h a h i k r i s h i u n n a y a n b a n k . T h e B a n g l a d e s h S m a l l & C o t t a g e I n d u s t r i e s Corporation (BSIC) is another institution that provides medium and long-term loans tosmall industries either directly or through a consortium of commercial banks. Bangladeshh o u s e b u i l d i n g F i n a n c e C o r p o r a t i o n p r o v i d e s l o n g - t e r m l o a n s f o r c o n s t r u c t i o n o f   r e s i d e n t i a l h o u s e s . D F I s g e n e r a t e t h e i r i n v e s t i b l e f u n d s t h r o u g h a l l o c a t i o n s f r o m government sources, credit from international financial institutions, and borrowings fromthe Bangladesh bank. Co-operative banks in the country provide medium and long-termcredit for purchase of land and agricultural equipment.Role financial market in economic development:Role of depository institutions:A m a j o r t y p e o f f i n a n c i a l i n t e r m e d i a r y i s t h e d e p o s i t o r y i n s t i t u t i o n s , w h i c h a c c e p t s d e p o s i t s f r o m s u r p l u s u n i t s a n d p r o v i d e s c r e d i t t o d e f i c i t u n i t s t h r o u g h l o a n s a n d  purchases of

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securities. Depository institutions are popular financial institutions for thefollowing reasons: •T h e y o f f e r d e p o s i t a c c o u n t s t h a t c a n a c c o m m o d a t e t h e a m o u n t a n d l i q u i d i t y characteristics desired by most surplus units.•They repackage funds received from deposits to provide loans of the size andmaturity desired by the deficit units.•They accept the risk on loan provided.•T h e y h a v e m o r e e x p e r t i s e t h a n i n d i v i d u a l s u r p l u s u n i t s i n e v a l u a t i n g t h e creditworthiness of deficit units.•They diversify their loans among numerous deficit units and therefore can absorbdefaulted 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, 30domestic private banks, 10 foreign banks and 28 non-bank financial institutions. Thefinancial system also includes insurance companies, stock exchanges and co-operative  banks. As the central bank, Bangladesh Bank has legal authority to supervise and regulatea l l t h e b a n k s . A l t h o u g h t h e f i n a n c i a l s y s t e m i n c l u d e s o t h e r p l a y e r s l i k e i n s u r a n c e c o m p a n i e s , s t o c k e x c h a n g e s a n d c o -o p e r a t i v e b a n k s , b u t B a n g l a d e s h B a n k d o e s n ’ tregulate these institutions. Each of the institution is regulated by different authorities. Thei n s u r a n c e c o m p a n i e s a r e r e g u l a t e d b y M i n i s t r y o f C o m m e r c e ; S t o c k e x c h a n g e s a r e 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 i l l iquid investment p r o j e c t s i n t o l i q u i d t r a d a b l e s e c u r i t i e s . F i n a n c i a l i n s t i t u t i o n s a c q u i r e a n d p r o c e s s i n f o r m a t i o n a b o u t i n v e s t m e n t p r o j e c t s o n b e h a l f o f t h e i r d e p o s i t o r s , w h i l e p r i c e s i n financial markets reflect different information and

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opinions on new ideas and projects.While market participants have developed techniques to overcome market frictions, theg o v e r n m e n t h a s a n a c t i v e r o l e t o p l a y i n p r o v i d i n g t h e “ i n f r a s t r u c t u r e ” f o r f i n a n c i a l service provision, i .e. the rules within which firms and household contract with each other and perform financial transactions.The banking system at independence consisted of two branch offices of the former StateBank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There werefourteen smaller commercial banks. Virtually all banking services were concentrated inu r b a n a r e a s . T h e n e w l y i n d e p e n d e n t g o v e r n m e n t i m m e d i a t e l y d e s i g n a t e d t h e D h a k a branch of the State Bank of Pakistan as the central bank and renamed it the

BangladeshBank. 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 systemand proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also n a t i o n a l i z e d a n d b e c a m e a s o u r c e o f p o t e n t i a l i n v e s t m e n t f u n d s . C o o p e r a t i v e c r e d i t systems and postal savings offices handled service to small individual and rural accounts.The new banking system succeeded in establishing reasonably efficient procedures for m a n a g i n g c r e d i t a n d f o r e i g n e x c h a n g e . T h e p r i m a r y f u n c t i o n o f t h e c r e d i t s y s t e m

hroughout the 1970s was to finance trade and the public sector, which together absorbed75 percent of total advances.The government's encouragement during the late 1970s and early 1980s of agriculturaldevelopment and private industry brought changes in lending strategies. Managed by theBangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmersa n d f i s h e r m e n d r a m a t i c a l l y e x p a n d e d . T h e n u m b e r o f r u r a l b a n k b r a n c h e s d o u b l e d  between 1977 and 1985, to more than 3,330.

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Denationalization and private industrialg r o w t h l e d t h e B a n g l a d e s h B a n k a n d t h e W o r l d B a n k t o f o c u s t h e i r l e n d i n g o n t h e 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 FY1987, 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. BangladeshBank 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 privatecommercial banks, nine foreign multinational banks and some specialized banks. The  Nobel-prize winning Grameen Bank is a specialized micro-finance institution, whichr e v o l u t i o n i z e d t h e c o n c e p t o f m i c r o - c r e d i t a n d c o n t r i b u t e d g r e a t l y t o w a r d s p o v e r t y reduction and the empowerment of women in Bangladesh.•Central Bank • Nationalized Commercial Banks•Private Commercial Banks•Foreign Banks•Specialized Banks•References•External linksCentral Bank: Bangladesh Bank Persuant to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized theDhaka branch of the State Bank of Pakistan as the central bank of the country, and namedit Bangladesh Bank with retrospective effect from 16 December, 1971. Nationalized Commercial Banks:T h e b a n k i n g s y s t e m o f B a n g l a d e s h i s d o m i n a t e d b y t h e 4 N a t i o n a l i z e d C o m m e r c i a l 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

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•Sonali Bank •Janata Bank •Agrani Bank •Rupali Bank  Private Commercial Banks:P r i v a t e b a n k s a r e t h e h i g h e s t g r o w t h s e c t o r d u e t o t h e d i s m a l p e r f o r m a n c e s o f   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•Prime Bank Limited

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•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

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•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 UnnayanBank) were created to meet the credit needs of the agricultural sector while the other two( B a n g l a d e s h S h i l p a B a n k ( B S B ) & B a n g l a d e s h S h i l p a R i n S a n g t h a ( B S R S ) a r e f o r   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-opRoles of the Regulatory institutions in the Capital Market of Bangladesh:In order to stimulate rapid economic growth of a country particularly throughindustrialization and mobilization of domestic savings, appropriate institutions in thecapital market are essential. The capital market in Bangladesh is governed by thefollowing institutions.The Security and Exchange Commission (SEC):

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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 tocontrol the capital market but also to give protection to investors. Capital market isregulated by the Security and Exchange organization Act 1993 and Companies Act 1994and 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 tothe 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 securitydealings.•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.•Carrying out research into and publication of information on security relatedmatters.Stock Exchange: Dhaka Stock Exchange (DSE): Dhaka Stock Exchange (DSE), the first bourse of thecountry 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:•

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Providing listing rules to give assurance that the issuance of a company’ssecurities has conformed to legal requirements.•Providing disclosure rules.•Publication of monthly journal, showing performance of the market as well aslisted 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 accelerateindustrial growth for overall benefit of the economy. Chittagong Stock Exchange wasincorporated as public limited company on April 1, 1995. Since then, it has accomplishedsome innovative functions.The Role of Chittagong Stock Exchange:the major role of Chittagong Stock Exchangeis to create an effective, efficient and transparent market of international standard to saveand invest in Bangladesh in order to facilitate the competent entrepreneurs to raisecapital.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 listingregulations or for not fulfilling the continuous listing requirements.

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The Investment Corporation of Bangladesh:one of the dominant players of thefinancial market in Bangladesh is Investment Corporation of Bangladesh, theestablishment of Investment Corporation of Bangladesh (ICB) on October 1,1976, was amajor 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 savingsand to support the stock market.•CB is also playing a leading role in the stock exchanges. Since inception, ICBhas been playing a dominant role to ensure a healthy and well organizedsecondary market.Insurance Companies:Insurance a system of spreading the risk of one to the shoulders of many. It is a contractw h e r e b y t h e i n s u r e r s , o n r e c e i p t o f a c o n s i d e r a t i o n k n o w n a s p r e m i u m , a g r e e t o i n d e m n i f y t h e i n s u r e d a g a i n s t l o s s e s a r i s i n g o u t o f c e r t a i n s p e c i f i e d u n f o r e s e e n 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 insurancethat they provide. They invest the funds that are

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received as premium in different sectorsuntil the funds are needed to cover the insurance claims. Thus through investing the fundsin different sectors, they serve as important financial intermediaries.Insurance is not a new business in Bangladesh. Almost a century back, during British rulein India, some insurance companies started transacting business, both life and general, inBengal. Insurance business gained momentum in East Pakistan during 1947-1971, when49 insurance companies transacted both life and general insurance schemes. But after theliberation, the government of Bangladesh nationalized insurance industry in 1972 by theB a n g l a d e s h I n s u r a n c e ( N a t i o n a l i z a t i o n ) O r d e r 1 9 7 2 . T h r o u g h t h i s p r o c e s s a l l 4 9 insurance companies and organizations transacting insurance business in the countrywere placed in the public sector under five corporations. These corporations were: theJatiya Bima Corporation, Tista Bima Corporation, Karnafuli Bima Corporation, RupsaJ i b a n B i m a C o r p o r a t i o n , a n d S u r m a J i b a n B i m a C o r p o r a t i o n . T h e J a t i y a B i m a Corporation was an apex corporation only to supervise and control the activities of theo t h e r i n s u r a n c e c o r p o r a t i o n s , w h i c h w e r e r e s p o n s i b l e f o r u n d e r w r i t i n g . T i s t a a n d Karnafuli Bima Corporations were for general insurance and Rupsa and Surma for lifei n s u r a n c e . T h e s p e c i a l i s t l i f e c o m p a n i e s o r t h e l i f e p o r t i o n o f a c o m p o s i t e c o m p a n yjoined the Rupsa and Surma corporations while specialist general insurance companies or the general portion of a composite company joined the Tista and Karnafuli corporations.C o n s e q u e n t l y , o n 1 4 M a y 1 9 7 3 , a r e s t r u c t u r i n g w a s m a d e u n d e r t h e I n s u r a n c e Corporations Act 1973. Following the Act, in place of five corporations the governmentf o r m e d t w o : t h e S a d h a r a n B i m a C o r p o r a t i o n f o r g e n e r a l b u s i n e s s , a n d J i b a n B i m a Corporation for life business.Up to 2000, the government has given permission to 19 general insurance companies and10 life insurance companies in the private sector. Insurers of the country now conductalmost all types of general and life insurance, except crop insurance and export creditg u a r a n t e e i n s u r a n c e , w h i c h a r e a v a i l a b l e o n l y w i t h t h e S a d h a r a n B i m a C o r p o r a t i o n . Some of the insurance companies that are working in Bangladesh are:•General Insurance Company• National Insurance Company•Bangladesh Co-operative Insurance Ltd.

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•American Life Insurance Company Ltd. (ALICO)•United Insurance Company etc.Role of Insurance Company:Insurance companies are working as important financial intermediaries in the economicdevelopment 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 insLeasing Companies:Lease Financing Lease is a contract between the owner and the user of assets for a certaintime period during which the second party uses an asset in exchange of making periodicrental payments to the first party without purchasing it. Under lease financing, the lesseeregularly pays the fixed lease rent over a period of time at the beginning or at the end of amonth, 3 months, 6 months or a year. At the end of the lease contract the asset reverts tothe real owner.L e g a l l y , a l e a s i n g c o m p a n y i s d e f i n e d a s o n e h a v i n g t h e b u s i n e s s o f h i r i n g p l a n t s o r   equipment or of financing their hire by others. The International Finance Corporation promotes leasing as a method of financing industrial development in the developingcountries 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 businessin Bangladesh moved away from regular leasing activities and is now involved in stock-market related activities such as issue management, underwriting, trust management,  p r i v a t e p l a c e m e n t , p o r t f o l i o m a n a g e m e n t , a n d m u t u a l f u n d o p e r a t i o n . B r o a d c a p i t a l market operations of the lease financing institutions include bridge financing, corporatecounseling, mergers and acquisition, capital restructuring, financial engineering, and lease syndicationThe leasing companies now operating in the country are-•Industrial Development Leasing Company of Bangladesh•United Leasing Company•GSP Finance Company (Bangladesh)

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•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 Internationa