Assignment

Course Title: Financial Market and Institution

Course Code: 302

Name of Assignment: Money market in Bangladesh

Submitted by

Name of Student: Aminul Islam

Program: Business Administration

Batch: (BBA 12E)

ID No: BBA 01206299

Submitted Date: 20.09.2020

Submitted to
Name of Teacher: Sharmin Akhter
Senior lecturer,
Department of Business Administration

Port City International University

Money Market in Bangladesh

INTRODUCTION

 The financial sector is a important part of an economy because of the role it plays
in intermediating savings of the private and public sector to productive activities
including investment. Bangladesh financial system is dominated by the banking
sector, which fundamentally depends on short- and medium-term deposits for
financing their lending portfolios. This limits availability of funds that would be
required for long-term investments like infrastructure and housing. Bangladesh
has a capital market, with its known difficulties, and there is no vibrant secondary
market for bonds, which limits the availability of resources for infrastructure
financing. The money market in Bangladesh is in its development stage. The
various constituent parts of it are in the process of formation, while continuous
efforts are being made to develop appropriate and adequate instruments to be
traded in the market. At present, government treasury bills of varying coming of
age, Bangladesh Bank Treasury Bills and Certificates of Deposits etc in short
supply are available for trading in the market. However, the short-term credit
market of the banking sector experienced a huge growth since liberation. In 1999,
a total of about 6000 branches of the scheduled banks provided short-term credit
throughout the country in the form of cash credit, overdraft and demand loan.
The rates of interest are set by the individual banks and as such the market is
quite competitive. Each bank maintains its liquidity and supply of fund is arranged
throughout the country with the help of an interconnected branches. Bangladesh
Bank as central bank of Bangladesh exercises its role in this market through the
use of instruments such as bank rate, open market operations and changes
in statutory liquidity requirements.
CHARACTERISTICS OF MONEY MARKET IN BANGLADESH

Money market has the following main characteristics

1. Money market is concerned with dealing in a particular variety of asset having

some Liquidity

 2. Money market relation is impersonal and it is a competitive institutions

3. Money market is not a fixed place but a centre

4. Money market does not always deals in money paper, but it deals in near-
money assets

5. Money market is a composite term. It is a group of specialized market.

6. Money market is the centre where different institutions like corporations,

commercial banks, non-bank financial intermediaries etc.

7. It is not a single market but a collection of markets for several instruments.

8. It is wholesale market of short term debt instrument

9. Its principal feature is honor where the creditworthiness of the participants is

important.

10. It is a need based market wherein the demand and supply of money shape the
market.

11. It is a market purely for short-terms funds or financial assets called near
money.

12. It deals with financial assets having a maturity period less than one year only.

13. In Money Market transaction cannot take place formal like stock exchange,
only through oral communication, relevant document and written communication
transaction can be done.
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14. Transactions have to be conducted without the help of brokers.

15. It is not a single homogeneous market, it comprises of several submarket like

call money market, acceptance & bill market.

16. The components of Money Market are the commercial banks, acceptance
houses & NBFC (Non-banking financial companies)

 STRUCTURE OF MONEY MARKET IN BANGLADESH

The structure of money market comprises Institutions, Credit instruments and

components or sub markets.

 Money market

   Institutions or Constituents of Money Market:

Main Constituents of money market are the lenders who supply funds and
borrowers who demand term credit. Institutions in the money market can be
divided in two parts.

a. Lender’s Sectors
b. Borrower’s Sector
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l a. Lender’s Sector

1. Commercial banks:
    Institutions

These banks discount bills, carry on acceptance business, lend out money
to discount houses and brokers which can be realized at a short notice (call
money). Commercial banks are the most important suppliers of short-term funds.
These banks finance industry and trade. They discount bills and re-discount
commercial papers. They operate generally in the call loan market

2. Discount Houses:

A discount house is a money lender that participates in the buying and

discounting of the bills of exchange and other financial products. They discount
bills and get their resources from banks, public and share capital. The discount
houses specializes in discounting bills of exchange. They deal in commercial bills
and treasury bills. They borrow from the commercial banks for short periods at a
low rate of interest and invest them in bills of exchange. The purpose is to
discount bills at a high rate and enjoy profit. When the cash balance of the
commercial banks falls, they will recall the loans already granted to discount
houses.

3. Bill Brokers and Dealers

They are the intermediaries between lenders and borrowers. Bill brokers act as
intermediaries between those who want to discount bills and those who want to
invest in bills. They get commission for their services.

4. Non-Bank Financial Intermediaries (NBFIs)

Various financial intermediaries NBFIs such as insurance companies, provident

fund, chit fund building societies and the like also invest a part of their total fund
in the short-term securities. They purchase the primary securities from the
ultimate borrowers and issue direct securities to ultimate lenders.

5. Central Bank

The central bank is the apex institution. It is the lender of last resort. It regulates
the working of money market and is the lender of all financial institutions the
country. A portion of the primary deposits of commercial banks is kept by a
central bank(minimum legal requirement). The central bank helps the commercial
banks at the time of need. It also provides facilities to the commercial banks for
converting their assets into perfect liquid form during a financial stringency

6. Acceptance Houses
The acceptance house is a specialized institution which acts as an agent between
the purchaser and seller of goods. The acceptance houses extend credit to their
customers by accepting bills of exchange on their behalf. They give acceptance to
trade and treasury bills. They become responsible for the amount of money
mentioning the bill in exchange for a commission. They can recognize the quality
and genuineness of a bill. When a bill a is accepted by the acceptance house, it
becomes readily saleable in the market.

b. Borrower’s Sector

The borrower’s sector is represented by the following

1. Businessman

2. Farmers

3. Stock merchants

4. Public

5. Brokers

6. Government and other financial institutions

MONEY MARKET INSTRUMENTS IN BANGLADESH

A variety of instruments are available in Bangladesh money market. They were)

 a) Treasury Bills (T-bills)

b) Commercial Paper

c) Certificate of deposited

 d) Bankers‟ Acceptances

 e) Call loans

Treasury Bills (T-bills

 Government used to finance fiscal deficits. Bangladesh Bank treasure bills are
issued in one three, six, twelve month and two year maturity. They pay a
seamount at maturity. Tax revenues or any other source of government funds
may be used to repay the holders of these financial instruments. They carry great
weight in the financial system due to their zero (or nearly zero) default risk, ready
marketability, and high liquidity.

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. 

Commercial Paper

Commercial paper consists of short term, unsecured promissory notes issued by

acorporation to raise short term cash, often to finance working capitalrequiremen
ts. Unsecured promissory notes with a fixed maturity of one to 270days; usually
sold at a discount from face value. Commercial paper is traded mainly in the
primary market. Opportunities for resale in the secondary market are more
limited

Commercial paper is rated prime, desirable or satisfactory depending on the

credit standing of the issuing company.

Types of Commercial Paper:

There are two major types of commercial paper.

 Direct paper is issued mainly by large finance companies and bank holding

companies directly to the investor.
 Dealer paper, or industrial paper, is issued by security dealers on behalf of their
corporate customers (mainly nonfinancial companies and smaller financial
companies).

Certificate of deposit

Time deposit, commonly offered to consumers by banks, thrift institutions, and

credit unions. It is a short term borrowing more like a bank term deposit account
to raise the fund. It is a promissory note issued by a bank in form of a certificate
entitling the bearer to receive interest. The certificate bears the maturity date,
the fixed rate of interest and the value. It can be issued in any denomination.
They are stamped and transferred by endorsement. Its term generally ranges
from three months to five years and restricts the holders to withdraw funds on
demand. However, on payment of certain penalty the money can be withdrawn
on demand also. The returns on certificate of deposits are higher than T-Bills
because it assumes higher level of risk. While buying Certificate of Deposit, return
method should be seen. Returns can be based on Annual Percentage Yield (APY)
or Annual Percentage Rate (APR). In APY, interest earned is based on
compounded interest calculation. However, in APR method, simple interest
calculation is done to generate the return. Accordingly, if the interest is paid
annually, equal return is generated by both APY and APR methods. However, if
interest is paid more than once in a year, it is beneficial to opt APY over APR.A
certificate of deposit (CD) is an interest-bearing receipt for funds left with
depository institution for a set period of time

 Bankers’ Acceptances

It is a short term credit investment created by a non financial firm and guaranteed
by a bank to make payment. It is simply a bill of exchange drawn by a person and
Accepted by a bank. It is a buyer’s promise to pay to the seller a certain specified
amount at certain date. The same is guaranteed by the banker of the buyer in
exchange for a claim on the goods as collateral. The person drawing the bill must
have a good credit rating otherwise the Banker’s Acceptance will not be tradable.

The most common term for these instruments is 90 days. However, they can vary
from 30 days to180 days. For corporations, it acts as a negotiable time draft for
financing imports, exports and other transactions in goods and is highly useful
when the credit worthiness of the foreign trade party is unknown. The seller need
not hold it until maturity and can sell off the same in secondary market at
discount from the face value to liquidate its receivables. A bankers’ acceptance is
a time draft drawn on and endorsed by an importer’s bank.

Acceptances are used in international trade because most exporters are uncertain
of the credit standing of their importers. The issuing bank unconditionally
guarantees to pay the face value of the acceptance when it matures, thus
shielding exporters and investors in international markets from default risk.
Acceptances carry maturities ranging from 30 to 270 days, with 90 days being the
most common. They are traded among financial institutions, industrial
corporations, and securities dealers as a high-quality investment and source of
ready cash.

Call loans

Call loans are short term loans provided for a period of one day or maximum
seven days without any collateral securities. The call loans are highly liquid and
are renewable on day to day basis.
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SUB-MARKETS OF MONEY MARKET

 A money market has a several submarkets such as bill market and discount
market, call loan market acceptance market and collateral loan market. The
functions of these markets are elaborated below

a. Bill Market
SUB-MARKET

In this market, short dated bills or papers are purchased and sold. The short dated
bills are treasury bills and bills of exchange. The bills of exchange, which are
commercial papers, are used to finance internal as well as foreign trade. Such bills
are generally for 90 days. The markets where treasury bills are purchased and
soldier called discount market.

b. Call money Market

This is the sub market specialized in call loans which are sometimes referred to as
“loans at call or short notices”. These are the extreme form of short notice loans.
They are granted for overnight use or for 24 hours or for maximum 7days. These
loans are highly liquid and can be recall on demand or at the shortest possible
notice. If the period of loans is more than one day or up to 14 days, it is called
Notice money and when borrowing or lending of funds exceed for a period of
14days it is called „term money‟. For such loans, no collateral or personal
securities are essential. This type of loan is required by business people and stock
exchange.

c. Acceptance Market

This is the sub market specialized in the acceptance of the exchange on behalf of
the customers. Acceptance house in the money market provides an example of
institutions specializing in the business. The acceptance business is usually done
by commercial banks. They accept bills of exchange on behalf of its customer
must pay money to the other holder of the bill on the due date. The maturity of
bank acceptance is usually up to 6 months. The bank will collect money from the
customer on whose behalf of his accepted the bill of exchange. Banks get
commission for this service. The bills which are accepted or guaranteed by a bank
called bankers bill or bankers acceptance.

d. Collateral loan Market

In this market, short term loan is obtained against personal collateral like stock
and bonds by brokers or by banks. Collateral loans are generally granted by the
commercial banks to stock exchange dealers or brokers. Business houses also
avail of short term loans against the security of goods, documents of title of
goods, stock exchange securities etc.

ROLE AND IMPORTANCE OF MONEY MARKET IN THE ECONOMY OF BANGLADESH

A Well-developed money market is essential for a modern economy. Though,
historically, money market has developed as a result of industrial and commercial
progress, it also has important role to play in the process of industrialization and
economic development of a country. Importance of a developed money market and
its various functions are discussed below:

A. 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.

B. 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.
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.

C. 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 asset. 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.

D. 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.

E. 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 quicksand
widespread influence on the sub-markets, and thus achieve effective
implementation of its policy.

  Drawbacks of Bangladesh 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
byte 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. 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.
C. Insufficient Funds or Resources

The economy with its seasonal structure faces frequent shortage of financial
recourse. Lower income, lower savings, and lack of banking habits among people
are some of the reasons for it.

 D. 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.

E. 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.

F. 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.

G. 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 less number of
dealers leads tithe slow contact between the end lender and end borrowers

Other drawbacks are

• Seasonal Shortage of Funds

• Undeveloped Bill Market

• Absence of Sub-Markets

• Insensitive to International Influence

RECOMMENDATIONS FOR MONEY MARKET IN BANGLADESH

• Steps has been taken to establish relations between indigenous bankers and

commercial banker

• Reducing monetary shortages through open market operations

• Diversifying the Market

• Access to bill rediscounting market increasingly

• Unique role for all banks for lending and borrowing of money

• 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.

CONCLUSIONS

The money market of Bangladesh reached its present phase through a series of
changes and evolution. Initially, after liberation, money market was the major
constituent part of the financial market of the country. Capital market, its other
segment was a relatively smaller part. All financial institutions of the country were
nationalized after liberation. The growth and evolution of money market in the
country took place during the period from 1971 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. However, in this period a vast
financial superstructure with large network of commercial bank branches was
established in the country. Simultaneously, specialized financial institutions under
government sector also emerged with the objective of mobilizing financial resources
and channeling them for short, medium and long-term credit and investments.