PRESENTATION ON

MONEY MARKET OF BANGLADESH

 COURSE NAME: WORKING CAPITAL MANAGEMENT
COURSE CODE: FIN 406

PRESENTED BY,

NAME: S.M. AMINUL HAQUE NAME: MAHMUD HASAN

ID-2276 ID-2242
 FINANCIAL MARKET

FINANCIAL
MARKET

MONEY MARKET CAPITAL MARKET

i.e. Treasury Bills i.e. Treasury Bonds
 MONEY MARKET PARTICIPANTS

 The central bank

 Commercial banks
 The government
 Finance companies
 Contractual saving institutions like the pension funds
 Insurance companies
 Savings and loan associations etc.
 MONEY MARKET INSTRUMENTS

 Treasury bills
 Short-term central bank and government bonds
 Negotiable certificates of deposits
 Bankers acceptances
 Commercial papers like the bills of exchange and
promissory notes
 Mutual funds etc.
 FUNCTION OF MONEY MARKET

 The money market, like all financial markets, provides a

channel for the exchange of financial assets for money. To
meet short-term cash needs.
 The money market is the mechanism through which holders of
temporary cash surpluses meet holders of temporary cash
deficits.
BACKGROUND OF BANGLADESH MONEY MARKET
 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.

 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 obective 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.
 CONSTITUENTS OF MONEY MARKET

The money market comprises banks and financial institutions as intermediaries, 20 of them
are primary dealers in treasury securities as well as non-bank financial institutions. Interbank
clean and repo based lending, BB's repo, reverse repo auctions, BB bills auctions, treasury
bills auctions are primary operations in the money market, there is also active secondary
trade in treasury bills (upto 1 year maturity). The country's money market is still segmented
into two groups: formal and informal.
FORMAL INSTITUTIONS:
The formal institutions include the Bangladesh Bank at the apex, 4 states owned commercial
banks, 30 domestic and 9 foreign private commercial banks, 5 specialised (development)
banks, 29 NON BANK FINANCIAL INSTITUTIONS, a number of non-scheduled banks.
INFORMAL INSTITUTIONS:
Informal institutions comprised mainly the moneylenders and small co-operative
organisations, which are not under the control of the central bank.
 CONSTITUENTS OF MONEY MARKET

The four distinct components of organised segment of money market of Bangladesh

are the inter-bank market, Call money market, Market for Repo and Reverse Repo, and
Bill market.
 SUB-MARKETS OF MONEY MARKET
Inter-bank Market
The interbank lending market is a market in which banks extend loans to one another for a specified term. It’s also
called HOT MONEY.
 Most interbank loans are for maturities of one week or less, the majority being overnight. Interbank deposit is
a temporary deposit to prevent default.
 Such loans are made at the interbank rate (also called the overnight rate if the term of the loan is overnight).
Call money market
Call money market is a short-term money market which allows for large financial institutions, such as
banks, mutual funds and corporations, to borrow and lend money at interbank rate.As the participants
are mostly banking institutions,therefore it’s called ‘Interbank call money market’.
 As there is no brokerage house or intermediary organisation, the transactions in call money market usually
take place on the basis of bilateral negotiations.
 Since call loans are made on clean basis, ie, without any security, lending institutions/banks are always
cautious in the selection of borrowing banks/institutions.
 The transactions of call money market are mainly Dhaka based. Since, the head offices of all banks and
financial institutions are located in Dhaka, the branches of the banks and financial institutions from all over
the country remit their excess funds to their respective head offices at Dhaka for investment.
 Foreign banks are the main source of liquidity in the call money market. Cost of funds for foreign banks are
very low as compared to the indigenous banks and as such they can hold a substantial amount of excess
liquidity for lending in the call money market.
 SUB-MARKETS OF MONEY MARKET

Market for Repo and Reverse Repo

A repurchase agreement, or repo, is a form of collateralized lending, while a reverse repurchase

agreement, or reverse repo, is a form of collateralized borrowing.
 The collateral is most commonly Treasury securities, but may include other government
bonds, agency securities, mortgage-backed securities, corporate bonds or equities.
 Legal title to the securities passes from the seller to the buyer and vice versa.
 The amount of collateralization is generally greater than the purchase price of the
securities. This is done to mitigate the risk that the counterparty might not be able to return
the collateral.
 Repos and reverse repos are short-term in nature with tenors ranging from overnight to less
than one year.
 SUB-MARKETS OF MONEY MARKET

Bill market:
Bill market is restricted to buying and selling of government treasury bills. In the past, it was
basically concentrated in transaction of government treasury bills of 3-month maturity at
predetermined rates. Commercial banks were obliged to buy these bills as approved security
to meet their statutory liquidity requirement (SLR) under the Banking Companies Act.
 MONEY MARKET INSTRUMENTS
Repurchase Agreements (Repo)
Repurchase Agreements which are also called as Repo or Reverse Repo are short term loans that
buyers and sellers agree upon for selling and repurchasing.
 Repo or Reverse Repo transactions can be done only between the parties approved by central
bank and allowed only between central bank-approved securities such as state and central
government securities, T-Bills, PSU bonds and corporate bonds.
BB’s Repo and Reverse Repo Auctions:
 A repo (reverse repo) is a financial transaction, where banks borrow (lend) money from (to)
the central bank, usually overnight, at a pre-determined policy rate set by Bangladesh Bank
against the collateral face value of government treasury bills and bonds.

 Current repo and reverse repo rates stand at 7.25% and 5.25% respectively.
 MONEY MARKET INSTRUMENTS

Bangladesh Bank Bill Auctions:

 Bangladesh Bank bills are mainly used to sterilize the impact of foreign exchange
purchases.
 They have a maturity of 30 days.
 Interest paid by Bangladesh Bank on these instruments currently amounts to 5.25%.
 Bangladesh Bank introduced its own security, the 91-day Bangladesh Bank Bill in
December 1990.
 Banks, financial institutions and others including individuals, firms, companies and
corporate bodies were eligible to invest in the Bangladesh Bank Bill.
 MONEY MARKET INSTRUMENTS
BB Treasury Bills Auctions:
Treasury bills is short-term obligations issued by Bangladesh Bank on behalf of the Government
of Bangladesh. The objectives of issuing these securities are two fold:
i) to finance the government deficit and ii) to reduce excess liquidity in the market.
 The different maturities of treasury bills are 3 months, 6 months and one year.
 In auction procedure, the Treasury Bills are issued through treasury style French auction
whereby the allotments are awarded to the bids which fulfill the notified issue amount
starting from the lowest yield. Pro-rata partial allotments are also made for bids at the cut-
off-yield.
 At present the treasury bills of 91-day, 182-day and 364-day are being continued for
sale/purchase in the market.
 MONEY MARKET INSTRUMENTS

 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.
 MONEY MARKET INSTRUMENTS

Commercial Paper:
Commercial paper consists of short term, unsecured promissory notes issued by a corporation to
raise short term cash, often to finance working capital requirements.
 Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a
discount from face value.
 Commercial paper is traded mainly in the primary market. Opportunities for resale in the
secondary market are more limited.
 Commercial paper is rated prime, desirable, or satisfactory, depending on the credit
standing of the issuing company.
 Types of Commercial Paper: There are two major types of commercial paper:
 Direct paper is issued mainly by large finance companies and bank holding companies
directly to the investor. Dealer paper, or industrial paper, is issued by security dealers on
behalf of their corporate customers (mainly nonfinancial companies and smaller
financial companies).
 Maturities of commercial paper range from three days (“weekend paper”) to nine
months. Most commercial paper is issued at a discount from par, and yields to the
investor are calculated by the bank discount method, just like Treasury bills.
 MONEY MARKET INSTRUMENTS
Certificate of deposit:
 Certificate of deposit was introduced as a money market instrument in Bangladesh in 1983.
Its objective was to strengthen the money market and bring idle funds, including those
arising from black money and unearned incomes, within the fold of the banking system.
 The Bearer of Certificate of Deposits (BCD) with a fixed maturity is issued by and payable
at the bank to Bangladeshi nationals, firms and companies.
 The certificate does not contain the name of the purchaser or holder.
 The interest rate is not fixed as in the case of other deposit resources accepted by the
banks at present.
 The interest is determined on the date of issue of CD’s based on the demand and supply of
funds in the money market. The difference between the face value of CDs and the
prepaid interest is received by the bank from the purchaser of CDs at the time of issue.
 The bearer of CDs can sell the same to another purchaser. 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 months.
 MONEY MARKET INSTRUMENTS
Bankers’ Acceptances:
 It is a short term credit investment created by a non financial firm and guaranteed by a bank to make
payment. It is simply a bill of exchange drawn by a person and accepted by a bank. It is a buyer’s promise
to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the
buyer in exchange for a claim on the goods as collateral.
 The person drawing the bill must have a good credit rating otherwise the Banker’s Acceptance will not be
tradable.
 The most common term for these instruments is 90 days. However, they can vary from 30 days to180 days.
For corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in
goods and is highly useful when the credit worthiness of the foreign trade party is unknown.
 The seller need not hold it until maturity and can sell off the same in secondary market at discount from
the face value to liquidate its receivables.
 A bankers’ acceptance is a time draft drawn on and endorsed by an importer’s bank. Acceptances are used
in international trade because most exporters are uncertain of the credit standing of their importers. The
issuing bank unconditionally guarantees to pay the face value of the acceptance when it matures, thus
shielding exporters and investors in international markets from default risk.
 Acceptances carry maturities ranging from 30 to 270 days, with 90 days being the most common.
 They are traded among financial institutions, industrial corporations, and securities dealers as a high-
quality investment and source of ready cash.
DRAWBACKS OF MONEY MARKET OF BANGLADESH
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.
 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.
 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.
 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.
 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.
DRAWBACKS OF MONEY MARKET OF BANGLADESH

 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.

 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.
 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.
 RECOMMENDATIONS

 Regulatory policies should be framed with long term vision. In recent months, some policy
decisions are being taken to address current problems at the cost of long term market
interest. These policy changes include fixation of minimum size of new public issue,
imposing restriction on private placements, disqualifying private sector companies under
direct listing and discouraging new mutual funds.
 There is a serious risk factor for the inexperienced investors. Entry of new companies in the
market can help reduce gap between demand and supply and help bring profitability in
the market.
 Private placements have been stopped in case of smaller companies. It is true that scope
of private placement has been misused in some cases recently and the problem called
for intervention.
 CONCLUSION

The money market is a wholesale market for funds – most trading occurs in multiples of a
million dollars. The market is dominated by a relatively small number of large financial
institutions that account for the bulk of federal funds trading. Securities also move readily
from sellers to buyers through the market-making activities of major security dealers and
brokers. And, of course, governments and central banks around the world play major roles in
the money market as the largest borrowers and as regulators. The money market supplies
the cash needs of short-term borrowers and provides savers who hold temporary cash
surpluses with an interest-bearing outlet for their funds.