ASSIGNMENT ON

“Money Market In Bangladesh”

Course Title:Financial Markets & Institutions.

Submitted to:
Fahmida Saima
Lecturer,
Dept of Finance,
Premier University, Chittagong.

Submitted By:
Name : Jubayda Khanam
ID : 1603410109132
Semester: 8 th
Batch : 34 th
Program: BBA
Major : Finance (B)
Date of submission: 20 february,2021

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 Table of Contents
Particulars Pages
Chapter 1: Introductory Aspects 3-6
1.1Introduction 4
1.2 Methodology 4
1.3 Rationale of the Study 5
1.4 Objectives of the report 5
1.5 Limitations 6
Chapter 2 Money Market and its instruments in Bangladesh 7-28
2.1 Background of the money market in Bangladesh 8
2.2 History of Money market in Bangladesh 10
2.3 Characteristics of money market in bangladesh 11
2.4 Structure of Money market in Bangladesh 14
2.5 Money market instruments in Bangladesh 17
2.6 Importance of Money market in Bangladesh Economy 25
2.7 Drawbacks of Bangladesh’s Money Market 27
2.18 Conclusion 28

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 CHAPTER 1
INTRODUCTORY
ASPECTS

1.1 Introduction

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Money Market 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, treasury bill’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.

The money market in Bangladesh is in its transitional 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 maturity, Bangladesh Bank Bills and
Certificates of Deposits etc in limited supply are available for trading in the market.
However, the short-term credit market of the banking sector experienced a
tremendous 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 determined 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 network of branches. Bangladesh bank as central
bank of the country exercises its role in this market through the use of instruments
such as bank rate, open market operations and changes in statutory liquidity
requirements.

1.2 Methodology
As there is no field work on this assignment, we do not use any primary data to
complete this assignment. Secondary sources of data will be used for data
requirements of the assignment. Secondary sources of data; Use Internet and
different articles published in the journals & magazines have been used.
Secondary Sources are:

 Textbooks

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  Journals.

 Reference books.

 Internet Books.

 Websites

1.3 Rationale of the study

The report is assigned by our course teacher Fahmida Saima as a part of our
“Financial Markets &Institutions” course. The topic of this assignment is
“Money Market in Bangladesh”. For preparing this assignment had to visit
many websites where i have got chance to see the real picture of the business.
By preparing this assignment we have known many more about money market
system such as their history, objective, organizational structure, business policy,
risk management system, their revenue and expenditure, their profit, how they
meet their customer’s claims and so on. By preparing this assignment I have
gained the practical knowledge which will be very helpful to our career. For this
reason we are very grateful to my career.

1.4 Objectives of the report

This report has some objectives, which are as follows.
1. To earn proper and right knowledge about the Money Market in
Bangladesh.
2. To earn practical knowledge about Money Market
3.To know the conditions under when claims are considered and the process of
meeting claim.
4. To know about their revenue, expenditure, profit, business policy, social work
etc.
5. To observe their development year by year.
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7. To know how they respond to different parties.
8. To know the importance and necessity of this market.

1.5 Limitations
The preparation of this assignment was not an easy task. I had to face some
problems & limitations during the preparation of this assignment despite the fact
that I have tried my best to prepare this project successfully. The limitations were:
• Getting the information and interpreting it, on the basis of my understanding and
then implementing it.
• Also, for the first time I have this made assignment so it was quite difficult for me
to understand the terms.
• There were several different information in different sites for that reason I faced
difficulties while collecting information from those sites.
• Data from different sources were quite inconsistent which created some
problems in making the assignment & compelled me to verify the data diligently.

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 CHAPTER 2
Money Market
and its
Instrument In
Bangladesh

7
2.1 Background of Money Market in Bangladesh
As an integral part of the financial market of a country, money market provides
a medium for the redistribution of short-term loan able funds among the
financial institutions. The money market of Bangladesh reached its present
phase through a series of changes and evolutions. Structurally, money market
in Bangladesh is composed of two broad groups of institutions: formal and
informal. The formal institutions (up to February 2005) include Bangladesh
Bank, 4 NCBs, 30PCBs, 10 FCBs, 5 Specialized Banks (SBs) and 28 Non-bank
Financial Institutions (NBFIs). Informal institutions comprise mainly of the
moneylenders and small co-operative organizations which are not under the
control of central bank. The five distinct components under the organized
segment of money market in Bangladesh are:
-inter-bank market,
-call money market,
-bill market,
-repo market and
-reverse repo market.
Among them inter-bank call money market is very important for the financial
institutions for their required fund management. A short brief on the above
five markets is given below.
Interbank market in Bangladesh operates in a limited scale in the form of
interbank deposits and inter bank borrowings and has virtually no interest rate
fixing mechanism. Traditionally, scheduled commercial banks lend to each
other when they need temporary funds. Sometimes, banks also keep a part of

8
their resources to other banks as deposit and borrow as and when needed
against the lien of those deposits. Usually, small banks keep their funds as
deposits with large banks for their safety. Non-bank financial institutions also
take part in this market by way of lending their fund to the deficit banks. The
interbank transactions are concentrated mainly in Dhaka city.
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 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.
Bill market is restricted to buying and selling of government treasury bills.
Commercial banks and non-bank financial institutions are obliged to buy these
bills as approved securities to meet their statutory Liquidity Requirement (SLR)
under the banking company act. Moreover, these instruments are being used
to mop up excess cash from the banking sector and help government to
borrow money from the banks to meet its budgetary shortfall. But the
commercial bill market remains very narrow in our country. Treasury bill rate
largely influences the market rate of other segments of the money market,
particularly, the rate of interest in the call money market.
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 risk and serves as a

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flexible instrument of liquidity management. Scheduled banks and financial
institutions are the participants of this market.
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.

2.2 History of Money Market in Bangladesh

The money market in Bangladesh is in its traditional 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 maturity. Bangladesh Bank Bills and
Certificates of Deposits etc in limited supple are available for trading in the market.
However, the short-term credit market of the banking sector experienced a
tremendous 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 determined by
the individual banks and as such the market is quite competitive. Each bank
maintains its liquidity and supply of funds is arranged throughout the country with
the help of an interconnected network of branches. Bangladesh banks as central
banks of the country exercises its role in this market through the use of
instruments such as bank rate, open market operations and changes in statutory
liquidity requirements.
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 relatively smaller part. All financial institution of 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

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sector also emerged with the objective of mobilizing financial resources and
channeling them for short, medium and long-term credit and investments. The
market participants had to operate in an environment of directed leading and loan
disbursement goals, and predetermined rates of interest fixed by the authority.
However, rate of interest in the call market was flexible but due to prevalence of
liberal refinance facility at concessional rates from Bangladesh Bank, the activities
of call money market remained insignificant.
In the beginning of the 1980s, money market in Bangladesh entered a new era with
the denationalization of two nationalized banks and establishments of some
private banks. With this development money market assumed the characteristics
of a competitive market in the country. However, the administered interest rate
structure and the government’s policy of priority sector lending continued to
operate as factors that deterred the development of a liberalized money market in
the country.

2.3 Characteristics of Money market in Bangladesh

 
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.
Even today, a large portion of Bangladesh’s money market remains unorganized.
They also do not always specify the purposes of finance, that is, whether finance is
required for genuine productive purposes or for indulging in speculative activities.
The unorganized sector of Bangladesh’s money market consists of a wide range of
non-banking financial institutions. Such institutions resemble banks very closely
and compete with banks in attracting public deposits. But they are not under the
control of the CB. So, heir presence reduces the effectiveness of the central bank’s
control over the money market. The main characteristics of money market of
Bangladesh are as follows.
A. Existence of Unorganized Money Market
The Major defect of the Bangladeshi money Market has always been the existence
of the indigenous bankers who do not distinguish between short-term and long-

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term finance. During the last decades, there is a whole lot of non banking financial
companies who raise funds from the general public but who are generally outside
the control and supervision of central bank of Bangladesh.

B. Absence of Integration
An important defect of the Indian money market at one time was the division of
the money market into several segments or sections, loosely connected to each
other. Each part of the money market carry on a particular type of banking
business or provide a specific type of financial service. Each financial institution
acts independently.

C. Diversity in Money Rates of Interest

Another defect of the Bangladeshi money market related to the existence of too
many rates of interest –the borrowing rate of the Government, the deposit and
lending rates of commercial banks, deposit and lending rates of cooperative banks
etc. The basic reason for the existence of so many rates of interest simultaneously
is the immobility of funds from one section of the money market to another.

D. Seasonal Stringency of Money

A very striking characteristic of the Bangladeshi money market is the seasonal
monetary stringency and high rates of interest during a part of the year.

E. Absence of the market

The existence of an organized bill market is absolutely essential for linking various
credit agreements with the central bank in an effective manner. No doubt there is
a Treasury bill market in Bangladesh. But the commercial bill market has not been
fully developed.
F. Limited Instruments
It is in fact a defect of the Bangladeshi money market. In our money market the
supply of various instruments such as the Treasury Bills, Commercial Bills,
Certificate of Deposits, Commercial Papers, etc. is very limited. In order to meet
the varied requirements of borrowers and lenders, It is necessary to develop
numerous instruments.
G. Volatile call money market
The inter-bank call money market is the market for short-term funds, known as
‘money at call and short notice’. Two components of this market are the call
market or overnight market and short notice market. The borrowing rate in this

12
market is known as the call money rate. This rate is determined by the market
forces, that is, by the forces of demand and supply. The demand or short-term
funds originates from all types of banks—nationalized, private and foreign.

Others 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

instrument.
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

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 exchange, only through oral communication, relevant document and
written communication transaction can be done.
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).

2.4 STRUCTURE OF MONEY MARKET IN BANGLADESH

The structure of money market comprises Institutions, Credit instruments and components or
sub markets : Money Market

Institutions Credit Instruments Sub-market

Fig: Structure of
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
Institutions
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 Business Man Farmers Brokers Govt. And other financial Institutions

Lender‟s Sector Borrower‟s Sector

Commercial Banks Discount Houses

Bill Broker s and DealersNBFI Central Banks Acceptance Houses

Fig: Institutions of
Money Market

a. Lender’s Sector
1.Commercial banks:

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.

15
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

16
 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
mention in the bill in exchange for a commission. They can recognise 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:

 4fvc
 Farmers
 Stock merchants
 Public
 Brokers
 Government and other financial institutions

2.5 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 deposit
d) Bankers‟ Acceptances
e) Call loans

A. Treasury Bills (T-bills)

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 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 set amount 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. The bank discount rate (DR) on T-
bills:

Par value – Purchase value 360

Par value Days to maturity

Because the rates of return on most other debt instruments are not figured in the same
way, comparisons with other securities cannot be made directly. The investment yield or
rate (IR) on T-bills:

Par value – Purchase value 365

Purchase value Days to maturity

The Essentials of Treasury bills

 Interest and maturity proceeds are guaranteed by the Government

 Your investment is secure as there is zero default risk
 Sure security of returns tradability leading to instant liquidity
 No withholding tax will be deducted from the earnings Bond

 Treasury Bill is a transferable instrument, where your ownership can be transferred

at any time by you. This makes it the safest and most liquid investment opportunity
available in the country. Since you can discount the Treasury Bill at any time, it is
almost like having cash in your hand.
Treasury Bills are issued at a discount and the face value is paid at maturity with
interest paid up front.You can buy Treasury Bills which are issued at three, six and

18
twelve month maturity periods, either directly from Commercial Bank or from
primary dealers.

Benefits of Treasury Bills

•  Issued by the Government and is 100% risk free.

•  Market determined yield rates enabling you to receive the highest possible
interest rates.

•  Treasury Bills are tradable in the secondary market providing you with instant
liquidity by sale.

•  You can make joint investments making Treasury Bills the ideal way to share
wealth with loved ones.

•  No taxation and no stamp duty.

All transactions will be by means of state-of-the-art scrip less security settlement

systems and the fully automated Central Depository System (CDS).

Eligibility

a. Resident individuals and corporate bodies incorporated in Bangladesh.

b. Foreign institutional investors including country funds, regional funds or mutual

funds.

c. Corporate bodies incorporated outside Bangladesh.

d. Citizens of foreign states whether resident in Bangladesh or outside in

Bangladesh.

e. Non resident Bangladesh.

are eligible to apply for Treasury Bills.

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If you fall in to the category of investors from c to e as mentioned above, you
should invest through Securities Investment Account and securities will be
allocated for same after inquiring the availability in the leeway from the Central
Bank.

Placing a Treasury Bill

You can visit a branch of your choice and discuss your requirement with an officer.

Interest rates applicable for Treasury Bills can be viewed through the rates and
tariffs page of this site.

Please fill the relevant application form and hand it over to the branch. Remember
to take your national identity card, driving license or passport. This is necessary for
us to identify you.

Withdrawals

Once a formal request is forwarded to the Treasury Department, your Treasury

Bills will be discounted based on the market rates.  

B. Commercial Paper        

Commercial Paper (CP) is basically a short-term debt security issued by highly rated
companies to raise funds for funding operating expenses as well as current assets
such as account receivables and inventories. Maturities on CP rarely range any
longer than 270 days though it can be up to 365 days. CP is being issued in the
form of promissory note in Bangladesh. It is typically issued at discount like
Treasury Bills, reflecting prevailing market interest rates. That means, investors

20
purchase promissory notes at less than face value and receive the face value at
maturity. The difference between the purchase price and face value, called the
discount, is the interest received on such investment.
CP is sporadically issued as an interest-bearing note, i.e., investors pay the face
value and, at maturity, receive the face value and accrued interest. All the
commercial papers issued so far in Bangladesh are interest-bearing only. 
Generally, companies and financial institutions can issue commercial paper. Even
though banks and non-bank financial institutions (NBFIs) can act as arrangers for
the issuers, only a scheduled bank can act as an issuing and paying agent (IPA) for
the issuance of CP. Banks, NBFIs and corporate bodies are the major investors in
CP.
Commercial paper market is experiencing rapid growth in Bangladesh for the last
couple of years owing to its low cost and easy access. CP is a highly promising
product for a developing country like Bangladesh for at least two reasons: First, it
fosters the goal of reducing cost of borrowing which can stimulate growth.
Through CP, companies can now get funds at lower cost compared to bank loans.
Weighted average interest rate on CPs issued in the last three years stands at 10.34
per cent against the weighted average bank lending rate 13.06 per cent during the
same period. Secondly, there are limited investment opportunities in the financial
market of Bangladesh. Often banks remain overburdened with surplus liquidity and
heavily dependent on government securities amid low credit growth in the
economy. The sharp fall in yields on the recently auctioned Treasury bonds
highlight the need for additional investment instruments.  Yields on the recently
auctioned 2-year, 5-year, 10-year, 15-year and 20-year bonds fell sharply by 60, 80,
93, 136 and 161 basis points respectively. Had there been more investment
instruments, fall in yields would not have been that much. Volatility of interest rate
would have been lower. CP can broaden investment opportunities as it provides
additional instrument to the investors. Thus, it can play an important role for
development and growth of sustainable financial market.

Current Status in Bangladesh

Commercial paper market, popular around the world, is in a very early stage of
development in Bangladesh.  Eastern Bank Limited is the pioneer of CP in the

21
country; it raised Tk. 500 million for ACI Limited in 2013. Since then, this market is
growing very fast in our country with approximate growth of 593.10 per cent in
2015. ACI Limited is so far the largest issuer of commercial paper in the country
with approximately 20 per cent market share. The amount of current outstanding
CPs is close to Tk. 10,050 million.

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).

Line of credit

Commercial paper is a lower-cost alternative to a line of credit with a bank. Once a

business becomes established, and builds a high credit rating, it is often cheaper to
draw on a commercial paper than on a bank line of credit. Nevertheless, many
companies still maintain bank lines of credit as a "backup". Banks often charge fees
for the amount of the line of the credit that does not have a balance, because
under the capital regulatory regimes set out by the Basel Accords, banks must
anticipate that such unused lines of credit will be drawn upon if a company gets
into financial distress. They must therefore put aside equity capital to account for
potential loan losses also on the currently unused part of lines of credit, and will
usually charge a fee for the cost of this equity capital.

Advantages of commercial paper:

 High credit ratings fetch a lower cost of capital.

 Wide range of maturity provide more flexibility.
 It does not create any lien on asset of the company.
 Tradability of Commercial Paper provides investors with exit options.

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Disadvantages of commercial paper:

 Its usage is limited to only blue chip companies.

 Issuances of commercial paper bring down the bank credit limits.
 A high degree of control is exercised on issue of Commercial Paper.
 Stand-by credit may become necessary

Commercial Paper Yields

Like treasury bills, yields on commercial paper are quoted on a discount basis—the
discount return to commercial paper holders is the annualized percentage difference
between the price paid for the paper and the face value using a 360-day year.
Specifically, where is the discount yield, is the face value, is
the price paid, and is the term length of the paper in days:

P f −P0 360
dy cp = ( Pf
× )
t

And when converted to a bond equivalent yield :

bey Pf −P0 365
cp=
( P0) ×
t

C. 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

23
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 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 in days. In secondary market trading, the bank discount rate (DR) is used as a
measure of CD yields.

Par value – Purchase value 360

Par value Days to maturity

The principal buyers of negotiable CDs include corporations, state and local
governments, foreign central banks and governments, wealthy individuals, and a
variety of financial institutions. Most buyers hold CDs until they mature. However,
prime-rate CDs are actively traded in the secondary market.

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

24
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.

2.6 Importance of Money Market in Bangladesh

Economy
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.

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

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2.7 Drawbacks 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.
A. 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.

B. 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.

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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 tc the slow contact between the end lender and end borrowers

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.

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