Money Market an integral part of the financial market of a country. It provides amedium for the redistribution of short term loanable funds among financial institutions,which perform this function by selling deposits of various types, certificate of depositsand discounting of bills, TREASURY BILLs etc. The participants in the money market are: thecentral bank, commercial banks, the government, finance companies, contractual savinginstitutions like the pension funds, insurance companies, savings and loan associationsetc. The instruments that are generally traded in the money market constitute: treasurybills, short-term central bank and government bonds, negotiable certificates of deposits,bankers acceptances and commercial papers like the bills of exchange and promissorynotes, mutual funds etc.The money market in Bangladesh is in its transitional stage. The various constituent partsof it are in the process of formation, while continuous efforts are being made to developappropriate and adequate instruments to be traded in the market. At present, governmenttreasury bills of varying maturity, Bangladesh Bank Bills and Certificates of Deposits etcin limited supply are available for trading in the market. However, the short-term CREDITmarket of the banking sector experienced a tremendous growth since liberation. In 1999,a total of about 6000 branches of the scheduled banks provided short-term creditthroughout the country in the form of cash credit, overdraft and demand loan. The ratesof interest are determined by the individual banks and as such the market is quitecompetitive. Each bank maintains its liquidity and supply of fund is arranged throughoutthe country with the help of an interconnected network of branches. BANGLADESH BANK ascentral bank of the country exercises its role in this market through the use of instrumentssuch as bank rate, open market operations and changes in statutory liquidityrequirements.The money market of Bangladesh reached its present phase through a series of changesand evolution. Initially, after liberation, money market was the major constituent part ofthe financial market of the country. Capital market, its other segment was a relativelysmaller part. All financial institutions of the country were nationalised after liberation.The growth and evolution of money market in the country took place during the periodfrom 1971 to the early eighties under various sets of interventionist rules and regulationsof the government and as such it could hardly reflect the actual market conditions.However, in this period a vast financial superstructure with large network of commercialbank branches was established in the country. Simultaneously, specialised financialinstitutions under government sector also emerged with the objective of mobilisingfinancial resources and channelling them for short, medium and long-term credit andinvestments. The market participants had to operate in an environment of directedlending and loan disbursement goals, and predetermined rates of interest fixed by theauthority. However, rate of interest in the call market was flexible but due to prevalenceof liberal refinance facility at concessional rates from Bangladesh Bank, the activities ofcall money market remained insignificant.In the beginning of the 1980s, money market in Bangladesh entered a new era with thedenationalisation of two nationalised 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 thegovernments policy of priority sector lending continued to operate as factors thatdeterred the development of a liberalised money market in the country.Constituents of money market Structurally, money market in Bangladesh is composed oftwo broad groups of institutions: formal and informal. The formal institutions (up to1999) include the Bangladesh Bank at the apex, 4 natioanlised commercial banks, 27domestic and 12 foreign private commercial banks, 9 specialised (development) banks,24 NON-BANK FINANCIAL INSTITUTIONs, a number of non-scheduled banks. Informalinstitutions comprised mainly the moneylenders and small co-operative organisations,which are not under the control of the central bank. The three distinct components oforganised segment of money market of Bangladesh are the inter-bank market, call moneymarket and bill market.The year 1990 may be treated as a landmark in the evolution of money market inBangladesh. This year a comprehensive Financial Sector Reform Programme (FSRP) wasundertaken to establish a market oriented financial structure in the country. Theobjectives of FSRP were to deregulate lending activities, replace the refinance facilitieswith rediscount facility, and abolish the administered interest rate regime. Subsequently,introduction of new money market instruments such as certificate of deposits (CDs),Bangladesh Bank bills of 91-days and 30-days maturity and some new governmenttreasury bills were introduced to accelerate the pace of development of money market inthe country.Inter-bank market operates within a limited scale in the form of inter bank deposits andborrowings and has virtually no fixed price fixing mechanism. Traditionally, scheduledcommercial banks lend to each other when they are in need of temporary funds.Sometimes, banks also keep a part of their resources to other banks as deposits andborrow as and when needed against the lien of those deposits. Small banks usually keeptheir funds as deposits with large banks for safety.Non-bank financial institutions also take part in inter-bank market operations inBangladesh by way of lending their fund to the deficit banks. The inter-bank transactionsare concentrated mainly in Dhaka city but may also be found in other parts of thecountry. As part of fund management, branch offices of banks, which can not send theirsurplus funds to their respective head offices, usually keep them in their nearest bigbranch or in other banks and draw the funds back as and when needed.Inter-bank transactions, although constitute an integral part of money market, comprise asmall portion of total banking activities. Inter-bank deposits as percent of total depositsvaried between 2 and 5 percent during 1986-99. This indicator was between 1.6 and 2.5percent during the FSRP period of 1990-96. Historically, there appears to be a positivecorrelation between growth of inter-bank deposits and excess cash reverses of thebanking system. Total inter-bank deposits increased from Tk 3.4 billion in June 1986 toTk 25 billion in December 1998. Excess cash reverses increased during this period fromTk 1.3 billion to Tk 21.5 billion.
The deposit resources of banks registered an increase of Tk 122.6 billion or an yearlyaverage growth of 22% during the period between June 1986 to June 1991 and 18%during June 1991- June 1998. That the money market is not much developed inBangladesh is depicted from the growth pattern of deposits of the country.Certificate of deposit was introduced as a money market instrument in Bangladesh in1983. Its objective was to strengthen the money market and bring idle funds, includingthose arising from black money and unearned incomes, within the fold of the bankingsystem. The Bearer of Certificate of Deposits (BCD) with a fixed maturity is issued byand payable at the bank to Bangladeshi nationals, firms and companies. The certificatedoes not contain the name of the purchaser or holder. The interest rate is not fixed as inthe case of other deposit resources accepted by the banks at present.The interest is determined on the date of issue of CDs based on the demand and supply offunds in the money market. The difference between the face value of CDs and the prepaidinterest is received by the bank from the purchaser of CDs at the time of issue. The bearerof CDs can sell the same to another purchaser. The bank maintains no record other thanthe Certificate No., rate of interest allowed, and the date of sale and encashment. A bankdoes not issue certificate of deposits for the value exceeding the limit prescribed for it bythe Bangladesh Bank. The outstanding amount of CDs was about Tk 1.05 billion in June1988 and increased to Tk 2.91 billion in June 1992 and further, to Tk 3.44 billion inDecember 1998. The amount of resources mobilised through issue of CDs was only 0.58percent of total deposits at the end of December 1998.Call money market is the most sensitive part of money market, in which a good numberof players from the banking as well as the non-bank financial sector actively participateon a regular basis. Initially, this market developed as an inter-bank market where thebanks in temporary deficit of cash resorted to borrowing from other banks having surplusfunds. As banks were in the public sector until the beginning of the 1980s, theBangladesh Bank provided them with liberal refinance facilities at concessional rates.There was hardly any need for raising funds from the call money market during thisperiod. Moreover, administered interest rate regime, easy availability of borrowing fromcentral bank and its directive to provide credit to priority sectors were the majorimpediments in development of a call money market in the country. Notwithstanding thefact, banks participated in a limited scale in the call money market mainly to wipe out thetemporary mismatch in their assets and liabilities.A turning point was the denationalisation of Uttara and Pubali Bank in 1983 and 1984respectively and the government decision to allow private banks to operate in the country.Formation of private banks during the 1980s provided new opportunities to develop thissegment of money market. In 1985, two investment companies and in 1989, one leasingcompany were allowed to participate in the call money market. At present, all banksincluding specialised ones and non-bank financial institutions are allowed to participatein this market.
Basic features The transactions of call money market are mainly Dhaka based. Since, thehead offices of all banks and financial institutions are located in Dhaka, the branches ofthe banks and financial institutions from all over the country remit their excess funds totheir respective head offices at Dhaka for investment. The head offices, after meetingtheir usual liquidity requirement invest the surplus funds in the call money market.As there is no brokerage house or intermediary organisation, the transactions in callmoney market usually take place on the basis of bilateral negotiations. Since call loansare made on clean basis, ie, without any security, lending institutions/banks are alwayscautious in the selection of borrowing banks/institutions.Foreign banks are the main source of liquidity in the call money market. Cost of funds forforeign banks are very low as compared to the indigenous banks and as such they canhold a substantial amount of excess liquidity for lending in the call money market. In caseof borrowing they are also at a very advantageous situation as compared to the localbanks. Foreign banks have in their portfolio lower amount of non-performing loanscompared to domestic private banks and nationalised banks. Local private banks appearto be the regular borrowers in the call money market.Information systems of banks in Bangladesh are outdated. Market players therefore, donot know much about the demand for and supply of fund. Banks and financial institutionshaving surplus funds take advantage of the market imperfection of domestic deficitbanks.Bangladesh Bank has circulated some guidelines to the lending and borrowing banks andfinancial institutions regarding operations in the call money market. Although it is notcompulsory for banks to participate in the call market, they are advised to provide callloans considering liquidity, solvency and sources of repayment of borrowings by theborrowing institutions.The demand for and supply of funds in the call market remains volatile throughout theyear with some occasional turbulence. The transactions and the rate of interest are largelylinked with government treasury bill market, seasonality in demand for bank loans,central banks monetary policy, variation in discount rate, open market operations,changes in statutory reserve requirements, excess liquidity position of the banks etc. Thetransactions and the variations of the rate of interest in call money market normallyremains high during November to April and as such the rate of interest during this periodalso goes up.The underdeveloped nature of the inter-bank market in Bangladesh is evident from thelarge spread between the highest and lowest rates in the call money market. The lowestcall money market rate always remained higher than the Bank Rate during the periodfrom September 1985 to June 1992. One notable feature of the call money market is thatthe spread between lowest and highest call money market rate has been larger during thereform period. It is because of the fact that with the implementation of FSRP, the need forfunds of banks other than the Bangladesh Bank increased with abolition of easy refinance
facility from the central bank. Thereafter, the lowest inter-bank call money rate remainedlower than the bank rate. The inter-bank call money rate varied with rise in excess cashreserves of banks.Experience suggests that when there was sufficient excess reserves with banks, the inter-bank rate came down but the rate denoted increase with the accentuation of short-fall inreserves position of banks. Compared to nationalised banks and domestic private banks,the foreign banks in general, and Islami banks in particular, held higher excess reserveswith them. Foreign banks are the major sources of supplier of funds to the inter-bankmarket in recent years. Before the introduction of financial sector reforms, foreign bankspreferred preserving excess liquidity to lending to inter-bank market partly because oflack of confidence and partly because of instructions from their head office. In addition,the information gap between borrowing and lending banks also discouraged transactionsin the inter-bank market.The rate of interest in the inter-bank call money market reached a maximum of 21% inNovember 1997. During the first half of 1998, there was a tremendous pressure in the callmoney market of the country. The rate of interest reached 27% in February 1998. A largenumber of domestic private and foreign banks borrowed at the rates of 20% and above upto April 1998. During 1997-98, Bangladesh Bank followed a restrictive monetary policy.In view of expansion of domestic credit, bank rate was raised to 8% from 7.5% inNovember 1997 and tightened the discount window for the banks. The government alsoborrowed substantial amount of funds from the banking sector to meet its budgetaryshortfall in the second half of 1997-98. Total outstanding treasury bill holding by thescheduled banks which was only Tk 11.48 billion at the end of June 1997, reached thelevel of Tk 25.11 billion at the end of January 1998, and further to Tk 27.94 billion at theend of June 1998. However, during 1998-99, the pressure in call money market easedsubstantially.The rates of interest amidst fluctuations reached a maximum of 17% during 1998-99. Dueto prolonged and devastating floods at the beginning of 1998-99, the countrys monetarypolicy was relaxed to enable banks to provide necessary credit for early recovery ofeconomic activities. Easy access of the scheduled banks to the discount window of theBangladesh Bank helped them holding liquidity position at a comfortable level. Thebanks borrowed an amount of Tk 9.15 billion from the Bangladesh Bank during 1998-99as compared to a much lower amount of Tk 1.13 billion during 1997-98. Moreover,excess reserve position of the banks increased by Tk 4.96 billion during 1998-99 ascompared to an increase of Tk 9.78 billion in the preceding year. As a result, the callmoney market witnessed a lower pressure during 1998-99.Bill market is restricted to buying and selling of government treasury bills. In the past, itwas basically concentrated in transaction of government treasury bills of 3-monthmaturity at predetermined rates. Commercial banks were obliged to buy these bills asapproved security to meet their statutory liquidity requirement (SLR) under the BankingCompanies Act. Moreover, these instruments were being used to mop up excess cashfrom the banking sector and help government to borrow money from banks to meet its
budgetary shortfall. In fact it was a guilt-edged market where both the principal andinterest was guaranteed by the government. Bangladesh Bank, on behalf of thegovernment, was entirely responsible for arranging buying and selling of treasury bills.However, the availability of the government treasury bills depended only on the fiscalconsideration of the government. Bangladesh Bank had no scope of its own to increase ordecrease their supply. Besides, interest rates were not market based and were fixedarbitrarily by the government from time to time. In addition to the commercial banks,Bangladesh Bank also had to hold a portion of government treasury bills.The commercial bill market remained very narrow in the country largely due to a lowlevel of industrialisation and a slow growth of trade and commerce. Banks traditionallyfinanced two broad categories of commercial bills viz. inland bills and export bills. Thesebills are marketable papers and can be resold in the market at a competitive rate. Usually,the holders of these bills sell them for cash to the banks, which pays the holder the facevalue of the bills less collection charges and the interest for the remaining period of thebill. Prevalence of cash credit system of the banks is a major hindrance in the way of thedevelopment of an active commercial bill market in the country. Stamp duty, proceduraldifficulties and reluctance of the drawees of bills to undertake the additional paper workinvolved in handling documents etc hindered the development of commercial bill market.With the introduction of FSRP, the commercial bill market is gradually developing in thecountry. The amount of commercial bill financing by the Deposit Money Bank (DMB)was only Tk 8.60 billion at the end of January 1991. This rose to Tk 36.20 billion at theend of December 1998.Bangladesh Bank introduced its own security, the 91-day Bangladesh Bank Bill inDecember 1990. This added a new dimension in the bill market of Bangladesh. The billwas issued at a discount at par value of Tk 100 through monthly auctions held at theBangladesh Bank. Banks, financial institutions and others including individuals, firms,companies and corporate bodies were eligible to invest in the Bangladesh Bank Bill. Thebill was introduced primarily to control liquidity of the banking system in accordancewith the requirement of monetary policy. The ultimate objective was the development ofa workable secondary market for successful open market operations by the BangladeshBank. Later, Bangladesh Bank introduced 30-day Bangladesh Bank Bills. The frequencyof auctions of these bills was also increased.Despite regular auction of Bangladesh Bank Bills, government treasury bills continued itsnormal transaction in the market. However, following the declaration of BangladeshBank Bills as approved securities for the SLR purposes, the effectiveness of the billsweakened as an instrument of monetary control. The auctions of Bangladesh Bank Billswere, therefore, suspended from March 1997. On the other hand, the auctions of the fourcategories of government treasury Bills ie, 30-day, 90-day, 180-day and 1-Year Billswere held on weekly basis regularly up to August 1998. These treasury bills werereplaced later by the newly introduced 28-day, 91-day, 182-day, 364-day, 2-year and 5-year government treasury bills since September 6 1998.The main features of the bill market are as follows:
It is still a captive market. Banks and financial institutions having SLR obligation are theonly participants in this market. Financial institutions having no obligation of SLR,corporate or non-corporate firms, semi-government or autonomous bodies havingtemporary surplus funds do not invest in government treasury bills.Bangladesh Bank is the main holder of treasury bills. These are sold to the banks andfinancial institutions on the basis of requirement through auctions.The rates of interest of treasury bills are now competitive and flexible. Treasury bill rateslargely influence the market rate in the other segment of the money market, particularly,the rate of interest in the call money market.There is no secondary market for trading of these bills. However, in case of need of fundsthe holders of bills can get them rediscounted with the Bangladesh Bank.The sale of treasury bills depends on the budgetary requirements of the government.Moreover, due to SLR obligations banks are compelled to hold a certain amount oftreasury bills. As a result, treasury bill market of Bangladesh turned to be a non-liquidmarket.The holdings of treasury bills by the deposit money banks (DMB) were only Tk 0.94billion on 30 June 1973 and the rate of interest was 6%. Amidst fluctuations, the volumewent up to Tk 9.54 billion at the end of June 1986. The rates of interest went up to 9% atthat time. Although the rate of interest declined to 8% at the beginning of 1987, thetreasury bill holdings by the DMBs went up substantially to Tk 12.51 billion at the end ofJune 1987. The treasury bill holdings reached a peak of Tk 45.12 billion at the end ofJune 1993 and thereafter, it declined to Tk 0.46 billion at the end of June 1995. However,the treasury bill holdings shoot up to Tk 49.73 billion by May 1999. It may be assumedthat lower treasury rate as compared to higher yield on Bangladesh Bank Bill might haveinduced the banks to shift their portfolio investments in favour of the latter. However, dueto suspension of auctioning of Bangladesh Bank Bills government treasury bills, otherthan the commercial bill segment, have become the only instruments in the bill market.