1

2
Money markets are used to facilitate the transfer of short-term funds from individuals,
corporations, or governments with excess funds to those with deficient funds. Even
investors who focus on long-terms securities tend to hold some money market securities.
Money markets enable financial market participants to maintain liuidity. Money market
securities are commonly purchased by households, corporations, and government
agencies that have funds available for short-term period. !ecause money market
securities have a short-term maturity and can typically be sold in the secondary market,
they provide liuidity to investors. Most firms and financial institutions maintain some
holdings of money market securities for this reason.
"he !angladesh economy is within the mainstream of the continuously changing global
financial system. #omestic as well as international trade also characteri$es !angladesh
economy. %ence a financial system has developed here consisting mainly of the capital
and the money market. &or any underdevelopment country the existence of a well
functioning money market is of paramount importance. "he money market currently
existing has also developed due to certain needs. 'n general, these needs can be termed as
need for short term liuidity within our financial system, to carry out the day to day
economic activities and obviously to meet and match need for short term lending and
borrowing of the participants within the financial system. "he money market is not a
well-defined place where the business is transacted as in the case of capital markets
where all business is transacted at a formal place, i.e. stock exchange. "he money market
is basically a telephone market and all the transactions are done through oral
communication and are subseuently confirmed by written communication and exchange
of relative instruments. "he money market consist of many sub-market such as the inter-
bank call money, bill discounting, treasury bills, (ertificate of deposits )(#s*,
(ommercial paper )(+s*, ,epurchase -ptions.,eady &orward ),E+- or ,&*, 'nter-!ank
participation certificates )'!+(s*, /ecuriti$ed #ebts, -ptions, &inancial &utures, &orward
,ate 0greement )&,0s*, etc. which collectively constitute the money market.
Money market securities are the debt securities that have a maturity one year or less.
"hey are issued in the primary market through a telecommunications network by the
"reasury, corporations, and financial intermediaries that wish to obtain short-term
financing. "he means by which money markets facilitate the flow of funds. "reasury
issues money market securities and uses the proceeds to finance the budget deficit.
(orporations issue money market securities and use the proceeds to support their existing
operations or to expand their operations. &inancial institutions issue money market
securities and bundle the proceeds to make loans to households or corporations. "hus, the
funds are channeled to support household purchases, such as cars and homes and to
support corporate investment in buildings and machinery. "he treasury and some
corporations commonly pay off their debt from maturing money market securities with
the proceeds from issuing new money market securities. 'n this way, they are able to
finance expenditures for long periods of time even though money market securities have
short-term maturities. -verall, money markets allow households, corporations, and the
"reasury to increase their expenditures and therefore finance economic growth.
"hey generally have a relatively high degree of liuidity. Money market securities tend to
have a low expected return but also a low degree of risk. 1arious types of money market
2
securities, their issuers, common investors, maturity, secondary market activities are
listed below3
1.2 ob4ectives and scope of the study5
"o provide a useful basis for building a sustainable capital market with a view to
creating a healthy investment climate in !angladesh.
"o analy$e limitations and examine opportunities of the capital market of
!angladesh covering both euity and debt markets in creating a congenial
investment climate.
"o sort out the problems associated with our capital market.
"o suggest some practicable solutions to these problems.

1.3Methodology of the study
"o prepare the report of internship, ' have collected all kinds of related data from the
primary and secondary sources.
Primary data:
"here are several ways to collect primary data. 0mong others important one is
interview. &or collecting primary data ' did follow interview method.
"here are several types of interview method. ' used only personal interview method.
1 "he primary data were collected through face-to-face interview with the #/E
officials.
2 "he primary data wee collected through participation and discussion during the
trading session.
2 ' had also collected information through interview with the #/E members.
6 ' had collected information through interview by the uestionnaire with the
investors by visiting various brokerage firms.
6
Secondary data: the study also used secondary data. &or this purpose we collect
information from various sources such as various publications of #/E.
1 1arious publications of #haka stock exchange and (hittagong /tock exchange..
2 "rade 4ournal.
2 ,esearch reports connected with the stock exchange.
6 #ifferent web site.
1.4 Limitations:
1. /ome of key peoples of #/E and (/E were very much busy with their duties
that they could seldom manage time to answer the uestions.
2. 'nvestors are not fluently giving opinion due to some restriction.
2. ,esearcher could not find sufficient data because of #/E great secrecy.
6. "ime constraint.
7
Chapter: 2
Theoretical Aspects
8
Money market and money market instruments
&or an investor, there are numerous opportunities available in the different financial
markets. /ome of these investments trade on regulated, organised and formalised markets
)known as exchanges*3 other investments trade on an informal basis between buyers and
sellers. 'nformal trading can take place over a counter, by telephone or even
electronically via computer systems. 'nformal trading where an instrument does not trade
through an exchange is known as over-the-counter trading )-"( trading*.
"he financial instruments trading in the above markets can be classified into different
categories according to the nature of the instruments and the market. 'n general the
financial markets are split into the following categories5
Equity Market 9 a market where the shares of companies and related instruments
such as euity derivatives are traded publicly. "he :ohannesburg /ecurities
Exchange ):/E* is a formalised exchange in /0 where shares that are listed on
this exchange are traded. 0 company must apply to list, and is sub4ect to certain
listing ualifying criteria which must be met prior to its listing
Money Market 9 comprises of short-term loans and investments in short term
debt instruments. "hese instruments do not trade through an exchange, but rather
-"( )over-the-counter*
ond Market 9 comprises of long-term loans. "he !ond Exchange of /0
)!E/0* is the exchange through which the instruments )called bonds* trade
!eri"ati"e Market 9 0 derivative instrument traded on a derivatives market
derives its value from an underlying instrument. "his market gives the investor
;
the opportunity to hedge against the risk of dramatic price fluctuations. <umerous
instruments known as derivatives trade in this market on an -"( basis, except for
futures and options which trade on the /outh 0frican &utures Exchange )/0&E=*
#oreign E$change Market 9 &oreign currencies can be bought and sold through
this market3 it is regulated in /0 by the /0 ,eserve !ank who acts in a
supervisory capacity. <o formalised exchange exists and currencies are traded on
an -"( basis directly between authorised dealers
Finance
&inance studies and addresses the ways in which individuals, businesses, and
organisations raise, allocate, and use monetary resources over time, taking into account
the risks entailed in their pro4ects. "he term finance may thus incorporate any of the
following5
"he study of money and other assets
"he management and control of those assets
+rofiling and managing pro4ect risks
"he science of managing money
0s a verb, >to finance? is to provide funds for business
"he activity of finance is the application of a set of techniues that individuals and
organisations )entities* use to manage their financial affairs, particularly the differences
between income and expenditure and the risks of their investments.
0n entity whose income exceeds its expenditure can lend or invest the excess income. -n
the other hand, an entity whose income is less than its expenditure can raise capital by
borrowing or selling euity claims, decreasing its expenses, or increasing its income. "he
lender can find a borrower, a financial intermediary, such as a bank or buy notes or bonds
in the bond market. "he lender receives interest, the borrower pays a higher interest than
the lender receives, and the financial intermediary pockets the difference.
0 bank aggregates the activities of many borrowers and lenders. 0 bank accepts deposits
from lenders, on which it pays the interest. "he bank then lends these deposits to
borrowers. !anks allow borrowers and lenders, of different si$es, to coordinate their
activity. !anks are thus compensators of money flows in space.
0 specific example of corporate finance is the sale of stock by a company to institutional
investors like investment banks, who in turn generally sell it to the public. "he stock
gives whoever owns it part ownership in that company. 'f you buy one share of =@A 'nc,
and they have 1BB shares outstanding )held by investors*, you are 1.1BB owner of that
company. @ou own 1.1BB of the net difference between assets and liabilities on the
balance sheet. -f course, in return for the stock, the company receives cash, which it uses
to expand its business in a process called >euity financing?. Euity financing mixed with
the sale of bonds )or any other debt financing* is called the companyCs capital structure.
D
&inance is used by individuals )personal finance*, by governments )public finance*, by
businesses )corporate finance*, etc., as well as by a wide variety of organisations
including schools and non-profit organisations. 'n general, the goals of each of the above
activities are achieved through the use of appropriate financial instruments, with
consideration to their institutional setting.
&inance is one of the most important aspects of business management. Eithout proper
financial planning a new enterprise is unlikely to be successful. Managing money )a
liuid asset* is essential to ensure a secure future, both for the individual and an
organisation.
Financial markets
'n economics a financial market is a mechanism that allows people to easily buy and sell
)trade* financial securities )such as stocks and bonds*, commodities )such as precious
metals or agricultural goods*, and other fungible items of value at low transaction costs
and at prices that reflect efficient markets.
&inancial markets have evolved significantly over several hundred years and are
undergoing constant innovation to improve liuidity.
!oth general markets, where many commodities are traded and specialised markets
)where only one commodity is traded* exist. Markets work by placing many interested
sellers in one >place?, thus making them easier to find for prospective buyers. 0n
economy which relies primarily on interactions between buyers and sellers to allocate
resources is known as a market economy in contrast either to a command economy or to a
non-market economy that is based, such as a gift economy.
'n &inance, financial markets facilitate5
"he raising of capital )in the capital markets*
"he transfer of risk )in the derivatives markets*
'nternational trade )in the currency markets*
"hey are used to match those who want capital to those who have it.
"ypically a borrower issues a receipt to the lender promising to pay back the capital.
"hese receipts are securities which may be freely bought or sold. 'n return for lending
money to the borrower, the lender will expect some compensation in the form of interest
or dividends.
Money market
"he money market is the global financial market for short-term borrowing and lending. 't
provides short term liuid funding for the global financial system.
F
'n the money markets, participants borrow and lend for short periods of time, typically up
to 12 months. Money market trades in short term financial instrument commonly called
>paper?. "his contrasts with the capital market for longer-term funding, which is supplied
by bonds and euity.
Borrowers
"he core money market consists of banks borrowing and lending to each other,
using commercial paper, repurchase agreements and similar instruments. "hese
instruments are often benchmarked to G'!-,
&inance companies, such HM0(, typically fund themselves by issuing large
amounts of asset-backed commercial paper which is secured by the pledge of
eligible assets into an asset-backed commercial paper conduit. Examples of
eligible assets include auto loans, credit card receivables, residential.commercial
mortgage loans, mortgage backed securities and similar financial assets
(ertain large corporations with strong credit ratings, notably Heneral Electric,
issue commercial paper on their own credit. -ther large corporations arrange for
banks to issue commercial paper on their behalf via commercial paper lines
"he governments issues bills for short term funding needs
"rading companies often purchase bankers acceptances to be tendered for
payment to overseas suppliers
Lenders
,etail and 'nstitutional Money Market &unds
!anks
(entral !anks
(ash management programmes
0rbitrage 0sset-backed commercial paper conduits, which seek to buy higher
yielding paper, while themselves selling cheaper paper
Common money market instruments
%&ills 9 "hese are the most liuid money market instrument. "hey are issue by the
government. Most common maturities are FB days, 1DB days and 28B days.
'egotia(le )ertificates of !e*osit 9 /hort term debt instrument offered by banks. "hey
offer better returns than "-!ills due the fact that there is a slight degree of credit risk.
)ommercial Pa*er - an unsecured, short-term loan issued by a corporation, typically for
financing accounts receivable and inventories. 't is usually issued at a discount, reflecting
current market interest rates. Maturities on commercial paper are usually no longer than
nine months, with maturities of between one and two months being the average.
What influences the Money Market?
!oth the monetary and fiscal policy influences the money market.
1B
Monetary *olicy is the process by which the government, central bank, or monetary
authority manages the money supply to achieve specific goalsIsuch as constraining
inflation or deflation, maintaining an exchange rate, achieving full employment or
economic growth. )Jsually the goal of monetary policy is to accommodate economic
growth in an environment of stable prices.* Monetary policy can involve changing certain
interest rates, either directly or indirectly through open market operations, setting reserve
reuirements, acting as a last-resort lender )i.e. discount window lending*, or trading in
foreign exchange markets.
#iscal *olicy is the economic term that defines the set of principles and decisions of a
government in setting the level of public expenditure and how that expenditure is funded.
&iscal policy and monetary policy are the macroeconomic tools that governments have at
their disposal to manage the economy. &iscal policy is the deliberate and thought out
change in government spending, government borrowing or taxes to stimulate or slow
down the economy. 't contrasts with monetary policy, which describes policies
concerning the supply of money to the economy.
Chapter: 3
Money Market instrument in Bangladesh
11
Money Market an integral part of the financial market of a country. 't provides a medium
for the redistribution of short-term loanable funds among financial institutions, which
perform this function by selling deposits of various types, certificate of deposits and
discounting of bills, ",E0/J !'GG ,@ s etc. "he participants in the money market are5 the
central bank, commercial banks, the government, finance companies, contractual saving
institutions like the pension funds, insurance companies, savings and loan associations
etc. "he instruments that are generally traded in the money market constitute5 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.
"he money market in !angladesh is in its transitional stage. "he various constituent parts
of it are in the process of formation, while continuous efforts are being made to develop
appropriate and adeuate instruments to be traded in the market. 0t present, government
treasury bills of varying maturity, !angladesh !ank !ills and (ertificates of #eposits etc
in limited supply are available for trading in the market. %owever, the short-term (,E#'"
market of the banking sector experienced a tremendous growth since liberation. 'n 1FFF,
a total of about 8BBB branches of the scheduled banks provided short-term credit
throughout the country in the form of cash credit, overdraft and demand loan. "he rates of
interest are determined by the individual banks and as such the market is uite
competitive. Each bank maintains its liuidity and supply of fund is arranged throughout
the country with the help of an interconnected network of branches. !0<HG0#E/% !0<K
as central bank of the country exercises its role in this market through the use of
12
instruments such as bank rate, open market operations and changes in statutory liuidity
reuirements.
"he money market of !angladesh reached its present phase through a series of changes
and evolution. 'nitially, after liberation, money market was the ma4or constituent part of
the financial market of the country. (apital market, its other segment was a relatively
smaller part. 0ll financial institutions of the country were nationalised after liberation.
"he growth and evolution of money market in the country took place during the period
from 1F;1 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.
%owever, in this period a vast financial superstructure with large network of commercial
bank branches was established in the country. /imultaneously, specialised financial
institutions under government sector also emerged with the ob4ective of mobilising
financial resources and channeling them for short, medium and long-term credit and
investments. "he market participants had to operate in an environment of directed lending
and loan disbursement goals, and predetermined rates of interest fixed by the authority.
%owever, rate of interest in the call market was flexible but due to prevalence of liberal
refinance facility at concessional rates from !angladesh !ank, the activities of call
money market remained insignificant.
0lthough at the beginning of the 1FDBs, steps were taken to make the countryCs banking
sector competitive money by denationalisation of two nationalised banks and
establishment of some private banks, the continuation of restricted regime acted as a
deterrent factor for the functioning of market based activities. 0bsence of instrument was
also a ma4or problem towards this end. %owever, these steps added a new dimension in
competition among the banks particularly, in mobilising and deployment of deposit
reflecting economic cost. Eith this development money market, for the first time
assumed the characteristics of a competitive structure in the country. Gater on,
government allowed a large number of banks and non-bank financial institutions both
domestically and foreign owned, to operate in the country. "his created a scope for
vibrant money market in the country.
't may be noted that before 1FFB, in its true sense there was no money market in the
country as ma4ority of the economic activities were directly or indirectly under the
control of state authority. !angladesh !ank was the ultimate and only source of finance
for the banks to meet their crises and the role of !angladesh !ank was to ensure the
supply of fund in the economy. "he &inancial /ector ,eform +rogramme )&/,+*,
initiated in :anuary 1FFB opened up the opportunities for the development of a virtual
money market by removing many of the long established restrictions and bottlenecks.
#eregulation of lending activities and interest rates, abolishment of priority lending
culture and liberal general refinance arrangements from !angladesh !ank created a
ground for market based financial activities in the country. 'n addition to these, a
comprehensive study programme was undertaken by the &/,+ team to explore the
possibility of introducing market bases instrument in the country. /ubseuently, after
amendment of !angladesh !ank -rder, new money market instruments such !angladesh
!ank bills of F1-days and 2B-days maturity were introduced. !esides some new
government treasury bills with different maturities were also introduced to accelerate the
pace of development of money market in the country. !angladesh !ank also introduced
certificate of deposits )(#s* in limited scale for the banks. "hus money market started its
12
4ourney to play a catalytic role for the development of the country. /imultaneous steps for
trade and exchange rate liberalisation added a new dimension to these developments.
'ntroduction of secondary market for government securities in &@ 2BB2 is a ma4or event
in the history of money market in !angladesh. "o facilitate development of secondary
market, ,epo and reverse repo were introduced for the banks and financial institutions.
&or effective liuidity management the banks collateralised by the government securities
use these facilities. Moreover, for the first time +rimary #ealers )+#s* were appointed to
deal in securities both in primary and secondary market. 0t present )2B1B* twelve
primary dealers are operating in the market.
Constituents of money market #espite a large scale expansion of banking sector as well
as non-bank financial institutions, the countryCs money market is still segmented into two
groups5 formal and informal. "he formal institutions )up to 2B1B* include the !angladesh
!ank at the apex, 6 states owned commercial banks, 2B domestic and F foreign private
commercial banks, 7 specialised )development* banks, 2F <-<-!0<K &'<0<('0G
'</"'"J"'-< s, a number of non-scheduled banks. 'nformal institutions comprised mainly
the moneylenders and small co-operative organisations, which are not under the control
of the central bank. "he four distinct components of organised segment of money market
of !angladesh are the inter-bank market, (all money market, Market for ,epo and
,everse ,epo, and !ill market.
Inter-bank market operates within a limited scale in the form of inter bank deposits and
borrowings and has virtually no fixed price fixing mechanism. "raditionally, scheduled
commercial banks lend to each other when they are in need of temporary funds.
/ometimes, banks also keep a part of their resources to other banks as deposits and
borrow as and when needed against the lien of those deposits. /mall banks usually keep
their funds as deposits with large banks for safety.
<on-bank financial institutions also take part in inter-bank market operations in
!angladesh by way of lending their fund to the deficit banks. "he inter-bank transactions
are concentrated mainly in #haka city but may also be found in other parts of the country.
0s part of fund management, branch offices of banks, which can not send their surplus
funds to their respective head offices, usually keep them in their nearest big branch or in
other banks and draw the funds back as and when needed.
'nter-bank transactions, although constitute an integral part of money market, comprise a
small portion of total banking activities. 'nter-bank deposits as percent of total deposits
varied between 2 and 7 percent during 1FD8-FF. "his indicator was between 1.8 and 2.7
percent during the &/,+ period of 1FFB-F8. %istorically, there appears to be a positive
correlation between growth of inter-bank deposits and excess cash reverses of the
banking system. "otal inter-bank deposits increased from "k 2.6 billion in :une 1FD8 to
"k 27 billion in #ecember 1FFD. Excess cash reverses increased during this period from
"k 1.2 billion to "k 21.7 billion.
"he deposit resources of banks registered an increase of "k 122.8 billion or an yearly
average growth of 22L during the period between :une 1FD8 to :une 1FF1 and 1DL
during :une 1FF1- :une 1FFD. "hat the money market is not much developed in
!angladesh is depicted from the growth pattern of deposits of the country.
(ertificate of deposit was introduced as a money market instrument in !angladesh in
1FD2. 'ts ob4ective was to strengthen the money market and bring idle funds, including
16
those arising from black money and unearned incomes, within the fold of the banking
system. "he !earer of (ertificate of #eposits )!(#* with a fixed maturity is issued by
and payable at the bank to !angladeshi nationals, firms and companies. "he certificate
does not contain the name of the purchaser or holder. "he interest rate is not fixed as in
the case of other deposit resources accepted by the banks at present.
"he interest is determined on the date of issue of (#s based on the demand and supply of
funds in the money market. "he difference between the face value of (#s and the prepaid
interest is received by the bank from the purchaser of (#s at the time of issue. "he bearer
of (#s can sell the same to another purchaser. "he bank maintains no record other than
the (ertificate <o., rate of interest allowed, and the date of sale and encashment. 0 bank
does not issue certificate of deposits for the value exceeding the limit prescribed for it by
the !angladesh !ank. "he outstanding amount of (#s was about "k 1.B7 billion in :une
1FDD and increased to "k 2.F1 billion in :une 1FF2 and further, to "k 2.66 billion in
#ecember 1FFD. "he amount of resources mobilised through issue of (#s was only B.7D
percent of total deposits at the end of #ecember 1FFD.
/ome important changes are also discernible in interbank market during &@ 2BBB to
2B1B. "he (ertificate of deposit had already been discontinued. #eposit resources of the
banks registered an increase of over 2BL on an average during this period indicating
increased financial deepening of the country. !ecause of emergence of a very active call
market and opening up of the scope of secondary market for bill.bond, the importance of
interbank market in traditional sense lost its importance which is reflected in lower
volume of transaction in this market.
Call money market is the most sensitive part of money market, in which a good number
of players from the banking as well as the non-bank financial sector actively participate
on a regular basis. 'nitially, this market developed as an inter-bank market where the
banks in temporary deficit of cash resorted to borrowing from other banks having surplus
funds. 0s banks were in the public sector until the beginning of the 1FDBs, the
!angladesh !ank provided them with liberal refinance facilities at concessional rates.
"here was hardly any need for raising funds from the call money market during this
period. Moreover, administered interest rate regime, easy availability of borrowing from
central bank and its directive to provide credit to priority sectors were the ma4or
impediments in development of a call money market in the country. <otwithstanding the
fact, banks participated in a limited scale in the call money market mainly to wipe out the
temporary mismatch in their assets and liabilities.
0 turning point was the denationalisation of Jttara and +ubali !ank in 1FD2 and 1FD6
respectively and the government decision to allow private banks to operate in the country.
&ormation of private banks during the 1FDBs provided new opportunities to develop this
segment of money market. 'n 1FD7, two investment companies and in 1FDF, one leasing
company were allowed to participate in the call money market. 0t present, all banks
including specialised ones and non-bank financial institutions are allowed to participate
in this market.
!asic features the transactions of call money market are mainly #haka based. /ince, the
head offices of all banks and financial institutions are located in #haka, the branches of
the banks and financial institutions from all over the country remit their excess funds to
their respective head offices at #haka for investment. "he head offices, after meeting
their usual liuidity reuirement invest the surplus funds in the call money market.
17
0s there is no brokerage house or intermediary organisation, the transactions in call
money market usually take place on the basis of bilateral negotiations. /ince call loans
are made on clean basis, ie, without any security, lending institutions.banks are always
cautious in the selection of borrowing banks.institutions.
&oreign banks are the main source of liuidity in the call money market. (ost of funds for
foreign banks are very low as compared to the indigenous banks and as such they can
hold a substantial amount of excess liuidity for lending in the call money market. 'n case
of borrowing they are also at a very advantageous situation as compared to the local
banks. &oreign banks have in their portfolio lower amount of non-performing loans
compared to domestic private banks and nationalised banks. Gocal private banks appear
to be the regular borrowers in the call money market.
'nformation systems of banks in !angladesh are outdated. Market players therefore, do
not know much about the demand for and supply of fund. !anks and financial institutions
having surplus funds take advantage of the market imperfection of domestic deficit
banks.
!angladesh !ank has circulated some guidelines to the lending and borrowing banks and
financial institutions regarding operations in the call money market. 0lthough it is not
compulsory for banks to participate in the call market, they are advised to provide call
loans considering liuidity, solvency and sources of repayment of borrowings by the
borrowing institutions.
"he demand for and supply of funds in the call market remains volatile throughout the
year with some occasional turbulence. "he transactions and the rate of interest are largely
linked with government treasury bill market, seasonality in demand for bank loans,
central bankCs monetary policy, variation in discount rate, open market operations,
changes in statutory reserve reuirements, excess liuidity position of the banks etc. "he
transactions and the variations of the rate of interest in call money market normally
remain high during <ovember to 0pril and as such the rate of interest during this period
also goes up.
"he underdeveloped nature of the inter-bank market in !angladesh is evident from the
large spread between the highest and lowest rates in the call money market. "he lowest
call money market rate always remained higher than the !ank ,ate during the period
from /eptember 1FD7 to :une 1FF2. -ne notable feature of the call money market is that
the spread between lowest and highest call money market rate has been larger during the
reform period. 't is because of the fact that with the implementation of &/,+, the need for
funds of banks other than the !angladesh !ank increased with abolition of easy refinance
facility from the central bank. "hereafter, the lowest inter-bank call money rate remained
lower than the bank rate. "he inter-bank call money rate varied with rise in excess cash
reserves of banks.
Experience suggests that when there was a sufficient excess reserve with banks, the inter-
bank rate came down but the rate denoted increase with the accentuation of shortfall in
reserves position of banks. (ompared to nationalised banks and domestic private banks,
the foreign banks in general, and 'slami banks in particular, held higher excess reserves
with them. &oreign banks are the ma4or sources of supplier of funds to the inter-bank
market in recent years. !efore the introduction of financial sector reforms, foreign banks
preferred preserving excess liuidity to lending to inter-bank market partly because of
lack of confidence and partly because of instructions from their head office. 'n addition,
18
the information gap between borrowing and lending banks also discouraged transactions
in the inter-bank market.
"he rate of interest in the inter-bank call money market reached a maximum of 21L in
<ovember 1FF;. #uring the first half of 1FFD, there was a tremendous pressure in the call
money market of the country. "he rate of interest reached 2;L in &ebruary 1FFD. 0 large
number of domestic private and foreign banks borrowed at the rates of 2BL and above up
to 0pril 1FFD. #uring 1FF;-FD, !angladesh !ank followed a restrictive monetary policy.
'n view of expansion of domestic credit, bank rate was raised to DL from ;.7L in
<ovember 1FF; and tightened the discount window for the banks. "he government also
borrowed substantial amount of funds from the banking sector to meet its budgetary
shortfall in the second half of 1FF;-FD. "otal outstanding treasury bill holding by the
scheduled banks which was only "k 11.6D billion at the end of :une 1FF;, reached the
level of "k 27.11 billion at the end of :anuary 1FFD, and further to "k 2;.F6 billion at the
end of :une 1FFD. %owever, during 1FFD-FF, the pressure in call money market eased
substantially.
"he rates of interest amidst fluctuations reached a maximum of 1;L during 1FFD-FF. #ue
to prolonged and devastating floods at the beginning of 1FFD-FF, the countryCs monetary
policy was relaxed to enable banks to provide necessary credit for early recovery of
economic activities. Easy access of the scheduled banks to the discount window of the
!angladesh !ank helped them holding liuidity position at a comfortable level. "he
banks borrowed an amount of "k F.17 billion from the !angladesh !ank during 1FFD-FF
as compared to a much lower amount of "k 1.12 billion during 1FF;-FD. Moreover,
excess reserve position of the banks increased by "k 6.F8 billion during 1FFD-FF as
compared to an increase of "k F.;D billion in the preceding year. 0s a result, the call
money market witnessed a lower pressure during 1FFD-FF.
"he call money market exhibited highest volatility during &@ 2BB1to &@ 2BB8 due to
prevalence of some unusual events and policy changes of !angladesh !ank. (hanges in
the procedure of (,, calculation with local currency only instead of with the balances in
foreign currency clearing account, increased borrowing by the government from the
domestic market and picking up of credit demand from the private were the driving
factors for fluctuation in call money rates. "he behavior of the +rimary #ealers )+#s*
also seems to be responsible for this as despite adeuate liuidity support from the !!,
they are unwilling to provide repo facility to the deserving banks, rather they are more
interested in call lending at higher rate. 0t the same time some local private banks in the
market having large non-performing loan and less capitali$ed had no easy access in the
market. #ue to this segmentation of the market, the healthy banks, including /ate -wned
!anks were unwilling to lend those through call market and very often they are
compelled to borrow through a broker bank at a very exorbitant rate to avoid !angladesh
!ankCs stiff penalties for non-compliance of ,eserve ,euirements. Moreover, in the
deregulated regime many banks emerged as aggressive profit maxi miser and deploying
their excess fund without considering liuidity maturity profile. Ehenever, these banks
faced liuidity shortfall, they rushed to the market without considering interest rate
impact
Bill market is restricted to buying and selling of government treasury bills. 'n the past, it
was basically concentrated in transaction of government treasury bills of 2-month
maturity at predetermined rates. (ommercial banks were obliged to buy these bills as
1;
approved security to meet their statutory liuidity reuirement )/G,* under the !anking
(ompanies 0ct. Moreover, these instruments were being used to mop up excess cash
from the banking sector and help government to borrow money from banks to meet its
budgetary shortfall. 'n fact it was a guilt-edged market where both the principal and
interest was guaranteed by the government. !angladesh !ank, on behalf of the
government, was entirely responsible for arranging buying and selling of treasury bills.
%owever, the availability of the government treasury bills depended only on the fiscal
consideration of the government. !angladesh !ank had no scope of its own to increase or
decrease their supply. !esides, interest rates were not market based and were fixed
arbitrarily by the government from time to time. 'n addition to the commercial banks,
!angladesh !ank also had to hold a portion of government treasury bills.
"he commercial bill market remained very narrow in the country largely due to a low
level of '<#J/",'0G'/0"'-< and a slow growth of trade and commerce. !anks
traditionally financed two broad categories of commercial bills vi$ inland bills and export
bills. "hese bills are marketable papers and can be resold in the market at a competitive
rate. Jsually, the holders of these bills sell them for cash to the banks, which pays the
holder the face value of the bills less collection charges and the interest for the remaining
period of the bill. +revalence of cash credit system of the banks is a ma4or hindrance in
the way of the development of an active commercial bill market in the country. /tamp
duty, procedural difficulties and reluctance of the drawees of bills to undertake the
additional paper work involved in handling documents etc hindered the development of
commercial bill market. Eith the introduction of &/,+, the commercial bill market is
gradually developing in the country. "he amount of commercial bill financing by the
#eposit Money !ank )#M!* was only "k D.8B billion at the end of :anuary 1FF1. "his
rose to "k 28.2B billion at the end of #ecember 1FFD.
!angladesh !ank introduced its own security, the F1-day !angladesh !ank !ill in
#ecember 1FFB. "his added a new dimension in the bill market of !angladesh. "he bill
was issued at a discount at par value of "k 1BB through monthly auctions held at the
!angladesh !ank. !anks, financial institutions and others including individuals, firms,
companies and corporate bodies were eligible to invest in the !angladesh !ank !ill. "he
bill was introduced primarily to control liuidity of the banking system in accordance
with the reuirement of monetary policy. "he ultimate ob4ective was the development of
a workable secondary market for successful open market operations by the !angladesh
!ank. Gater, !angladesh !ank introduced 2B-day !angladesh !ank !ills. "he freuency
of auctions of these bills was also increased.
#espite regular auction of !angladesh !ank !ills, government treasury bills continued its
normal transaction in the market. %owever, following the declaration of !angladesh
!ank !ills as approved securities for the /G, purposes, the effectiveness of the bills
weakened as an instrument of monetary control. "he auctions of !angladesh !ank !ills
were, therefore, suspended from March 1FF;. -n the other hand, the auctions of the four
categories of government treasury !ills i.e, 2B-day, FB-day, 1DB-day and 1-@ear !ills
were held on weekly basis regularly up to 0ugust 1FFD. "he newly introduced 2D-day,
F1-day, 1D2-day, 286-day, 2-year and 7-year government treasury bills replaced these
treasury bills later since /eptember 8, 1FFD.
"reasury !ills continued to be the main instruments for monetary policy management till
now although some ma4or ad4ustments have been made up to 2B1B. 0s a part of this, in
1D
&@ 2BB6 auctioning of "reasury bill of 7-year maturity had been discontinued. 'n auction
procedure, the "reasury !ills are issued through treasury style &rench auction whereby
the allotments are awarded to the bids which fulfill the notified issue amount starting
from the lowest yield. +ro-rata partial allotments are also made for bids at the cut-off-
yield. 0nother notable development of "reasury bill market is that with effect from
-ctober 2B, 2BB2, electronic registry bases transactions of these instruments has been
introduced in the country. /ale.purchase and transfer of treasury bills among the banks
and financial institutions are being done through online mechanism. "hese new
marketing strategies and arrangements have widened the base and will also help in
deepening the financial market of the country. "he market based system of auction of
"reasury !ills through publishing auction calendar containing date and amount was
introduced in &@ 2BB;. %owever, for matching the tenor of "reasury !ills with
international convention, auctioning of 2-year "reasury !ills had been dropped.
Moreover, the auctioning of 2D-day treasury bills had been discontinued to avoid the
overlapping with 2B-day !angladesh !ank !ill from 1st :uly 2BBD. Eith these, at present
the treasury bills of F1-day, 1D2-day and 286-day are being continued for sale.purchase in
the market.
!esides, to mobilise long term fund from domestic sources for financing government
expenditure programme !angladesh Hovernment "reasury !onds )!H"!*, bearing half
yearly interest coupons, with tenors of 7-year, 1B-year, 17-year 2B-year have been
introduced which are being traded in the money market. "hese bonds are issued at par
through yield based multiple price auction mechanism held in !angladesh !ank with
effect from 2BB;. "hese bonds can be used in the market to avail repo facilities.
The main features of the bill market is still a largely captive market financial
institutions having no /G, obligations and corporate or non-corporate firms, semi-
government or autonomous bodies having temporary surplus funds or the institutions
having pension funds are investing in government treasury bills .bonds through auction
mechanism under non-competitive bid. "hus the scope of bill.bond market is growing in
the recent year. /econdary market of this segment is increasing gradually which will
largely remove the illiuidity of the instrument.
1F
Chapter: 4
2B
+ntroduction
"he !angladesh economy is within the mainstream of the continuously changing global
financial system. #omestic as well as international trade also characteri$es !angladesh
economy. %ence a financial system has developed here consisting mainly of the capital
and the money market. &or any underdevelopment country the existence of a well
functioning money market is of paramount importance. "he money market currently
existing has also developed due to certain needs. 'n general, these needs can be termed as
need for short term liuidity 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. "-bill market is by far the
largest component of the money market in !angladesh.
(apital markets are essentially about matching the needs of investors with those that need
capital for development. !angladesh has no shortage of both such parties, a young and
dynamic population that increasingly wants, and is able to, make provision for lifetime
events, to save for childrenCs education, for the possibility of ill health and ultimately for
old age and retirement. -n the other side of the euation, !angladesh has a pressing need
for investment resources to bolster its stretched infrastructure resources, to build more
power stations, bridges, ports and gas-pipelines to empower the people in the
development of enterprise and the creation of 4obs. #ebt markets are an extremely
effective mechanism for matching the long term needs of savers with those of
entrepreneurs. Gike emerging&market countries around the world, !angladesh could
benefit from having a local-currency, fixed&income securities market. 0t present, its main
fixed income 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*. !ut in general the corporate debt
market is still very small compared with the euity market.
Money market securities
are the debt securities that have a maturity one year or less. "hey generally have a
relatively high degree of liuidity. Money market securities tend to have a low expected
21
return but also a low degree of risk. 1arious types of money market securities are listed
below.
Money Market
Securities
+ssued (y )ommon
+n"estors
)ommon
Maturities
Secondary
Market
,cti"ity
%reasury (ills &ederal
Hovernment
%ouseholds,
firms and
financial
institutions
12 weeks, 28
weeks. 1 year
%igh
-etail
certificates of
de*osit .)!s/
!anks and
saving
institutions
%ouseholds ; days to 7
years or longer
<onexistent
'egotia(le
certificates of
de*osit .')!s/
Garge banks
and saving
'nstitutions
&irms 2 weeks to 1
year
Moderate
)ommercial
*a*er
!ank holding
companies,
finance
companies and
other
companies
&irms 1 days to 2;B
days
Gow
Eurodollar
!e*osit
!anks located
outside the
country
&irms and
government
1 day to 1 year <onexistent
anker0s
acce*tances
!anks
) exporting firm
can sell the
acceptance at a
discount obtain
funds*
&irms 2B days to 2;B
days
%igh
#ederal #unds #epository
institutions
#epository
institutions
1 day to ; days <onexistent
-e*urchase
agreements
&irms and
financial
institutions
&irms and
financial
institutions
1 day to 17
days
<onexistent
%&ill Progress in angladesh
Issuer
!angladesh !ank )!!*, the central bank of !angladesh, operates throughout the country
with its nine branches. Hovernment receipts and payments are overseen and managed by
!0<HG0#E/% !0<K. Ehere there is no !0<HG0#E/% !0<K branch but
22
transactions of government occur, different branches of /onali !ank )/!* are assigned to
take part in these transactions on behalf of !0<HG0#E/% !0<K. "hese branches are
known as M(hest !ranchesM. 'n a district, there may be one chest and some sub-chests.
!0<HG0#E/% !0<K directly monitors (hest branches. "his function is known as
M&eedM. "he !angladesh government finances its expenditures in excess of tax receipts
through the sale of debt obligations. (urrently, the total par value of outstanding "reasury
bills stood at about "aka 22BBB crore.
Types
"reasury bills are designated by the number of days to their maturity. "here are six types
of "-bills that prevail in !angladesh. "hese are
a* 2D days "-bill
b* F1 days "-bill
c* 1D2 days "-bill,
d* 286 days "-bill
e* 2 years "-bill
f* 7 years "-bill
Participants
"he market for !angladesh "reasury bills has a complex structure and involves numerous
participants--Ministry of &inance, !angladesh !ank, government securities dealers and
brokers, and other holders of "reasury securities.
Who and Ho Can In!est
Jntil 2BB2, there was no secondary market for treasury securities. 0ny investor
)institution or individual*, who maintains a current account with !angladesh !ank, can
invest in "-bills through primary market auctions. 0uction is held on every /unday at 11
a.m. at the Moti4heel !ranch of !!. 'f /unday is a holiday, then the last working day
before /unday is used. 0ll the investors submit their bid unless otherwise pension or
provident fund. 0fter receiving the bid, the auction committee decides how much "-bills
will be offloaded. "here is a high-powered committee to oversee the treasury functions3
which includes seven members.
"chedule for Issuance
Marketable "reasury securities are issued through regularly scheduled auctions in what is
called the primary market. "he process importantly involves the !angladesh !ank, which
serve as conduits for the auctions.
22
"ellin# "ystem
"reasury 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. "reasury bills are not listed at the /tock
Exchange. 'f one wanted to exit before maturity, rediscounting isnMt possible at the
(entral !ank, rather he or she may take part in the ,epo auction.
"econdary $arket for T-Bill
Jntil 2BB2, there was no secondary market for "-bills transaction in !angladesh.
Hovernment had decided to introduce the secondary "-bill market with a vision of
broadening the government securities market. EorldMs leading financial institution
(itigroupMs subsidiary (itibank, <.0. and local +rime !ank Gimited had taken part in the
first secondary transaction of "-bills in !angladesh that year. (itibank, <.0. had sold a "-
bill of 2 years maturity bearing "aka 2 crore of face value to +rime bank.
!0<HG0#E/% !0<K had taken necessary steps to assist this transaction. "his was
regarded the first secondary "-bill transaction in the country. a. +rimary #ealers5
!angladesh !ank has selected eight banks and one non-bank financial institution as
primary dealers )+#s* to handle secondary transactions of "-bills and other government
bonds. "he eight banks are /onali !ank, :anata !ank, 0grani !ank, +rime !ank Gtd,
Jttara !ank Gtd, /outh-East !ank Gtd, :amuna !ank Gtd, and <((!G, and the only
<!&' is 'nternational Geasing and &inancial /ervices Gtd. "he inter-bank ,epo is one
kind of secondary market for "-bills and government securities, which was introduced
from :uly 2;, 2BB2. "he selected banks and the <!&' have already ended all procedural
eligibility reuirements for being appointed and start operating as secondary bond market
dealers. "he !0<HG0#E/% !0<K earlier invited applications from all scheduled
banks and financial institutions and directed interested parties to drop applications to the
&-,E= ,eserve and "reasury Management #epartment of the central bank latest by
0ugust 21, 2BB2. 0 total of 1D commercial banks and 1 non-bank financial institution
filed their applications for receiving +# licenses during the stipulated time. "he central
bank earlier issued a guideline for the +#s with a view to activating and streamlining the
countryMs secondary bond market. Jnder the guideline, the +#s will subscribe and
underwrite primary issues and make secondary trading deals with 2-way price uotes. 0
26
+# wonMt short sell any particular issue and wonMt carry a short position in secondary
dealings. "he +#s wonMt act as inter-bank or inter-dealer brokers3 it was specified in the
guidelines.
Procedure to allot T-bills
"o foster liuidity in the market, the "reasury issues securities consistently and
predictably through a regular schedule of auctions. 'n !angladesh, Multi*le&units
,uction Model is followed. "wo types of bids may be submitted at the auction5
a* (ompetitive bids
b* <on-competitive bids
(ompetitive bids specify both the uantity of the security sought and a yield. 'f the
specified yield is within the range accepted at the auction, the bidder is awarded the entire
uantity sought )unless the specified yield is the highest rate accepted, in which case the
bidder is awarded a prorated portion of the bid. <oncompetitive bids specify only the
uantity of the security sought. Get us discuss the procedure that !0<HG0#E/% !0<K
follows to allot "-bills to competitive and non-competitive bidders through "-bill
auctions. 'n !angladesh, "-bills are uoted on a 286-day discount basis. Ee define the
bank discount rate )!#,* as !#, N #.M O 286.t, where t is the number of days from
settlement to maturity, and # is the discount from par, # N M - +, M being the par or
maturity value, and + being the price. %ence the discount from par is given by # N !#,
x M x t.286, while + N M - #. Example5 "he E/: on Monday, &eb ;, 1FF6 gives the ask
uote on the May B7, MF6 "-bill as 2.21L. )'f we were to buy the bill, we would buy at the
ask*. "he uote is for &riday, &ebruary 6. "he market convention used in the E/: is that
two days are needed for settlement3 under this convention settlement would take place on
"uesday, &eb D. "here are D8 days between &eb D and May 7. "he discount on a P1B,BBB
par bill is # N 2.21L x 1B, BBB xD8.286 N ;7.D6, and the price is + N 1B, BBB - ;7.D6 N
FF26.18. (onversely, assume the price of the "-bill were PF,FBB. "he discount amounts to
# N 1B, BBB - F, FBB N 1BB, and the bank-discount rate euals !#, N1BB.1BBBB O 286.D8
N 6.22L.
T-BI%%&eild
"he values of "reasury securities are often summari$ed by the yield curve, which plots
the yields of all non-callable securities against their maturities. 0n example of the yield
27
curve on 0ugust 2;, 2BBF )0uction no Q277* is given below. "his curve has an upward-
sloping, concave shape. /ecurities having maturities of less than five years are highly
concentrated, because shorter-term securities are auctioned more freuently and because
many previously issued longer-term securities fall in that maturity range.
@ield 1olatility of "-bills in !angladesh
)0s of 2;-B;-2B1B 0uction no.277*
%&ill 1ield 23 days 41 days 132 days 354 days 2 years 6 years
23 days 8.D6L --
41 days D.72L 1.8DL --
132 days F.17L B.82L B.82L --
354 days F.;8L B.81L B.81L B.81L --
2 years 1B.82L B.D8L B.D8L B.D8L B.D8L --
6 years 1B.8FL B.B;L B.B;L B.B;L B.B;L B.B;L --
/ource5 !angladesh bank
%his is an u*7ard slo*ing yield cur"e or normal yield cur"e 7hich indicates that the
higher the maturity8 the higher the yield. "hat means, yield of F1-dayu "-bill is higher
than that of 2D-day "-bill and so on.
28
%ere the yield spread between the F1-day "-bills and 2D-day "-bills is 1.8DL, which is
the maximum than those of others. "he reason is that the demand of "-bills gradually
decreases with term to maturity.
Call $oney 'ate
is the interest rate banks charge a broker for the funding of loans to investors who buy on
margin. "his is also known as broker loan rate. 'n the call money market, participants
enter into lending and borrowing for overnight. "he transaction takes place due to
immediate liuidity need. "his may arise from various sources like temporary inability to
meet the mandatory 6L cash reserve reuirement )(,,* 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. "he call money rate is a volatile rate in our country. 't is uite affected
by certain seasonality. #uring the Eid especially when there is a surge of deposit
withdrawals, the banks find themselves in immediate liuidity crisis. "here is a direct and
positive relationship between "-bill rate and call money rate. Ehen there is a seasonal
cash crisis, banks rush to the call money market. 'n this situation, call money rate peaks.
<aturally investors of "-bills are not available at that time unless otherwise they are
offered higher yield rate.
!ifference 7ith the (asic definition
%owever, in !angladesh, two and five year securities are also regarded as "-bills since
they are $ero coupon securities.
-EP9
,epo is a commitment of the seller to the buyer to buy back the instrument as and when
the buyer intends to sell. "his is an arrangement between seller and buyer.
Earlier in !angladesh, there was a premature encashment facility for the investors of "-
bills. Premature encashment facility is a procedure of buying back the security when
cash is needed giving amount and accrued interest. "his is also called discounting the "-
bills. (urrently, instead of #iscounting Eindow, ,epo facility is opened for the investors.
%ere instrument isnMt reuired, rather it is lined. 'nvestors can borrow either full or partial
amount against the bill. 'f an investor borrows 1BBL against the bill, then maximum F7L
discounted value will be provided. "here is also a ,epo auction that is held side by side
2;
of the "-bill auction. "he yield rate of ,epo is determined through bid offer and bid
acceptance, and this yield is higher than the yield of "-bill. &or example, let us assume
that, "-bill yield N DL, ,epo yield N FL, then, <et yield N 1L. "o whom ,epo facility
will be provided is dependent upon the liuidity in the market. ,epo auction is held for 1
and ; days tenure.
-e"erse -e*o
Ehen a bank or financial institution has excess liuidity, it can deposit it to !angladesh
bank. "his procedure is freuently known as ,everse ,epo. "here is also a ,everse ,epo
auction that is held side by side of the "-bill auction. ,everse ,epo auction is also held
for 1 and ; days tenure.
Suggestions
'ntroducing new instruments will create adeuate opportunity for investment of short-
term excess fund, which in turn will increase liuidity and further reduce dependency on
the call money market
"he instruments may be introduced be as new 'nstruments in !angladesh Money Market
are explained here. 14 days %&(ills5 this new lesser maturity bill will give the investors
greater liuidity preference in the short term. 0nd give an out let for earning return on
ideal excess fund.
2D
/E-" 0<0G@/'/
/trength
R (apital Market 'nvestment (ommittee )(M'(* has been formed with the member
of best skilled professionals of !,0( !ank, by whom the policy is made
regarding investment.
R "he policy of !,0( !ank to invest in S0C category shares implement that bank
has elevated scope to get high return from the investment.
R !,0( E+G.E+/G playing a successful role in making analysis and profitable
investment.
R ,eporting about the performance of investment is very structural and well
monitored. /uch as, "rading and operation unit have to give daily report to
(M'(.
R "he analysis on (apital Market exposure for last 2 years giving a result that there
is a consistency in investment.
R Every rules and regulation imposed by !angladesh !ank are practiced very
obediently
Weakness
R "he dependency for reporting with other team sometime making conflict in
maintaining deadline and transparency.
R "he dissatisfaction among employees regarding salary and workload may not
able to bring best outcome from them.
2F
R &rom the analysis ' have found out that !,0( !ank is not that much risk
lover. !ecause analysis showing us that !,0( bank has the highest
investment of 6.18L on its total liabilities over the last three years where a
commercial bank is allowed to invest 1BL of its total liabilities on the capital
market.
-pportunity
0fter the crash on capital market in #ecember 2B1B government took a number of steps
which could a great opportunity for !,0( !ank limited for future profitable investment.
/ome of those are5
R "k. 8BB crore worth of funds distributed to the stateowned banks and 'nvestment
(orporation of !angladesh )'(!*, and formation of a mutual fund titled
!angladesh &und with an initial resource of "k. 1,7BB crore.
R Jnder the national budget of &@2B1112, government announced a number of
incentives to regenerate the capital market. /ome of these were 9 reintroduction
of tax repayment facilities, taxfree facilities for mutual funds
R Hovernment has decided to take actions against people who were involved in
malpractices and manipulation.

"hreats
R 'n a strategy it has shown that, only 1F per cent of total listed companies were
audited by firms that had official affiliation with international audit firms. /o
there have a uestion about the ranking of share.
R !ull cartels are reported to be formed with some members of #/E.(/E, officials
of the /E(, political leaders, highprofile businessmen, officials of financial
institutions, and -wners of brokerage houses, etc. /o it is a great threat in taking
investment decision.
R "he changes in policies of Hovernment by the changes of Hovernment parties.
R Jnstable and unpredictable capital market of !angladesh.
2B
(hapter5 6
(oncubinary 0spects
21
,ecommendations5
"he above data as well as information reveal the facts that the contribution of capital
market especially, of share market towards the economy of !angladesh is not propitiatory
so far. !ecause, in terms of indices, market capitali$ation, turnover, percentage of H#+,
amount of securities, issued capital etc, the capital market position as a whole, does not
support the sound economy. !esides, the position of primary and secondary share market
is not smooth as well as stable where the issuers and investors could not feel better
involving themselves. "hus, the second hypothesis could be considered established.
%ence, th said market could not play the desired role to the economy of !angladesh.
0gain, as per the analyses and interpretations done, regulatory systems are not
transparent as well as not sound, as a result investors remain in dark in knowing the rules
which are fluctuating also and that conseuently invite the syndication appears to have
dominated which causes market situation uncertain when local investors do not keenly
intend to invest in the said market and foreign investments do not take place in time as
well. %ere, the intermediaries among the four groups mentioned earlier do not play
adeuate role in the development of this market. %ere, first hypothesis corroborates the
same ideas. -f course the Hovernment of !angladesh has taken some positive steps
regarding the strengthening of /E( imposing some compulsory terms on the
intermediaries and developing the activities of banks and financial institutions. %owever,
to upgrade the share market, in other words, to generate the capital market for smooth
financing for the stakeholders the following suggestions could play the fruitful role5
a. "he presence of the financially sound institutions is negligible in the market. /o, lots of
(ompanies which are financially sound should come forward towards this market e.g.
Hrameen +hone (ompany has already appeared in this market, 0gain, careful attention
should be given for regular holding of 0HM of the (ompanies, preparation of financial
statements along with the audit reports according to the 0ccounting and 0uditing
/tandards3

b. "he bridge financing activities are not satisfactory, here S(onsortium bodyC )'(!,
#!G* should be more active in playing their role for S!ridge &inancing3
c. "he monitoring phenomenon is some how weak, hence, Merchant !ank which has
been directed under the control of /E( must be monitored time to time whether it is
properly functioning for the interest of participators in the said market3

22
d. "he inflation rate is fluctuating and it has to be kept stable so that the value of money
could not be degraded3

e. 0deuate training and other options are not to be observed, thus, /E( should conduct a
well-established "raining (enter where the new comers could have knowledge regarding
their involvements in this market. 0t the same time, there should be an arrangement of
seminars, symposiums and talk shows for the betterment of the investors
f. "o ensure the availability of loans along with low interests for the investors as well as
participators )especially for the /mall and Medium /cale Enterprises, /MEs* !angladesh
!ank should take positive steps through the schedule banks either public or private
whatever they are3

g. "he arms for control of the share market like S(ircuit !reakerC, S/urveillance with -n-
Gine and -f-Gine mechanism etc. have to be active more so that somebody could not take
the chance otherwise3
h. ,esearch activities must be conducted to find out the deficiencies as well as fficiencies
associated with this market which could contribute to the
achievement of Hross #omestic +roduct and Hross
<ational +roduct so far.
22
)onclusion:
"he market is still struggling to be stable. Market is trying to recover from its bearish
mood but we have observed still much confusion, lack of cooperation among the
government, #/E members, and regulators. 0ll are waiting for a stable market so that
investors get confidence to put their valued money in this market. ' think it is the high
time government should sit with all the elements of capital market and take proper steps
to stabili$e the market for the greatest interest of the small investors as we know they are
heart of this market.
The performance of existing fnancial products is an important issue in the capital
market to increase the new products for reducing the risk of dependency on common
stocks. There are only fve products are traded including three types of bonds. The
average growth rate of market capitalization of common stocks, treasury bonds,
mutual funds, corporate bonds & debentures are 7.!"#, "$.7$#, %%.&'# and
!'.$# respectively. The growth of market capitalization of all products is high. The
share of common stocks, treasury bond, corporate bond, debentures, mutual funds to
total market capitalizations are &7.7(#, "."'#, !."$#, !.7# and !.&(#
respectively. )o, the market is common stock based. The government bonds are
traded among the institutional investors. The corporate bond market is very small.
There is lot of scope in the market for absorbing the new products. )o, there should
be increased new fnancial instruments in the capital market to reduce the
dependency on share only. The proposed fnancial instruments are various types of
preferred stock, bond, )*+,, option, futures, and forwards. There are lots of research
scopes in this feld to study the products which will be e-ective for this market.
26
27
7.1 !ibliography.
'nternational -rgani$ation of /ecurities (ommissions )2BB2*, %he
!e"elo*ment of )or*orate ond Markets in Emerging Market
)ountries8 May, J/0.
Mu, @ibin ) 2BBF*, South ,sia ond Markets and angladesh8 Eorld !ank,
#haka.
"he 0nnual ,eport .2::6;2::5;2::<;2::3/8 angladesh ank8 !haka8
angladesh.
7.2 ,eferences5
1 www.dsebd.org
2 0nnual report of #haka /tock Exchange Gtd
2 0nnual report of (hittagong /tock Exchange Gtd.
)onclusion
28
"he capital market is the engine of growth for an economy, and performs a critical role in
acting as an intermediary between savers and companies seeking additional financing for
business expansion. 1ibrant capital is likely to support a robust economy. Ehile lending
by commercial banks provides valuable initial support for corporate growth, a developed
stock-market is an important pre-reuisite for moving into a more mature growth phase
with more sophisticated conglomerates. !angladeshMs stock market is poised for rapid
development. &or this the /E(, #/E, (/E and all market players should work together
with the support of the government. Market confidence is sure to erode if conflicting
signals are received from different authorities. 0t the same time investors will have to
understand that in any stock market there are ups and downs and they cannot blame
others whenever stock prices slide down. &ortunately, investors are getting matured
gradually and hopefully we may not have to see shouting and slogan in front of the
exchanges any longer. !angladesh should really focus on improving governance and
developing advanced market products, such as derivatives, swaps etc.
!ibliography
2;
2D