it very important for business students.

1. Shah Alam
Lecturer
Department of Accounting & Information Systems
University of Dhaka

2. Financial System
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.
Thus, a financial system is a set of organized
institutional set-up through which surplus units
transfer their funds to deficit units.

3. Structure of Financial System

4. 1. Financial Institutions
Financial institutions are intermediaries that channel the
savings of individuals, businesses, and governments into
loans or investments. Financial institutions can be sub-
categorized into banks and non-bank financial institutions:
Banks:
Central Bank
State-Owned Commercial Banks
Private Commercial Banks
Foreign Commercial Banks
Specialized Banks

5. 1. Financial Institutions
Non-Bank Financial Institutions (NBFIs):
Financing Companies
Insurance Companies
Security Firms
Investment Banks
Mutual Funds
Pension Funds

6. 1. Financial Institutions
Investment banks are institutions that assist companies in
raising capital, advise firms on major transactions such as
mergers or financial restructurings, and engage in trading and
market making activities.
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.
A pension fund is a fund established by an employer to
facilitate and organize the investment of employees' retirement
funds contributed by the employer and employees.

7. 2. Financial Markets
Financial markets are forums in which suppliers of
funds and demanders of funds can transact business
directly. Financial markets can be sub-categorized
into the following:
Money Market
Capital Market
Primary Market
Secondary Market

8. 2. Financial Markets
Money Market vs. Capital Market:
• The key distinguishing feature between the money
market and the capital market is the maturity period of
the securities traded in them.
• The money market is concerned with the borrowing
and lending of short term funds, whereas the capital
market is a market that enables suppliers and
demanders of long-term funds to make transactions.

9. 2. Financial Markets
Primary Market vs. Secondary Market:
• The primary market is the financial market in which
securities are initially issued; the only market in
which the issuer is directly involved in the transaction.
• Secondary market is the financial market in which
previously issued securities are traded among
investors. Secondary market is influenced by demand
and supply theory, and heavily affected by market
forces.

10. 3. Financial Instruments
Financial instruments can be thought of as easily
tradeable packages of capital, each having its own unique
characteristics and structure. Based on financial markets,
financial instruments can be sub-categorized into money
market instruments and capital market instruments.
Money Market Instruments:
Treasury Bills
Commercial Papers
Certificate of Deposits
Bill of Exchange
Bankers’ Acceptance

11. 3. Financial Instruments
Capital Market Instruments:
Stocks
 Common Stocks
 Preferred Stocks
Debt Securities
 Secured
 Unsecured
Derivative Securities

12. 3. Financial Instruments
A treasury bill (T-bill) is a short-term maturity
promissory note issued by a national government as a
primary instrument for regulating money supply and
raising funds via open market operations. Issued through
the country's central bank, T-bills commonly pay no
explicit interest but are sold at a discount, their yield being
the difference between the purchase price and the par-
value.
A commercial paper is an unsecured short-term
promissory note issued by a corporation to raise short-
term cash, often to finance working capital requirements.

13. 3. Financial Instruments
A certificate of deposit is a savings certificate entitling
the bearer to receive interest. It is a promissory note issued
by a bank. It is a time deposit that restricts holders from
withdrawing funds on demand.
A banker’s acceptance is a short-term debt instrument
issued by a firm that is guaranteed by a commercial bank.
Banker's acceptances are considered to be relatively safe
investments, since the bank and the borrower are liable for
the amount that is due when the instrument matures.

14. 3. Financial Instruments
A stock is a type of security that signifies ownership in a
corporation and represents a claim on part of the
corporation's assets and earnings.
There are two main types of stock: common and
preferred. Common stock usually entitles the owner to
vote at shareholders' meetings and to receive dividends.
Preferred stock generally does not have voting rights, but
has a higher claim on assets and earnings than the
common shares. It is a special form of ownership that has
features of both a bond and common stock.

15. 3. Financial Instruments
A debt security is any debt instrument that can be bought or
sold between two parties and has basic terms defined, such as
notional amount, interest rate and maturity/renewal date.
Secured loans are those loans that are protected by an asset or
collateral of some sort. Examples of secured debt include
mortgages, which are secured by houses, and auto loans, which
are secured by cars.
An unsecured loan is a loan not backed by an underlying
asset. Unsecured debt includes credit card debt, medical bills,
utility bills and any other type of loan or credit that was
extended without a collateral requirement.

16. 3. Financial Instruments
A derivative security is a security whose price is
dependent upon or derived from one or more underlying
assets. The derivative itself is merely a contract between
two or more parties. Its value is determined by
fluctuations in the underlying asset. The most common
underlying assets include stocks, bonds, commodities,
currencies, interest rates and market indexes.
Futures contracts, forward contracts, options and swaps
are the most common types of derivatives. Derivatives are
generally used as an instrument to hedge risk, but can also
be used for speculative purposes.

17. Regulatory Authorities
In Bangladesh, there are separate regulatory bodies for
regulation of money market and capital market. They are
as follows:
Bangladesh Bank
Bangladesh Securities and Exchange Commission
Dhaka Stock Exchange
Chittagong Stock Exchange

18. Regulatory Authorities
Bangladesh Bank (BB), the central bank and apex
regulatory body for the country's monetary and financial
system, was established in Dhaka as a body corporate vide
the Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972)
with effect from 16th December, 1971. At present it has
ten offices located at Motijheel, Sadarghat, Chittagong,
Khulna, Bogra, Rajshahi, Sylhet, Barisal, Rangpur and
Mymensingh in Bangladesh; total manpower stood at
4951 (officials 3961, subordinate staff 990) as on
November 30, 2012.

19. BB performs all the core functions of a typical monetary and
financial sector regulator, and a number of other non core functions.
The major functional areas include:
Formulation and implementation of monetary and credit policies.
Regulation and supervision of banks and non-bank financial institutions,
promotion and development of domestic financial markets.
Management of the country's international reserves.
Issuance of currency notes.
Regulation and supervision of the payment system.
Acting as banker to the government.
Money Laundering Prevention.
Collection and furnishing of credit information.
Implementation of the Foreign exchange regulation Act.
Managing a Deposit Insurance Scheme.
Regulatory Authorities

20. Regulatory Authorities
The Bangladesh Securities and Exchange
Commission (BSEC) was established on 8th June,
1993 as the regulator of the country’s capital market
through enactment of the Securities and Exchange
Commission Act 1993. Through an amendment of the
Securities and Exchange Commission Act, 1993, on
December 10, 2012, its name has been changed as
Bangladesh Securities and Exchange Commission
from previous Securities and Exchange Commission.

21.  The main functions of BSEC are:
 Regulating the business of the Stock Exchanges or any other securities market.
 Registering and regulating the business of stock-brokers, sub-brokers, share transfer
agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of
an issue, underwriters, portfolio managers, investment advisers and other
intermediaries.
 Registering, monitoring and regulating of collective investment schemes.
 Monitoring and regulating all authorized self regulatory organizations.
 Prohibiting fraudulent and unfair trade practices relating to securities.
 Promoting investors’ education and providing training for intermediaries.
 Prohibiting insider trading in securities.
 Regulating the substantial acquisition of shares and take-over of companies.
 Undertaking investigation and inspection, inquiries and audit of any issuer or dealer
of securities, the Stock Exchanges and intermediaries and any self regulatory
organization.
 Conducting research and publishing information.
Regulatory Authorities

22. The Dhaka Stock Exchange (DSE) is registered as a
Public Limited Company and its activities are regulated
by its Articles of Association rules & regulations and by-
laws along with the Securities and Exchange Ordinance -
1969, Companies Act - 1994 & Bangladesh Securities &
Exchange Commission Act - 1993.
Regulatory Authorities

23. The major functions of DSE are:
 Listing of Companies (As per Listing Regulations).
 Providing the screen based automated trading of listed Securities.
 Settlement of trading (As per Settlement of Transaction Regulations).
 Gifting of share / granting approval to the transaction/transfer of share
outside the trading system of the exchange (As per Listing Regulations 42).
 Market Administration & Control.
 Market Surveillance.
 Publication of Monthly Review.
 Monitoring the activities of listed companies (As per Listing Regulations).
 Investors grievance Cell (Disposal of complaint bye laws 1997).
 Investors Protection Fund (As per investor protection fund Regulations
1999).
 Announcement of Price sensitive or other information about listed
companies through online.
Regulatory Authorities

24. The Chittagong Stock Exchange (CSE) began its journey in 10th
October of 1995 from Chittagong City through the cry-out trading
system with the promise to create a state-of-the art bourse in the
country. CSE was formally opened by then Honorable Prime
Minister of Bangladesh on November 4, 1995.
Objectives of CSE are to:
Increase business turnover
Modernize trading system
Ensure effective relationship management
Achieve high level of confidence & professionalism
Engage in product and market diversification
Contribute to capital market policy development
Ensure exchange related quality services
Regulatory Authorities