Term Paper On:

“Money Market Contribution in a Developing Economy like Bangladesh”

Submitted To:

Ms. Fatema Afreen

Lecturer

Finance Discipline

Department of Business Administration

Premier University, Chattogram

Submitted By:

Md. Sakib Uddin

ID: 1503210108498

Batch – 32nd

Finance Discipline

Department of Business Administration

Premier University, Chattogram

Date of Submission: 8th August, 2020

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 Letter of Transmittal

Ms. Fatema Afreen

Finance Discipline

Premier University Chattogram

Sub: Letter of Transmittal

Dear Madam,

It is indeed a great pleasure for me to be able to hand over the result of my hardship of the study
over “Money Market Contribution in a Developing Economy like Bangladesh”. This report is the
result of the knowledge which has been acquired from the respective course. I tried my level best
for preparing this report. The information of this report is mainly based on Bangladesh Bank’s
website. Some other details were gathered from the help of some article about this topic and
books. I gave my hundred percent for making this report come together.

I fervently hope that you will read this report. Please feel free for any query or clarification that
you would like me to explain. Hope you will appreciate my hard work and excuse the minor
errors.

Thanking you for your cooperation.

Sincerely,

Md. Sakib Uddin

ID: 1503210108498

Program: BBA (Finance)

Batch: 32

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 Acknowledgement

First of all, I am very much grateful to God for blessing me with the strength, aptitude and
patience for successfully completing my term paper. Next, I would like to express my kindness
to my beloved parents whose continuous inspiration and blessings encourages me to make a right
move in my life.

I would like to thank my honorable supervisor, Ms. Fatema Afreen, Lecturer, Finance Discipline,
Faculty of Business Studies, Premier University, Chattogram, for giving me the opportunity to
work with her during my period of term paper. I have completed this term paper in a
comprehensive manner due to the guidance, support and counseling that she has provided me
with during this period. I have tried my best to implement his constructive suggestions while
doing my term paper.

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 Table of Contents

Chapter Content Page no.

Chapter – 1 1. Introduction Aspects
1.1 Background of the study 06
1.2 Objective of the study 06
1.3 Scope of the study 07
1.4 Methodology of the study 07
1.5 Limitations of the study 07
Chapter – 2 2. Theoretical aspect
2.1 Money Market 09
2.2 Participants of Bangladesh money market 09
2.3 Structure of the Money Market 11
2.3.1. Organized market 12
2.3.2. Unorganized market 12
2.4 Characteristics of Bangladesh money market 12
2.5 Constituents of Money Market 13
2.5.1. Inter -bank market 13
2.5.2. Call money market 13
2.5.3. Bill Market 15
2.5.4. Repo market 15
2.5.5. Reverse repo market 16
2.6 Money market securities 17
2.6.1. Treasury bill 17
2.6.2. Repurchase agreement 18
2.6.3. Commercial paper 18
2.6.4. Certificate of deposit 19
2.6.5. Bankers’ acceptance 19
2.6.6. Eurodollars deposits 20
2.6.7. Federal funds 21

2.7 Functions of Bangladesh Money market 22

Chapter-3 3. Practical aspects
3.1 Significance of money market in Bangladesh 24
economy
3.2 Findings of Bangladesh Money Market 26
3.3 SWOT analysis of Bangladesh money market 27
3.3.1. Strength 27
3.3.2. Weakness 27
3.3.3. Opportunity 28

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 3.3.4. Threat 28
3.4 Problems of Bangladesh’s money market 28
Chapter-4 4. Conclusionary Aspects
4.1 Recommendations for money market in Bangladesh 30
4.2 Conclusions 30
Chapter-5 5. Ending Matters

5.1 Reference 32

Chapter – 1
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 Introduction Aspects

1.1 BACKGROUND OF THE STUDY:

Money market means market where money or its equivalent can be traded. Money is synonym of
liquidity. Money market consists of financial institutions and dealers in money or credit who
wish to generate liquidity. It is better known as a place where large institutions and government
manage their short-term cash needs. For generation of liquidity, short term borrowing and
lending is done by these financial institutions and dealers. Money Market is part of financial
market where instruments with high liquidity and very short-term maturities are traded. Due to
highly liquid nature of securities and their short-term maturities, money market is treated as a
safe place. Hence, money market is a market where short term obligations such as treasury bills,
commercial papers and bankers’ acceptances are bought and sold.

Money markets exist to facilitate efficient transfer of short-term funds between holders and
borrowers of cash assets. For the lender/investor, it provides a good return on their funds. For the
borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term
liabilities. One of the primary functions of money market is to provide focal point for RBI’s
intervention for influencing liquidity and general levels of interest rates in the economy. RBI
being the main constituent in the money market aims at ensuring that liquidity and short-term
interest rates are consistent with the monetary policy objectives.

1.2 OBJECTIVES OF THE STUDY:

The main objective of this term paper is the essential requirement of BBA program. And this
paper will help to gather knowledge regarding followings:

a) The role of money Market in the growth of economy of the country.

b) How money market promotes liquidity and safety of funds.
c) Safe way of transferring funds from one place to another.
d) Short term investment opportunity for short term savings.
e) Identify the current situation of money market of Bangladesh.

1.3 SCOPE OF THE STUDY:

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 a) Subject matter of the study: Contribution of money market in a developing economy
like Bangladesh is the subject matter of the study.
b) ‘Topics’ that will be discussed: The study will be focused on the current scenario of
Bangladesh Money Market and their methods and strategies, facilities, finding the
problems and recommend the solution of those problem.
c) Population of the study: The Central Bank, Microfinance Institutions, Co-operative
Bank, Credit Rating and Stock Exchange, Nationalized Commercial Bank, Private
Commercial Bank, Foreign Commercial Bank, State Owned Specialized Bank, Non-Bank
Financial Institutions, Commercial Banks, Co-operative Banks, Finance, industrial and
service companies, Money market mutual funds and Primary Dealers are allowed to
borrow and lend.
d) The duration of the study: The duration of the study is 2019-2020 financial year.

1.4 METHODOLOGY OF THE STUDY:

All the data are used in this term paper are collected from secondary sources. Relevant literature
survey, observation method was used extensively. The study can be used for educational
purpose. Data used in this term paper can also be used to analyze the contribution of Money
Market. The study of this kind is generally encountered with some limitations. Unavailability of
data is a major problem. Data accuracy cannot be ensured as mainly secondary data collected
from Annual Report, journals, Various Financial Stability reports, Economic trends is used in the
study. However, repeated and sincere efforts have been given to ensure the accuracy of the data
is used in this study.

1.5 LIMITATIONS OF THE STUDY:

a) Sample Size: Over the 100 companies/institutions are involved in this system but this
study will be conducted only few (5-10) institutions.
b) Sample Profile: In this study I have to use many secondary data. There are many
advantages for this, such as easy access and low costs for data collection. But those data
are also extremely limiting because the population of the study is comprised of people
with varies profiles.

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c) Method: Very often, a method is accurate for a research aim, but it also includes many
limitations. In this study I intend to understand the contribution of Money Market in
economic development of the country. But some respondent may feel uncomfortable to
share their institutions position and information with me. May be that information is
confidential.
d) Time: I have a deadline to complete my task. If I had unlimited time to do research and
collect data, I Would do better work. “Time” was a very common limitation.
e) Timing of Study: I did not investigate a matter long after it happened. I also collected
some data in a period that was not exactly suitable for respondents for some specific
reason.
f) Financial Resources: Money is always a problem. I had to purchase an internet
connection which was very expensive for me. Also, collection of data is a matter of
money. Consequently, such limitations might be reflected in the results of study.

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 Chapter – 2

Theoretical Aspect

2.1 MONEY MARKET

Money market is a component of the financial market where financial instruments with high
liquidity and very short maturities are traded. Money market is a platform that enables lenders
and borrowers trade in assets that have maturities of less than a year. These short-term
instruments are highly liquid, marketable, with a minimum chance of loss.

Money market consists of negotiable instruments such as treasury bills, commercial papers and
certificates of deposit. It is used by many participants, including companies, govt etc. to raise
funds by selling commercial papers in the market. Individuals, businesses, and governments all
invest in money market instruments. They invest indirectly through regulated money market
mutual funds and unregulated money market intermediaries. Large individual and institutional
investors acquire wholesale money market instruments indirectly and directly. Money market is
considered a safe place to invest due to the high liquidity of securities.

2.2 Participants of Money Market

It is usually well known that in money market there are two main participants: Supplier and
demander of money market securities. It is quite natural that participants in the money market
acts both supplier and demander of loans and securities. Generally, the participants in money
market are:
i Individual
ii Business and
iii Government.

 More specifically we can identify different participants as:

1. Central Bank

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2. Commercial Banks, Co-operative Banks, Finance, industrial and service companies,
Money market mutual funds and Primary Dealers are allowed to borrow and lend.

3. Financial Institutions, Mutual Funds, and certain specified entities are allowed to
access to Call/Notice money market only as lenders.

4. Individuals, firms, companies, corporate bodies, trusts and institutions can purchase
the treasury bills, CPs and CDs.

5. All other financial institutions (investing)

6. Short-term investing for income and liquidity

7. Short-term financing for short and permanent needs

8. Large transaction size and telecommunication network

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2.3 STRUCTURE OF MONEY MARKET

Money
Market

Unorganiz
Organized Banglades
ed Sector
Sector h Bank

Co-operative Commerci
Banks & al Bank
Credit
Institutions

Public Private
Sector Sector

4 Regional
Nonschedu
Nationalized Rural
led Bank
Bank Bank

Scheduled
Bank

Bangladesh
Foreign
i

FIG: STRUCTURE OF MONEY MARKET

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2.3.1. Organized market

Organized market is that part which comes under the regulatory purview of Bangladesh Bank.
The nature of the money market transactions is such that they are large in amount and high in
volume. Thus, the entire market is dominated by small number of large players.

2.3.2. Unorganized market

Unorganized market is old Indigenous market mainly made of

1. Indigenous bankers

2. Money lenders

3. Individuals

4. NBFIs

5. Friends

2.4 CHARACTERISTICS OF BANGLADESH MONEY MARKET:

The central bank controls the entire operation of the organized sector of the Money Market. Over
the years both commercial banks and other banks have come to depend more and more on the
rediscounting and borrowing facilities provided by central bank (CB), especially during the busy
season. Moreover, the CB supervises their lending policies from time to time. The main
characteristics of money market of Bangladesh are as follows.
1. It is not a single market but a collection of markets for several instruments
2. It is wholesale market of short-term debt instruments
3. Its principal feature is honor where the creditworthiness of the participants is important.
4. The main players are: Reserve bank of India (RBI), Discount and Finance House of India
(DFHI), mutual funds, banks, corporate investor, non-banking finance companies (NBFCs), state

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governments, provident funds, Primary dealers. Securities Trading Corporation of India (STCI),
public sector undertaking (PSUs), non-resident Indians and overseas corporate bodies.
5. It is a need-based market wherein the demand and supply of money shape the market.

2.5 Constituents of money market

The five distinct components under the organized segment of money market in Bangladesh are:

1) INTER-BANK MARKET

2) CALL MONEY MARKET

3) BILL MARKET

4) REPO MARKET AND

5) REVERSE REPO MARKET

1) Inter-bank market: The interbank market is a network of international banks operating

in financial centers around the world. Currency trading today is largely concentrated in
the hands of about a dozen major global financial firms, such as UBS, Deutsche Bank,
Citibank, JPMorgan Chase, Barclays, Goldman Sachs, and Royal Bank of Scotland, to
name just a few. Hundreds of other international banks and financial institutions trade
alongside the top banks, and all contribute liquidity and market interest.

These banks maintain trading operations to facilitate speculation for their own accounts,
called proprietary trading (or prop trading for short), and to provide currency trading
services for their customers. Banks’ customers can range from corporations and
government agencies to hedge funds and wealthy private individuals.

2) Call money market was initially a part of inter-bank market. In 1980s, banks
participated in a limited scale in the call money market mainly to wipe out the temporary
mismatch in their assets and liabilities. Formation of private banks during the 1980s

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 provided new opportunities to develop the call money market. In 1985, two investment
companies and in 1989, one leasing company were allowed to participate in the call
money market. But at present, all banks including specialized banks and non-bank
financial institutions are allowed to participate in this market.

 Call Money Rate: The interest rate banks charge a broker for the funding of loans to
investors who buy on margin is called call money rate or broker loan rate. In the call
money market, participants enter in to 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 or special
occasions 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.

In Bangladesh changes in the inter-bank call money rate were more pronounced than the bank rate. The
rate at which the central bank lends to the scheduled banks. The inter-bank call money rate (from 06
April, 2020 to 23 March, 2020) are shown in Table:
Table: Call money rate

Serial Date Rate of Interest Lending Volume

no. Highest Lowest Weighted (Crore Taka)
average
1 06 April, 2020 5 5 5 3,267.00
2 05 April, 2020 5 4.5 4.99 4,132.00
3 02 April, 2020 5 5 5 135
4 01 April, 2020 5 5 5 650
5 31 March, 2020 5 5 5 55

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 6 24 March, 2020 5.5 4.4 5.17 1,386.33
7 23 March, 2020 5.5 4.25 5.16 1,406.52
Source: Bangladesh Bank

 Features of Call Money Rate

a) Effects of High Call Money Rate in the Economy Increases the Cost of Fund: The
high interest rate in interbank money market increases the cost of fund of the weak banks
and NBFIs may incur loss by frequent borrowing at a high interest rate. Therefore, the
financial health of the weak NBFIs may be lost by the borrowing of money from the
inter-bank money market at a high interest rate.

b) Increases the Interest Rate in other financial markets: High interest rates in interbank
money market can push the interest rates in other financial markets, like borrowing from
foreign exchange market, financial derivatives and other instruments in financial markets.
Moreover, an increase in interest rate will negatively affect the investment.
c) Creates Volatility in Financial Market: High interest rates in interbank money market
increases the volatility in financial market. Borrowing money from interbank money
market at a high interest rate by the NBFIs may create panic in the financial sector which
may result a loss of credibility of NBFIs and may also create a liquidity crisis.
3) Bill market: Bill Market refers to the market for short-term bills generally of three
months maturity. A bill is a promise to pay a specified amount by the borrower (drawer)
to the creditor (drawee). Bills are of three types- (a) bills of exchange or commercial bills
used to finance trade; (b) finance bills or promissory notes; and (c) treasury bills used to
meet temporary financial needs to the government. These bills may be bought and sold in
the discount market which consists of commercial banks, discount houses and other
institutions.
4) Repo Market is a market in which securities are exchanged for cash with an agreement
to repurchase the securities at a future date. Repo is attractive as a monetary policy
instrument because it carries a low credit r5isk and serves as a flexible instrument of
liquidity management. Scheduled banks and financial institutions are the participants of
this market.

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 Table: Repo with Bangladesh Bank

Auction Tenor Bids received Bids accepted

date Total bids Total amount Int. rate Total Amount Cut-off
(cr Taka) (%) bids (cr Taka) rate
(%)
24/03/202 1 124 9813.12 6 124 9788.57 6
0
  Total 124 9813.12   124 9788.57  
23/03/202 1 121 7324.64 6 122 7253.36 6
0
  Total 121 7324.64   122 7253.36  
Source: Bangladesh Bank

5) Reverse Repo auctions were introduced in FY 2003 as a counterpart of repo auctions

with the view to limiting excess funds that the banks offered in the reverse repo auctions.
The reverse repo auctions are used as a fine-tuning supplement to the weekly treasury
bills auctions to mop up excess liquidity.

Table: Reverse Repo with Bangladesh Bank

Auction Tenor Bids received Bids accepted

date Total Amount Range of Total Amount Cut-off
bids (cr Taka) rate (%) bids (cr Taka) rate (%)
15/11/201 1 15 7058 5.25 15 2046.5 5.25
5
  Total 15 7058   15 2046.5  
12/11/201 1 12 6474 5.25 12 2105 5.25
5
  Total 12 6474   12 2105  
11/11/201 1 15 7627 5.25 15 2136 5.25
5

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   Total 15 7627   15 2136  
Source: Bangladesh Bank

2.6 MONEY MARKET SECURITIES:

Debt securities having maturity one year or less is call money market securities. Money markets
securities are relatively high degree of liquidate. 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.

1) TREASURY BILLS

Treasury Bills issued by the government as an important tool of raising public finance were of
three types, although all of them were 90-day bills. Among these three types, bulk was
represented by ad-hoc treasury bills issued to meet the cash balance need of the government. A
second type was the 3-months treasury bills on tap introduced in August 1972 and their
purpose was to mop up the excess liquidity of banks. The third type was the 3-months treasury
bills introduced for subscription exclusively by the NON-BANK FINANCIAL INSTITUTIONS, non-
financial enterprises and the public.

TYPES OF T-BILL

• Three-months (12-Weeks / 90-days)

• Six-months (24-Weeks)
• Twelve-months (one-year)

Treasury bills are sold at a discount to the par value, which is its actual value. For example, a
Treasury bill with a par value of $10,000 may be sold for $9,500. The US Government, through
the Department of Treasury, promises to pay the investor the full-face value of the T-bill at its
specified maturity date. Upon maturity, the government will pay the investor $10,000, resulting

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in a profit of $500. The amount of profit earned from the payment is considered the interest
earned on the T-bill.

 HOW TO CALCULATE RETURN ON T-BILLS?

As we have studied earlier that T-Bills do not carry any interest rate but instead are sold at a
discount from their par value or face value. Thus, their yield is based on their appreciation in
price between time of issue and the time they mature or are sold by the investor.

T-bills do not carry a promised interest rate. Instead, they are sold at a discount from their par or
face value. Bill yields are determined by the bank discount method, which does not compound
interest rates and uses a 360-day year for simplicity. The bank discount rate (DR) on T-bills:

Par value – Purchase value 360

= Par value * Days¿
maturity ¿

2) CERTIFICATE OF DEPOSIT

A certificate of deposit (CD) is a product offered by banks and credit unions that provides an
interest rate premium in exchange for the customer agreeing to leave a lump-sum
deposit untouched for a predetermined period of time. Almost all consumer financial
institutions offer them, although it’s up to each bank which CD terms it wants to offer, how
much higher the rate will be compared to the bank’s savings and money market products, and
what penalties it applies for early withdrawal.
A certificate of deposit (CD) is an interest-bearing receipt for funds left with a depository
institution for a set period of time. CD interest rates are computed as a yield to maturity (YTM)
on a 360-day basis.

Term∈days
Interest income = 360
* Deposit Principal * Promised YTM

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 3) COMMERCIAL PAPER
Commercial paper is a commonly used type of unsecured, short-term debt instrument
issued by corporations, typically used for the financing of payroll, accounts payable and
inventories, and meeting other short-term liabilities. Maturities on commercial paper
typically last several days, and rarely range longer than 270 days. Commercial paper is
usually issued at a discount from face value and reflects prevailing market interest rates.

 CALCULATION OF RATE OF RETURN ON COMMERCIAL PAPER

DRCP = (PAR VALUE – PURCHASE PRICE) / PAR VALUE * 360 / DAYS TO MATURITY

4) REPURCHASE AGREEMENT (REPO)

Repurchase agreements are agreements between a borrower and a lender where the borrower,
in effect, sells securities to the lender with the stipulation that the securities will be repurchased
on a specified date and at a specified, higher price. The securities serve as collateral for the
loan. Most Repo agreements mark the collateral to market daily. If the value of the collateral
drops below the required margin, then the borrower must send more securities to the lender to
maintain margin or some money to reduce the principal outstanding.

 MAJOR BORROWERS AND LENDERS

Major borrowers include government bond dealers of Treasuries and federal agency
securities, and large banks. Government securities are the main collateral for most
repos, along with federal agency securities and mortgage-backed securities etc.
Active lenders include state and local governments, insurance companies, non-
financial corporations, and foreign financial institutions who find the market a
convenient, relatively low risky way to invest temporary surplus cash that may be
retrieves quickly when the need arises.

 CALCULATION OF REPO INTEREST INCOME

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 Usually the securities pledged behind a Repo are valued at their current market price
plus accrued interest on security less a small “haircut” (discount) to reduce the lender’s
exposure to market risk. Longer the term and riskier or less liquid the security pledged;
larger the “haircut” will be charged. Interest income from repurchase agreement can be
determined by this formula:
RP Interest income = Amount of loan x Current Repo Rate x (Repo Term in days/360
days)

5) BANKERS ACCEPTANCE

The literal meaning of the term acceptance is approval. In financial terms acceptance means a
vow to pay a definite amount of money. The person who will pay is called as the promissory
while the one who will receive is the beneficiary.

The document which is the evidence of this promise is called a draft. When this draft tells the
promissory to pay the money on a predetermined specified date then this draft is termed as a
time draft. The promissory puts his

• Signature
• The word accepted on top of his signatures and the date on which
the amount will be paid.

Now the promissory is legally obliged to pay the amount as mentioned in the draft to the
beneficiary because it has been accepted properly by him according to all requirements of
official acceptance. If the time draft is formally accepted by a bank then it becomes a banker’s
acceptance.

In case of a banker’s acceptance the initial promissory is obliged to pay the sum of money and
the interest money charged before or on the maturity date to the bank while the bank is obliged
to pay the money to the beneficiary. The bank becomes the primary obligor.

Banker’s acceptance is usually used in trade; mostly for international business but is also
frequently used for domestic dealing as well. The maturities of banker’s acceptance mostly
range from 30 to 180 days. It allows the international as well as national dealers to trade with
each other. As the dealing firms have not met or may even never meet; have a problem of

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trusting each other. So, banker’s acceptance minimizes their risk. Meanwhile the promissory
also gets more time to make the payments.

6) EURODOLLARS DEPOSITS
Eurodollars are the leading component of the Eurocurrency markets today. There is a need for
Eurocurrency markets because funds are required in international currencies worldwide mainly
in Dollars, Euros and Pounds. Eurodollars are the Eurodollars of US dollars in banks which are
located outside United States.
These can also be the branches of the US banks located outside US. The deposits are recorded
in the denomination of dollars rather than their home currency. Generally, the "euro" prefix can
be used to indicate any currency held in a country where it is not the official currency.
These deposits are loaned to the home offices of the banks in US, lent to business enterprises
that have to make their payments in dollars. It can be retained as well to meet the reserve
requirements and to maintain liquidity. These can be lent to government if it needs dollars and
to private investors as well. The Eurodollar deposits are always moving in the form of loans.

7) FEDERAL FUNDS
Federal funds refer to the overnight borrowings which are undertaken in order to meet the state
bank’s reserve requirements. These are transferred from the lending institution’s account to the
borrowers account.
The funds are not physically transferred. When they are repaid then an entry in books satisfies
the whole loan. The most important borrower in the federal funds market is the commercial
banks. Other financial institutions, security dealers, business corporations and the local
government provide readily available funds for lending in the federal market.
The banks and DFIs are legally obliged to keep a certain amount of funds in the reserve
account which is kept with the state bank of Pakistan. This is equal to the fraction of the
deposits which are kept with a bank.
To meet the requirement of this legal reserve ratio the banks borrow funds mostly on overnight
basis from the federal funds market. Most federal funds are for overnight basis and they have a
fixed interest rate.

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Today the online system has made it very easy to know that which institutions are short of
funds and which have surplus. The one who is short gets the benefit that its immediate
requirement of money is fulfilled while the one with surplus gets interest income on its funds
and thus earns it through the federal fund market.
The interest rates which are levied on these funds highly fluctuate daily. It depends on the
volume of funds which is surplus in the market and the volume of fund needed by the market.

2.7 FUNCTIONS OF A MONEY MARKET:

A money market performs a number of functions in an economy.

1. Provides Funds: It provides short-term funds to the public and private institutions needing
such financing for their working capital requirements. It is done by discounting trade bills
through commercial banks, discount houses, brokers and acceptance houses. Thus, the money
market helps the development of commerce, industry and trade within and outside the country.
2. Use of Surplus Funds: It provides an opportunity to banks and other institutions to use their
surplus funds profitably for a short period. These institutions include not only commercial banks
and other financial institutions but also large non-financial business corporations, states and local
governments.
3. No Need to Borrow from Banks: The existence of a developed money market removes the
necessity of borrowing by the commercial banks from the central bank. If the former finds their
reserves short of cash requirements, they can call in some of their loans from the money market.
The commercial banks prefer to recall their loans rather than borrow from the central banks at a
higher rate of interests.
4. Helps Government: The money market helps the government in borrowing short-term funds
at low interest rates on the basis of treasury bills. On the other hand, if the government were to
issue paper money or borrow from the central bank. It would lead to inflationary pressures in the
economy.
5. Helps in Monetary Policy: A well-developed money market helps in the successful
implementation of the monetary policies of the central bank. It is through the money market that

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the central banks are in a position to control the banking system and thereby influence commerce
and industry.
6. Helps in Financial Mobility: By facilitating the transfer for funds from one sector to another,
the money market helps in financial mobility. Mobility in the flow of funds is essential for the
development of commerce and industry in an economy.
7. Promotes Liquidity and Safety: One of the important functions of the money market is that
it promotes liquidity and safety of financial assets. It thus encourages savings and investments.
8. Equilibrium between Demand and Supply of Funds: The money market brings equilibrium
between the demand and supply of loanable funds. This it does by allocating saving into
investment channels. In this way, it also helps in rational allocation of resources.
9. Economy in Use of Cash: As the money market deals in near-money assets and not money
proper, it helps in economizing the use of cash. It thus provides a convenient and safe way of
transferring funds from one place to another, thereby immensely helping commerce and industry.

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 Chapter-3
PRACTICAL ASPECTS
3.1 SIGNIFICANCE OF MONEY MARKET IN BANGLADESH ECONOMY

Money markets play a key role in banks’ liquidity management and the transmission of monetary
policy. In normal times, money markets are among the most liquid in the financial sector. By
providing the appropriate instruments and partners for liquidity trading, the money market allows
the refinancing of short and medium-term positions and facilitates the mitigation of business’
liquidity risk. The banking system and the money market represent the exclusive setting
monetary policy operates in. A developed, active and efficient interbank market enhances the
efficiency of central bank’s monetary policy, transmitting its impulses into the economy best.
Thus, the development of the money market smoothest the progress of financial intermediation
and boosts lending to economy, hence improving the country’s economic and social welfare.
Therefore, the development of the money market is in all stakeholders’ interests: the banking
system, the Central Bank and the economy on the whole. Importance of a developed money
market and its various functions are discussed below:

1) Financing Trade: Money Market plays crucial role in financing both internal as well as
international trade. Commercial finance is made available to the traders through bills of
exchange, which are discounted by the bill market. The acceptance houses and discount
markets help in financing foreign trade.
2) Financing Industry: Money market contributes to the growth of industries in two ways:
(a) Money market helps the industries in securing short-term loans to meet their working
capital requirements through the system of finance bills, commercial papers, etc. (b)
Industries generally need long-term loans, which are provided in the capital market.

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 However, capital market depends upon the nature of and the conditions in the money
market. The short-term interest rates of the money market influence the long-term interest
rates of the capital market. Thus, money market indirectly helps the industries through its
link with and influence on long-term capital market.
3) Encouragements to saving and investment: Money market has encouraged investors to
save which results in encouragement to investment in the economy. The savings and
investment equilibrium of demand and supply of loanable funds helps in the allocation of
resources.
4) Controls the price line in economy: Inflation is one of the severe economic problems
that all the developing economies have to face every now and then. Cyclical fluctuations
do influence the price level differently depending upon the demand and supply situation
at the given point of time. Money market rates play a main role in controlling the price
line. Higher rates in the money markets decrease the liquidity in the economy and have
the effect of reducing the economic activity in the system. Reduced rates on the other
hand increase the liquidity in the market and bring down the cost of capital considerably,
thereby raising the investment. This function also assists the RBI to control the general
money supply in the economy.
5) Helps in correcting the imbalances in economy: Financial policy on the other hand, has
longer term perspective and aims at correcting the imbalances in the economy. Credit
policy and the financial policy both balance each other to achieve the long-term goals
strong-minded by the government. It not only maintains total control over the credit
creation by the banks, but also keeps a close watch over it. The instruments of financial
policy counting the repo rate cash reserve ratio and bank rate are used by the Central
Bank of the country to give the necessary direction to the monetary policy.
6) Producing information and allocating capital: Money Market develop models where
financial intermediaries arise to produce information and sell this information to savers.
Financial intermediaries can improve the extant assessment of investment opportunities
with positive ramifications on resource allocation by economizing on information
acquisition costs. For sustained growth at the frontier of technology, acquiring
information and strengthening incentives for obtaining information to improve resource
allocation become key issues.

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 7) Liquidity: Money market funds provide valuable liquidity by investing in commercial
paper, municipal securities and repurchase agreements: Money market funds are
significant participants in the commercial paper, municipal securities and repurchase
agreement (or repo) markets. Money market funds hold almost 40% of all outstanding
commercial paper, which is now the primary source for short-term funding for
corporations, who issue commercial paper as a lower-cost alternative to short-term bank
loans. The repo market is an important means by which the Federal Reserve conducts
monetary policy and provides daily liquidity to global financial institutions.
8) Profitable Investment: Money market enables the commercial banks to use their excess
reserves in profitable investment. The main objective of the commercial banks is to earn
income from its reserves as well as maintain liquidity to meet the uncertain cash demand
of the depositors. In the money market, the excess reserves of the commercial banks are
invested in near-money assets (e.g. short-term bills of exchange) which are highly liquid
and can be easily converted into cash. Thus, the commercial banks earn profits without
losing liquidity.
9) Self-Sufficiency of Commercial Bank: Developed money market helps the commercial
banks to become self-sufficient. In the situation of emergency, when the commercial
banks have scarcity of funds, they need not approach the central bank and borrow at a
higher interest rate. On the other hand, they can meet their requirements by recalling their
old short-run loans from the money market.
10) Help to Central Bank: Though the central bank can function and influence the banking
system in the absence of a money market, the existence of a developed money market
smoothens the functioning and increases the efficiency of the central bank.
Money market helps the central bank in two ways: (a)The short-run interest rates of the
money market serves as an indicator of the monetary and banking conditions in the
country and, in this way, guide the central bank to adopt an appropriate banking policy,
(b)The sensitive and integrated money market helps the central bank to secure quick and
widespread influence on the sub-markets, and thus achieve effective implementation of
its policy.
3.2 Findings of Bangladesh Money Market

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Bangladesh's money market has been volatile due to the deepening problems in the banking
sector.
 Liquidity crisis
 Non-performing loans
 Widening current account deficit
 A distortion in the interest rate market and
 Growing gap between lending and deposit growth
 Lack of skilled manpower is the existing problem of Bangladesh money market.

However, government can still control the overall system, and return back the stability of Money
Market. Authority should take actions.
 Diversifying the Market
 Placing right person in the right place
 Improving Manpower by providing proper skill and
 Reform a board for taking care of overall situation.
 An organized sector needed consists of the central bank, state owned and private
commercial bank, specialized banks, scheduled and non-scheduled banks and other
NBFIs etc.

3.3 SWOT analysis of Bangladesh Money Market

a) Strength
• Ability to issue paper
• Help for the Government
• A Great Place to Park Money
• Highly Liquid

b) Weakness
• Shortage of Investment Instruments
• Opportunity Lost
• Expenses Can Take a Toll

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 • Lack of Organized Banking System
• Risk of alienating banks whose loans may be needed when an emergency develops.

c) Opportunity

• The new taxation policy can significantly impact the way of doing business and can open
new opportunity for established players such as Financial Institutions, Inc. to increase its
profitability.
• Lower inflation rate – The low inflation rate brings more stability in the market, enable
credit at lower interest rate to the customers of Financial Institutions.
• Bank management has to ensure profit in line with the target set by the board, said
Rahman, also the managing director of Dhaka Bank.

d) Threat
• Insufficient Funds or Resources
• Purchasing Power Can Suffer
• Less number of Dealers

3.4 Problems of Bangladesh’s Money Market

Though the Bangladeshi money market is considered as the advanced money market among
developing countries, it still suffers from many drawbacks or defects. These defects limit the
efficiency of our market.

1) Absence of Integration: The money market of Bangladesh is broadly divided into the
Organized and Unorganized Sectors. The former comprises the legal financial institutions
backed by the central bank. The unorganized statement of it includes various institutions
such as indigenous bankers, village money lenders, traders, etc. There is lack of proper
integration between these two segments.
2) Shortage of Capital: Bangladesh is a labor intensive. Always have been shortage of
capital prevail in the market.

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3) Inelasticity and Instability: There are always instability prevail in the money market of
Bangladesh. A stable market can secure the elasticity of the market. But Bangladesh have
limitation on that occasion.
4) Shortage of Investment Instruments: In Bangladesh, various investment instruments
such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers,
etc. are used. But taking into account the size of the population and market these
instruments are inadequate.
5) Shortage of Commercial Bill: In our country, as many banks keep large funds for
liquidity purpose, the use of the commercial bills is very limited. Similarly, since a large
number of transactions are preferred in the cash form the scope for commercial bills are
limited.
6) Lack of Organized Banking System: In Bangladesh, even though we have a big
network of commercial banks, still the banking system suffers from major weaknesses.
The absence of the organized banking system is major problem for Indian money market.
7) Less number of Dealers: There are poor number of dealers in the short-term assets who
can act as mediators between the government and the banking system. The smaller
number of dealers leads to the slow contact between the end lender and end borrowers.
8) Multiple rate of interest: In the Bangladeshi money market, especially the banks, there
exists too many rates of interests. These rates vary for lending, borrowing, government
activities, etc. Many rates of interests create confusion among the investors.

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 CHAPTER-4

CONCLUSIONARY ASPECTS

4.1 RECOMMENDATIONS FOR MONEY MARKET OF BANGLADESH

The following recommendation can make our money market more active and smarter.

• Diversifying the Market

• Access to bill rediscounting market increasingly
• Unique role for all bank for lending and borrowing of money
• Denationalization of state-owned banks can influence the money market.
• The micro finance institutions should move forwards to regulate the money market.
• Weekly performing banks must be broad under the Bangladesh Bank.
• Reducing monetary shortages through open market operations

4.2 CONCLUSIONS
Money markets originated long ago as a dull corner of the capital market where businesses
financed short-term trade and working capital. They’ve since grown in size with the help of
securitization and structured finance to rival the volume of credit intermediated through the
banking system, taking on massive maturity mismatch, credit risk, and liquidity risk in the
process. The modern transformation of the money market was facilitated by a series of
permissive regulatory rulings most importantly exempting money market mutual funds from
marking their shares to market, exempting repurchase agreements from the stay in bankruptcy,
allowing depository institutions to guarantee asset backed commercial paper without setting
aside regulatory capital, and allowing rating agencies to qualify asset backed commercial paper
for financing in money market mutual funds on the basis of non-binding voluntary credit
guarantees by depository sponsors. The result was a credit cycle fueled by money market

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finance that collapsed with runs in asset backed commercial paper, tri-party repo, and money
market mutual funds. The disastrous role of money market finance in the credit cycle should
prompt a reconsideration of the permissive regulatory rulings above so that money markets do
not again become the financial fuel for a future catastrophe.

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 CHAPTER-5

Ending Matters
Reference:

• https://www.dsebd.org/ilf.phpProblems
• https://www.cse.com.bd/about/inside_cse
• https://www.wallstreetmojo.com/non-marketable-securities/
• https://www.investopedia.com/terms/n/non-marketable_securities.asp
• https://www.scribd.com/presentation/320946251/Capital-Market-of-Bangladesh
• https://eaglesinvestors.com/news/capital-markets-functions/
• http://www.stockbangladesh.com/users/index
• http://www.preservearticles.comunctionsney
• https://www.slideshare.net/ArifHasan008/money-market-instrument-in-bangladesh

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