Contribution Of Financial Markets In Bangladesh.

The financial market in Bangladesh is mainly of following types:

 Financial System in Bangladesh: The financial system of an economy

provides the medium of exchange, allocates resources, provides a return on and
affects the level of savings. It also pools, transforms and distributes risks as an
important locus of implementation of development policy of a country. Real
economic growth goes hand in hand with an increasing amount and diversity of
activity of financial institutions, market and instruments. The financial structure is
composed of two sets of elements; namely, financial instruments and financial
institutions. In the context of Bangladesh, an efficient and developed financial
system is essential for transferring capital from savers to investors and to
channelize scarce resources to maximize production, “Financial Market can be
thought of as the brain of the entire economic system, the central locus of
decision making”. In fact, the financial system’s contribution to growth lies
precisely in its ability to increase efficiency in financial deepening through viable
and effective financial market and financial instruments and profitable interaction
with the progressive globalization.

 Characteristics of Financial Sector in Bangladesh:

Before liberation of Bangladesh, the banking and finance industries in erstwhile

East Pakistan was owned and controlled by erstwhile West Pakistani owners.
Bangladesh inherited a narrow and thin financial sector with six commercial
banks which were nationalized, a few foreign banks and two Govt. owned
specialized financial institutions. The banking system was operating until the end
of 1980s with the directives of monetary authorities aiming at achieving
objectives of supplying cheap money to the State Owned Enterprises (SOEs)
and priority sector like Agriculture, Export and Small and Cottage Industries in
the private sector. The two important instruments at the armory of monetary
authority to execute monetary policy was selective credit control measures an
administered interest rate. One consequence of Central Bank’s regulated deposit
and lending rates at that time without consideration of market clearing rate was
that in real terms, interest rates appeared to be negative in view of high rates of
inflation during the mid 70s and upto the end of 1980s. The policy of arbitrarily
fixed low interest rate brought about undesirable consequences of distortion in
allocation of resources between different sectors. Consequently, the financial
interrelations ratio (Goldsmith, 1969) measured in terms of ratio of total financial
assets to National Wealth remained abysmally low in Bangladesh ranging
between 10%-20% between 1973-1983 compared to 40% – 65% in Pakistan,
India, Sri Lanka, Thailand, Philippines and Malaysia (IMF Financial Statistics,
1980 – 1984).

 Recent developments in the financial sector:

The stock market grew by 82% in 2009 compared to the year 2008, representing
a total capitalization of $275m. In order to encourage corporate houses with good
fundamentals to come forward with new Initial Public Offerings (IPOs), the
regulatory body introduced the ‘book building mechanism’. In the year 2009, the
Securities and Exchange Commission also asked Dhaka Stock Exchange to
open Order Confirmation Transaction (OCT) market to facilitate trading of de-
listed companies from the floor. Moreover, preparations are afoot to set up
Bangladesh Institute of Capital Market to work for its expansion. The scheduled
banks in Bangladesh will be able to get credit reports of their clients online from
the Credit Information Bureau from mid 2010. BRAC bank plans to open
exchange houses in Malaysia, Singapore and Italy, in order to attract more
remittances through its own channel.

 Macro-financial developments:

Overall, GDP growth in FY09 is likely to be around 6.0 percent and if no drastic
shock affects the economy and business confidence and investment climate
improve further, the economy could grow faster. The 12-month average inflation
rose to 10.06 percent in September 2008 which fell afterwards reaching 8.46
percent in January 2009. If the current trends are maintained, it is likely that the
average inflation would fall to around 7.8 percent in FY09. During the first half of
FY09, total revenue and total expenditure as shares of GDP stood at 5.9 percent
and 8.1 percent respectively. Overall fiscal deficit as share of GDP reached 2.2
percent at the end of the first half of FY09 as against the yearly target of 4.99
percent. Public sector credit grew at 9.6 percent during H1 FY09 while the growth
rate of private sector credit was 10.8 percent. Bangladesh’s financial sector has
shown remarkable resilience to the upholding global financial turmoil and slowing
growth in high income countries, largely due to the country’s insulation from
international capital markets and the negligible role of foreign portfolio investors.
This resilience also derives partly from strengthened policy frameworks and
macroeconomic fundamentals.

The Banking Sector:

The number of banks in all now stands at 49 in Bangladesh. Out of the 49 banks,
four are Nationalized Commercial Banks (NCBs), 28 local private commercial
banks, 12 foreign banks and the rest five are Development Financial Institutions
(DFIs).

Sonali Bank is the largest among the NCBs while Pubali is leading in the private
ones. Among the 12 foreign banks, Standard Chartered has become the largest
in the country. Besides the scheduled banks, Samabai (Cooperative) Bank,
Ansar-VDP Bank, Karmasansthan (Employment) Bank and Grameen bank are
functioning in the financial sector. The number of total branches of all scheduled
banks is 6,038 as of June 2000. Of the branches, 39.95 per cent (2,412) are
located in the urban areas and 60.05 per cent (3,626) in the rural areas. Of the
branches NCBs hold 3,616, private commercial banks 1,214, foreign banks 31
and specialized banks 1,177. Bangladesh Bank (BB) regulates and supervises
the activities of all banks. The BB is now carrying out a reform program to ensure
quality services by the banks.

 NBFI Industry in Bangladesh:

Twenty-nine financial institutions are now operating in Bangladesh. Of these

institutions, 1(one) is govt. owned, 15 (fifteen) are local (private) and the other
13(thirteen) are established under joint venture with foreign participation. The
total amount of loan & lease of these institutions is Tk.99,091.80 million as on 31
December, 2007. Bangladesh Bank has introduced a policy for loan & lease
classification and provisioning for FIs from December 2000 on half-yearly basis.
To enable the financial institutions to mobilize medium and long-term resources,
Government of Bangladesh (GOB) signed a project loan with IDA, and a project
known as ‘Financial Institutions Development Project (FIDP)’ has started its
operation from February 2000. Bangladesh Bank is administering the project.The
project has established ‘Credit, Bridge and Standby Facility (CBSF)’ to implement
the financing program with a cost of US$ 57.00 million.
Non-Bank Financial Institutions in Bangladesh:

Initially, NBFIs were incorporated in Bangladesh under the Companies Act, 1913
and were regulated by the provision relating to Non-Banking Institutions as
contained in Chapter V of the Bangladesh Bank Order, 1972. Non-Bank Financial
Institutions are an important part of financial system in Bangladesh. NBFIs
operations are regulated under the Financial Institutions Act, 1993. The NBFIs
consist of investment, finance, leasing companies etc. There were 29 financial
institutions operating in Bangladesh as of 31 December 2006. Of these one is
government owned, 15 are local (private) and the other 13 are established under
joint venture with foreign participation. Bangladesh Bank has introduced a policy
for loan and lease classification and provisioning for NBFIs from December 2000
on a half-yearly basis. Among the 29 financial institutions, 12 have been listed in
the stock exchanges up to 31 December 2006 to strengthen financial capability
and the rest are under process to be listed in due course.

Successive Industry Improvement:

During the nationalized period, the insurance sector could not flourish as the
proactive focus on customers was simply not there. The industry also lacked
people with proper technical knowledge and experience. In the 3rd quarter of
1985, the private sector was allowed into the insurance sector. Since then the
industry gained momentum as the private insurance companies with superior
service quality and customer- oriented business approach changed the
landscape of insurance industry. And the impact still continues.

Business sector
Nowadays in Bangladesh the SME plays an important role in the economic
development. But they are deprived from taking loans from bank for large
amount. If insurance business focuses this section in Bangladesh they are able
to contribute more in the economy .Thus insurance business has a bright
prospect in business sector in a developing country like Bangladesh.

The 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
like you and me. In simple term, it is a globally accepted scheme to share
ownership of economic development with general public.

The Capital market, an important ingredient of the financial system, plays a

significant role in the economy of the country.

Money Market:

Money Market an integral part of the financial market of a country. It provides a

medium for the redistribution of short-term loadable funds among financial
institutions, which perform this function by selling deposits of various types,
certificate of deposits and discounting of bills, treasubillry s 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

Taka Treasury Bond market:

 The Taka Treasury bond market consists of primary issues of treasury bonds of
different maturities (2, 5, 10, 15 and 20 years), and secondary trade therein
through primary dealers. 20 banks performing as Primary Dealers participate
directly in the primary auctions. Other bank and non bank investors can
participate in primary auctions and in secondary trading through their nominated
Primary Dealers. Non-resident individual and institutional investors can also
participate in primary and secondary market, but only in treasury bonds.

Monthly data on primary and secondary trade volumes in treasury bills and
bonds and data on outstanding volume of treasury bonds held by non residents
can be accessed at Monthly data of Treasury Bills & Bonds .

Capital market:

The primary issues and secondary trading of equity securities of capital market
take place through two (02) stock exchanges-Dhaka Stock Exchange and
Chittagong Stock Exchange. The instruments in these exchanges are equity
securities (shares), debentures and corporate bonds. The capital market is
regulated by Bangladesh Securities and Exchange Commission (BSEC).

Foreign Exchange Market

Towards liberalization of foreign exchange transactions, a number of measures

were adopted since 1990s. Bangladeshi currency, the taka, was declared
convertible on current account transactions (as on 24 March 1994), in terms of
Article VIII of IMF Article of Agreement (1994). As Taka is not convertible in
capital account, resident owned capital is not freely transferable abroad.
Repatriation of profits or disinvestment proceeds on non-resident FDI and
portfolio investment inflows are permitted freely. Direct investments of non-
residents in the industrial sector and portfolio investments of non-residents
through stock exchanges are repatriable abroad, as also are capital gains and
profits/dividends thereon. Investment abroad of resident-owned capital is subject
to prior Bangladesh Bank approval, which is allowed only sparingly. Bangladesh
adopted Floating Exchange Rate regime since 31 May 2003. Under the regime,
BB does not interfere in the determination of exchange rate, but operates the
monetary policy prudently for minimizing extreme swings in exchange rate to
avoid adverse repercussion on the domestic economy. 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.

Importance of Stock Market in Bangladesh

One of the most burning questions today is what the use of the capital market is
and why the government should get involved to stabilize the market. Why should
we care about the prospect of the market, if it does not contribute to our
economy? Apparently, it seems that stock market does not keep any connection
with the economy. But this market offers a great opportunity for the whole
economy if we can grab it properly: Firstly, the companies can arrange their long
term capital for business expansion from market with a minimum cost. The banks
are suitable only for short term and midterm financing. Secondly, the companies
listed in the stock market come under regulation of Securities and Exchange
Commission, which ensures the corporate governance of the companies. The
financial statement of listed companies is quite informative and valuable than
unlisted companies. Thirdly, the most important factor is that stock market can
attract investment. People reduce their consumption and invest here to earn
better in future. Fourthly, stock market can finance huge fund for large projects
easily. Finally, stock market is considered as the barometer of economy. An
efficient stock market is the leading indicator of the economy.