The Role of Financial Intermediaries and financial Market (By Badhon)
The role of financial market and institution in the economic development of bangladesh (new)
1. 1
The role of Financial Market and Institution in the Economic Development of
Bangladesh
Financial market
Financial market is created to satisfy particular preferences
o f m a r k e t p a r t i c i p a n t s . Financial markets transfer funds from
those who have excess funs to those who needfunds. That is they
facilitate the transfer of funds from
surplus unit
to
deficit unit
.Because funding needs vary among deficit units, various financial
markets have beenestablished. The primary market allows for the
issuance of new secu rities, while thes e c o n d a r y m a r k e t a l l o w s f o r
the sale of short term securities, while capital
m a r k e t s facilitate the sale of long term securities.The main participants of
financial market can be classified as households, businesses andgovernment
agencies. Those participants who provide funds to the financial markets arecalled
surplus unit
. Households are the main type of surplus unit. Participants who
usefinancial markets to obtain the funds are called the
deficit unit
.
Money market:
Money market an integral part of the financial market of a country. It provides a
mediumfor the redistribution of short term loan able funds among
financial institutions, which perform this function by selling deposits
of various types, certificate of deposits anddiscounting o f bills,
treasury bills etc. The participants in the money market are: the central
bank, commercial banks, the government, finance companies, contractual
savinginstitutions like the pension funds, insurance companies,
savings and loan associationsetc. The i nstruments that are generally
traded in the money market constitute: treasury bills, 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
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varying maturity, Bangladesh Bank Bills and Certificates of Deposits etcin limited
supply are available for trading in the market. However, the short-term credit1
The role of Financial Market and Institution in the Economic Development of
Bangladesh
market of the banking sector experienced a tremendous growth since liberation. In
1999,a t o t a l o f a b o u t 6 0 0 0 b r a n c h e s o f t h e s c h e d u l e d b a n k s
p r o v i d e d s h o r t - t e r m c r e d i t throughout the country in the form of
cash credit, overdraft and demand loan. The rates o f i n t e r e s t a r e
determined by the individual banks and as such the market
i s q u i t e competitive. 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 instrumentss u c h a s b a n k r a t e , o p e n
market operations and changes in statutory
l i q u i d i t y requirements. The money market of Bangladesh
r e a c h e d i t s p r e s e n t p h a s e t h r o u g h a series of changes and
evolution. Initially, after liberation, money market was the
major constituent part of the financial market of the country. Capital market, its
other segmentwas a relatively smaller part. All financi al institutions of
the country were nationalizedafter liberation. The growth and
evolution of money market in the country took placeduring the period
from 1971 to the early eighties under various sets of
interventionistrules and regulations of the governme nt and as such it
could hardly reflect the actualmarket conditions. However, in this
period a vast financial superstructure with largenetwork of
commercial bank branches was established in the country.
Simultaneously,s p e c i a l i z e d f i n a n c i a l i n s t i t u t i o n s u n d e r
g o v e r n m e n t s e c t o r a l s o e m e r g e d w i t h t h e objective of
mobilizing financial resources and channeling them for short,
medium andl o n g - t e r m c r e d i t a n d i n v e s t m e n t s . T h e
m a r k e t p a r t i c i p a n t s h a d t o o p e r a t e i n a n 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 BangladeshBank, the activities of call money market remained
insignificant.
Capital market:
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Capital Market the market, or realistically, the group of interrelated
markets, in whichcapital in financial form is lent or borrowed for medium and
long term and, in cases suchas equities, for unspecified periods.The capital
markets, in distinction from other parts of the financial market that
is, themoney markets, are those for long-term government securities, corporate
bonds, stocks,municipal bonds issued by state and local government units, and
mortgages. Industry andc o m m e r c e a s w e l l a s g o v e r n m e n t a n d l o c a l
authorities raise capital from the capital m a r k e t w h i c h
performs several important functions in the process
o f e c o n o m i c development. Most important among them are the
promotion of savings and investment a n d e f f i c i e n t a l l o c a t i o n o f
funds among competing uses. Participants in the
c a p i t a l markets are many. They include the commercial banks, saving
and loan associations, c r e d i t u n i o n s , m u t u a l s a v i n g b a n k s ,
f i n a n c e h o u s e s , f i n a n c e c o m p a n i e s , m e r c h a n t bankers,
discount houses, venture capital companies, leasing companies,
investment banks, investment companies, investment clubs, pension funds, stock
exchanges, securitycompanies, underwriters, portfolio-managers, and insurance
companies
The growth of capital market in Bangladesh was very slow
because of the highlyregulated economic regime and market
imperfections. Long -term funds required byindustrial
enterprises were generally provided by government -owned
d e v e l o p m e n t finance institutions (DFIs) at concessional and directed
interest rates. The DFIs are the Bangladesh Shilpa Bank, Bangladesh Shilpa
Rin Sangstha, Bangladesh Krishi Bank andt h e r a j s h a h i k r i s h i
unnayan bank. The Bangladesh Small & Cottage
I n d u s t r i e s Corporation (BSIC) is anot her institution that provides
medium and long-term loans tosmall industries either directly or through a
consortium of commercial banks. Bangladeshh o u s e b u i l d i n g F i n a n c e
Corporation provides long-term loans for construction
of residential houses. DFIs generate their investible funds
t h r o u g h a l l o c a t i o n s f r o m government sources, credit from international
financial institutions, and borrowings fromthe Bangladesh bank. Co -
operative banks in the country provide medium and long -termcredit for
purchase of land and agricultural equipment.
Role financial market in economic development:Role of depository institutions:
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A major type of financial intermediary is the depository
institutions, which acceptsdeposits from surplus units and
p r o v i d e s c r e d i t t o d e f i c i t u n i t s t h r o u g h l o a n s a n d purchases of
securities. Depository institutions are popular financial institutions for thefollowing
reasons:
•
They offer deposit accounts that can accommodate the
a m o u n t a n d l i q u i d i t y characteristics desired by most surplus units.
•
They repackage funds received from deposits to provide loans of the
size andmaturity desired by the deficit units.
•
They accept the risk on loan provided.
•
They have more expertise than individual surplus
u n i t s i n e v a l u a t i n g t h e creditworthiness of deficit units.
•
They diversify their loans among numerous deficit units and therefore can
absorbdefaulted loans better than individual surplus units could.The depository
institutions and there roles are given below
Bank:
The financial system of Bangladesh consists of Bangladesh Bank (BB), the central
bank,4 nationalized commercial banks (NCB), 5 government owned
specialized banks, 30domestic private banks, 10 foreign banks and 28
non-bank financial institutions. Thefinancial system also includes
insurance companies, stock exchanges and co -operative banks. As the
central bank, Bangladesh Bank has legal authority to supervise and regulatea l l
the banks. Although the financial system includes other
players like insurancecompanies, stock exchanges and co -
operative banks, but Bangladesh Bank doesn’t
regulate these institutions. Each of the institution is regulated by different
authorities. Thei n s u r a n c e c o m p a n i e s a r e r e g u l a t e d b y M i n i s t r y
o f C o m m e r c e ; S t o c k e x c h a n g e s a r e regulated by Securities and
Exchange Commission (SEC) and Cooperative banks are regulated by
Ministry of Local Government, Rural Development and Co-operatives.Financial
markets allow the transformation of claims on multi -year illiquid
investment p r o j e c t s i n t o l i q u i d t r a d a b l e s e c u r i t i e s . F i n a n c i a l
institutions acquire and processinformation about
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investment projects on behalf of their depositors, while
p r i c e s i n financial markets reflect different information and
opinions on new ideas and projects.While market participants have
developed techniques to overcome market frictions,
theg o v e r n m e n t h a s a n a c t i v e r o l e t o p l a y i n p r o v i d i n g t h e
“ i n f r a s t r u c t u r e ” f o r f i n a n c i a l service provision, i.e. the rules
within which firms and household contract with each other and perform
financial transactions.The banking system at independence consisted of two
branch offices of the former StateBank of Pakistan and seventeen large
commercial banks, two of which were controlled by Bangladeshi
interests and three by foreigners other than West Pakistanis. There
werefourteen smaller commercial banks. Virtually all banking
services were concentrated in u r b a n a r e a s . T h e n e w l y
independent government immediately designated the
D h a k a branch of the State Bank of Pakistan as the central ban k and
renamed it the
BangladeshBank. The bank was responsible for regulating currency, controlling
credit and monetary policy, and administering exchange control and the
official foreign exchange reserves.The Bangladesh government
initially nationalized t he entire domestic banking systemand
proceeded to reorganize and rename the various banks. Foreign -
owned banks were permitted to continue doing business in
Bangladesh. The insurance business was also n a t i o n a l i z e d a n d
became a source of potential investment funds.
C o o p e r a t i v e c r e d i t systems and postal savings offices handled service to
small individual and rural accounts.The new banking system succeeded in
establishing reasonably efficient procedures for m a n a g i n g c r e d i t
and foreign exchange. The primary functi on of the credit
system
hroughout the 1970s was to finance trade and the public sector, which together
absorbed75 percent of total advances.The government's encouragement
during the late 1970s and early 1980s of agricultural development and
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private industry brought changes in lending strategies. Managed by theBangladesh
Krishi Bank, a specialized agricultural banking institution, lending to farmersa n d
fishermen dramatically expanded. The number of rural bank
b r a n c h e s d o u b l e d between 1977 and 1985, to more th an 3,330.
Denationalization and private industrial g r o w t h l e d t h e
Bangladesh Bank and the World Bank to focus their lending
o n t h e emerging private manufacturing sector. Scheduled bank advances to
private agriculture,as a percentage of sectoral GDP, rose fro m 2 percent
in FY 1979 to 11 percent in FY 1987, while advances to private
manufacturing rose from 13 percent to 53 percent.
List of banks in Bangladesh:
The commercial banking system dominates Bangladesh's financial
sector. BangladeshBank is the Central Ba nk of Bangladesh and the
chief regulatory authority in the sector. The banking system consists of four
nationalized commercial Banks, around forty privatecommercial banks, nine
foreign multinational banks and some specialized banks. The Nobel-
prize winning Grameen Bank is a specialized micro -finance
institution, whichr e v o l u t i o n i z e d t h e c o n c e p t o f m i c r o - c r e d i t
a n d c o n t r i b u t e d g r e a t l y t o w a r d s p o v e r t y reduction and the
empowerment of women in Bangladesh.
•
Central Bank
•
Nationalized Commercial Banks
•
Private Commercial Banks
•
Foreign Banks
•
Specialized Banks
•
References
•
External links
Central Bank: Bangladesh Bank
Persuant to Bangladesh Bank Order, 1972 the Government of Bangladesh
reorganized theDhaka branch of the State Bank of Pakistan as the central bank of
the country, and namedit Bangladesh Bank with retrospective effect from 16
December, 1971.
Nationalized Commercial Banks:
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The banking system of Bangladesh is dominated by the 4
N a t i o n a l i z e d C o m m e r c i a l Banks , which together controlled more than
54% of deposits and operated 3388 branches(54% of the total) as of December 31,
2004[1]. The nationalized commercial banks are
•
Sonali Bank
•
Janata Bank
•
Agrani Bank
•
Rupali Bank
Private Commercial Banks:
Private banks are the highest growth sector due to
t h e d i s m a l p e r f o r m a n c e s o f government banks (above). They tend
to offer better service and products.
•
AB Bank Limited
•
BRAC Bank Limited
•
Eastern Bank Limited
•
Dutch Bangla Bank Limited
•
Dhaka Bank Limited
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Islami Bank Bangladesh Ltd
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Pubali Bank Limited
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Uttara Bank Limited
•
IFIC Bank Limited
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National Bank Limited
•
The City Bank Limited
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United Commercial Bank Limited
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NCC Bank Limited
•
Prime Bank Limited
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SouthEast Bank Limited
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Al-Arafah Islami Bank Limited
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Social Investment Bank Limited
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Standard Bank Limited
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One Bank Limited
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Exim Bank Limited
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Mercantile Bank Limited
•
Bangladesh Commerce Bank Limited
•
Mutual Trust Bank Limited
•
First Security Bank Limited
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The Premier Bank Limited
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Bank Asia Limited
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Trust Bank Limited
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Shahjalal Bank Limited
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Jamuna Bank Limited
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Foreign Banks
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Citigroup
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HSBC
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Standard Chartered Bank
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Commercial Bank of Ceylon
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State Bank of India
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Habib Bank
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National Bank of Pakistan
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Woori Bank
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Bank Alfalah
•
ICB Islami Bank
Specialized Banks:
Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi
UnnayanBank) were created to meet the credit needs of the agricultural sector
while the other two( B a n g l a d e s h S h i l p a B a n k ( B S B ) &
B a n g l a d e s h S h i l p a R i n S a n g t h a ( B S R S ) a r e f o r extending term
loans to the industrial sector[1]. The Specialized banks are:
•
Grameen Bank
•
Bangladesh Krishi Bank
•
Bangladesh Shilpa Bank
•
Rajshahi Krishi Unnayan Bank
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Bangladesh Shilpa Rin Sangstha
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Basic Bank Ltd (Bank of Small Industries and Commerce)
•
Bangladesh Somobay Bank Limited(Cooperative Bank)
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The Dhaka Mercantile Co-op
Roles of the Regulatory institutions in the Capital Market of Bangladesh:
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In order to stimulate rapid economic growth of a country particularly
throughindustrialization and mobilization of domestic savings, appropriate
institutions in thecapital market are essential. The capital market in Bangladesh is
governed by thefollowing institutions.
The Security and Exchange Commission (SEC):
Security and Exchange Commission(SEC) was formed to supervise the securities
market of Bangladesh in June 09, 1993.SEC is a dynamic body regulating the
activities of capital market on the basis of introducing regulatory measures from
time to time. SEC has been set up not only tocontrol the capital market but also to
give protection to investors. Capital market isregulated by the Security and
Exchange organization Act 1993 and Companies Act 1994and rules and regulation
trade there under.
The major Function and Responsibilities of the SEC are:
•
Regulating the business of stock market determination and regulation of
the business of brokers, sub-brokers, share-transfer agents, and manager/brokers
tothe issues, underwriters, portfolio managers, investment consultants and
other middlemen related to security dealings.
•
Registration, control and management of mutual funds of joint fund schemes.
•
Development monitoring and control of self regulated bodies related to
securitydealings.
•
Prohibition of insider’s fraudulent deals treated to securities of security markets
•
Prohibition of unauthorized trading.
•
Takeovers and management of companies and shares or stock.
•
Spreading investment education
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Calling information from and inspection, investigation or audit of security
issues,stock exchanges and related parties.
•
Carrying out research into and publication of information on security
relatedmatters.
Stock Exchange:
Dhaka Stock Exchange (DSE):
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Dhaka Stock Exchange (DSE), the first bourse of thecountry was established in
1954. It is regulations and run by its own Board comprising of nine elected
councilors and three councilors nominated by the government.
The Major Functions of DSE:
•
Providing listing rules to give assurance that the issuance of a company’ssecurities
has conformed to legal requirements.
•
Providing disclosure rules.
•
Publication of monthly journal, showing performance of the market as well aslisted
companies.
•
Provide floor for transaction.
•
Ensure adequate volume of trade leading to liquidity.
•
Provide reasonable level of fairness in deal making and trading.
•
Registering, monitoring security prices.
•
Provide adequate instruments and technical aids for prompt and smooth trading.
Chittagong Stock Exchange (CSE):
Bangladesh government approved Chittagong Stock Exchange s a second bourse
of the country on February 12,1995, in order to accelerateindustrial growth for
overall benefit of the economy. Chittagong Stock Exchange wasincorporated as
public limited company on April 1, 1995. Since then, it has accomplishedsome
innovative functions.
The Role of Chittagong Stock Exchange:
the major role of Chittagong Stock Exchangeis to create an effective, efficient and
transparent market of international standard to saveand invest in Bangladesh in
order to facilitate the competent entrepreneurs to raisecapital.
Other roles are:
•
Seek explanation from the listed company(s) on any reasonable ground,
•
Delist any company for some specific reasons.
•
Extend time schedule for AGM/EGM.
•
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Observe AGM/EGM time schedule.
•
It can take any legal action against the listed companies for violation of
listingregulations or for not fulfilling the continuous listing requirements.
The Investment Corporation of Bangladesh:
one of the dominant players of thefinancial market in Bangladesh is Investment
Corporation of Bangladesh, theestablishment of Investment Corporation of
Bangladesh (ICB) on October 1,1976, was amajor step in a series of measures
undertaken by the government to accelerate the pace of industrialization and
develop a well organized and vibrant capital market.
The Major Activities of ICB are:
•
Act as a catalytic agent to encourage and broaden the base of investors.
•
Development the capital market through mobilizing savings.
•
Provide financial assistance in the form of underwriting, issue of securities,
IPO placement, and trustee to debenture issue of IPO facilities over industrial
project/companies.
•
ICB provides investment counsel to issuers and investors.
•
Participate I government dis-investment programme.
•
Finance joint venture project.
•
Provide credit facilities to invest in IPO and in listed securities.
•
Manage eight close-end mutual funds and an open-end (unit fund) to mob
savingsand to support the stock market.
•
CB is also playing a leading role in the stock exchanges. Since inception, ICBhas
been playing a dominant role to ensure a healthy and well organizedsecondary
market.
Insurance Companies:
Insurance a system of spreading the risk of one to the shoulders of many. It is a
contractw h e r e b y t h e i n s u r e r s , o n r e c e i p t o f a
consideration known as premium, agree toindemnify
the insured against losses arising out of certain
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s p e c i f i e d u n f o r e s e e n contingencies or perils insured a gainst.
Thus insurance companies provide insurance policies to individuals
and firms that reduce the financial burden associated with
death,illness and damages to property. They charges premiums in
exchange for the insurancethat they provide. They invest the funds that are
received as premium in different sectorsuntil the funds are needed to cover the
insurance claims. Thus through investing the fundsin different sectors, they serve
as important financial intermediaries.Insurance is not a new business in
Bangladesh. Almost a century back, during British rulein India, some insurance
companies started transacting business, both life and general, inBengal. Insurance
business gained momentum in East Pakistan during 1947-1971, when49 insurance
companies transacted both life and general insurance schemes. But after
theliberation, the government of Bangladesh nationalized insurance industry in
1972 by theB a n g l a d e s h I n s u r a n c e ( N a t i o n a l i z a t i o n ) O r d e r
1 9 7 2 . T h r o u g h t h i s p r o c e s s a l l 4 9 insurance companies and
organizations transacting insurance business in the countrywere
placed in the public sector under five corporations. These
corporations were: theJatiya Bima Corporation, Tista Bima
Corporation, Karnafuli Bima Corporation, Rupsa J i b a n B i m a
Corporation, and Surma Jiban Bima Corporation. The
J a t i y a B i m a Corporation was an apex corporation only to supervise
and control the activities of the o t h e r i n s u r a n c e c o r p o r a t i o n s ,
w h i c h w e r e r e s p o n s i b l e f o r u n d e r w r i t i n g . T i s t a a n d Karnafuli
Bima Corporations were for general insurance a nd Rupsa and Surma
for lifei n s u r a n c e . T h e s p e c i a l i s t l i f e c o m p a n i e s o r t h e l i f e
portion of a composite company
joined the Rupsa and Surma corporations while specialist general insurance
companies or the general portion of a composite company joined the Tista and
Karnafuli corporations.C o n s e q u e n t l y , o n 1 4 M a y 1 9 7 3 , a
r e s t r u c t u r i n g w a s m a d e u n d e r t h e I n s u r a n c e Corporations
Act 1973. Following the Act, in place of five corporations the
governmentf o r m e d t w o : t h e S a d h a r a n B i m a C o r p o r a t i o n f o r
g e n e r a l b u s i n e s s , a n d J i b a n B i m a Corporation for life business.Up to
2000, the government has given permission to 19 general insurance companies
and10 life insurance companies in the private sector. Insurers of the
country now conductalmost all types of general and life ins urance,
except crop insurance and export credit g u a r a n t e e i n s u r a n c e ,
which are available only with the Sadharan Bima
C o r p o r a t i o n . Some of the insurance companies that are working in Bangladesh
are:
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•
General Insurance Company
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National Insurance Company
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Bangladesh Co-operative Insurance Ltd.
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American Life Insurance Company Ltd. (ALICO)
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United Insurance Company etc.
Role of Insurance Company:
Insurance companies are working as important financial intermediaries in the
economicdevelopment of the country. Some of the role performs by the insurance
companies’ are-
•
They financially supports individuals and firms in case of any financial burden.
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Reinsure the ins
Leasing Companies:
Lease Financing Lease is a contract between the owner and the user of assets for a
certaintime period during which the second party uses an asset in exchange of
making periodicrental payments to the first party without purchasing it. Under
lease financing, the lesseeregularly pays the fixed lease rent over a period of time
at the beginning or at the end of amonth, 3 months, 6 months or a year. At the end
of the lease contract the asset reverts tothe real owner.L e g a l l y , a l e a s i n g
company is defined as one having the business of hiring
p l a n t s o r equipment or of financing their hire by others. The
International Finance Corporation promotes leasing as a method of
financing industrial development in the developing countries as a part of
its capital market development strategies.The functions of a lease business
include lease financing, short-term financing, house building financing,
and merchant banking and corporate financing. The leasing businessin Bangladesh
moved away from regular leasing activities and is now involved in stock-market
related activities such as issue management, unde rwriting, trust
management, p r i v a t e p l a c e m e n t , p o r t f o l i o m a n a g e m e n t , a n d
m u t u a l f u n d o p e r a t i o n . B r o a d c a p i t a l market operations of the lease
financing institutions include bridge financing, corporatecounseling, mergers
and acquisition, capital restructuring , financial engineering, and lease
syndication
The leasing companies now operating in the country are-
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Industrial Development Leasing Company of Bangladesh
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United Leasing Company
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GSP Finance Company (Bangladesh)
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Uttara Finance and Investments
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Bay Leasing and Investment
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Phoenix Leasing Company
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Prime Finance and Investment
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International Leasing and Financial Services
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Union Capital
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Vanik Bangladesh
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Peoples Leasing and Financial Services
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Bangladesh Industrial Finance Company
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UAE-Bangladesh Investment Company
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Bangladesh Finance and Investment Company and
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First Lease Internationa