MONEY MARKET OF BANGLADESH

4th October, 2012

Money Market of Bangladesh

Department of Banking MBA 13TH Batch University of Dhaka

Corse Name: Islamic Economics Corse Code: B524 Term Paper Topic: The money market of Bangladesh

Professor. M. Muzahidul Islam Course Teacher Department Of Banking

Submitted By
Name S. M. Mohaimen NasruFuad Tarikul Islam Mehedi Hassan Zobyad Ahmed Roles 136 169 163 162 137

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Money Market of Bangladesh

This report focuses on the situation of the money market of Bangladesh and summarizes there financial status in a statistical manner. It is attempted to discuss some of the main problems the money market and recommended some solutions as well. So we therefore thank you sir for giving me this topic. It has really given us a wide view the money market of Bangladesh. Thank you sir.

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Money Market of Bangladesh

4th October, 2012

To The Course Teacher Department Of Banking University of Dhaka Subject: Prayer for permission to submit the term paper on Money Market of

Bangladesh.
Sir, With due respect and humble submission I would like to present you the term paper on Money Market of Bangladesh. Surely it has been a great learning experience for us. I got the chance to implement my gathered knowledge on the real world and saw how the money market of Bangladesh works and what are its limitations. So with great honor I am asking for your permission to submit you this term paper. Yours sincerely

On behalf of the group S. M. Mohaimen MBA 13th Batch Roll- 136, Serial-15 Department of Banking University Of Dhaka

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Money Market of Bangladesh

The Bangladesh economy is within the mainstream of the continuously changing global financial system. Domestic as well as international trade is also characterizes Bangladesh economy. Hence a financial system has developed here consisting mainly of the capital market and the money market. For any underdeveloped country the existence of a well-functioning money market is of paramount importance. The money market currently existing has also developed due to certain needs. In general these needs can be termed as need for short term liquidity within our financial system, to carry out the day to day economic activities and obviously to meet and match need for short term lending and borrowing of the participants within the financial system. T-bill market is by far the largest component of the money market in Bangladesh

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Money Market of Bangladesh

Items Introduction T- bill progress in Bangladesh Current Scenario of Money market in Bangladesh Historical Trends Problems of the Money market in Bangladesh Recommendation and Solutions Conclusion

Pages 6-7 8-12 13-18 19- 22 23-26 27 28

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Money Market of Bangladesh

Introduction
The Bangladesh economy is within the mainstream of the continuously changing global financial system. Domestic as well as international trade also characterizes Bangladesh economy. Hence a financial system has developed here consisting mainly of the capital and the money market. As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter, is wholesale. Various instruments exist, such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities. It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure. For any underdevelopment country the existence of a well-functioning money market is of paramount importance. The money market currently existing has also developed due to certain needs. In general, these needs can be termed as need for short term liquidity within our financial system, to carry out the day to day economic activities and obviously to meet and match need for short term lending and borrowing of the participants within the financial system. T-bill market is by far the largest component of the money market in Bangladesh. Capital markets are essentially about matching the needs of investors with those that need capital for development. Debt markets are an extremely effective mechanism for matching the long term needs of savers with those of entrepreneurs. Like emerging-market countries around the world, Bangladesh could benefit from having a local-currency, fixed-income securities market. At present, its main fixedincome financial products are bank deposits, bank loans, government savings certificates, term loans, treasury bills, and government bonds and corporate debt (syndicated loans, private placement, and debentures). But in general the corporate debt market is still very small compared with the equity market. For any underdevelopment country the existence of a well functioning money market is of paramount importance. The money market currently existing has also developed due to certain needs. In general, these needs can be termed as need for short term liquidity within our financial system, to carry out the day to day economic activities and obviously to meet and match need for short term lending and borrowing of the participants within the financial system. T-bill market is by far the largest component of the money market in Bangladesh. Capital markets are essentially about matching the needs of investors with those that need capital for development. Debt markets are an extremely effective mechanism for matching the long term needs of savers with those of entrepreneurs. Like emerging-market countries around the world, Bangladesh could benefit from having a local-currency, fixed-income securities market. At present, its main fixedincome financial products are bank deposits, bank loans, government savings certificates, term loans, treasury
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Money Market of Bangladesh

bills, and government bonds and corporate debt (syndicated loans, private placement, and debentures). But in general the corporate debt market is still very small compared with the equity market.

Money market securities Money market securities are the debt securities that have a maturity one year or less. They generally have a relatively high degree of liquidity. Money market securities tend to have a low expected return but also a low degree of risk. Various types of money market securities are listed below. Money Market Issued by Securities Federal Treasury bills Government Retail certificates deposit (CDs) Common Investors Households, firms and financial institutions Banks and saving Households of institutions Common Secondary Maturities Market Activity 13 weeks, 26 High weeks. 1 year
7 days to 5 years Nonexistent or longer

Large banks and Firms Negotiable certificates of saving Institutions deposit (NCDs)

2 weeks to 1 year

Moderate

Commercial paper

Eurodollar Deposit Bankers acceptances

Bank holding Firms companies, finance companies and other companies Banks located Firms outside the government country Banks ( exporting Firms firm can sell the acceptance at a discount obtain funds) Depository Depository institutions institutions Firms financial institutions and Firms financial institutions

1 days to 270 Low days

and 1 day to 1 year

Nonexistent

30 days to 270 High days

Federal Funds Repurchase agreements

1 day to 7 days and 1 day to 15 days

Nonexistent Nonexistent

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Money Market of Bangladesh

T-Bill Progress in Bangladesh

Issuer Bangladesh Bank (BB), the central bank of Bangladesh, operates throughout the country with its nine branches. Government receipts and payments are overseen and managed by BANGLADESH BANK. Where there is no BANGLADESH BANK branch but transactions of government occur, different branches of Sonali Bank (SB) are assigned to take part in these transactions on behalf of BANGLADESH BANK. These branches are known as 'Chest Branches'. In a district, there may be one chest and some sub-chests. BANGLADESH BANK directly monitors Chest branches. This function is known as 'Feed'. The Bangladesh government finances its expenditures in excess of tax receipts through the sale of debt obligations. Currently, the total par value of outstanding Treasury bills stood at about Taka 22000 crore. Types Treasury bills are designated by the number of days to their maturity. There are six types of T-bills that prevail in Bangladesh. These are a) b) c) d) e) f) 28 days T-bill 91 days T-bill 182 days T-bill, 364 days T-bill 2 years T-bill 5 years T-bill

Participants The market for Bangladesh Treasury bills has a complex structure and involves numerous participants-Ministry of Finance, Bangladesh Bank, government securities dealers and brokers, and other holders of Treasury securities. Who and How Can Invest Until 2003, there was no secondary market for treasury securities. Any investor (institution or individual), who maintains a current account with Bangladesh Bank, can invest in T-bills through primary market auctions. Auction is held on every Sunday at 11 a.m. at the Motijheel Branch of BB. If Sunday is a holiday, then the last working day before Sunday is used. All the investors submit their bid unless otherwise pension or provident fund. After receiving the bid, the auction committee decides how much T-bills will be offloaded. There is a high-powered committee to oversee the treasury functions; which includes seven members.

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Money Market of Bangladesh

Schedule for Issuance Marketable Treasury securities are issued through regularly scheduled auctions in what is called the primary market. The process importantly involves the Bangladesh Bank, which serve as conduits for the auctions. Selling System Treasury bills are sold on a discount basis, which in simple terms means that we have to pay for the bills less the interest receivable during the term of the bill and receive the face value of the bill at the end of the period. Treasury bills are not listed at the Stock Exchange. If one wanted to exit before maturity, rediscounting isn't possible at the Central Bank, rather he or she may take part in the Repo auction. Secondary Market for T-Bill Until 2003, there was no secondary market for T-bills transaction in Bangladesh. Government had decided to introduce the secondary T-bill market with a vision of broadening the government securities market. World's leading financial institution Citigroup's subsidiary Citibank, N.A. and local Prime Bank Limited had taken part in the first secondary transaction of T-bills in Bangladesh that year. Citibank, N.A. had sold a T-bill of 2 years maturity bearing Taka 3 crore of face value to Prime bank. BANGLADESH BANK had taken necessary steps to assist this transaction. This was regarded the first secondary T-bill transaction in the country. a. Primary Dealers: Bangladesh Bank has selected eight banks and one non-bank financial institution as primary dealers (PDs) to handle secondary transactions of T-bills and other government bonds. The eight banks are Sonali Bank, Janata Bank, Agrani Bank, Prime Bank Ltd, Uttara Bank Ltd, South-East Bank Ltd, Jamuna Bank Ltd, and NCCBL, and the only NBFI is International Leasing and Financial Services Ltd. The inter-bank Repo is one kind of secondary market for T-bills and government securities, which was introduced from July 27, 2003. The selected banks and the NBFI have already ended all procedural eligibility requirements for being appointed and start operating as secondary bond market dealers. The BANGLADESH BANK earlier invited applications from all scheduled banks and financial institutions and directed interested parties to drop applications to the FOREX Reserve and Treasury Management Department of the central bank latest by August 21, 2003. A total of 18 commercial banks and 1 non-bank financial institution filed their applications for receiving PD licenses during the stipulated time. The central bank earlier issued a guideline for the PDs with a view to activating and streamlining the country's secondary bond market. Under the guideline, the PDs will subscribe and underwrite primary issues and make secondary trading deals with 2-way price quotes. A PD won't short sell any particular issue and won't carry a short position in secondary dealings. The PDs won't act as inter-bank or inter-dealer brokers; it was specified in the guidelines.

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Money Market of Bangladesh

Procedure to allot T-bills To foster liquidity in the market, the Treasury issues securities consistently and predictably through a regular schedule of auctions. In Bangladesh, Multiple-units Auction Model is followed. Two types of bids may be submitted at the auction: a) Competitive bids b) Non-competitive bids Competitive bids specify both the quantity of the security sought and a yield. If the specified yield is within the range accepted at the auction, the bidder is awarded the entire quantity sought (unless the specified yield is the highest rate accepted, in which case the bidder is awarded a prorated portion of the bid. Noncompetitive bids specify only the quantity of the security sought. Let us discuss the procedure that BANGLADESH BANK follows to allot T-bills to competitive and non-competitive bidders through T-bill auctions. In Bangladesh, T-bills are quoted on a 364-day discount basis. We define the bank discount rate (BDR) as BDR = D/M * 364/t, where t is the number of days from settlement to maturity, and D is the discount from par, D = M - P, M being the par or maturity value, and P being the price. Hence the discount from par is given by D = BDR x M x t/364, while P = M - D. Example: The WSJ on Monday, Feb 7, 1994 gives the ask quote on the May 05, '94 T-bill as 3.21%. (If we were to buy the bill, we would buy at the ask). The quote is for Friday, February 4. The market convention used in the WSJ is that two days are needed for settlement; under this convention settlement would take place on Tuesday, Feb 8. There are 86 days between Feb 8 and May 5. The discount on a $10,000 par bill is D = 3.21% x 10, 000 x86/364 = 75.84, and the price is P = 10, 000 - 75.84 = 9924.16. Conversely, assume the price of the T-bill were $9,900. The discount amounts to D = 10, 000 - 9, 900 = 100, and the bank-discount rate equals BDR =100/10000 * 364/86 = 4.23%.

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Money Market of Bangladesh

T-BILLYeild The values of Treasury securities are often summarized by the yield curve, which plots the yields of all non-callable securities against their maturities. An example of the yield curve on August 27, 2009 (Auction no #255) is given below. This curve has an upward-sloping, concave shape. Securities having maturities of less than five years are highly concentrated, because shorter-term securities are auctioned more frequently and because many previously issued longer-term securities fall in that maturity range. Yield Volatility of T-bills in Bangladesh (As of 27-07-2010 Auction no.255) T-Bill Yield 28 days 91 days 28 days 91 days 182 days 364 days 2 years 5 years 6.84% 8.52% 9.15% 9.76% 10.62% 10.69% -1.68% 0.63% 0.61% 0.86% 0.07%

182 days

364 days

2 years

5 years

-0.63% 0.61% 0.86% 0.07%

-0.61% 0.86% 0.07%

-0.86% 0.07%

-0.07%

--

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 91Yield dayu T-bill is higher than that 12.00% of 28-day T-bill and so on. Here the yield spread between the 91-day T-bills and 28-day T-bills is 1.68%, which is the maximum than those of others. The reason is that the demand of T-bills gradually decreases with term to maturity.
10.00% 8.00% 6.00% 4.00% 2.00% 0.00%

Yield 28 91 days days 182 364 2 days days 5 years years

Source:Bangladeshbank

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Money Market of Bangladesh

Call Money Rate is the interest rate banks charge a broker for the funding of loans to investors who buy on margin. This is also known as broker loan rate. In the call money market, participants enter into lending and borrowing for overnight. The transaction takes place due to immediate liquidity need. This may arise from various sources like temporary inability to meet the mandatory 4% cash reserve requirement (CRR) demanded by the central bank, sudden shortage of fund to meet the liabilities 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. It is quite affected by certain seasonality. During the Eid especially when there is a surge of deposit withdrawals, the banks find themselves in immediate liquidity crisis. There is a direct and positive relationship between T-bill rate and call money rate. When there is a seasonal cash crisis, banks rush to the call money market. In this situation, call money rate peaks. Naturally investors of T-bills are not available at that time unless otherwise they are offered higher yield rate. Difference with the basic definition However, in Bangladesh, two and five year securities are also regarded as T-bills since they are zero coupon securities. REPO Repo is a commitment of the seller to the buyer to buy back the instrument as and when the buyer intends to sell. This is an arrangement between seller and buyer. Earlier in Bangladesh, there was a premature encashment facility for the investors of T-bills. Premature encashment facility is a procedure of buying back the security when cash is needed giving amount and accrued interest. This is also called discounting the T-bills. Currently, instead of Discounting Window, Repo facility is opened for the investors. Here instrument isn't required, rather it is lined. Investors can borrow either full or partial amount against the bill. If an investor borrows 100% against the bill, then maximum 95% discounted value will be provided. There is also a Repo auction that is held side by side of the T-bill auction. The yield rate of Repo is determined through bid offer and bid acceptance, and this yield is higher than the yield of T-bill. For example, let us assume that, T-bill yield = 8%, Repo yield = 9%, then, Net yield = 1%. To whom Repo facility will be provided is dependent upon the liquidity in the market. Repo auction is held for 1 and 7 days tenure. Reverse Repo When a bank or financial institution has excess liquidity, it can deposit it to Bangladesh bank. This procedure is frequently known as Reverse Repo. There is also a Reverse Repo auction that is held side by side of the T-bill auction. Reverse Repo auction is also held for 1 and 7 days tenure.

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Money Market of Bangladesh

Current scenario of Money market in Bangladesh

Bangladesh Bank (BB) remained proactive to ensure domestic resource mobilization, generation of savings and investments in productive sectors so that country's most profitable and efficient projects are systematically and continuously directed to the most productive sources of future growth. To achieve greater efficiency, stability and transparency in the financial sector, the ongoing reform was continued in FY11. However, the short-term and long-term credit markets of the country experienced a tremendous growth in FY11 due to expansionary economic activities of the country. With the increased demand for domestic credit as the economy paced up to the expected buoyant economic growth coupled with heavy outflows for imports and other external payments, put the banks into liquidity pressure from December 2010. Moreover, unauthorized investment of the banks in the unproductive sector also played role to put the banks into liquidity pressure. Despite the uptrend in inflationary pressure Bangladesh Bank has been providing liquidity facility to the banks in respect of increased demand in the money market as well as taking supervisory and credit policies to rectify unbalanced lending practices in banks including monitoring and enforcing of prudent advance-deposit ratios and good forward looking liquidity management and of regulatory ceilings on capital market exposures, tightening loan monitoring requirements to discourage diversion of credit to unauthorised and unproductive uses. Lending interest rate caps imposed earlier in the backdrop of global slowdown being no longer tenable in the changed context of high and rising demand, phase out of these caps was initiated in March 2011, starting with loans other than industrial term loans and loans for export, agriculture and essential imports. Call Money Market FY11 The banking sector remained steady throughout the year. Moreover, BB provided repo and special liquidity support to the primary dealers against the holding of treasury bills and bonds in order to fine tune the liquidity market situation. As a result, the weighted average interest rate in the call money market moved within the range of 3.3 percent to 33.5 percent during FY11 (Table- Volume of trade & weighted average interest rate in call money market and chart ) which was ranged from 0.7 percent to 6.6 percent during FY10. During FY11 the average volume of trade in the call money market increased to Taka 698.7 billion which was 2.8 percent higher than that of FY10. The volume of transaction and the weighted average interest rate in the call money market showed mixed trend during FY11. Repo Auction

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Money Market of Bangladesh

Table: Volume of trade & weighted average interest rate in call money market

BB has been proactive in liquidity management through repo auctions. The repo injects money in the system and provides banks with necessary funds to maintain their liquidity. While pursuing a cautious monetary policy, Bangladesh Bank kept this window open for the banks to maintain the market liquidity at a desired level. In FY11, the banks were provided a reasonable amount of the repo funds through daily repo auction. In order to achieve monetary policy objectives BB hiked 5 times the repo and reverse repo rate totally 225 basis points during FY11. Repo and reverse repo rate was fixed at 6.8 percent and 4.8 percent respectively as on end June 2011.

A total of 184 repo auctions were held during FY11. In all, 3764 bids for Taka 34255.2 billion were received, of which 3739 bids for a total of Taka 8032.1 billion were accepted. During FY10 bids for Taka 877.8 billion were received, of which Taka 866.1 billion was accepted. The range of interest rate against the accepted bids was 4.5-8.8 percent per annum in FY11 as against 4.5-8.5 percent per annum in the previous year. Table: Repo auction

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Reverse Repo Auctions FY11

Bangladesh Bank uses the reverse repo auctions to maintain intended level of liquidity in the market and to keep up monetary aggregates on track. In FY11, reasonable amount of the received bids were accepted to maintain liquidity position comfortable. A total of 68 daily reverse repo auctions were held in FY11. In all, 240 bids of 1-2 day and 3-7 day tenors for a total of Taka 763.2 billion were received, of which 203 bids amounting to Taka 684.8 billion were accepted. During FY10 bids for Taka 1003.3 billion were received, of which Taka 658.4 billion were accepted. The interest rate range against the accepted bids was 2.5-3.5 percent per annum during FY11 (Table: reverse repo auction). Table: reverse repo auction

Operations of Bangladesh Bank Bill revived again during FY09 and continued in FY11 as a tool of Open Market Operation (OMO) in order to maintain liquidity of the banking system more effectively. A total of 15 bids amounting to Taka 22.0 billion were received, of which 10 bids amounting to Taka 15.8 billion were accepted. The weighted average yield-to-maturity against the accepted bids ranged from 2.5 percent to 3.5 percent during FY11 (Table: Bangladesh Bank Bill FY 11).

Table: Bangladesh Bank Bill FY 11

Government Securities Market Government Treasury Bills Auctions Treasury bills and T-bonds are short-term and long term obligations issued by Bangladesh Bank on behalf of the government of Bangladesh. Pro-rata partial allotments are made for bids at the cut-offyield. 15 primary dealers (PDs) are acted as underwriters and market makers with commitments to bid in
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Money Market of Bangladesh

auctions. Weekly auctions of 91-day, 182-day and 364-day treasury bills continued to be the main instruments for monetary policy management during the year under report. The objectives for issuing these securities are twofold. The first is to provide a mechanism for financing government deficit at a low cost and to use as a mopping-up instrument of excess liquidity prevailing in the market. Table : Auctions of government treasury bill

The results of treasury bills auction in FY11 are summarized at (Table: Auctions of government treasury bill.) The auctions of 91-day, 182-day and 364-day tenor bills were mostly over-subscribed with bids, whereas the volume of devolvement to Bangladesh Bank/PDs decreased. The cut-offrate of most of the treasury bills increased during FY11.

Depending on the liquidity conditions in the money market, the cut off yields of treasury bills of different maturities varied within wide ranges. The yields for various tenors as of end June 2011 depicted somewhat a moderate range than the yields as of end June 2010 (Table: Auctions of government treasury bill). A total of 1051 bids amounting to Taka 224.8 billion were received, of which 666 bids amounting to Taka 206.3 billion (including Taka 53.3 billion as devolved amount) were accepted. The weighted average yield-to-maturity against the accepted bids ranged from 2.43 percent to 7.55 percent. In FY10 a total of 1476 bids amounting to Taka 417.0 billion were received, of which Taka 210.8 billion was accepted.

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Money Market of Bangladesh

Bangladesh Government Treasury Bonds (BGTBs) Auctions

Treasury Bonds bearing half yearly interest coupons, with tenors of 5-year, 10-year, 15-year and 20year are auctioned in every month. 48 auctions of these instruments were held in FY11. A total of 742 bids for Taka 151.2 billion were received and 445 bids for Taka 142.7 billion were accepted, of which Taka 42.0 billion was devolved on BB/PDs. The amount of outstanding bonds stood at Taka 534.0 billion at end June 2011 as against Taka 396.3 billion at end June 2010. The outstanding amount of bonds at the end of June 2011 was 34.8 percent higher than that of the previous year. Table: Auctions of Bangladesh Government Treasury Bonds

The coupon rate for the treasury bonds ranged from 7.88 percent to 9.65 percent in FY11. It was found that the coupon rates on all tenors of treasury bonds were increased during the last year. The movements of the weighted average yield-tomaturity of all the treasury bonds are depicted in the chart. It is mentionable that in FY10, bids for a total of Taka 218.5 billion were received and Taka 87.9 billion was accepted of which Taka 39.41 billion was devolved on BB/PDs. The overall weighted average yield-to-maturity ranged from 7.47 percent to 9.42 percent in FY10.

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Bangladesh Government Islamic Investment Bond (Islamic Bond) The operations of 6-month, 1-year and 2-year Bangladesh Government Islamic Investment Bond (Islamic Bond) which introduced in FY05 continued in FY11. This Government Bond is operated in accordance with the rules of Islamic Shariah. As per the rules, Bangladeshi institutions, individuals and non-resident Bangladeshis who agree to share profit or loss in line with IslamiShariah may buy this bond. As of end June 2011 the total sale against this bond amounted to Taka 25.3 billion while balance of total amount of financing stood at Taka 22.8 billion and the net outstanding against the bond stood at Taka 2.5 billion. As of end June 2010 the total sale against this bond was Taka 23.4 billion against the balance of total financing of Taka 15.4 billion and the net outstanding of Taka 8.0 billion. The overall transaction of this bond are summarised in Table: Bangladesh Government Islamic investment Bond. Table: Bangladesh Government Islamic investment Bond

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Historical Trends
After liberation, the banks operating in Bangladesh (except those incorporated abroad) were nationalised. These banks were merged and grouped into six commercial banks. Of the total six commercial banks, Pubali Bank Ltd. and Uttara Bank Ltd. Were subsequently transferred to the private sector with effect from January 1985. Rupali Bank was transferred as public limited company from December1986. The rest three State limited company from the quarter October- specialized banks were renamed as Bangladesh Krishi Bank and Bangladesh Shilpa Bank. In March 1987 Bangladesh Krishi Bank was bifurcated and another specialised bank emerged as RajshahiKrishiUnnayan Bank (RAKUB) for Rajshahi Division. Bank of Small Industries & Commerce Bangladesh Ltd. (BASIC) started its operation as a private bank from September 1988. Later on BASIC was brought under direct control of the Government and was reckoned to as a specialised bank with effect from June 1993. From July 1995 again the BASIC was categorised as a private bank. In 1997, Government decided to treat this bank as a specialised bank again. So in this booklet, the BASIC has been treated as a specialised bank. BSB & BSRS merged and renamed as BDBL from the quarter January- Standard Chartered Grindlays Bank was merged with Standard Chartered Bank during the Quarter (January-March, 2003). American Express Bank also merged with Standard Chartered Bank during the quarter (October- December, 2005).The Oriental Bank Ltd. An Islamic private bank was renamed as ICB Islamic Bank Ltd. from the quarter (April- June, 2008). Credit Agricole Indosuez, a foreign private bank is renamed as Commercial Bank of Ceylon Ltd. from the quarter (October-December, 2003).Shamil Bank is renamed as Bank Al-Falah Ltd. From the quarter (April-June, 2005). Arab Bangladesh Bank Ltd is renamed as AB Bank Ltd from the quarter (January-March, 2008) and Social Investment Bank Ltd is renamed as Social Islami Bank Ltd from the quarter (April-June, 2009). It is mentioned that First Security Bank Ltd has started its operation according to Islamic Sariah from the quarter (January- has started its operation according to Islamic Sariah from the quarter (April-June 2004) and EXIM Bank Ltd has also started its operation according to Islamic Sariah from the quarter (July-September, 2004). The branches of foreign banks operating in Bangladesh are being treated as foreign private banks. All such banks operating in Bangladesh with different paid-up capital and reserves having a minimum of an aggregate value of Tk. 50 lacs and conducting their affairs to the satisfaction of the Bangladesh Bank have been declared as scheduled banks in terms of section 37(2) of Bangladesh Bank Order 1972. In terms of section 13 of Bank Company Act, 1991, the minimum aggregate value was Tk. 20 crores. From 30th 2003 it was Tk 100 crores. From 8th 2007 it was Tk. 200 crores . From 11th August 2011, it has been raised at the minimum of Tk. 400 crores( as per Circular Letter No. BRPD (R-1) 717/ 2008 - 511 dated August 12, 2008).
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Bangladesh Bank (BB) continued to pursue a cautiously restrained monetary stance adopted for FY12 to curb inflationary expectations and external sector pressures, while ensuring adequate private sector credit to stimulate production oriented inclusive growth during the second half of FY12. BBs monetary policy specifically aimed to contain reserve money growth to 12.2 percent and broad money growth to 17.0 percent by June 2012 and credit to the private sector is programmed to remain at a 16.0 percent (January, 2012, MPS). As a result, the growth of various monetary aggregates (M1, M2), reserve money (RM), private sector credit slow down during Q3FY12 compared with the same period of the preceding year. However, domestic credit growth increased by 22.45 percent (y-o-y) in Q3FY12 compared with 28.95 percent growth during the same period of the preceding year. During Q3FY12, the total private sector credit by banks, non-bank and microfinance institutions grew by 18.8 percent (y-o-y) as against 27.9 percent during the same period of the preceding year. In view of containing inflation and inflationary expectations BB raised its policy rates, namely repo and reverse repo rates by 50 basis points in H2FY12 and also other short and long term Treasury bill rates, lending and deposits rates during the quarter under report. Provisional data show that M2 experienced a growth of 17.60 percent (y-o-y) and stood at Tk.4903.2 billion at end March, 2012 fueled mainly by 20.19 percent growth in NDA resulting from increased credit to the public and private sectors. The growth of M1 increased by 6.56 percent at end March, 2012 which increased by 28.90 percent during the same period of the preceding year mainly due to sharp decline in demand deposits growth rate of banks. A look at the components of M2 shows that currency, demand deposits and time deposits increased by 11.91 percent, 0.62 percent and 21.09 percent (y-o-y) respectively during Q3FY12 as compared with 24.84 percent, 33.55 percent and 21.90 percent respectively during the same period of the preceding year. The money multiplier (M2/RM) increased by 4.26 in Q3FY12 from -3.09 during the same period of the preceding year. The increased of multiplier was influenced by the expansion of more M2 than RM. The RM grew by 13.54 percent (y-o-y) and stood at Tk. 999.4 billion in March, 2012 which experienced a 24.87 percent (y-o-y) growth during the same period of the preceding year. This occurred due to significant growth in NDA by 30.88 percent despite moderate growth in
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NFA by 5.47 percent. The significant growth in NDA mainly resulting from a substantial increased in claims on banks and also claims on the public sector by 15.62 percent and 63.31 percent respectively in Q3FY12 which increased by 185.78 percent and 64.00 percent respectively during the same period of the preceding year. The total advances by economic purposes increased by 19.9 percent and stood at Tk.3533.7 billion in Q3FY12 which was increased by 28.1 percent during the same period of thepreceding year. An analysis of trends of the bank advances to private sector shows that banklending toward transport and communication, construction, storage, trade, industry sectors increased significantly during the current quarter. Bank advances to the transport andcommunication sector increased significantly by 73.3 percent compared with 46.7 percent duringthe same period preceding year. Credit to the construction and industry sectors increased by 36.5percent and 20.1 percent respectively in Q3FY12 which increased by 40.7 percent and 24.3percent during the same period of the preceding year. Credit to storage sector increased by 30.3percent in Q3FY12, which was increased by 8.1 percent during the same period of the precedingyear. Credit to the trade sector increased by 20.4 percent in Q3FY12, compared with 31.6percent increase during the same period of the preceding year. The growth rate of credit to theagriculture sector remained the same (however, of which crops increased slightly by 0.3 percent and others declined by 2.5 percent) in Q3FY12, which increased by 26.7 percent (of which cropsby 25.0 percent and others by 46.3 percent) in Q3FY11. However, on account of the first nine months of FY12 crops loan grew by almost 12.0 percent over the same period of the preceding year. Credit to the working capital financing increased by 10.7 percent in Q3FY12 as against 22.8 percent during the same period of the preceding year. 2.6 The disbursement of term lending by banks and NBFIs increased by 2.53 percent and stood at Tk. 77.55 billion at end Q3FY12, which was Tk. 75.63 billion during the same period of the preceding year. Between Q3FY11 and Q3FY12, term lending by PCBs actually increased from Tk. 52.26 billion to Tk. 52.80 billion, SCBs term lending increased from Tk. 8.92 billion to Tk. 11.44 billion, while term lending by FCBs decreased from Tk. 4.29 billion to Tk. 2.58 billion, and by NBFIs deceased from Tk. 7.98 billion in Q3FY11 to Tk. 6.32 billion in Q3FY12. However, the term lending by specialized banks increased from Tk. 2.19 billion to Tk. 4.40
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billion during the same period. In line with the policy stance of BB, the repo and reverse repo rates were increased by 50 basis points and stood at 7.75 percent and 5.75 respectively in March, 2012 making a total of 325 basis points increase in FY11-12 to contain inflation and inflationary pressure emanating from various domestic and international factors. Likewise, overall yields on short term treasury bills e.g., 91-day increased to 11.00 percent in March, 2012 from 5.48 percent in March, 2011, while 182-day, 364-day treasury bills rates also increased to 11.20 and 11.25 percent at end of March,2012 from 5.63 and 6.20 percent respectively at the end of March, 2011. Long-term bond such as5-year and 10-year increased to 11.30 and 11.40 percent at the end of March, 2012 from 8.26percent and 9.36 percent in March, 2011 (Table II.3), while the yields on 15-year, and 20-yearBGTB both also increased from 9.20 percent and 9.63 percent respectively to 11.65 and 12.06percent in March, 2012. The call money rate was 12.51 percent at the end of March, 2012 which was 10.35 percent at the end of March, 2011 due to increased credit demand in the private sector.The outstanding stock of NSD certificates in March, 2012 stood at Tk. 634.6 billion against Tk.640.2 billion in March, 2011 despite an increase in the 3-Year and 5-Year NSD certificate rate to2.59 percent and 13.19 percent in Q3FY12 from 10.00 percent and 10.50 percent respectively inQ3FY11.

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Problems of Money Market in Bangladesh:

1. The Political circumstances: The Peoples Republic of Bangladesh has been a parliamentary democracy since September 1991. The present government is headed by the Awami League which has an absolute majority, but the opposition party has stepped up its nationwide program of strikes, processions, and mass meetings. These activities have weakened the governments intentions to foster changes such as the development of the financial market. In addition, certain commercial and financial regulations are outdated in that they tend to focus on institutions rather than functions. Governance and accountability are lacking in certain areas, and there are elements of inefficiency in the financial system, mainly concerning the state-owned banking sector. Although the government is aware of these problems, it has been slow to improve governance and develop strong institutional capacity. The problems created by these weak institutions are compounded by an increasingly confrontational. 2. Lack of policy:A sense of urgency is missing in policymaking, despite the growing imbalances

in the economy and crowding out as Bangladesh continues to channel vast monetary resources into servicing bad loans. Given that macroeconomic changes can happen in short periods of time and that nonperforming loan, which account for a third of the loan portfolio, can create financial sector vulnerability, the bad-loan situation could trigger a severe liquidity crisis nationwide. It can take decades to build a fixed-income market in the wake of such crises. This issue clearly needs immediate and focused attention. 3. Inadequate laws and regulation:Certain omissions or drawbacks of the broader laws and

regulations directly affect development of the fixed-income market. Nevertheless insider trading affects the market to a great extent due to the inadequate laws and regulations. 4. Small size:The government securities market in Bangladesh is small, does not provide much of a

yield curve to support a corporate bond market, and does not provide intermediaries with skills and a profit base to support the corporate bond market. The constituents of the money market are few. Some of the money market instruments are not available in Bangladesh. 5. Regulators and Regulations: One impediment at the regulator and regulation level is the

overlapping authority between the two financial market regulators, Bangladesh Bank and the Securities
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and Exchange Commission (SEC), and no clear jurisdiction over the fixed-income market. In general, BB regulates the commercial banks and their activities, while the SEC regulates the NBFIs, the two stock exchanges, and the capital market. A second problem is that the SEC has no authority to issue rules and regulations, and the procedure as a whole is long and drawn out. As a result, the SEC has not proposed any regulations for the issuance of bonds or debentures. All rule proposals must first be submitted to the Minister of Finance for approval and then passed on for approval from Ministry of Law. Furthermore, potential issuers have to look at various sets of regulations and follow a long and cumbersome procedure. 6. Investors: On the investor side, few investors are sophisticated enough to think about investing

in bonds. Most of them dont have even financial literacy. They are not aware about the proper functioning of the money market. They are not the real investors. In other words they can be called as speculator. 7. Intermediaries: Intermediaries in Bangladesh lack many of the skills needed to foster an active

local corporate bond market. As mentioned earlier, commercial banks dominate the financial sector and not enough intermediaries are skilled in securities. Few are able to identify issuers and investors and bring them to the market. They provide little or no research analysis on industries or companies to encourage investment in the local debt market. Too few private merchant banks are able to conduct financial advisory and trust services. Nor do any feel motivated to become a market maker for an issue. Hence the market is illiquid, with large spreads. At the same time, the fee structure and pricing are high enough to allow intermediaries to make money, but because transactions are so limited, the intermediaries seldom make money. Even if they are able to participate, intermediaries are reluctant to take any risk in dealing. 8. Growth of mutual fund: The growth of mutual fund in Bangladesh is slow. Only recently there

has been a rush for new funds. Many banks and financial institutions are in the queue with proposals for their funds. Mutual fund is often a misunderstood subject in Bangladesh. Many investors do not understand the difference between mutual fund shares and other company shares. 9. Inadequate functioning of SEC: The Securities and Exchange Commission will have to be

more efficient and professional. It simply cannot run with the present manpower. It needs more
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professionals, more training at home and abroad and more logistic support. But it is just not possible to attract the right kind of professionals with the current pay structure. 10. Lack of transparency in public sector borrowing:Public sector borrowing has been riddled

with lack of transparency that failed to eventually proffer any reliable demand-supply scenario in which an efficient debt market can function. Because of the frequent shifts and ad hoc culture and volatility of demand, many of the debt instruments could not be designed to be publicly traded that could fuel a vibrant market. Efforts are now on to issue tradable instruments and bring fiscal discipline. 11. Price manipulation: It has been observed that the share values of some profitable companies

have been increased fictitiously some times that hampers the smooth operation of DSE and CSE. 12. Delays in settlement: Financing procedures and delivery of securities sometimes take an

unusual long time for which the money is blocked for nothing. 13. Lack of regulations in dividends: Some companies do not hold AGM and eventually declare

dividends that confused the shareholders about the financial position of the company. 14. Biasness of the directors:Some members being the directors of listed companies of DSE look

for their own interest using the internal information of share market 15. Corruption of audit firms:Many companies of DSE dont focus real position of the company as

some audit firms involve in corruption while preparing financial statements. 16. Small market:As the DSE is small market, the spread/cost ratio is relatively higher which is a

more important factor for capitalization. 17. Lack of expertise & innovation: General lack of expertise and innovation and absence of

institutions in bringing variations in debt products have kept the market uninteresting. Lawyers, financial advisors and other service providers have not been competent in identifying the rights and obligations of the parties involved in debt securities. Expertise and institutional base for issuing various forms of debt is yet to visibly evolve. There is also absence of pertinent financial research institutions. The Bangladesh Bank have now issued Primary Dealer licenses to selected banks and NBFIs and the

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SEC have also initiated the process of appointing eligible stock brokers for trading of government securities at the bourses.

18.

Absence of institutional investors:In Bangladesh the institutional investor community like

investment & merchant banks, mutual funds, pension & provident funds, life insurers etc. has unfortunately not developed due to multifarious impediments. The market is essentially retail based and prone to high risk. The newly licensed merchant banks are yet to make any tangible mark, the government pension funds are essentially non-funded and non-accounted-for liabilities, provident and insurance funds restrained under age old qualitative and quantitative restrictions and growth of private mutual fund retarded under stringent regulatory frame-work and an uneven playing field. None of these ground realities has been conducive to growth of a healthy and vibrant capital market.

19.

Overlapping parastatal:

Since Bangladesh Bank and the SEC enjoy some overlapping

regulatory powers on the money and bond markets; there remain potentials of confusion among the issuers and market intermediaries. The governance of the debt securities regime was weak and a disincentive along with the absence of arbitration institutions. 20. Absence of policy support: Until recently there had been no government initiative, policy support

or expressed political will develop the financial and infrastructural base where a debt market could grow. Only recently the government has taken some measures that hint policy shift and discipline, including intended listing of two new sovereign bonds at the bourses for the first time. Outcrowding effect from bad loan situation and fiscal deficit of the government as well as dominance of NCBs also played a damper on viable debt securities market development.

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Recommendations and Solutions:

The money market in Bangladesh is in its transitional stage. Continuous efforts are needed for the betterment of the market. Some of the possible solutions are given for the development of money market in Bangladesh. Try to increase the number of items for treaded in the money market as debentures, commercial paper, financial paper, market for CDs, forward and futures, options market etc. Countries short-term bond market is not so develop as a few number of companies issued the bond and the treading volume is negligible. On the other hand a good numbers of Islamic banks are operating in the country, thats why the Islamic short-term bond market is necessary. The call money market in Bangladesh is very much volatile as sometimes the interest rate reaches a very high level 180 to 185 percent, because the central banks standing credit facility is not so strong. Bangladesh bank needs to be much more dynamic in handling the crisis moment to protect the Bank-Run. The forward market, future market and option contract can reduce the future possible liquidity crisis problem of the financial institutions. For that reason we need to develop those markets and try to integrate with international markets of forward and futures. The Factoring facility in Bangladesh market is not so prevalent. In first world countries even the salary check is factored. Mainly factoring provides the companies bridge loan facilities which fasten the economic activities. In Bangladesh factoring market need to be developed. In case of foreign bill selling, we encounter various types of irregularities as fake foreign bills, fraudulent transfer of the bank fund and many other problems. The respective bank and the central bank need to be careful in this regard. Central banks monetary policy need to be dynamic. Increasing the reserve the requirement to fine tune the money supply in the economy is just like cutting the diamond with jack hammer. So in this case the central bank needs to be calculative. Government borrowing from the money market is a negative signal for the countrys economy. In Bangladesh this tendency of the govt. is very high. For the betterment of the economy and to avoid the possible crowd out effect the govt. should avoid borrowing from this sector. The rate of interest of the banks short-term lending needed to be in a reasonable range, thats why the small borrowers can afford that. For that reason the central banks determined cap and floor limit on borrowing and lending must be implemented and try to avoid mal-competition for hunting the customers.

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Conclusion
The money market is perceived as the engine of growth for an economy. Hence it performs a significant role in acting as an intermediary between savers and companies seeking additional financing for business expansion. Vibrant capital is likely to support a robust economy. While lending by commercial banks provides valuable initial support for corporate growth, a developed money-market is an important pre-requisite for moving into a more mature growth phase with more sophisticated money market instruments However we have to concern about our current money market products. If we can bring diversity in this sector then a massive amount of money can be collected which will ease the way of the financial institution. As a result the liquidity scarcity will be filled up to a great extent. On other hand the Bangladesh government should strengthen the regulatory framework so that sound functioning of money market sector is ensured. Fortunately, investors are getting matured gradually and hopefully we may not have to see shouting and slogan in front of the exchanges any longer. Bangladesh should really focus on improving governance and developing advanced market products, such as derivatives, swaps etc.

References:

BANGLADESH BANK Central Bank of Bangladesh [online] available from: http://www.banglades-bank.org [Accessed: 25th September, 2012]

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