Role of financial markets and institutions

1. .
Role of Financial Markets
and Institutions

2. A financial market is a market in which
financial assets (securities) such as stocks and
bonds can be purchased or sold.
• Funds are transferred in financial markets when
one party purchases financial assets previously
held by another party.
• Financial markets facilitate the flow of funds and
thereby allow financing and investing by
households, firms, and government agencies.

3. Financial Institutions….

5. What Customer do?

6. We are the best…..

7. FUNCTIONS
• Price Determination: Demand and supply of an asset in a financial
market help to determine their price. Investors are the supplier of the
funds, while the industries are in need of the funds. Thus, the
interaction between these two participants and other market forces helps
to determine the price.
• Mobilization of savings: For an economy to be successful it is crucial
that the money does not sit idle. Thus, a financial market helps in
connecting those with money with those who require money.
• Ensures liquidity: Assets that buyers and sellers trade in the financial
market have high liquidity. It means that investors can easily sell
those assets and convert them into cash whenever they want.
Liquidity is an important reason for investors to participate in trade.
• Saves time and money: Financial markets serve as a platform where
buyers and sellers can easily find each other without making too much
efforts or wasting time. Also, since these markets handle so many
transactions it helps them to achieve economies of scale. This results in
lower transaction cost and fees for the investors.

8. ROLE OF FINANCIAL MARKETS
• Accommodating Corporate Finance Needs:
The financial markets serve as the mechanism
whereby corporations (acting as deficit
units) can obtain funds from investors (acting as
surplus units).
• Accommodating Investment Needs: Another
key role of financial markets is accommodating
surplus units who want to invest in either debt or
equity securities.
• Primary versus Secondary Market : Primary
markets facilitate the issuance of new securities.
Secondary markets facilitate the trading of existing
securities, which allows for a change in the
ownership of the securities.

9. ROLE OF FINANCIAL MARKETS

10. CLASSIFICATION OF THE FINANCIAL
MARKET
BY NATURE OF CLAIM
• Equity Market: It is a market where investors
deal in stocks or other equity instruments. It is
basically the market for residual claims.
• Debt Market: In this market, investors buy
and sell fixed claims or debt instruments, like
debentures or bonds.

11. BY MATURITY OF CLAIM
• Money Market: The markets where investors buy and
sell securities that mature within a year are the money
market.
• Assets that investors buy and sell in this market are
commercial paper, certificate of deposits, treasury bills,
and more.
• Capital Market: Markets, where investors buy and sell
medium and long term financial assets, is a capital
market.
• There are two types of capital market:
Primary Market (where a company issues its shares for
the first time (IPO), or already listed company issues fresh
shares)
and Secondary Market or Stock Market (where buyers
and sellers trade already issued securities in the primary
market).

12. SECURITIES TRADED IN FINANCIAL
MARKETS
• Money Market Securities
▫ Treasury Bills
▫ Commercial Papers
▫ Negotiable Certificates
• Capital Market Securities
▫ Bonds
▫ Mortgages
▫ Stocks
• Derivative Securities
▫ Speculations
▫ Risk Management

13. Valuation of Securities in Financial
Markets:
Each type of security generates a unique stream of expected cash flows to
investors. The valuation of a security is measured as the present value of
its expected cash flows, discounted at a rate that reflects the
uncertainty surrounding the cash flows.
• Impact of Information on Valuation : Investors
can attempt to estimate the future cash flows that they will receive by
obtaining information that may influence a security’s future cash flows.

14. • Impact of the Internet on Valuation: The
Internet has improved the valuation of securities in several
ways. Prices of securities are quoted online and can be
obtained at any given moment by investors.
• Impact of Behavioral Finance on Valuation:
Behavioral finance is the application of psychology to make
financial decisions. It offers a reason why markets are not
always efficient.
• Uncertainty Surrounding Valuation of
Securities: Even if markets are efficient, the valuation of a
firm’s security is subject to much uncertainty because
investors have limited information available to value that
security.

15. Market Efficiency
Because securities have market-determined prices,
their favorable or unfavorable characteristics as
perceived by the market are reflected in their prices.
When security prices fully reflect all available
information, the Markets for these securities are
referred to as efficient.

16. Role of Financial Institutions
• Role of Depository Institutions:
■ They offer deposit accounts that can accommodate the
amount and liquidity characteristics desired by most
surplus units.
■ They repackage funds received from deposits to
provide loans of the size and maturity desired by deficit
units.
■ They accept the risk on loans provided.
■ They have more expertise than individual surplus units
in evaluating the creditworthiness of deficit units.
■ They diversify their loans among numerous deficit
units and therefore can absorb defaulted loans better
than individual surplus units could.
▫ Commercial Banks
▫ Savings Institutions
▫ Credit Unions

17. • Role of Non depository Financial
Institutions:
Non depository institutions generate funds from sources
other than deposits but also play a major role in financial
intermediation.
▫ Finance Companies
▫ Mutual Funds – sell shares to surplus unit and use the
fund received to purchase a portfolio of securities.
▫ Securities Firms
▫ Insurance Companies
▫ Pension Funds

18. Comparison of Roles among Financial Institutions

19. Financial Market Regulation

20. Consolidation of Financial Institutions

21. Overview of Financial Institution of
Bangladesh
• Banks
After the independence, banking industry in Bangladesh
started its journey with 6 Nationalized commercialized
banks, 3 State owned Specialized banks and 9 Foreign
Banks. In the 1980's banking industry achieved significant
expansion with the entrance of private banks. Now, banks in
Bangladesh are primarily of two types:
• Scheduled Banks: The banks that remain in the list of banks
maintained under the Bangladesh Bank Order, 1972.
• Non-Scheduled Banks: The banks which are established for
special and definite objective and operate under any act act
but are not Scheduled Banks. These banks cannot perform
all functions of scheduled banks.

22. There are 59 scheduled banks in Bangladesh who operate under full
control and supervision of Bangladesh Bank which is empowered to do so
through Bangladesh Bank Order, 1972 and Bank Company Act, 1991.
Scheduled Banks are classified into following types:
• State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are
fully or majorly owned by the Government of Bangladesh.
• Specialized Banks (SDBs): 3 specialized banks are now operating
which were established for specific objectives like agricultural or
industrial development. These banks are also fully or majorly owned by
the Government of Bangladesh.
• Private Commercial Banks (PCBs): There are 41 private commercial
banks which are majorly owned by individuals/the private entities.
PCBs can be categorized into two groups:
• Conventional PCBs: 33 conventional PCBs are now operating in the
industry. They perform the banking functions in conventional fashion i.e
interest based operations.
• Islami Shariah based PCBs: There are 8 Islami Shariah based
PCBs in Bangladesh and they execute banking activities according to
Islami Shariah based principles i.e. Profit-Loss Sharing (PLS) mode.
• Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh
as the branches of the banks which are incorporated in abroad.

23. There are now 5 non-scheduled banks in Bangladesh which
are:
• Ansar VDP Unnayan Bank,
• Karmashangosthan Bank,
• Grameen Bank,
• Jubilee Bank,
• Palli Sanchay Bank
FIs
Non Bank Financial Institutions (FIs) are those types of financial
institutions which are regulated under Financial Institution Act,
1993 and controlled by Bangladesh Bank. Now, 34 FIs are
operating in Bangladesh while the maiden one was established in
1981. Out of the total, 2 is fully government owned, 1 is the
subsidiary of a SOCB, 15 were initiated by private domestic
initiative and 15 were initiated by joint venture initiative. Major
sources of funds of FIs are Term Deposit (at least three months
tenure), Credit Facility from Banks and other FIs, Call Money as
well as Bond and Securitization.

24. The major difference between banks and FIs
are as follows:
• FIs cannot issue cheques, pay-orders or demand
drafts.
• FIs cannot receive demand deposits,
• FIs cannot be involved in foreign exchange
financing,
• FIs can conduct their business operations with
diversified financing modes like syndicated
financing, bridge financing, lease financing,
securitization instruments, private placement of
equity etc.

25. Insurance sector in Bangladesh emerged after independence
with 2 nationalized insurance companies- 1 Life & 1 General;
and 1 foreign insurance company. In mid 80s, private sector
insurance companies started to enter in the industry and it got
expanded. Now days, 62 companies are operating under
Insurance Act 2010. Out of them-
• 18 are Life Insurance Companies including 1 foreign
company and 1 is state-owned company,
• 44 General Insurance Companies including 1 state-owned
company.
• Insurance companies in Bangladesh provide following
services:
▫ 1. Life insurance,
▫ 2. General Insurance,
▫ 3. Reinsurance,
▫ 4. Micro-insurance,
▫ 5. Takaful or Islami insurance.