Money Market & Capital Market of Bangladesh

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Money Market & Capital Market of Bangladesh: Prospect & ProgressFinance Assignment

Transcript of Money Market & Capital Market of Bangladesh

At a glance of Money Market:

The Bangladesh economy is the most growing economy in the world. With the changing of the world financial market the Domestic as well as international policy for Bangladesh upgrading gradually. Actually financial system mainly developed though the development of domestic and foreign capital and the money market. For functioning the economic system money market well-functioning perimeter is very important. For meeting short term liquidate demand by lending and borrowing of the participants within the financial system is the mechanism of money market. T-bill is the largest component of the money market in Bangladesh. Capital markets are essentially about matching the needs of investors with those that need capital for development. Debt markets are an extremely effective mechanism for matching the long term needs of savers with those of entrepreneurs. Like emerging market countries around the world, Bangladesh couldbenefit from having a local-currency, fixed income securities market. At present, its main fixed income financial products are bank deposits, bank loans, government savings certificates, treasury bills, and government bonds and corporate debt etc.

Background of Bangladesh Money Market: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. The market participants had to operate in an environment of directed lending 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 establishment 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.

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.

Money-Market securitiesIssuerCommon InvestorsMaturitiesSecondary Market Existence

Treasury billFederal GovernmentHouseholds, firms and financial institutions13 weeks, 26 weeks or 1 Year1 yearHigh

Retail certificates ofdeposit (CDs)Banks and saving instituteHouseholds7 Days to 5 Years or LongNonexistent

Negotiable certificates ofdeposit (NCDs)Large Banks and Saving InstitutionsFirms2 Week to 1YearModerate

Commercial paperBank holding Companies , Finance Companies and OthersFirms1Days to 270 DaysLow

Eurodollar DepositForeign BankFirms and Government1 Days to 1 YearNonexistent

Bankers acceptancesBank(Exporting firm can sell the acceptance at a discount obtain funds)Firms30 Days to 270 DaysHigh

Federal FundsDepository institutionsDepository Institutions1 Days to 7 DaysNonexistent

Repurchase agreementsFirm and Financial InstitutionsFirms and Financial Intuitions1 Days to 15 DaysNonexistent

Treasury-Bill Progress in Bangladesh

Issuer:

The central bank of Bangladesh (Bangladesh Bank) operates throughout the country with its nine branches. Government receipts and payments are overseen and managed by the central bank. Different branches of Sonali Bank (SB) are assigned to take part in these transactions on behalf of the central bank, where there is no Bangladesh Bank branch. These branches are known as 'Chest Branches'. In a district, there may be one chest and some sub-chests. Bangladesh Bank hasdirectly monitors Chest branches. This function is called Feed. The Bangladesh government finances its expenditures in excess of tax receipts through the sale of debt obligations. Currently, the total par value of outstanding Treasury bills stood at about Taka 24.6 core up to July 2013 while in June, 2012 it was 147.8 core(Source: Bangladesh bank).

Types:Treasury bills are divided with its maturity by the number of days. There are six types of T-bills found in Bangladesh. These are

a) 30 days T-bill

b) 91 days T-bill

c) 182 days T-bill

d) 364 days T-bill

e) 2 years T-bill

f) 5 years T-bill

Participants:The market for Bangladesh Treasury bills has a complex structure with numerousparticipants. They are Ministry of Finance, Bangladesh Bank, government securities dealers and brokers, and other holders of Treasury securities. Banks usually buy three kinds of T-bills tenures of which range between 91-day to 364-day and four kinds of T-bonds tenures of which range between 5-year to 20-year from the Bangladesh Bank. Generally, the participants in money market are:

1) individual

2) Business and

3) Government More specifically we can identify different participants as:

1) Government Treasury Department They are the only demander of fund

2) Central Bank They are both supplier and demander of fund

3) Commercial Bank They are both supplier and demander of fund

4) Business They are also both supplier and demander of fund

5) Investment and Securities Firm- a. Investment Companies/Bank

b. Finance Companies

c. Insurance CompaniesWho and How Can Invest:

There was no secondary market for treasury securities until 2003,. Any investor (institution orindividual), with a current account with Bangladesh Bank, can invest in T-bills through primary market auctions. Auction is held on every Sunday at 11 a.m. at the Motijheel Branch of BB. If Sunday is a holiday, then the last working day before Sunday will be chosen. All the investors submit their bid unless otherwise pension or provident fund. After receiving the bid, the auction committee decides how much T-bills will be off loaded. There is a high-powered committee to oversee the treasury functions (which includes seven members).

Schedule for Issuance: Treasury securities are issued through regularly scheduled auctions in the primary market. The process importantly involves the Bangladesh Bank, which serve as conduits for the auctions.

Selling System:Treasury bills are not listed at the Bangladesh Stock Exchange. T- Bills are sold on a discount basis, with a terms means that we have to pay forthe bills less the interest receivable during the term of the bill and receive the face value of thebill at the end of the period. If one wanted to exit before maturity, rediscounting isn't possible at the Central Bank, rather he or she may go for Repo auction.

Secondary Market for T-Bill:

In 2003, government had decided to introduce the secondary T-bill market with a vision of broadening the government securities market. World's leading financial institution Citigroup's subsidiary Citibank, N.A. and local Prime Bank Limited had taken part in the first secondary transaction of T-bills in Bangladesh that year. Citibank, N.A. had sold a T-bill of 2 years maturity bearing Taka 3 crore of face value to Prime bank. Bangladesh Bank had taken necessary steps to assist this transaction. This was regarded the first secondary T-bill transaction in the country. Bangladesh Bank has selected eight banks and one non-bank financial institution asprimary dealers (PDs) to handle secondary transactions of T-bills and other government bonds. The eight banks are Sonali Bank, Janata Bank, Agrani Bank, Prime Bank Ltd, Uttara Bank Ltd, South-East Bank Ltd, Jamuna Bank Ltd, and NCCBL, and the only NBFI is International l Leasing and Financial Services Ltd. The inter-bank Repo is one kind of secondary market for T-bills and government securities, which was introduced from July 27, 2003. The selected banks and the NBFI have already ended all procedural eligibility requirements for being appointed and start operating as secondary bond market dealers. The Bangladesh Bank earlier invited applications from all scheduled banks and financial institutions and directed interested parties to drop applications to the FOREX Reserve and Treasury Management Department of the centralbank latest by August 21, 2003. A total of 18 commercial banks and 1 non-bank financial institution filed their applications for receiving PD licenses during the stipulated time.

Procedure to allot T-bills:The Treasury issues securities consistently and predictably through a regular schedule of auctions. In Bangladesh, Multiple-units Auction Model Is followed. Two types of bids may be submitted at the auction:

a) Competitive bids &b) Non-competitive bids