Financial System in Bangladesh

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

INTERNATIONAL ISLAMIC UNIVERSITY CHITTAGONG

Assignment On… ISLAMIC FINANCIAL SYSTEM Topic: Structure of Financial System in Bangladesh Submitted To: MR. ABDULLAHIL MAMUN LECTURER DEPARTMENT OF BUSINESS ADMINISTRATION INTERNATIONAL ISLAMIC UNIVERSITY CHITTAGONG.

Submitted By: MUHAMMAD SHAHINUR EKRAM CHOWDHURY ID No: R093117

RMBA, 4th Trimester, Section (B).

Submitted Date:

22 February, 2010.

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

Financial System:

The financial system is a set of organized institutional set-up through which surplus units transfer their funds to deficit units. Define a financial system fair narrowly, to consist of a set of markets, individuals and institutions, which trade in those markets and the supervisory bodies responsible for their regulation. The end-users of the system are people and firms whose desire is to lend and to borrow. A financial system is a system that to channels funds from lenders to borrowers, to creates liquidity and money, to provides a payments mechanism, to provides financial services such as insurance & pensions and to offers portfolio adjustment facilities. In Finance, the financial system is the system that allows the transfer of money between savers and borrowers. It comprises a set of complex and closely interconnected financial institutions, markets, instruments, services, practices and transactions. An economy’s financial system exists to organize the settlement of payments, to raise and allocate finance and to manage the risks associated with financing and exchange. So, the government sector and the corporate sector are the users of financial surplus of household sector and that the financial sector performs this vital function of intermediation. Empirical evidence shows that the growth of financial markets and development of the economy are complementary to each other. A developed financial system is one that has a secure and efficient payment system, security market and financial intermediaries that arrange financing and derivative markets & financial institutions that provide access to risk management instruments. Thus, A financial system consists of a set of organized markets and institutions together with regulators of those markets and institutions. Their main function is to channel funds between end users of the system: from lenders (‘surplus units’) to borrowers (‘deficit units’). In addition, a financial system provides payments facilities, a variety of services such as insurance, pensions and foreign exchange, together with facilities, which allow people to adjust their existing wealth portfolios. 2

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

Background of financial system in Bangladesh: The financial system in Bangladesh includes Bangladesh Bank (the Central Bank), scheduled banks, non-bank financial institutions, Microfinance institutions (MFIs), insurance companies, co-operative banks, credit rating agencies and stock exchange. Among scheduled banks there are 4 Nationalised commercial banks (NCBs), 5 stateowned specialized banks (SBs), 30 domestic private commercial banks (PCBs), 9 foreign commercial banks (FCBs) and 29 non-bank financial institutions (NBFIs) as of December 2006 after that total number of institutions are increasing rapidly. However, Rupali Bank, an NCB is being sold to a foreign buyer, and once this transaction is completed, the country will have only 3 NCBs., which are being corporative. Over and above the institutions cited above, three development financial institutions namely House Building Finance Corporation (HBFC), Ansar-VDP Unnayan Bank and Karma Shangsthan Bank are operating in Bangladesh, all of which are state owned. The financial system of Bangladesh is mainly bank dependent. Though in the recent years, a number of non-banking financial institutions (leasing and merchant banks) have been established, yet the banking sector still captures the lion share of the financial market.

Financial Sectors in Bangladesh: Bangladesh Bank is the key player for the financial sector of Bangladesh as well as for the economy. Bangladesh Bank is the banker to the government as well as to other banks. It formulates and implements monetary policy, manages foreign exchange reserve and is the authority to supervise and regulate other banks and non-bank financial institutions. The financial sector of Bangladesh has gone through a lot of reforms in the past two decades and central bank reform was a key element of the reform agenda. This study maps the various reforms that have taken place so far. Bangladesh Bank has improved in certain areas and yet there are avenues where more can be done. The bank plays a dual role in the economy. Bangladesh Bank supervises

and regulates the country’s banking sector where it has significant

improvements. On the other hand, the bank underachieves in terms of autonomous formulation and implementation of monetary policy in coordination with the government.

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

Structure of Financial System: The Main Constituents of Our Countries Financial System Are: 01. Financial Institutions/Intermediaries. 02. Financial Instruments. 03. Financial Markets.

Structure of Financial System

01-(i). Banks: a)

01.

Financial Institutions

b) c) d)

Private Commercial Banks Public Commercial Banks Private Foreign Commercial Banks Specialized Financial Institutions

02-(i). Money Market

Financial Instruments

a)

Treasure Bills

b)

Commercial Paper

c)

Negotiable Certificate of deposits

d)

03.

Financial Markets

Banker Acceptances

a) b) c) d) e) f)

Insurance Companies Security Firms Investment Banks Financial Companies Mutual Funds Pension Funds

02-(ii). Capital Market Instruments:

Instruments:

02.

01-(ii). Non-Bank Financial Institutions:

a) b) c) d) e) f)

Bonds Stocks Govt. Securities Bank & Consumer Commercial Paper Debentures Mortgages

03-(i).

Primary Market

03-(ii).

Secondary Ma rket

03-(iii). Mon ey Mark et 03-(iv). Capital Market

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

01. Financial Institutions/Intermediaries: An organization which borrows funds from lenders and lends them to borrowers on terms which are better for both parties than if they dealt directly with each other. Financial institutions as ‘intermediaries’: As a general rule, financial institutions are all engaged to some degree in what is called intermediation. Rather obviously ‘intermediation’ means acting as a go-between for two parties. The parties here are usually called lenders and borrowers or sometimes-surplus sectors or units, and deficit sectors or units. As a general rule, what financial intermediaries do is: to create assets for savers and liabilities for borrowers which are more attractive to each than would be the case if the parties had to deal with each other directly. There are two general consequences of financial intermediation. The first is that there will exist more financial assets and liabilities than would be the case if the community were to rely upon direct lending. The second general consequence of the intervention of financial institutions is that lending and borrowing have become easier. It is now no longer necessary for savers to search out borrowers with matching needs. In this sense financial intermediaries have lowered the ‘transaction costs’ of lending and borrowing.

01-(i). Banks: Banking is essentially based on the debtor-creditor relationship between the depositors and the bank on the one hand and between the borrowers and the bank on the other. Interest is considered to be the price of credit, reflecting the opportunity cost of money. The commercial banking system dominates Bangladesh's financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking system is composed of four Public commercial banks, five specialized development banks, thirty private commercial Banks and nine foreign commercial banks. Out of 6562 scheduled bank branches operating in the country, up to end December 2006 the NCBs operate 3384 branches, of which 2146 are in rural areas and 1238 are in urban areas; SBs have 1354 branches of which 1200 are in rural areas and 154 are in urban areas; PCBs have 1776 branches of which 488 are in rural areas and 1288 are in urban areas; and FCBs have 48 branches exclusively in urban areas. Out of 30 PCBs, six have been operating as Islamic banks. After the year 2006 that total number of branches are increasing rapidly up to 2009. List of All types of banking sectors are: • Central Bank • Private Commercial Banks • Public Commercial Banks • Foreign Commercial Banks • Specialized Development Banks 5

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

a) Private Commercial Banks: Even with all the provisions at hand, during the interviews many experts opined that there could be separate agencies to regulate and supervise the private sector banking activities in Bangladesh. A number of agencies can be set up and each would look into a number aspects related to private sector banking. Under the current system, the commercial banks and financial institutions have to report to and are to a certain extent supervised by the Securities and Exchange Commission, when they register with the stock exchange. Private banks are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products. • AB Bank Ltd • Aziz Co-op Commerce & Finance Bank Ltd. • BRAC Bank Limited • Eastern Bank Limited • Eastern Bank Limited • Social Investment Bank Limited • Dutch Bangla Bank Limited • Uttara Bank Limited • Dhaka Bank Limited • Islami Bank Bangladesh Ltd • Pubali Bank Limited • Uttara Bank Limited • IFIC Bank Limited • National Bank Limited • United Commercial Bank Limited • NCC Bank Limited • Prime Bank Limited • SouthEast Bank Limited • Al-Arafah Islami Bank Limited • Social Islami Bank Limited • Standard Bank Limited • One Bank Limited • Exim Bank Limited • Mercantile Bank Limited • Bangladesh Commerce Bank Limited • Mutual Trust Bank Limited • First Security Islami Bank Limited • The Premier Bank Limited • Bank Asia Limited • Trust Bank Limited • Shahjalal Islami Bank Limited • Jamuna Bank Limited • ICB Islami Bank • Moon Bank Limited • United Commercial Bank Limited 6

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

b) Public Commercial Banks: The Basel Committee on Banking Supervision published guidance in 1999 to assist banking supervisors in promoting the adoption of sound corporate governance practices by banking organizations in their countries. This guidance drew from principles of corporate governance that were published earlier that year by the Organization for Economic Co-operation and Development (OECD) with the purpose of assisting governments in their efforts to evaluate and improve their frameworks for corporate governance and to provide guidance for financial market regulators and participants in financial markets at public commercial banks. • • • •

Sonali Bank Limited Janata Bank Limited Agrani Bank Limited Rupali Bank Limited

c) Private Foreign Commercial Banks: The state and nature of corporate governance has been studied under five general headings. Three types of foreign commercial banks or companies were studied: a) the public corporations - these are mainly private utility companies operated by the government with a board of director consisting of the people of Bangladesh and few experts, b) financial institutions like banks which are listed in the Dhaka Stock Exchange but related with governmental condition about share distribution and c) non-financial limited companies also listed in the stock exchanges in the country but related with governmental condition about share distribution. • Citibank • HSBC • Standard Chartered Bank • Commercial Bank of Ceylon • State Bank of India • Habib Bank • National Bank of Pakistan • Bank Alfalah d) Specialized Financial Institutions: Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sector while the other two ( Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) are for extending term loans to the industrial sector. The Specialized banks are: • Grameen Bank • Bangladesh Krishi Bank • Bangladesh Development Bank Ltd • Rajshahi Krishi Unnayan Bank • Basic Bank Ltd (Bank of Small Industries and Commerce) • Bangladesh Somobay Bank Limited (Cooperative Bank) • Ansar VDP Unnyan Bank

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

01-(ii). Non-Bank Financial Institutions: Non-Bank Financial Institutions (NBFIs) are an important part of financial system in Bangladesh. NBFIs operations are regulated under the Financial Institutions Act, 1993. The NBFIs consist of investment, finance, leasing companies etc. There were 29 financial institutions operating in Bangladesh as of 31 December 2006. Of these one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation. Bangladesh Bank has introduced a policy for loan and lease classification and provisioning for NBFIs from December 2000 on a half-yearly basis. Among the 29 financial institutions, 12 have been listed in the stock exchanges up to 31 December 2006 to strengthen financial capability and the rest are under process to be listed in due course after the year 2006 that the total number of institutions are increasing rapidly. Products and Services Offered by NBFIs Non-Bank Financial Institutions play a key role in fulfilling the gap of financial services that are not generally provided by the banking sector. The competition among NBFIs is increasing over the years, which is forcing them to diversify to a wider range of products and services and to provide innovative investment solutions. NBFIs appear to offer flexible options and highly competitive products to help customers meet their operational and financial goals. The table below provides a summary of the product range offered by existing NBFIs of Bangladesh. Different Products and Services of NBFIs

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

a) Insurance Companies The insurance sector is regulated by the Insurance Act, 1938 with regulatory oversight provided by the Controller of Insurance on authority under the Ministry of Commerce. A separate Insurance Regulatory Authority is being established. A total of 62 insurance companies have been operating in Bangladesh, of which 19 provide life insurance and 43 are in the general insurance field. Among the life insurance companies, except the state-owned Jiban Bima Corporation (GBC) foreign owned American Life Insurance Company (ALlCO), and the rest of the private. Among the general insurance companies, state-owned Shadharan Bima Corporation (SBC) is the most active in the insurance sector. A total of 31 insurance companies are listed in the capital market, of which 8 offer life insurances.

i) Life Insurance Company (Public) • Jiban Bima Corporation ii) Life Insurance Company (Foreign) • American Life Insurance Co. iii) Life Insurance Company (Private) • Progressive Life Insurance Co. Ltd. • National Life Insurance Co. Ltd. • Rupali Life Insurance Co. Ltd. • Delta Life Insurance Co. Ltd. • Fareast Islami Life Insurance Co. Ltd. • Sun Life Insurance Co. Ltd. • Homeland Life Insurance Co. Ltd. • Meghna Life Insurance Co. Ltd. • Padma Islami Life Insurance Co. Ltd. • Sandhani Life Insurance Co. Ltd. • Sunflower Life Insurance Co. Ltd. • Baira Life Insurance Co. Ltd. • Golden Life Insurance Co. Ltd. • Progoti Life Insurance Co. Ltd. • Prime Life Insurance Co. Ltd. • Popular Life Insurance Co. Ltd. 11

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

iv) General Insurance Company (Public) • Sadharan Bima Corporation v) General Insurance Company (Private) • Agrani Insurance Company Limited. • Bangladesh Co-operative General Insurance Ltd. • Bangladesh General Insurance Co. Ltd. • Bangladesh National Insurance Co. Ltd. • Central Insurance Co. Ltd. • City General Insurance Co. Ltd • Eastern Insurance Co. Ltd • Eastland Insurance Co. Ltd • Federal Insurance Co. Ltd • Green Delta Insurance Co. Ltd • Janata Insurance Co. Ltd • Karnafully Insurance Co. Ltd • Meghna Insurance Co. Ltd • Mercantile Insurance Co. Ltd • Northern General Insurance Co. Ltd • People's Insurance Co. Ltd • Phoenix Insurance Co. Ltd • Pioneer Insurance Co. Ltd • Prime Insurance Co. Ltd • Progoti General Insurance Co. Ltd • Provati Insurance Co. Ltd • Purabi General Insurance Co. Ltd • Reliance Insurance Co. Ltd • Rupali Insurance Co. Ltd • United Insurance Co. Ltd • Takaful Islami Insurance Company Limited • Crystal Insurance Co. Ltd • Republic Insurance Company Limited • Global Insurance Company Limited • Paramount Insurance Co. Ltd. • Standard Insurance Co. Ltd. • Asia Pacific Insurance Co. Ltd. • South Asia Insurance Co. Ltd. • Express Insurance Ltd. • Continental Insurance Ltd. • Desh General Insurance Ltd.

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

b) Security Firms Financial institutions that underwrite securities and engage in related activities such as securities brokerage, securities trading and making a market in which securities can trade. • Nabiul Karim Securities Ltd. • Haji Mohammad Ali Securities Ltd. • GMF Securities Limited • Quaiyum Securities Ltd. • Dragon Securities Ltd. • TA Khan Securities Co. Ltd., • Md. Fokhrul Islam Securities Limited. • Shahiq Securities Ltd. • Habibur Rahman Securities Limited • Ershad Securities Ltd. • Mian Abdur Rashid Securities Ltd. • Khurshid Securities Ltd. • Rapid Securities Limited • Dawn Securities Limited. • Arafat Securities Ltd. • Shahed Securities Ltd. • Tobarak Securities Ltd. • Midway Securities Ltd. • Parkway Securities Ltd. • HR Securities & Investment Limted • Kazi Feroz Rashid Securities Ltd. • MAH Securities Ltd. • DMR Securities Services Ltd. • Alhaj Jahanara Securities Ltd. • RNI Securities Ltd. • GQ Securities Ltd. • Crest Securities Limited. • Asenz Securities Ltd. • Finvest Securities Ltd. • MAH Securities Limited • Nabiul Karim Securities Limited • Jalalabad Securities Limited • Haji Mohammad Ali Securities • Akij Securities Limited • Mian Abdur Rashid Securities 13

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

c) Investment Banks It primarily helps net suppliers of funds transfer funds to net users of funds at a low cost and with maximum degree of efficiency. • Bay Leasing & Investments Limited. • Union Capital Ltd. • First Lease International Limited • Phoenix Leasing Co. Ltd. • Peoples Leasing & Financial Services Ltd. d) Financial Companies The primary function of finance companies is to make loans to both individuals and business. Finance companies provide such services as consumer lending, business lending and mortgage financing. • Industrial Development Leasing Company of Bangladesh (IDLC) • Infrastructure Development Company Limited (IDCOL) • GSP Finance Limited • Delta Brac Housing Finance Corporation Ltd. • Fidelity Assets & Securities Company Limited. • Fareast Finance & Investment Ltd. • LankaBangla Finance Ltd. • Prime Finance & Investment Limited • Bangladesh Industrial Finance Co. Ltd. e) Mutual Funds Mutual funds are portfolios of different securities such as stocks, bonds, treasuries, derivatives, etc. Mutual funds pool money of both individual and institutional investors allowing the funds to achieve: (i) economies of scale by reducing costs and increasing investment returns; (ii) divisibility and diversification; (iii) active management with superior stock picking and market timing; (iv) reinvestment of dividends, interest and capital gains; (v) tax-efficiency; and (vi) buying and selling flexibility. There might be varieties of mutual funds that differ in terms of their investment objectives, underlying portfolios of shares, risks and returns, fees and expenses, etc. Mutual funds are professionally managed investment schemes that collect funds from small investors and invest in stocks, bonds, short term money market instruments, and other securities. This ensures a diversified portfolio for the investors at much less efforts than through purchasing individual stocks and bonds. Fund managers who undertake trading of the pooled money and are responsible for managing the portfolio of holdings usually manage mutual funds. Generally, mutual funds are organized under the law as companies or business trusts and managed by separate entities. Mutual funds fall into two categories: open-end funds and closedend funds. 14

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

Some categories of mutual funds are: • ICB, 1st ICB Mutual Fund, 2nd ICB Mutual Fund, 3rd ICB Mutual Fund, 4th ICB Mutual Fund, 5th ICB Mutual Fund, 6th ICB Mutual Fund, 7th ICB Mutual Fund • ICB Mutual Fund • 1st BSRS Mutual Fund • AIMS First Granted Mutual • Grameen Mutual Fund One • Grameen One: Scheme Two • ICB AMCL 1st Mutual Fund • ICB AMCL Islamic Mutual Fund • ICB AMCL Unit Fund • ICB AMCL Pension Holder Unit Fund • ICB AMCL First NRB Mutual Fund • ICB AMCL Second NRB Mutual Fund f) Pension Funds Pension funds are analyzed as financial intermediaries using a functional approach to finance, which encompasses traditional theories of intermediation. Funds fulfill a number of the functions of the financial system more efficiently than banks or direct holdings. Their growth complements that of capital markets and they have acted as major catalysts of change in the financial landscape. Financial efficiency in this functional sense is not the only reason for growth. It is also a consequence of fiscal incentives and benefits to employers, as well as growing demand arising from the ageing of the population. Employers, such as companies, public corporations, and industry or trade groups, typically sponsor pension funds; accordingly, employers as well as employees typically contribute. Funds may be internally or externally managed. Returns to members of pension plans backed by such funds may be purely dependent on the market (defined contribution funds) or may be overlaid by a guarantee of the rate of return by the sponsor (defined benefit funds).

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

02. Financial Instruments: A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. A financial asset is any asset that is: (i) Cash; (ii) An equity instrument of another entity; A contractual right: (i) To receive cash or another financial asset from another entity; or (ii) To exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity. A contract that will or may be settled in the entity’s own equity instruments and is: (i) A non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or (ii) A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments. The specific form, which a claim takes, is a financial instrument. The range of instruments is existence and also because it enables us to distinguish certain broad categories of instrument. Selections of instruments are: • Treasure Bills • Commercial Paper • Negotiable Certificate of deposits • Banker Acceptances • Bonds • Stocks • Govt. Securities • Bank & Consumer Commercial Paper • Debentures • Mortgages Company shares and government stock, for example, once created can be bought and sold in organized markets without their original issuers ever again being involved. Instruments that are issued with a fixed rate of interest for as long as they exist – government bonds, for example – from those assets whose yield varies according to market conditions. The latter category includes a wide range of claims from bank deposits to company shares. A very popular basis for distinguishing types of instrument is maturity. This means the length of time, which has to elapse before the claim is repaid. This may be very long. With company shares, for example, it is theoretically infinity. Some government stocks are issued with twenty-five years to maturity. Contrast this with treasury bills, which are issued for ninety-one days or even bank deposits that can be demanded immediately or ‘at sight’. 16

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

02-(i). Money Market Instruments: The Money Market is an instrument of the fixed income market. Generally speaking, the term "fixed income" is synonymous with bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities, and their near-liquid nature (almost immediate access upon request). Money market securities are essentially IOU's issued by governments, financial institutions, and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower return than most other securities. One of the main differences between the money market and the stock market is that most money market securities trade in awfully high denominations. This limits the access of the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock market where a broker receives commission to acts as an agent, while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems. The easiest way for us to gain access to the money market is with a money market mutual funds, or through money market bank account, which are offered at this website.. These accounts and funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments, like treasury bills, may be purchased directly. Failing that, they can be acquired through other large financial institutions with direct access to these markets. Call money rate -the rate at which short term funds are lent and borrowed among banks- is the core of an overnight money market for credit. Volatility of the overnight money market rate (call money rate) is a very usual phenomenon for a wellfunctioning market. Market participants determine the rate according to their perceptions of the current and future liquidity condition in the market. Thus this rate reflects the supply and demand behavior of bank reserves, and hence, gives important signals to the central bank to understand the market pressure. Call money rate in Bangladesh can be viewed as a market-clearing rate. Fluctuations in the overnight rates come mainly from supply and demand for liquidity in the money market. Periodic change in reserve requirements as well as economic and seasonal factors may cause the demand to rise. The overnight money market rate can also be impacted on the days when Bangladesh Bank (BB) conducts open market operations. a) Treasure Bills Dept obligations of the 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. 17

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

b) Commercial Paper It is an unsecured short-term promissory notes issued by a corporation to raise shortterm cash, often to finance working capital requirements. A Sample copy of Commercial Paper is given below: 01. PARTNERSHIP ACCOUNT:

TERMS & CONDITIONS

We request and authorize you until any one of us shall give you notice in writing to the contrary, to honour and debit to the firm’s account all Cheques, Guarantees, Negotiable Instruments, or other Orders which may be drawn, or Bills Accepted or Notes made or Receipts for Money owing by you to the firm signed by any one of us in the name or on behalf of the firm, whether the firm’s Account be for the time being in credit or overdrawn or may become overdrawn in consequence of such debit and we will be jointly and severally responsible for the repayment of any such overdraft and interest there against. -We also request and authorize you to accept the endorsement of any one of us in the name or on behalf of the firm on Cheques, Orders, Bills, Notes or other Negotiable Instruments. -You are hereby authorized to carry out any instruction in connection with the account (including instruction of countermanding payment of Cheques, Bills of Exchange, Promissory Notes or order for payment) when such instructions are given by all or any one of us. -Any security or other property of or deposited in the name of the firm may be withdrawn and any money may be borrowed from you in the name or on behalf of the firm and may be secured in any manner upon any security money or property of or deposited in the name of the firm by any one of us and we will jointly and severally be responsible for repayment of such money with interest, costs, charges and expenses. -Any liability whatsoever incurred in respect of the account shall be joint and several. -This authority shall remain in force until revoked notwithstanding any change in the constitution or name of the firm and shall apply notwithstanding any change in the membership of the firm by death, bankruptcy, and retirement or otherwise or the admission of any new partner(s). (This account opening form must be signed by all the Partners)

Partner’s Signature Name:

Partner’s Signature Name:

Partner’s Signature Name:

Partner’s Signature Name:

02. LIMITED COMPANY: At General Meeting/a Meeting of the Board or Directors of…………………………………………………… Limited held at its office at………………………………………………………………………… on…………..…,the company decided to open a Current/……… Account with ONE Bank Limited……………………….. Branch and we have been authorized to advise the Bank accordingly. We enclose the following Documents for the purpose: a. Certified copy of the Memorandum & Articles of Association of the Company. b. Certificate of Incorporation of the Company for inspection and return, and a duly certified photocopy for Bank’s record c. Certificate from the Registrar of Joint Stock Companies that the company is entitled to commence business (in case of Public Ltd. Co.) for inspection and return, and a duly certified Photocopy for Banks record. d. Latest copy of Balance sheet. e. Extract of resolution of the Board/General Meeting of the Company for opening the account and authorization for its operation duly certified by the Chairman/Managing Director of the Company. List of Directors with addresses (a latest certified copy of the form-xii)

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH We would now request you to open a Current/……………..Account in the name of the Company. We undertake to advise the Bank, of changes in the authorized signatures and these will be supported by further Resolution of the Company. We agree to comply with the rules governing the account of ONE Bank Limited and agree to comply with the Schedule of Charges of the Bank. Authorized Signature Name:

Authorized Signature Name:

Authorized Signature Name:

Authorized Signature Name:

03. GENERAL CONDITIONS OF GOVERNING ACCOUNTS: a) The law, rules and regulations of Bangladesh, usual customs and procedures common to Banks in Bangladesh will apply to and govern the conducts of the account opened with the Bank. b) Any person opening an account will be deemed to have read, understood and accepted the rules governing the account. c) A suitable introduction by an introducer acceptable to the Bank is required prior to opening of any account. Recent photographs of the account openers duly attested by the introducer must be produced. d) Each account will be given one account number. This number is to be properly quoted on all letters and / or documents addressed to the Bank and on all deposit slips. The Bank will not be responsible for any loss or damage occurring as a result of wrong quotation of account number. e) Interest/commissions/service or maintenance of account charges will be levied by the Bank as determined by the Bank from time to time and as per Bangladesh Bank regulation. f) The funds available in any of the account holder’s account (the customer) with the Bank will be considered by the Bank to be a security for any commitment(s), the Bank is entitled without giving prior notice to the customer to utilize such funds against the obligation(s) and/or commitment(s) of the customer to the Bank. g) Any statement of account dispatched to the customer will be considered as approved unless any discrepancy (-ies) is/are notified in writing to the Bank within 15 days from the date of dispatch. The Bank is not responsible for delays or non-delivery due to mail problems. Statement of account to be picked up will be considered as approved even if not picked up 15 days after the date they are produced. Statements of account are not produced when there is no operation during the month. Those can be obtained on special request. h) Account holders must provide maximum security to the cheque books in their possession and the Bank is not responsible for any loss occurring due to inadequacy of security. Any chequebook loss or misuse must be immediately reported to the Bank and confirmed in writing without any delay. i) When cheque deposited are payable by other Banks or outstation, they are available after clearing or collection only. Service charge will be charged @ Tk. 100/- in Current A/C and Savings A/C Half yearly or as changed by the bank from time to time as and when required. j) The Bank reserves the right to close any account without giving prior notice if the conduct of the account is unsatisfactory in the opinion of the Bank or for any other reason(s) whatsoever. k) The balance in the account(s) is payable solely at ONE Bank Limited and shall be governed by and subject to “laws” in effect in Bangladesh. As used herein laws will include Bank Circulars, Modifications, Regulations and Orders of the Government and Bangladesh Bank including practice of banking. l) The Bank reserves the right to amend the present rules at any time in any manner with or without giving prior notice to the account holder(s) separately or to the public. The chequebook will not be issued unless and until all the required formalities are completed. 04.

AGREEMENT: I/We hereby agree to the above general conditions.

Signature of the applicant/

Signature of the applicant/

Signature of the applicant/

Signature of the applicant/

Authorized signature

Authorized signature

Authorized signature

Authorized signature

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

c) Negotiable Certificate of deposits Negotiable certificate of deposit means a short-term security, typically issued by a bank to raise funds. A Negotiable Certificate of Deposit is a short-term investment in a security, being a negotiable certificate of deposit issued by NAB. If you choose to invest in a Negotiable Certificate of Deposit, you pay the purchase price on the purchase date. On the maturity date, NAB pays you the face value of the Negotiable Certificate of Deposit. The return on your investment is equal to the difference between the purchase price and the face value. d) Banker Acceptances It is a time draft payable to a seller of goods, with payment guaranteed by a bank. Time drafts issued by a bank are orders for the bank to pay a specified amount of money to the bearer of the time draft on a given date.

02-(ii). Capital Market Instruments: Capital Market Instruments are a number of capital market instruments used for market trade, including stocks, bonds, debentures, foreign exchange, fixed deposits, and others. The investors to make a profit out of their respective markets use these. All of these are called capital market instruments because these are responsible for generating funds for companies, corporations, and sometimes national governments. This market is also known as securities market because long-term funds are raised through trade on debt and equity securities. Both companies and governments may conduct these activities. This market is divided into primary capital market and secondary capital market. The primary market is designed for the new issues and the secondary market is meant for the trade of existing issues. Stocks and bonds are the two basic capital market instruments used in both the primary and secondary markets. There are three different markets in which stocks are used as the capital market instrument: the physical, virtual, and auction markets. Bonds, however, are traded in a separate bond market. This market is also known as a debt, credit, or fixed income market. Trade in debt securities are done in this market. There are also the Debentures that are used as capital market instruments by the investors. These instruments are more secured than the others, but they also provide less return than the other capital market instruments. While all capital market instruments are designed to provide a return on investment, the risk

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

factors are different for each and the selection of the instrument depends on the choice of the investor. The risk tolerance factor and the expected returns from the investment play a decisive role in the selection by an investor of a capital market instrument. Capital market instruments should be selected only after doing proper research in order to increase one. Bangladesh Capital Market Summary (As on 31 March 2008) Indicators No. of companies No. of mutual funds No. of debentures No. of treasury bonds No. of corporate bonds Total No. of Listed Securities

Dhaka Stock Exchange

Chittagong Stock Exchange

270 14 8 75 1 368

215 14 1 230

a) Bonds Bond market links issuers having long term financing needs with investors willing to place funds in a long term, interest bearing securities. A matured domestic bond market offers wide range of funding for the government and the private sector. While fixed income instruments are the epitome of long term finance options, the size of tradable government bonds is small, secondary trading is rare, and more critically, public issue of corporate bonds may remain suspended, as it has been the case in Bangladesh since 1996 [Hossain and Azim, 2005]. Bangladesh Bank has taken a number of initiatives to promote bond market development, such as changing legal and regulatory framework and also the tax system for securing, or issuing of zero-coupon bonds. But there are some major problems in development of bond market in the country: weak governance at the institutional and market levels; high non-performing assets of the nationalized commercial banks (NCBs); poorly defined and overlapping responsibilities of Securities and Exchange Commission (SEC) and Ministry of Finance; and the lack of incentives and private initiatives to drive market developments. The government is aware of these problems, and international organizations such as World Bank, IMF and some agencies such as IFC or ADB have been observing to push for possible solutions.

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

b) Stocks The stock market is an important ingredient of the financial system in Bangladesh. It is an important avenue for channeling funds to investors through mobilizing resources from individuals. In view of the rapidly increasing role of the stock market, volatility in stock prices can have significant implications on the performance of the financial sector as well as the entire economy. There exists important link between stock market uncertainty and public confidence in the financial market.

c) Govt. Securities The government has initiated reforms program in the area of debt management since 2005. It has enacted the Bangladesh Government Treasury Bonds (BGTB) Rules, 2003 under which T. Bonds are being marketed on a regular basis. Development of a primary market for buying and selling of Government bonds of varying maturity (5 year, 10-year, 15year and 20-year) to raise fund from the domestic market is one of the significant achievements of such reforms initiatives.

Treasury Bills and Treasury Bonds auctions are being held on the basis of a pre-announced Auction Calendar. This ensures higher degree of competition resulting a steady decline in the cost of borrowing for the government from domestic source.

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

d) Bank & Consumer Commercial Paper The paper intends to provide an overview of key issues pertaining to consumer confidence in financial markets in Bangladesh. The formal financial sector in Bangladesh includes: (a) Bangladesh Bank as the central bank (b) 43 commercial banks, including four nationalized commercial banks, 30 domestic private commercial banks, 9 foreign commercial banks (c) 5 government-owned specialized banks (d) 28 non-bank financial institutions (e) one government-owned investment company (f) two government-owned insurance companies and a quite good number of private insurance companies and (g) two stock exchanges. The banking sector, however, dominates the country’s financial system. Consumer confidence may be defined as the consumer’s appraisal of the current economic conditions and his expectations of future economic conditions. A silent revolution had occurred in financial services legislation and regulation in the direction of building consumer confidence in the markets, it is felt that there is a need for exploring ways for further improvement of market conditions to meet the expectation of consumers of financial services. In this backdrop the paper will discuss various factors undermining consumer confidence in the financial markets, retrace the legislative and regulatory measures undertaken in the past to protect consumer interest and suggest further actions needed to enhance consumer confidence in the financial services sector in Bangladesh. e) Debentures When any duly stamped debenture is renewed by the issue of a new debenture in the same terms, the Collector shall, upon application made within one month, repay to the person issuing such debenture, the value of the stamp on the original or on the new debenture, Provided that the original debenture is produced before the Collector and cancelled by him in such manner as the Government may direct. A debenture shall be deemed to be renewed in the same terms within the meaning of this section notwithstanding the following changes: (a) The issue of two or more debentures in place of one original debenture, the total amount secured being the same; (b) The issue of one debenture in place of two or more original debenture, the total amount secured being the same; (c) The substitution of the name of the holder at the time of renewal for the name of the original holder; and (d) The alteration of the rate of interest or the dates of payment thereof.

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

f) Mortgages Mortgage markets means lending institutions & mortgage brokers. According to Ministry of law, Bangladesh - Chapter IV: Sec. (58) “Mortgage”, ”mortgagor”, ”Mortgagee”, ”Mortgage-money” and “mortgage-deed” defined as: Simple mortgage, mortgage by conditional sale, usufructuary mortgage, english mortgage, mortgage by deposit of title – deeds anomalous mortgage. Sec. (59) Mortgage when to be assurance. Sec. (59.A) References to mortgagors and mortgages to include persons driving title from them. Mortgage loan taken out to buy the family home from the mortgage market. Thirty years ago, such a loan would almost certainly have come from a building society. The borrower would probably have had to wait in a queue, which he or she could join only after having saved for some period with the society. The loan would have been in sterling and the borrower would have paid a rate of interest that varied at short notice (broadly) with changes in the level of official interest rates imposed by the monetary authorities. The interest would have been paid monthly together with a small additional sum calculated to repay the loan over a scheduled period, such loans were instantly available from a range of institutions. They could be repaid by the method described above or they could be ‘interest-only’ mortgages in which the borrower pays only the interest but makes simultaneous payments into a long-term savings scheme (typically an endowment insurance policy), which is designed to repay the mortgage when the policy matures. The mortgage may have a rate of interest that can be fixed for long periods.

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

03. Financial Markets

An organizational framework within which financial instruments can be bought and sold. In economics a market is an organizational device that brings together buyers and sellers. Textbooks usually hurry on to point out that a market does not have to have a physical location, though plainly it could do so. In fact, financial markets offer some of the best examples of buyers and sellers interacting over a widely dispersed geographical area.

Fina nc ial market of an economy comprises the banking sec tor, other financial institutions and capital market. At present, 4 SCBs, 5 nationalized specialized banks, 30 private commercial ba nks, 9 foreign co mmercial banks and 29 non-bank financial institutions, Investment Corporation of Bangladesh (ICB), Bangladesh House Building Finance Corporation (BHBFC), Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) are working in the financial market of Bangladesh.

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

Banks and other financ ial institutions (OFIs) have been playing a key role in activating the financial sector that in turn infuses dynamism to the economy. Banks are engaged in upgrading the socio-economic status of the co untry by investing money to productive sec tors. However, in the context of globali zation, importance has bee n given to the devel opment of the financial market through banking sec tor. In order to uphold the rule of ba nking secto r in financial market development, the government ha s taken a range of measures, whic h include further deployment of bank branches and evaluation of their performance, classific atio n of loans following the international standards, assessment of capital adequacy, determination of quality of assets and earning of impressive profit.

03-(i).

Primary Market

Means new capital rose in the financial markets. Primary market services are incl uded: • The investment banking & • The financial intermediatio n etc.

(Tk)

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

03-(ii).

Secondary Market

Markets in whic h existing securities are traded; as opposed to a prima ry market where securities are sold for the first time. In most cases a stock exchange largely fulfils the role of a secondary market, with the flotation of new issues representing only a small proportion of its total business. However, it is the existence of a flourishing sec ondary market, providing liquidity and the spreading of risk. Means exchange of ownership in the financial markets. Se co ndary market servic es included: • Brokerage services

Tk

Tk

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

03-(iii). Money Market Monetary polic y framework refers to a logic al and sequential set of actions that a centra l bank has to design to conduct monetary polic y. The c entral bank wants to achieve certain goals but cannot directly influence the goals. It has a set of tools at its disposal that can affect the goals indirectly after long and variable lags. So, if central bank waits to see the effect of the tools on the goals it will be too late to make any correction to the policy. That is why it aims at some variables that lie between tools and goals, whic h it can influence and monitor very shortly. Thus a c entral bank decides on the strategy for conducting monetary policy. The variables that the central bank addresses can be classified as instruments, ta rgets and goals. If the framework is ex pressed in a flow chart instruments (i.e. tools) and goals are on the two ends and targets are in between. The targets are further classified as operational target and intermediate target. The central bank also keeps an eye on some information variables to make any policy deci sion.

03-(iv). Capital Market The capital market in Bangladesh is regulated and supervised by the Securities and Exchange Commission (SEC) under the SEC Act, 1993. The SEC so far has issued licenses to 27 non-bank institutions to participate in the capital market of which 19 institutions are Merchant Banker and Portfolio Manager while 7 are Issue Managers and (one) acts as Issue Manager and Underwriter. The Dhaka Stock Exchange (DSE), which was established as a public limited company in April 1954, and the Chittagong Stock Exchange (CSE), established in April 1995, dealing in the secondary capital market. As of end December 2006 the total number of enlisted securities with DSE stood at 310 of which 255 are listed companies, 13 mutual funds, 8 debentures and 34 treasury bonds after the year 2006 that the total number of institutions are increasing rapidly.

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH

Recently, two (2)-power sector companies namely Dhaka Electric Supply Company (DESCO) and Power Grid Company of Bangladesh (PGCB) have been listed in the capital market under the newly introduced direct listing regulation. The Investment Corporation of Bangladesh (ICB) was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programs, and maintains investment accounts, floats and manages closed-end and open-end mutual funds and closed-end unit funds to ensure supply of securities as well as generating demand for securities. ICB also operates in both DSE and CSE as dealer. Some SBs, such as Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), Bangladesh Small Industries and Commerce (BASIC) Bank Ltd. As well as NCBs and some foreign banks are engaged in long-term industrial financing. Capital Market product in Bangladesh: • Share: Ordinary Share, Preference Share • Mutual Fund • Debt Securities • Debenture • Bond A well-developed tradable bond market is critical to ensuring stability and efficiency of the financial market in Bangladesh. In the country, most of the available savings are held by the banks in the form of deposits that are channeled through lending to the investors. The dominance of banks, with high bad loan portfolios and nontransferability of most of their debt/savings instruments, is a prime hindrance to developing a well-performing bond market. The absence of such a market makes the financial market less competitive as it fails to generate market interest rates that reflect the opportunity cost of funds at different maturities and results in excessive reliance on the banking system.

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