The role of financial market and institution in the economic development of bangladesh (new)


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The role of financial market and institution in the economic development of bangladesh (new)

  1. 1. 1The role of Financial Market and Institution in the Economic Development ofBangladeshFinancial marketFinancial market is created to satisfy particular preferenceso f m a r k e t p a r t i c i p a n t s . Financial markets transfer funds fromthose who have excess funs to those who needfunds. That is theyfacilitate the transfer of funds fromsurplus unittodeficit unit.Because funding needs vary among deficit units, various financialmarkets have beenestablished. The primary market allows for theissuance 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 rthe sale of short term securities, while capitalm a r k e t s facilitate the sale of long term securities.The main participants offinancial market can be classified as households, businesses andgovernmentagencies. Those participants who provide funds to the financial markets arecalledsurplus unit. Households are the main type of surplus unit. Participants whousefinancial markets to obtain the funds are called thedeficit unit.Money market:Money market an integral part of the financial market of a country. It provides amediumfor the redistribution of short term loan able funds amongfinancial institutions, which perform this function by selling depositsof various types, certificate of deposits anddiscounting o f bills,treasury bills etc. The participants in the money market are: the centralbank, commercial banks, the government, finance companies, contractualsavinginstitutions like the pension funds, insurance companies,savings and loan associationsetc. The i nstruments that are generallytraded in the money market constitute: treasury bills, short-term centralbank and government bonds, negotiable certificates of deposits, bankersacceptances and commercial papers like the bills of exchange andpromissorynotes, mutual funds etc.The money market in Bangladesh is in itstransitional stage. The various constituent partsof it are in the process of formation,while continuous efforts are being made to developappropriate and adequateinstruments to be traded in the market. At present, governmenttreasury bills of
  2. 2. 2varying maturity, Bangladesh Bank Bills and Certificates of Deposits etcin limitedsupply are available for trading in the market. However, the short-term credit1The role of Financial Market and Institution in the Economic Development ofBangladeshmarket of the banking sector experienced a tremendous growth since liberation. In1999,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 sp 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 ofcash credit, overdraft and demand loan. The rates o f i n t e r e s t a r edetermined by the individual banks and as such the marketi s q u i t e competitive. Each bank maintains its liquidity and supply of fund isarranged throughoutthe country with the help of an interconnected network ofbranches. Bangladesh bank ascentral bank of the country exercises its role in thismarket through the use of instrumentss u c h a s b a n k r a t e , o p e nmarket operations and changes in statutoryl i q u i d i t y requirements. The money market of Bangladeshr 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 andevolution. Initially, after liberation, money market was themajor constituent part of the financial market of the country. Capital market, itsother segmentwas a relatively smaller part. All financi al institutions ofthe country were nationalizedafter liberation. The growth andevolution of money market in the country took placeduring the periodfrom 1971 to the early eighties under various sets ofinterventionistrules and regulations of the governme nt and as such itcould hardly reflect the actualmarket conditions. However, in thisperiod a vast financial superstructure with largenetwork ofcommercial 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 rg 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 ofmobilizing 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 em 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 ofdirected lending and loan disbursement goals, and predetermined rates of interestfixed by the authority. However, rate of interest in the call marketwas flexible but due to prevalence of liberal refinance facility at concessionalrates from BangladeshBank, the activities of call money market remainedinsignificant.Capital market:
  3. 3. 3Capital Market the market, or realistically, the group of interrelatedmarkets, in whichcapital in financial form is lent or borrowed for medium andlong term and, in cases suchas equities, for unspecified periods.The capitalmarkets, in distinction from other parts of the financial market thatis, themoney markets, are those for long-term government securities, corporatebonds, stocks,municipal bonds issued by state and local government units, andmortgages. 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 lauthorities raise capital from the capital m a r k e t w h i c hperforms several important functions in the processo f e c o n o m i c development. Most important among them are thepromotion 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 ffunds among competing uses. Participants in thec a p i t a l markets are many. They include the commercial banks, savingand 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, stockexchanges, securitycompanies, underwriters, portfolio-managers, and insurancecompaniesThe growth of capital market in Bangladesh was very slowbecause of the highlyregulated economic regime and marketimperfections. Long -term funds required byindustrialenterprises were generally provided by government -ownedd e v e l o p m e n t finance institutions (DFIs) at concessional and directedinterest rates. The DFIs are the Bangladesh Shilpa Bank, Bangladesh ShilpaRin Sangstha, Bangladesh Krishi Bank andt h e r a j s h a h i k r i s h iunnayan bank. The Bangladesh Small & CottageI n d u s t r i e s Corporation (BSIC) is anot her institution that providesmedium and long-term loans tosmall industries either directly or through aconsortium of commercial banks. Bangladeshh o u s e b u i l d i n g F i n a n c eCorporation provides long-term loans for constructionof residential houses. DFIs generate their investible fundst 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 internationalfinancial institutions, and borrowings fromthe Bangladesh bank. Co -operative banks in the country provide medium and long -termcredit forpurchase of land and agricultural equipment.Role financial market in economic development:Role of depository institutions:
  4. 4. 4A major type of financial intermediary is the depositoryinstitutions, which acceptsdeposits from surplus units andp 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 ofsecurities. Depository institutions are popular financial institutions for thefollowingreasons:•They offer deposit accounts that can accommodate thea 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 thesize andmaturity desired by the deficit units.•They accept the risk on loan provided.•They have more expertise than individual surplusu 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 canabsorbdefaulted loans better than individual surplus units could.The depositoryinstitutions and there roles are given below Bank:The financial system of Bangladesh consists of Bangladesh Bank (BB), the centralbank,4 nationalized commercial banks (NCB), 5 government ownedspecialized banks, 30domestic private banks, 10 foreign banks and 28non-bank financial institutions. Thefinancial system also includesinsurance companies, stock exchanges and co -operative banks. As thecentral bank, Bangladesh Bank has legal authority to supervise and regulatea l lthe banks. Although the financial system includes otherplayers like insurancecompanies, stock exchanges and co -operative banks, but Bangladesh Bank doesn’tregulate these institutions. Each of the institution is regulated by differentauthorities. 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 yo 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 andExchange Commission (SEC) and Cooperative banks are regulated byMinistry of Local Government, Rural Development and Co-operatives.Financialmarkets allow the transformation of claims on multi -year illiquidinvestment 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 linstitutions acquire and processinformation about
  5. 5. 5investment projects on behalf of their depositors, whilep r i c e s i n financial markets reflect different information andopinions on new ideas and projects.While market participants havedeveloped 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 ruleswithin which firms and household contract with each other and performfinancial transactions.The banking system at independence consisted of twobranch offices of the former StateBank of Pakistan and seventeen largecommercial banks, two of which were controlled by Bangladeshiinterests and three by foreigners other than West Pakistanis. Therewerefourteen smaller commercial banks. Virtually all bankingservices were concentrated in u r b a n a r e a s . T h e n e w l yindependent government immediately designated theD h a k a branch of the State Bank of Pakistan as the central ban k andrenamed it theBangladeshBank. The bank was responsible for regulating currency, controllingcredit and monetary policy, and administering exchange control and theofficial foreign exchange reserves.The Bangladesh governmentinitially nationalized t he entire domestic banking systemandproceeded to reorganize and rename the various banks. Foreign -owned banks were permitted to continue doing business inBangladesh. The insurance business was also n a t i o n a l i z e d a n dbecame 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 tosmall individual and rural accounts.The new banking system succeeded inestablishing reasonably efficient procedures for m a n a g i n g c r e d i tand foreign exchange. The primary functi on of the creditsystemhroughout the 1970s was to finance trade and the public sector, which togetherabsorbed75 percent of total advances.The governments encouragementduring the late 1970s and early 1980s of agricultural development and
  6. 6. 6private industry brought changes in lending strategies. Managed by theBangladeshKrishi Bank, a specialized agricultural banking institution, lending to farmersa n dfishermen dramatically expanded. The number of rural bankb 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 eBangladesh Bank and the World Bank to focus their lendingo n t h e emerging private manufacturing sector. Scheduled bank advances toprivate agriculture,as a percentage of sectoral GDP, rose fro m 2 percentin FY 1979 to 11 percent in FY 1987, while advances to privatemanufacturing rose from 13 percent to 53 percent.List of banks in Bangladesh:The commercial banking system dominates Bangladeshs financialsector. BangladeshBank is the Central Ba nk of Bangladesh and thechief regulatory authority in the sector. The banking system consists of fournationalized commercial Banks, around forty privatecommercial banks, nineforeign multinational banks and some specialized banks. The Nobel-prize winning Grameen Bank is a specialized micro -financeinstitution, 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 ta 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 theempowerment of women in Bangladesh.•Central Bank• Nationalized Commercial Banks•Private Commercial Banks•Foreign Banks•Specialized Banks•References•External linksCentral Bank: Bangladesh BankPersuant to Bangladesh Bank Order, 1972 the Government of Bangladeshreorganized theDhaka branch of the State Bank of Pakistan as the central bank ofthe country, and namedit Bangladesh Bank with retrospective effect from 16December, 1971. Nationalized Commercial Banks:
  7. 7. 7The banking system of Bangladesh is dominated by the 4N 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 than54% 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 tot 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 tendto offer better service and products.•AB Bank Limited•BRAC Bank Limited•Eastern Bank Limited•Dutch Bangla Bank Limited•Dhaka Bank Limited•Islami Bank Bangladesh Ltd•Pubali Bank Limited•Uttara Bank Limited•IFIC Bank Limited• National Bank Limited•The City Bank Limited•United Commercial Bank Limited
  8. 8. 8• NCC Bank Limited•Prime Bank Limited•SouthEast Bank Limited•Al-Arafah Islami Bank Limited•Social Investment Bank Limited•Standard Bank Limited•One Bank Limited•Exim Bank Limited•Mercantile Bank Limited•Bangladesh Commerce Bank Limited•Mutual Trust Bank Limited•First Security Bank Limited•The Premier Bank Limited•Bank Asia Limited•Trust Bank Limited•Shahjalal Bank Limited•Jamuna Bank Limited•Foreign Banks•Citigroup•HSBC
  9. 9. 9•Standard Chartered Bank•Commercial Bank of Ceylon•State Bank of India•Habib Bank• National Bank of Pakistan•Woori Bank•Bank Alfalah•ICB Islami Bank Specialized Banks:Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi KrishiUnnayanBank) were created to meet the credit needs of the agricultural sectorwhile 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 termloans to the industrial sector[1]. The Specialized banks are:•Grameen Bank•Bangladesh Krishi Bank•Bangladesh Shilpa Bank•Rajshahi Krishi Unnayan Bank•Bangladesh Shilpa Rin Sangstha•Basic Bank Ltd (Bank of Small Industries and Commerce)•Bangladesh Somobay Bank Limited(Cooperative Bank)•The Dhaka Mercantile Co-opRoles of the Regulatory institutions in the Capital Market of Bangladesh:
  10. 10. 10In order to stimulate rapid economic growth of a country particularlythroughindustrialization and mobilization of domestic savings, appropriateinstitutions in thecapital market are essential. The capital market in Bangladesh isgoverned by thefollowing institutions.The Security and Exchange Commission (SEC):Security and Exchange Commission(SEC) was formed to supervise the securitiesmarket of Bangladesh in June 09, 1993.SEC is a dynamic body regulating theactivities of capital market on the basis of introducing regulatory measures fromtime to time. SEC has been set up not only tocontrol the capital market but also togive protection to investors. Capital market isregulated by the Security andExchange organization Act 1993 and Companies Act 1994and rules and regulationtrade there under.The major Function and Responsibilities of the SEC are:•Regulating the business of stock market determination and regulation ofthe business of brokers, sub-brokers, share-transfer agents, and manager/brokerstothe issues, underwriters, portfolio managers, investment consultants andother 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 tosecuritydealings.•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•Calling information from and inspection, investigation or audit of securityissues,stock exchanges and related parties.•Carrying out research into and publication of information on securityrelatedmatters.Stock Exchange: Dhaka Stock Exchange (DSE):
  11. 11. 11Dhaka Stock Exchange (DSE), the first bourse of thecountry was established in1954. It is regulations and run by its own Board comprising of nine electedcouncilors and three councilors nominated by the government.The Major Functions of DSE:•Providing listing rules to give assurance that the issuance of a company’ssecuritieshas conformed to legal requirements.•Providing disclosure rules.•Publication of monthly journal, showing performance of the market as well aslistedcompanies.•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 bourseof the country on February 12,1995, in order to accelerateindustrial growth foroverall benefit of the economy. Chittagong Stock Exchange wasincorporated aspublic limited company on April 1, 1995. Since then, it has accomplishedsomeinnovative functions.The Role of Chittagong Stock Exchange:the major role of Chittagong Stock Exchangeis to create an effective, efficient andtransparent market of international standard to saveand invest in Bangladesh inorder 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.•
  12. 12. 12Observe AGM/EGM time schedule.•It can take any legal action against the listed companies for violation oflistingregulations or for not fulfilling the continuous listing requirements.The Investment Corporation of Bangladesh:one of the dominant players of thefinancial market in Bangladesh is InvestmentCorporation of Bangladesh, theestablishment of Investment Corporation ofBangladesh (ICB) on October 1,1976, was amajor step in a series of measuresundertaken by the government to accelerate the pace of industrialization anddevelop 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 industrialproject/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 mobsavingsand to support the stock market.•CB is also playing a leading role in the stock exchanges. Since inception, ICBhasbeen playing a dominant role to ensure a healthy and well organizedsecondarymarket.Insurance Companies:Insurance a system of spreading the risk of one to the shoulders of many. It is acontractw 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 aconsideration known as premium, agree toindemnifythe insured against losses arising out of certain
  13. 13. 13s 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 individualsand firms that reduce the financial burden associated withdeath,illness and damages to property. They charges premiums inexchange for the insurancethat they provide. They invest the funds that arereceived as premium in different sectorsuntil the funds are needed to cover theinsurance claims. Thus through investing the fundsin different sectors, they serveas important financial intermediaries.Insurance is not a new business inBangladesh. Almost a century back, during British rulein India, some insurancecompanies started transacting business, both life and general, inBengal. Insurancebusiness gained momentum in East Pakistan during 1947-1971, when49 insurancecompanies transacted both life and general insurance schemes. But aftertheliberation, the government of Bangladesh nationalized insurance industry in1972 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 r1 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 andorganizations transacting insurance business in the countrywereplaced in the public sector under five corporations. Thesecorporations were: theJatiya Bima Corporation, Tista BimaCorporation, Karnafuli Bima Corporation, Rupsa J i b a n B i m aCorporation, and Surma Jiban Bima Corporation. TheJ a t i y a B i m a Corporation was an apex corporation only to superviseand 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 KarnafuliBima Corporations were for general insurance a nd Rupsa and Surmafor 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 eportion of a composite companyjoined the Rupsa and Surma corporations while specialist general insurancecompanies or the general portion of a composite company joined the Tista andKarnafuli corporations.C o n s e q u e n t l y , o n 1 4 M a y 1 9 7 3 , ar 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 CorporationsAct 1973. Following the Act, in place of five corporations thegovernmentf 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 rg 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 to2000, the government has given permission to 19 general insurance companiesand10 life insurance companies in the private sector. Insurers of thecountry 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 BimaC o r p o r a t i o n . Some of the insurance companies that are working in Bangladeshare:
  14. 14. 14•General Insurance Company• National Insurance Company•Bangladesh Co-operative Insurance Ltd.•American Life Insurance Company Ltd. (ALICO)•United Insurance Company etc.Role of Insurance Company:Insurance companies are working as important financial intermediaries in theeconomicdevelopment of the country. Some of the role performs by the insurancecompanies’ are-•They financially supports individuals and firms in case of any financial burden.•Reinsure the insLeasing Companies:Lease Financing Lease is a contract between the owner and the user of assets for acertaintime period during which the second party uses an asset in exchange ofmaking periodicrental payments to the first party without purchasing it. Underlease financing, the lesseeregularly pays the fixed lease rent over a period of timeat the beginning or at the end of amonth, 3 months, 6 months or a year. At the endof the lease contract the asset reverts tothe real owner.L e g a l l y , a l e a s i n gcompany is defined as one having the business of hiringp l a n t s o r equipment or of financing their hire by others. TheInternational Finance Corporation promotes leasing as a method offinancing industrial development in the developing countries as a part ofits capital market development strategies.The functions of a lease businessinclude lease financing, short-term financing, house building financing,and merchant banking and corporate financing. The leasing businessin Bangladeshmoved away from regular leasing activities and is now involved in stock-marketrelated activities such as issue management, unde rwriting, trustmanagement, 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 dm 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 leasefinancing institutions include bridge financing, corporatecounseling, mergersand acquisition, capital restructuring , financial engineering, and leasesyndicationThe leasing companies now operating in the country are-
  15. 15. 15•Industrial Development Leasing Company of Bangladesh•United Leasing Company•GSP Finance Company (Bangladesh)•Uttara Finance and Investments•Bay Leasing and Investment•Phoenix Leasing Company•Prime Finance and Investment•International Leasing and Financial Services•Union Capital•Vanik Bangladesh•Peoples Leasing and Financial Services•Bangladesh Industrial Finance Company•UAE-Bangladesh Investment Company•Bangladesh Finance and Investment Company and•First Lease Internationa