Chapter-6

Financial Markets

6.1 A sound and well-functioning financial

system helps mobilise savings, allocate Table 6.1 Volume of trade and weighted average
interest rates in call money market in FY06
resources, exert corporate control, facilitate risk
management and ease trades and contracts by
Volume of trade Weighted average
solving market frictions. Efforts have been Period (billion taka) interest rate (%)
continued in FY06 to establish a sound financial
system in the country. Despite the stronger Jul 05 331.4 5.4
growth of some major macroeconomic
Aug 05 469.8 6.3
indicators, Bangladesh economy faced some
challenges originating from price hike of oil and Sep 05 420.8 6.9
petroleum products and some major imported Oct 05 426.4 7.2
commodities in the international market causing Nov 05 393.9 8.2
fluctuations in real sector and foreign exchange
Dec 05 492.4 8.4
market in FY06. As a result, the financial market
Jan 06 469.6 14.9
was a little bit volatile in the second half of FY06.
Except this temporary fluctuations in the Feb 06 496.0 12.1
financial market, the overall market was sound Mar 06 538.6 16.4
functioning during FY06. With a view to Apr 06 470.4 21.5
establishing a healthy, sound, well functioning
May 06 492.6 15.2
and dynamically evolving financial system, a
series of reform measures were initiated in Jun 06 394.8 11.1
FY06. FY06 5396.7 11.5

Source : Forex Reserve & Treasury Management

Money Market Department, Bangladesh Bank.

6.2 Efforts were made effectively to establish a

stable money market in FY06. Steps towards degree of fluctuations in the last two quarters of
improved functioning and extending of the FY06 resulting from the recent pressure in the
money market for activation of secondary foreign exchange market and tight liquidity
trading in treasury bills/bonds have also been situation in the money market. This stemmed
continued. Developments in the money market mainly due to the increased demand of
during FY06 are summarized below. Government’s credit that was met up from
NCBs to finance the cost of imported petroleum
Call Money Market products. Till the second quarter of FY06 the
call money rates remained mostly stable but
6.3 The volume of transactions and weighted became somewhat volatile in the third quarter.
average interest rates in the call money market At the beginning of the last quarter of FY06, the
showed mixed trend during FY06 (Table 6.1) weighted average call money rate stood at 21.5
reflecting some noise in the activities of money percent, substantially higher than 5.4 percent
market. The call money rates witnessed some recorded in the beginning of the first quarter.

46
Financial Markets Chapter-6

Repo Auctions - FY06 Chart 6.1

6.4 With a view to inject the required money in Call money rate
the economy the daily repo auctions were
continued in FY06. This facilitated liquidity 25
management within a short period by enabling
the banks to place bids for funds collateralised 20
by T-bills. Bangladesh Bank provided the banks
with the needed funds against the repo facility 15

Percent
thus maintaining the market liquidity at desired
10
level. A total of 77 repo auctions were held
during FY06. In all, 148 bids for Taka 341.9
5
billion were received in these auctions, of which
25 bids for a total of Taka 53.4 billion were 0
accepted. The weighted average interest rates

Aug 05
Sep 05

Dec 05
Oct 05

Feb 06

Apr 06
Mar 06
Jan 06

Jun 06
May 06
Jul 05

Nov 05
against the accepted bids ranged from 8.5 to
8.0 percent per annum in FY06 (Table 6.2) as
against 10.0 to 4.5 percent per annum in FY05.

Table 6.2 Repo auctions - FY06

Bids received Bids accepted Range of the weighted

Total No. of auctions Tenor
No. of bids Face value No. of bids Face value average interest rates of
held during the year
(billion Taka) (billion Taka) the accepted bids (%)

1-Day/2-Day 91 201.5 10 15.0 8.5 – 8.0

77 3-Day/9-Day 57 140.4 15 38.4 8.3 – 8.0
Total 148 341.9 25 53.4 8.5 – 8.0*
Source : Monetary Policy Department, Bangladesh Bank.
* Overall range of the rates of different tenors.

Reverse Repo Auctions - FY06

keep the monetary aggregates on track during
6.5 As a counterpart of repo auctions, to mop- FY06. A total of 224 daily reverse repo auctions
up excess liquidity form the money market, the were held in FY06. In all, 1304 bids of 1-2 day
reverse repo auctions are being used as an and 3-9 day tenors for a total of Taka 964.2
instrument that continued in FY06. Bangladesh billion were received in these auctions, of which
Bank maintained the intended level of liquidity in 1299 bids amounting to Taka 962.1 billion were
FY06. The reverse repo auctions were used as accepted. The weighted average interest rates
a fine-tuning supplement to the weekly T-bills against the accepted bids ranged from 4.5 to
auctions to contain the credit growth and to 6.5 percent per annum in FY06 (Table 6.3).

Table 6.3 Reverse repo auctions - FY06

Bids received Bids accepted Range of the weighted
Total No. of auctions Tenor
No. of bids Face value No. of bids Face value average interest rates of
held during the year the accepted bids (%)
(billion Taka) (billion Taka)
1-Day/2 Day 517 285.0 512 283.0 4.5 - 6.1
224 3-Day/9 Day 787 679.2 787 679.1 4.7 - 6.5
Total 1304 964.2 1299 962.1 4.5 - 6.5*
Source : Monetary Policy Department, Bangladesh Bank.
* Overall range of the rates of different tenors.

47
Chapter-6 Financial Markets

Government Securities Market and other investors as of end June 2006 is, of
Government Treasury Bills Auctions course not large when seen against Taka 1380.2
billion time deposits in banks and financial
6.6 Weekly auctions of 28-day, 91-day, 182- institutions. A shift in the bidders’ preference to
day, 364-day and 2-year Government Treasury the shortest (28-day) tenor bill from the 364-day
bills (T-bills) continued to be the main and 2-year tenor bills in FY06 is observed
instruments for monetary policy management in Table 6.4. It may be mentioned here that
during the year under report. Bangladesh Bank the weekly auctions of 5-year T-bills were
actively used Treasury bill sales to mop up discontinuing since 10 March 2004.
excess liquidity linked to large inflow of export
earnings and remittances as well as huge
6.8 The yields of T-bills of different tenors varied
government borrowing.
within wide ranges, depending on the prevailing
liquidity conditions in the money market. The
6.7 Treasury bills auction results of FY06 are
yields for various tenors as of end June 2006
summarised at Table 6.4. The bidders'
(Table 6.4) depicted narrower range than the
preference of T-bills remained unchanged
during the year under report because of its yields as of end June 2005. Overall, yields on T-
suitability as a stable base for banks and bills of all maturities depicted a gradual increasing
financial institutions in meeting their SLR trend during the year under report as compared
requirements. The market-based yield rates of to the previous year owing partly to tight
long term T-bills also made suitable for monetary policy stance in FY06. The weighted
investment by the Provident Funds. The average annual yield rate of the accepted bids
outstanding amount of Taka 104.4 billion holding ranged from 6.6 percent to 9.0 percent in FY06,
of long term (2-Year and 5-Year) T-bills by banks which were 4.0 percent to 7.2 percent in FY05.

Table 6.4 Auctions of government treasury bills - FY06

Tenor Bids offered Bids accepted

Outstanding bills as of end
of bills Face value Face value Yield range* (%)
No. of No. of June 2006 (billion Taka)
bids (billion Taka) bids (billion Taka)
28-Day 882 398.8 871 396.8 14.6 6.6 - 7.1
91-Day 48 6.1 21 5.3 1.1 6.9 - 7.5
182-Day 61 3.3 18 2.1 1.1 6.8 - 7.8
364-Day 81 5.1 69 4. 5 4.5 7.0 - 8.8
2-Year 68 6.6 52 6.2 19.5 7.2 - 9.0
5-Year - - - - 84.9 -
Total 1140 419.9 1031 414.9 125.7 6.6 - 9.0*

Source : Monetary Policy Department, Bangladesh Bank.

* Range of the weighted average annual yield of the accepted bids.

Bangladesh Government Treasury Bonds these instruments were held in FY06. A total of
(BGTBs) Auctions 146 bids for Taka 17.8 billion were received in
these auctions, of which 80 bids for a total of
6.9 Bi-monthly auctions for 5-year and 10-year Taka 12.4 billion were accepted. The weighted
maturity Bangladesh Government Treasury average annual yield ranged from 10.5 to 12.1
Bonds (BGTBs) bearing half-yearly interest percent (Table 6.5). The amount of outstanding
coupons have been used as the secondary bonds stood at Taka 26.6 billion at the end of
instruments for government's debt and June 2006 as against Taka 14.3 billion at the
monetary policy management. Four auctions of end of June 2005.

48
Financial Markets Chapter-6

Table 6.5 Auctions of Bangladesh government treasury bonds - FY06

Bids offered Bids accepted Outstanding bonds as

Tenor of Yield range*
Face value Face value of end June 2006
bonds Number Number (%)
(billion Taka) (billion Taka) (billion Taka)

5-Year 48 7.1 22 4.9 13.8 10.5 - 10.7

10-Year 98 10.7 58 7.5 12.8 11.7 - 12.1
Total 146 17.8 80 12.4 26.6 10.5 - 12.1@

Source : Monetary Policy Department, Bangladesh Bank.

* Range of the weighted average annual yield of the accepted bids.
@ Overall range of treasury bonds of different terms.

Bangladesh Government Islamic Investment and public offerings in the capital market in
Bond (Islamic Bond) FY06. This indicates the overwhelming
preference of bank finance in industrial
6.10 The Government of the People’s Republic investment financing. The Taka 273.8P billion
of Bangladesh introduced a bond namely the outstanding balances of industrial term loans of
Bangladesh Government Islamic Investment banks and financial institutions as of end June
Bond (Islamic Bond) in accordance with the 2006 is also higher than the Taka 225.3 billion
rules of Islami Shariah on 2 September 2004 market capitalization of the securities listed in
(sale started from 14 October 2004) for 6- the Dhaka Stock Exchange (Tables 6.6 and 6.7).
month, 1-year and 2-year maturity. As per the
rules, Bangladeshi institutions and individuals 6.12 The high dominance of term loans in
who will agree to share profit or loss in investment financing implies low equity stake
accordance with Islamic Shariah, may buy this and risk exposure of the owners, with
bond. Any non-resident Bangladeshi will also be disproportionately high incidence of risk on the
eligible for buying the bond. As on June 2006 lending banks and financial institutions,
the total sale against this bond amounted to including liquidity risk arising from the funding of
Taka 6.4 billion while balance of total financing these long-term loans with typically shorter-term
stood at Taka 6.3 billion and the net outstanding deposits.
against the bond stood at Taka 0.03 billion. As
of end June 2005 the total sale against this 6.13 The securities market witnessed a mixed
bond was Taka 5.4 billion against the balance of trend during FY06. As there is dearth of
total financing of Taka 4.4 billion and the net securities having good fundamentals in the
outstanding of Taka 1.0 billion. capital market, at the time of rise in demand, the
price of securities listed on exchanges shows
Capital Market an unusual upward trend that makes the capital
market somewhat volatile. Although all other
Investment Financing in Bangladesh: Minor
economic indicators of the economy showed a
Role of Capital Market
positive trend, the performance of capital
market showed somewhat downward
6.11 The amount of industrial term loans
movement in case of market capitalization,
disbursement by banks and financial institutions
turnover and all-share price indices in FY06 as
stood at Taka 96.5P billion, many-fold higher
compared to FY05. The securities market,
than the amount of Taka 1.7 billion raised by
however, was not so active because of the
new capital issues through private placements
liquidity crises created by the tight monetary
P = Provisional. policy adopted by BB. In order to arrest this

49
Chapter-6 Financial Markets

trend, to ensure the stability of stock market and

to retain the investors’ confidence, the Table 6.6 Industrial term loans of banks and
regulatory bodies of the capital market have financial institutions
taken different reforms programmes. The (billion Taka)
increased minimum capital requirement for Particulars FY04 FY05 FY06P
banks and financial institutions to Taka 1.0 i. Disbursement 66.8 86.9 96.5
billion and 0.25 billion respectively prescribed by ii. Recovery 49.4 85.4 67.6
the Bangladesh Bank has infused some impetus iii. Outstanding (end June) 203.9 226.3 273.8
in the capital market. Positive public perception
Source : Agricultural Credit & Special Programmes Department,
about the Bangladesh Bank supervision of Bangladesh Bank.
banks and financial institutions in addition to P= Provisional.
the general Securities and Exchange
Commission (SEC) supervision of public
companies has attracted strong investor Table 6.7 Dhaka Stock Exchange (DSE) activities
interest in the new capital issues of banks and
financial institutions. This reawakened investor End June
Particulars
confidence in the capital market should extend to FY04 FY05 FY06
new issues of listed companies in other i. No. of listed securities* 267 277 303
economic sectors with stronger SEC supervision, ii. Issued equity and debt
more demanding audit and financial disclosure (billion Taka) 48.9 66.4 85.7
standards, and credit rating of issuers by iii. Eqity through private
independent rating agencies. placements & IPOs
(billion taka) 2.4 1.2 1.7
Capital Market Activities in FY06 iv. Market capitalization
(billion Taka) 142.4 224.6 225.3
Primary Issuance v. Turnover in value
(billion Taka) 24.8 75.6 46.0
6.14 Fourteen companies raised new equity of vi. Turnover in volume
Taka 1.7 billion in the primary market in FY06, (no. in billion) 0.5 1.0 0.6
higher than the Taka 1.2 billion raised by eight vii. All-share price index 1319 1713 1340
companies in FY05. Of the new equity issues,
Source : Dhaka Stock Exchange.
Taka 0.2 billion raised through private * = including companies, mutual funds, debentures and
placements and Taka 1.5 billion through public treasury bonds.
offerings in FY06 as against Taka 0.1 billion
raised through private placements and Taka 1.1
billion through public offerings in FY05.
Table 6.8 Chittagong Stock Exchange (CSE) activities
6.15 The volume of public offerings in FY06
End June
was predictably oversubscribed more than ten Particulars
FY04 FY05 FY06
times indicating the high demand of new
securities in the primary market. Bonus shares i. No. of listed securities* 201 198 213
valued at Taka 4.6 billion were issued in FY06 ii. Issued equity and debt
by fifty-six companies against retained profits, (billion Taka) 45.0 50.0 63.8
much higher than the Taka 3.5 billion issued in iii. Market Capitalization
FY05 by forty-five companies. (billion Taka) 127.2 201.7 195.6
iv. Turnover (billion Taka) 8.4 16.7 11.4
Secondary Market Activities v. All-share price index 2292 3347 2879

Source : Chittagong Stock Exchange.

6.16 Market capitalization inclusive of new * = including companies, mutual funds and debentures.
issues increased slightly by 0.3 percent in

50
Financial Markets Chapter-6

Dhaka Stock Exchange and it decreased by 3.0 Chart 6.2

percent in Chittagong Stock Exchange in FY06 Trends of market behaviour of DSE
than that of FY05 (Tables 6.7 and 6.8). In FY06,
the amount of market turnovers in the 400 2000
secondary market decreased by 39.2 percent
and 31.7 percent respectively at the Dhaka and 300 1500

Billion Taka
Chittagong stock exchanges. The main reasons

Price index
for declining the turnover were increased fresh 200 1000
new investment through new issues in the
capital market, which squeezed the trading. In 100 500
FY06, all-share price index in Dhaka and
Chittagong exchanges also decreased by 21.8 0 0

May 06
Aug 05
Sep 05

Nov 05
Dec 05

Feb 06
Mar 06
Jun 05

Jan 06

Jun 06
Oct 05

Apr 06
Jul 05
percent and 14.0 percent respectively. Day to
day changes in price indices and market
capitalization in FY06 mainly reflected local Market capitalisation Tournover Index
conditions with a mixed sentiment during the
year under report (Chart 6.2).
billion and Taka 0.36 billion respectively at the
Non-resident Portfolio Investment end of June 2006. The ICB asset management
subsidiary IAMCL floated four mutual funds. The
6.17 In FY06, net investment inflow by non- net investment in the portfolios of the funds
residents through NITA in the shares and stood at Taka 0.58 billion and the market prices
securities of the stock exchanges stood at Taka of net investment stood at Taka 0.52 billion at
2.2 billion with gross investment inflow of Taka the end of June 2006. Besides, the own
2.4 billion and gross outflow as repatriation of financing of IAMCL, the net investment and the
sale proceeds of Taka 0.2 billion. Gross market prices of net investment of the mutual
investment inflow was Taka 0.05 billion and funds stood at Taka 0.16 billion and Taka 0.16
repatriation of sale proceeds was Taka 0.3 billion billion respectively at the end of June 2006. The
in FY05. From the beginning (April 1992) to till ICB securities trading subsidiary ISTCL
June 2006 the gross investment inflow stood at emerged as the largest stockbroker in the
Taka 11.8 billion against gross outflow as country handling total transactions worth Taka
repatriation of sale proceeds of Taka 13.7 billion. 57.42 billion in FY06. The parent ICB itself sold
unit certificates amounting Taka 0.18 billion
Activities of the ICB against repurchased of unit certificates
amounting Taka 0.19 billion in FY06. In FY06,
6.18 The three subsidiaries of state-owned the ICB received deposits of Taka 0.17 billion
Investment Corporation of Bangladesh (ICB) and approved loans of Taka 0.95 billion in
namely the ICB Capital Management Ltd investment accounts of investors. The volume of
(ICML), the ICB Asset Management Company securities traded in FY06 by the ICB was Taka
Ltd. (IAMCL) and the ICB Securities Trading 6.82 billion against Taka 10.66 billion traded in
Company Ltd. (ISTCL) under on going FY05. Total commitments for investment made
restructuring programme of the capital market by the ICB in FY06 stood at Taka 3.53 billion of
development programme (CMDP) are functioning which, for direct investment (pre-IPO placement)
in the capital market in Bangladesh. The ICB in shares Taka 0.57 billion, (pre-IPO placement)
capital management subsidiary ICML acted in in debentures Taka 0.47 billion, purchase of
the roles of underwriter, issue manager and preference share Taka 0.32 billion, investment in
placement services provider. The net equity Taka 0.21 billion, purchase of debentures
investment against the investors’ accounts Taka 0.96 billion, investment in bond Taka 0.10
stood at Taka 0.11 billion at the end of June billion and in lease financing Taka 0.92 billion. In
2006. The net investment and the market prices FY05 the total amount of commitments was
of company’s own portfolio stood at Taka 0.27 Taka 3.26 billion.

51
Chapter-6 Financial Markets

Scheduled Bank Investments in Capital exceeded or will have exceeded Taka 0.4
Market Securities billion must convert itself into a public
limited company, and public limited
6.19 Holdings of capital market assets (equities, companies whose paid-up capital
debentures) by scheduled banks stood at Taka exceeded or will have exceeded Taka 0.5
20.4 billion as of end June 2006 as against Taka billion in a given point in time must raise
19.9 billion as of end June 2005. Outstanding 30.0 percent of capital through further
advances of scheduled banks against shares and issue of public offering of securities.
securities amounted to Taka 3.1 billion at the end

Off-loading a part of existing shares of
of June 2006, which was Taka 4.5 billion at the end
those companies having good
of June 2005.
fundamental through capital market
directly in DSE and CSE according to
Measures Supporting Capital Market
Development “Dhaka and Chittagong Stock Exchange
Direct Listing Regulation, 2006”.
6.20 The Securities and Exchange Commission
Issuing “Corporate Governance Guidelines”
(SEC) undertook following measures to strengthen on complies or explain basis to elevate
capital market through build-up the confidence of corporate governance scenario in
the investors in capital market in FY06: Bangladesh and according to this
guideline, provisioning has been made to

“The Public Issue Rules, 1998” and “the have audit committee and independent
Rights Issue Rules, 1998” have been director in a listed company.
replaced by amending “the Securities and
Exchange Commission (Public Issue)
Increasing the supply side transitions of
Rules, 2006” and “the Securities and securities through the approved
Exchange Commission (Rights Issue) ‘CSE/DSE Short-sale Regulations, 2005”.
Rules, 2006” to encourage companies to

The SEC accorded consent to issue Asset
raise capital through public issue. Besides,
Backed Zero Coupon Bond of Taka 10.32
SEC has made amendments to individual
billion on private placement basis through
rules, requiring mandatory employment of
compliance officer by the market a SPV for Jatrabari-Gulistan Flyover
intermediaries operating in the capital Securitization Trust 2005 and also
market and listed companies. accorded consent to issue Asset Backed
securities worth of US$ 0.18 billion

Reducing the public offering (IPO) numerous through BRAC Micro Credit Receivables
costs viz. consent fee to commission, Securitization by BRAC Micro Credit
listing fee of securities to stock Securitization Trust.
exchanges, underwriting and issue
management fee to merchant bankers and
Changing the settlement and clearing period
banker to the issue fee for encouraging for A, B & Z category companies on the
the companies to issue the securities T+3 basis in place of pervious T+4 basis,
through IPO. to create liquidity and to increase demand

Simplifying the procedures of IPO floatation and trade of good securities in the capital
through withdrawal of requirement of market.
publishing prospectus in widely circulated
daily newspapers. 6.21 The measures declared in the national

Imposing condition that private limited budget of FY06 in support of capital market
companies whose paid-up capital development included:

52
Financial Markets Chapter-6

Increasing the corporate tax for non-listed

Table 6.9 Advances of scheduled banks by
companies from 37.5 percent to 40.0
economic purposes
percent to increase the tax gap of listed (billion Taka)
and non-listed companies to 10.0 percent. End June
Sector
FY04 FY05 FY06P

Extension of tax holiday up to 30 June
2008 for 18 thrust sectors. 1. Agriculture, forestry and fishing 98.4 106.7 113.5
2. Industry 183.8 199.5 244.8

Withdrawal of provision of Dividend 3. Construction 64.3 74.6 86.7
Distribution Tax and a new tax @ 10.0 4. Transport & communication 11.7 13.8 19.6
5. Trade 320.3 394.9 437.6
percent has to be withheld at source for 6. Working capital financing 175.0 220.7 258.2
the listed companies. 8. Others 97.9 107.1 131.5
Grand Total 951.4 1117.3 1291.7

Introduction a new provision for income Source : Statistics Department, Bangladesh Bank.
tax at source @ 0.015 percent on the P=provisional.
transaction value of shares for the
members of the Exchanges as final improvement by 42.0 percent, followed by
settlement of tax liability. industry sector 22.7 percent, working capital
financing sector 17.0 percent, construction

Reducing the tax on approved securities
sector 16.2 percent, trade sector 10.8 percent,
and bond to 10.0 percent from 20.0
agriculture, forestry and fishing sector 6.4
percent. percent, and other sectors 22.8 percent in FY06

Reducing the provision for banks’ bad and as compared to FY05. Sector-wise contribution
doubtful debts to 1.0 percent from 2.0 of total advances show that the trade sector
percent. plays the main role (33.9 percent) and working
capital financing plays the second fiddle (20.0

Extension the declaration time for undeclared percent), followed by advances for industry
income up to 30 June 2006 with a (18.9 percent), agriculture, forestry and fishing
provision of 7.5 percent tax. (8.8 percent), construction (6.7 percent) and

Raising the minimum limit of taxable transport and communication sector (1.5
individual income to Taka 1.2 lac from percent) and other sectors (10.2 percent)
Taka 1.0 lac. in FY06. Sector-wise contribution of total
advances is reported in Chart 6.3.
Credit Market Industrial Term Loans of Banks and
Financial Institutions
Advances of Scheduled Banks by Economic
Purposes 6.23 Disbursement of industrial term loans by
banks and financial institutions increased
6.22 Total advances of scheduled banks by by 11.0 percent to Taka 96.5P billion in FY06.
economic purposes showed an upward trend The outstanding balance showed a positive
during FY06 (Table 6.9). Total advances of growth of 21.0 percent at the end of June 2006,
scheduled banks by economic purposes stood owing to a negative growth of 20.8 percent in
at Taka 1291.7P billion at the end of June 2006 recoveries indicating the poor management in
which is 15.6 percent higher than the total banking system. The overdues have been
advances of Taka 1117.3 billion at the end of declining, but were still high at 14.1 percent of
June 2005. In recent years, significant changes outstanding as of end June 2006 (Table 6.10).
have been taking place in the trends in total
bank advances classified by economic 6.24 The four NCBs and five state-owned
purposes. Of the total advances, transport and specialized banks together had Taka 107.3
communication sector recorded the significant billion (29.2 percent) share of the total Taka

P=provisional.
53
Chapter-6 Financial Markets

273.8 billion outstanding loans as of end June Chart 6.3

2006, making them major players in industrial
term lending (Table 6.10, Chart 6.4). However, Sectoral share of total advances
with very high levels of past overdues, their
actual role in current lending is quite minor, they
Agriculture,
disbursed only Taka 8.9 billion (9.2 percent) out Working capital Others forestry and fishing
of total Taka 96.5 billion disbursements in FY06. financing 10.2% 8.8%
Industry
In relation to disbursement, private commercial 20.0% 18.9%
banks were the major shares holders (Taka 60.6
billion) in FY06, followed by non-bank financial
institutions (Taka 17.5 billion), foreign banks
(Taka 9.5 billion), NCBs (Taka 5.9 billion) and
state owned five specialized bank (Taka 3.0 Construction
billion). Transport & 6.7%
Trade
33.9% communication
1.5%
6.25 The foreign banks had very low overdues
(0.5 percent at end June 2006), the overdues
were low also for both non-bank financial Chart 6.4
institutions and private commercial banks (7.3
percent). In FY06, overdues of the NCBs and Industrial term loans of banks and
the specialized banks were very high (26.4 financial institutions : FY06
percent and 2.15 percent), although declined 70
from 31.7 percent for NCBs and 24.8 percent for
60
the spcialized banks from the previous year.
50

6.26 As, BKB and RAKUB are agriculture sector 40

lenders have insignificant role in industrial term 30
lending. The specialized industrial sector lenders
20
extremely high overdues have concentrated in
the recent years on recovery rather than 10

fresh term lending. In FY06 there have been an 0

improvement. The amount of overdues of NCBs PCBs FCBs SBs NBFIs

specialized state banks owned at 21.5 percent of Disbursement Recovery Overdues

outstanding as of end June 2006.

Table 6.10 Industrial term loans of banks and financial institutions

(billion Taka)
Disbursement Recovery Outstanding Overdues Overdues as % of
Lender outstanding
FY05 FY06p FY05 FY06p FY05 FY06p FY05 FY06p FY05 FY06
p

i. NCBs 4.5 5.9 4.0 5.9 78.3 85.4 24.8 22.5 31.7 26.4
ii.PCBs 50.8 60.6 55.0 37.1 82.6 115.3 8.2 8.4 9.9 7.3
iii.
Foreign banks 11.4 9.5 10.2 8.1 8.8 10.2 0.03 0.05 0.3 0.5
iv.Specialized banks
(BSB, BSRS, BKB,
RAKUB, BASIC) 3.0 3.0 3.2 3.3 22.2 21.9 5.5 4.7 24.8 21.5
v. Non-bank financial
institutions 17.2 17.5 13.0 13.2 34.4 41.0 2.6 3.0 7.6 7.3
Total 86.9 96.5 85.4 67.6 226.3 273.8 41.1 38.7 18.2 14.1
Source : Agricultural Credit & Special Programmes Department, Bangladesh Bank.
P = Provisional.

54
Financial Markets Chapter-6

Measures for Strengthening Term Lending
BB has launched a 100 percent refinance
Practices scheme of Taka 0.5 billion at bank rate
against term loans (medium and long
6.27 The persistent high levels of overdue term term) for agro-based industries in rural
loans have received intensive corrective areas initiated in November 2001 with
attention of the authorities. Amongst the salient fixed capital not exceeding Taka 0.05
measures adopted over the past several years billion. Under this project Taka 0.63 billion
were the stricter income recognition and has been disbursed till end June 2006.
provisioning standards for banks in line

Under another BB’s refinance scheme of
with international best practices, prohibition of
Taka 1.0 billion introduced at bank rate
new credit accommodation to loan defaulters,
against term loans for development of
stringent restrictions on lending to directors and
small and medium enterprises effective
their connected interests. Substantial measures
from May 2004 with fixed capital not
to strengthen term lending practices initiated in
exceeding Taka 0.01 billion. Under this
previous years were continuing under the
scheme the total amount of Taka 1.0 billion
continuous process of financial sector reforms.
has been disbursed as early February
Among the new preventive and curative
initiatives to strengthen term lending practices 2005. For high demanding, the scheme is
taken in FY06 are: financing the amount of recovery as a
revolving fund to provide loans to SME

BB has instructed the banks to make sectors.
General Provision @ 5.0 percent on the
The World Bank’s IDA wing has been
outstanding amount of loans kept in the provided an additional fund of Taka 0.6
“Special Mention Account” after netting of billion (US$10.0 million) to refinance in the
the amount of Interest Suspense; project of development of small enterprises,

BB has prepared and forwarded a guideline of which Taka 1.7 billion has been
for Managing Core Risk in banking system. disbursed as a term lending till June 2006.
In case of sanctioning/renewal/rescheduling
Self-employment small enterprise Credit
of loans, Credit risk Grading system has Scheme for voluntary retired officers and
been introduced for all loans (other than employees introduced in 1993 with a fund
short term agricultural credit and micro of Taka 0.2 billion and under this project
credit), where loans have been graded into Taka 0.04 billion has been disbursed till
eight categories as Superior (SUP), good end June 2006.
(GD), Acceptable (ACCPT), Marginal/
Watchlist (MG/WL), Special Mention
The major objective of the Financial
Account (SMA), Substandard (SS), Doubtful Institutions Development Project (FIDP) is
(BF) and Loss (BL). to promote the development of Financial
Institutions (FIs) and improvements in
Broadening of Fund Base for Industrial Term investment financing on a sustainable
Lending basis through strengthening the quality of
intermediation with a view to accelerating
6.28 Dependence of banks on shorter-term industrial growth in Bangladesh. Under
deposit resources for funding long-term this project, Taka 2.7 billion (USD 45.58
industrial loans increases their liquidity risks. million) has been disbursed against 147
Providing refinance facilities to banks and projects to the six Participating Financial
financial institutions for broadening the base of Institutions (PFIs) upto June 2006. Under
longer-term funds for small and medium scale private placements of debt instruments
industrial lending under some special schemes worth Taka 1.4 billion were facilitated by
and programmes taken by Bangladesh Bank in the FIDP in FY06. So far, three of the PFIs
FY06 were: and one non-PFI have been given NOC

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Chapter-6 Financial Markets

(No Objection Certificate) to form SPV billion of total of 31 projects in food processing
(Special Purpose Vehicle) for issuing and agro-based sectors, involving total project
‘Zero-coupon’ bonds and Taka 1.0 billion cost of Taka 1.2 billion. Taka 1.5 billion was
has been disbursed for this purpose. disbursed from equity participation against the
Besides, the prospect of securitizing the sanctioned Taka 2.8 billion to 134 projects in
receivables of ‘Jamuna Multipurpose FY05. Up to 30 June 2006 with the project cost
Bridge’ with the technical support of FIDP of Taka 17.8 billion, a total of 262 projects
is currently under consideration. (including 228 agro-based and food processing

A project named “Investment Promotion projects, and 34 IT projects) has been disbursed
and Financing Facility (IPFF)” for financing Taka 3.5 billion against the sanctioned of Taka
government approved private sector 6.9 billion.
infrastructure projects (i.e. power
generation, transmission and distribution Housing Finance
and services, port (sea, river and land)
development, environmental, industrial 6.30 Total housing loans from banks and
and solid waste management, highways financial institutions as of end June 2006
and expressways including flyovers, water amounted to Taka 96.1 billion (Table 6.11),
supply and distribution sewerage and which was 7.6 percent of total credit to the
drainage, industrial estates and park private sector.
development etc.) has been signed 1 June
2006 between the Government of 6.31 The state owned House Building Finance
Bangladesh (GOB) and International Corporation (HBFC) has the largest share of
Development Association (IDA). The Taka 26.8P billion in outstanding housing loans
estimated cost of the project is USD 105.2 as of end June FY06. Not a deposit taker, the
million, of which USD 50.0 million would HBFC in the past funded its housing loans by
be provided by IDA, USD 10.0 million by issuance of low interest debentures bought by
GOB, and USD 14.4 million and USD the NCBs and the Bangladesh Bank. This
30.8 million by PFIs and concerned funding mode has been unavailable in recent
entrepreneurs respectively. One of the years; the HBFC has been constrained to rely
main features of the project is that 30 on recoveries of past loans for new lending after
percent of the cost of any approved defraying operating and debt servicing costs.
project should be borne by entrepreneurs’ Consequently, its new lending has been small.
own source, 20 percent from PFIs and rest Taka 0.41 billion and Taka 0.42 billion in FY05
50 percent from IPFF. and FY06 were disbursed out of recoveries of
Taka 3.42 and Taka 3.64 billion respectively.
Equity and Entrepreneurship Fund (EEF)
6.32 The NCBs and private sector banks with
6.29 Initiated in FY01 with the amount of Taka ample deposit resources have been expanding
1.0 billion Equity and Entrepreneurship Fund their housing loan portfolios, attaining dominant
(EEF) created by the Government and managed market position (Table 6.11). Two newer private
by the Bangladesh Bank was active in FY06 to sector specialized housing finance providers are
encourage investments with equity participation also slowly gaining ground, they fund their
in the risky but prospective agro-based, food operations with long term deposits including
processing and IT sector projects. From EEF in some contractual deposit schemes.
FY06, a total amount of Taka 1.1 billion
(including the fund released against projects 6.33 The Grameen Bank provides housing
sanctioned in the previous years) were loans for basic shelter housing in rural areas to
disbursed as against the sanctioned Taka 0.5 its microcredit borrower members. Some

P=provisional

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Financial Markets Chapter-6

microcredit NGOs also have small involvements

in lending for basic shelter housing, financed Table 6.11 Outstanding housing loans
from a Grihayan Tahbil created by the (billion Taka)
government. In FY05 and FY06, the Tahbil has Outstanding as of end June
recovered Taka 0.07 billion and Taka 0.08 billion Lenders
FY04 FY05 FY06p
respectively as against of disbursed Taka 0.15 a. Specialized housing
billion and Taka 0.09 billion through NGOs for finance providers
this purpose. The Tahbil also disbursed Taka i) HBFC 28.9 27.8 26.8
1.04 billion since its beginning from FY98 to end ii) Delta-BRAC Housing Finance 3.4 4.4 5.5
iii) National Housing Finance 1.3 1.8 1.9
June 2006. Besides, to provide safe, healthy and b. Banks
cheap housing facilities for the women labourers i) NCBs 23.6 24.1 25.7
working in the garments and other industries, ii) Other banks 22.9 26.2 32.9
2000-seated hostels have been constructed by c. Other financial institutions 1.0 1.6 2.9
d. Microcredit lenders
BRAC at Askona, Uttara, Dhaka with worth of Grameen Bank 1.3 0.9 0.4
Taka 0.1 billion financing facility from the Tahbil. Total 82.4 86.8 96.1
P = provisional.
Foreign Exchange Market

6.34 Bangladesh Bank floated its exchange Table 6.12 Sales and purchases of foreign
rate for Taka with effect from 31 May 2003. exchange by the Bangladesh Bank
Under this arrangement, banks and authorised (million US dollar)
dealers are free to set their own rates for their Particulars FY04 FY05 FY06
inter-bank and customer transactions. The Sale nil 459.5 413.0
exchange rate is being determined in the market Purchase 314.0 70.1 77.0
on the basis of market demand and supply
Source : Forex Reserve & Treasury Management
forces of the respective currencies. For avoiding
Department, Bangladesh Bank.
any unusual volatility in the exchange rate, BB
may purchase and sell US Dollar as and when it
deems necessary to maintain stability in the slowdown in export earnings in the first half of
foreign exchange market. Bangladesh Taka is FY06. But due to adoption of contractionary
fully convertible for current international monetary policy together with substantial inflow
transactions. Repatriation of profits or of foreign exchange from export earnings and
disinvestment proceeds on non-resident FDI and remittances, the situations eased later on. To
portfolio investment inflows are permitted freely. increase the supply of foreign currencies in the
market, BB sold USD 413.0 million as against
Purchases and Sales of Foreign Exchange the purchase of USD 77.0 million in FY06.
by the Bangladesh Bank Overall trend in purchases of foreign currency by
the BB, are showing declining trends during
6.35 The exchange rates of Bangladesh Taka FY04 to FY06 indicating gradually less necessity
against major international currencies remained for intervention by the Bangladesh Bank.
somewhat stable at the floating regime. Very
recently, however, the foreign exchange market Inter-bank Foreign Exchange Transactions
experienced substantial pressure on demand of
foreign currencies that made market depreciation 6.36 The volume of inter-bank foreign exchange
of Taka against US Dollar. Analysis shows that transactions in FY06 stood at USD 20.3 billion,
pressure in the foreign exchange market arose which was 2.0 percent higher than the USD 19.9
mainly from continued price hike of oil and billion of FY05. As authorised dealer banks were
petroleum products and major import instructed not to undertake any non-real cross
commodities coupled with higher growth in currency forward and swap transactions, volume
lending to the private sector, which led to rapid of inter-bank forward transactions was almost nil
growth in imports demand in the face of in FY06 as against USD 0.3 billion in FY05.

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