1.

Introduction:
A financial market is a market in which people trade financial securities. Financial markets are
facilitated through the flow of funds in order to finance investments by corporations,
governments, and individuals. Financial Institutions are the key players in financial because
they serve as intermediaries that determine the flow of funds. So, among them we have to
channelize the fund in proper way to give the opportunity for investment.
Financial market has been playing an increasingly important role in the development of a
Country. There are many segments of financial market including money market, stock market,
bond market, insurance market, foreign exchange market. Money moves from one segment to
another segment of the financial market due mostly to the relative rates of return in different
segments.

Capital Market – Capital market is a mechanism to flow fund from the hands of small savers
(individuals and institutions) at low costs to those entrepreneurs who do need fund to start
business or to business. In the other words, capital market mechanism gives a part ownership
of big companies/corporations to small savers. In simple term, it is a globally accepted scheme
to share ownership of economic development with general public. The capital market in
Bangladesh consists of two stock exchange companies-Dhaka Stock Exchange (DSE) and
Chittagong Stock Exchange(CSE). These two stock exchanges are regulated by the
Securities and Exchange Commission (SEC). Recently capital market has flourished
noticeably due to stronger economic fundamentals of the listed companies, various measures
by its regulator SEC and opportunity of gaining more returns from holding stocks.
Money market- It is an integral part of the financial market of a country. It 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,
treasurys bill etc. The participants in the money market are: the central bank, commercial
banks, the government, finance companies, contractual saving institutions like the pension
funds, insurance companies, savings and loan associations etc. The instruments that are
generally traded in the money market constitute: treasury bills, short-term central bank and
government bonds, negotiable certificates of deposits, bankers acceptances and commercial
papers like the bills of exchange and promissory notes, mutual funds etc.

Government Bond market - Government issued various types of bonds of different tenures
for long term financing of its deficits, mainly from banks and NBFIs. Besides, for financing
the budget deficit, government issued different saving instruments through National Saving
Directorate (NSD). NSD instruments are sold to the household and collection of money from
the sales of such instruments depends mainly on the rates of interest offered by these
instruments. If interest rates on NSD instruments are lower than the return on the instruments
of other segment of financial market, government’s collection of money from sales of NSD
instruments falls.

Insurance Market – There are more than 62 insurance companies have been operating in
Bangladesh, of which 18 provide life insurance and others are in the general insurance field.
The major source of fund of insurance companies is collecting insurance premium. The
insurance market in Bangladesh has been remained insignificant on the basis of its relatively
small asset size.

The foreign exchange market- It is a global decentralized or over-the-counter (OTC) market

for the trading of currencies. This market determines the foreign exchange rate. It includes all
aspects of buying, selling and exchanging currencies at current or determined prices. The
exchange rate is being determined in the market on the basis of market demand and supply
forces of the respective currencies. In the forex market banks are free to buy and sale foreign
currency in the spot and also in the forward markets. However, to avoid any unusual volatility
in the exchange rate, Bangladesh Bank, the regulator of foreign exchange market remains
vigilant over the developments in the foreign exchange market and intervenes by buying and
selling foreign currencies whenever it deems necessary to maintain stability in the foreign
exchange market.
2. My current interactions with the financial markets:
Dhaka Stock Exchange (DSE):
The total number of listed securities stood at 572 at the end of June 2018. Among listed
companies, there were 305 companies, 37 mutual funds, 221 government bonds, 8 debentures,
and 1 corporate bond respectively. The number of companies consists of 30 banks, 23 financial
Institutions, 47 insurance companies and 205other companies. During the period April-June
2018, a total number of 4.35 billion shares were traded as
against 6.5 billion shares during January-March 2018 and
11.13 billion shares during the same period of the
previous year. It was 33.05 percent and 60.92 percent
lower than that of preceding quarter and that of the same
period of the previous year respectively. During the
period under report, the total turnover value of traded
shares was Tk. 93.60 billion which was 61.75 percent and
75.20 percent lower than that of the preceding quarter and
the same quarter of the previous year respectively.

All Share Price Index of DSE (DSEX) stood at 5405.46

points at the end of June 2018, which was 3.43percent
lower than 5597.44 points at the end of March 2018 as
well as 4.43 percent lower than 5656.05 points at the end
of June 2017(Chart-1). DSE30 index stood at 1959.95
points at the end of June 2018, which was 6.94 percent
and 5.94 percent lower than 2106.02 and 2083.80 points
at the end of March 2018 and June2017 respectively.
Sharia'h Compliant index named DSES went down to
1263.65 points at the end of June 2018 which was
1314.65 points at the end of March 2018 and 1296.74
points at the end of June 2017 (Chart 2).The market
capitalization of DSE stood at Tk. 3812.29 billion at the
end of June 2018, which was 2.68 percent lower than that
of the previous quarter but 0.30 percent higher than that
of the same period of the previous year (Chart-3). The
ratio of market capitalization to GDP stood at 17.19
percent at the end of June 2018, which registered the peak at 43.52 during the month of
December 2010.

The price-earning (P/E) ratio slightly decreased to 14.97 during the period under report which
was 15.67 at the end of the preceding quarter. The ratio was 15.74 at the end of the same quarter
of the preceding year. In contrast, the yield of all share increased to 3.63 at the end of June
2018 which was 3.50 at the end of March 2018 and 3.61
at the end of June 2017. Trend of Price-Earnings ratio
and yield are shown in the Chart 4.

Sector wise Issued capital and market capitalization of

DSE The total amount of issued capital increased to Tk.
1219.67 billion at the end of June 2018 which was Tk.
1197.44 billion and Tk. 1165.51 billion at the end of
March 2018 and June 2017 respectively. At the end of
June 2018 among different sectors, Bangladesh Govt.
Treasury Bonds (BGTBs) dominate the bourse in terms
of issued capital. This sector issued around 44.98 percent
of the capital followed by banking sectors (22.78
percent) and other companies (21.75 percent). At the same time the shares of Mutual Fund,
Financial institutions (FIs), Insurance companies and corporate bonds were 4.50 percent, 3.86
percent, 1.89 percent, and 0.25 percent respectively (Chart 5).The contribution of Banks to the
total market capitalization was 14.87 percent. The contribution of Govt. Treasury Bonds
(BGTBs), Financial Institutions (FIs), Insurance Companies, Mutual Fund and Corporate
Bonds was approximately 14.39 percent, 5.51 percent, 2.25 percent, 1.07 percent and 0.08
percent respectively. During the same period, except financial sector the contribution of other
listed companies (manufacturing, service and others) captured the highest portion (61.83
percent) among all listed securities in DSE (chart 6). Price-earnings (P/E) ratio of all securities
of DSE registered 14.97 percent at the end of June 2018. Within the financial sector companies
the P/E ratios for banking sector historically performs the best. P/E ratios for banks, FIs and
Insurances companies are 8.76, 14.66 and 11.00 percent respectively (chart 7).
A comparative picture of the two stock exchanges (Table-2) is given below:
3. What sorts of things can destabilize the financial market of a country :
Financial market failures refer to situations where financial markets fail to operate efficiently,
causing lost economic output and reductions in the value of national wealth. Financial Market
is a mechanism that brings buyer and seller of financial assets together for fixing the price of a
particular security.
When a financial market fails, it means that the price mechanism does not work effectively. A
significant function of the price mechanism is allocate goods and services a price, but in
financial markets, the prices of assets may not reflect the full range of costs and benefits
associated with owning, or trading in, those assets. For example, failing to establish the 'risk'
associated with holding a financial asset may cause a divergence between the market (or traded)
value of the asset, and the true value. This can distort decision making and lead to a
misallocation of resources. One feature of the financial crisis was the emergence of 'toxic'
assets, where risks were hidden, and hence market values failed to reflect the underlying value
of the asset based on accurate risk calculation.
There are several features of financial markets that suggest that within those markets the price
mechanism may fail maximize economic welfare. The result was that banks were failing to
fulfil a key banking function, namely to make loans and ensure the adequate flow of liquidity
into the economy.
Financial market failures can lead to numerous negative externalities, which may include:
 Falling real output.
 Rising unemployment.
 Falling real wages.
 Rising poverty levels.
 Falling profits and bankruptcies.

4. What strategies can help a financial market to stay in balanced condition-

The economic and financial situation and prospects are characterized by two features: first, a
synchronized decline or deceleration in economic activity in all economies which is associated
with a collapse in world trade; and, second, growing signs of an adverse feedback loop between
the real economy and the financial sector. Although the sharp drop in the value of toxic assets
has weakened many banks’ balance sheets, the weakening of economic activity has been
impairing the quality of bank loans, adversely affecting their capital positions and their
willingness to extend credit to the private sector. This, in turn, constrains the pace of economic
activity and the ability of the private sector to service its debts, entailing a risk of a vicious
circle.
Policies for economic recovery and sustained growth - These observations have two general
implications for economic policy. First, the economy’s recovery requires the simultaneous
implementation of macroeconomic policies to stimulate aggregate demand and of measures
that will help repair banks’ balance sheets and encourage the provision of credit to the
economy. In this way, a potential vicious circle can be prevented. Second, concerted policy
efforts in all economies, especially the large ones, are necessary so that world trade can be
revitalized and financial capital flows stabilized. This will help support the emerging market
economies. The immediate priority of macroeconomic policies and bank support schemes is to
promote the economy’s recovery and preserve price and financial stability. The Central bank
monetary policy and provision of liquidity have played a key role in containing the downside
risks to price stability, supporting economic activity and stabilizing the financial system.
Financial system reform this brings two final points concerning two other essential conditions
for sustainable growth: financial system reform and sound fiscal policy. It is by now generally
agreed that there is both a great and urgent need to introduce reforms that prevent the recurrence
of episodes of financial market excesses.
Fiscal policy - it is also essential for sustainable growth and prosperity that confidence in the
long-term soundness of public finances is maintained.

5. What situations Bangladesh financial market are currently facing?

Several situations can explain the financial market condition of Bangladesh. We’ve tried to list
them below.
Performance of Domestic Equity Market:
Capital market of Bangladesh passed a challenging year in 2018. Average daily turnover
amounted to USD 65.6 mn, down by 37.0% than that in 2017. In 2018, financial sector was
adversely affected by rising interest rate and growing NPL problems which dominated its stock
market performance. Financial composite which includes Bank, NBFI, and Insurance declined
by 18.6% against overall market decline of 13.8%.Bangladesh was the worst performer among
the peer emerging and frontier economies in this region. Rising US interest rate and currency
triggered net outflow of foreign portfolio investment across the region. Regional economic
power India declined by 7.3%, while Bangladesh’s close competitor Vietnam shed 9.3% in
2018.
Interest Rate Hike: Interest rate hike was the key driver of market performance recently. After
years of gradual decline to a comfortable level, interest rate shoot up in early 2018. Difference
between bank deposit rates and risk free rate offered by National Savings Certificates (NSCs)
widened as the former steadily declined for a long period until 2018, and the later remained
unchanged out of sync of market.

Current Account Deficit and pressure on Exchange rate: Current account deficit of
Bangladesh reached its historical highest at USD 9.8 bn in 2018. High import growth arising
primarily from one–time surge in food grain import due to flood and sharp increase in
petroleum products import exerted significant pressure on current account. Modest
performance in export and remittance turned out to be insufficient to ameliorate it. As a result
USD gets dearer. Central bank supported the currency throughout the year, soaking up further
BDT liquidity from the market. In anticipation of currency devaluation, foreign fund managers
lowered their exposure from capital market of Bangladesh. Large caps were affected the most
by this and pulled index down with them. Corporate profitability was also hit as cost of
imported raw material rose.

Banking Sector Turmoil: Already weakened by macro pressure, vulnerability of banks asset
books were further exposed recently. As on September 2018, banking sector NPL stood at
11.5%, which would go up to 17%, if rescheduled and restructured loans were taken into
account. NPL in Bangladesh is one of the highest in this region. Trouble with a fourth
generation bank reached a critical point in last year, leading to a government administered
management change. The weak state of its books brought fragile financials of the other fourth
generation banks into limelight. Meanwhile, asset quality of public sector banks did not
improve. A few of the private commercial banks also revealed to be in dire straits. Such state
deterred investors causing a rout that shed almost USD 2 bn of Mcap from the sector.

Political Environment: Caution over political environment is a palpable catalyst recently.

Market participants were defensive as election approached. However, compared to previous
elections, political environment was rather calm as the election approached and passed.

Major Developments in Capital Market in Recent time

Strategic Partnership between DSE and Chinese Consortium: The most important event in
capital market of Bangladesh in recent time probably is the strategic partnership between DSE
and a Chinese consortium of Shanghai and Shenzhen Stock exchanges. The consortium took
25% stake in DSE in exchange of USD 125 mn, valuing the exchange at USD 500 mn. The
deal promised additional technical assistances worth USD 37 mn.

Regulatory Developments: One of the biggest regulatory moves is extension of tenure of

closed end mutual funds for another term of 10 years, provided that the total tenure of the
mutual funds don’t go beyond 20 years. On the aftermath of the decision, total market
capitalization of closed end mutual funds declined by 7.1% or BDT 2.6 bn by the year end of
2018. Whereas, market capitalization of DSE declined by 0.9% during the same period.
In 2018, BSEC approved draft Bangladesh Securities and Exchange Commission (Qualified
Investor Offer by Small Capital Companies) Rules, 2018. The rule is expected to facilitate a
separate market for small cap companies, increasing efficiency of overall market.

Merger & Acquisition activities: Three big M&A activities took place in the local market
after a long time. Earlier in 2018, global Fin-tech giant Ant Financial took 20% stake in local
Mobile Financial Service provider bkash, a subsidiary of listed Brac Bank Ltd. The entrance
of the global leader in the industry is promising potentials of rapid development and innovation
in the local MFS industry. In late 2018, under a global transaction, local consumer business
unit of GlaxoSmithKline was acquired by Unilever. In last year, privately held tobacco business
of Akij group was fully acquired by Japan Tobacco International at a valuation of about USD
1.5 bn. All these big M&A activities reflect increasing interest of global giants in Bangladesh.
Given the growth story of Bangladesh, we believe the interest to get even keener in coming
days.

6. Conclusions:
The government of Bangladesh expects that GDP growth would stand at 7.8% in 2019, while
inflation would be 5.6%. Economic Intelligence Unit predicted Bangladesh to be the second
best performing economy in the world in 2019, growing by 7.9%. In concurrence, United
Nations predicted Bangladesh to be third fastest growing economy with a growth rate of
7.4%. We believe post-election stable political environment will attract domestic and foreign
investment and boost growth. As both export and remittance shows sign of significant
improvement while import growth slowed, current account balance should also improve, easing
pressure on currency. Bangladesh Bank expects Trade Deficit to be USD 17.2 bn, and Current
Account Deficit to come down to USD 6.4 bn, while BOP situation to remain almost unchanged
at a deficit of USD 0.6 bn. However, money market may remain stressed until NSC rates
rationalization, NPL buildup, such structural issues are addressed.