FINANCIAL INSTITUTON & MARKETS

Assignment
On
MONEY MARKET INSTRUMENTS IN BANGLADESH

PREPARED FOR:
MS. FAHMIDA SAIMA
LECTURER,
DISCIPLINE OF FINANCE,
PREMIER UNIVERSITY, CHITTAGONG.

PREPARED BY:
IMRAN MAHMUD ROHEL

SEMESTER: 8TH. BATCH: 34TH.

DISCIPLINE: FINANCE SECTION: B

ID : 1603410109073

DATE OF SUBMISSION: 20 FEBRUARY, 2021

TH
 LETTER OF TRANSMITTAL
20th February,2021
Ms. Fahmida Saima
Lecturer,
Discipline of Finance,
Premier University, Chittagong.

Dear Ma’am,

In accordance with your instructions, in the "Financial Institution & Markets" course, I have
prepared an assignment on “The Money Market Instruments in Bangladesh”

I have tried my best to make this report as best as possible. I have collected these information
from various sources and websites via the Internet. Then, after evaluating this information I
were able to do this.

Thank you very much for giving me such an opportunity that I enjoyed very much

Sincerely,
Imran Mahmud Rohel
th th
34 Batch, 8 Semester,
Discipline of Finance(B),
Premier University, Chittagong.
 Table of Contents

INTRODUCTION 1
MONEY MARKET 2
CHARACHTERISTICS OF MONEY MARKETS IN BANGLADESH 3
MONEY MARKET PARTICIPANTS 5

MONEY MARKET INSTRUMENTS IN BANGLADESH 6

ROLE AND IMPORTANCE OF MONEY MARKET IN THE ECONOMY OF

BANGLADESH 16

DRAWBACKS OF MONEY MARKET IN BANGLADESH 18

RECOMMENDATIONS FOR MONEY MARKET IN BANGLADESH 19

CONCLUSIONS 20

BIBLIOGRAPHY 21
 1

Introduction
Money market is an organized exchange market where participants can lend and borrow short-
term, high-quality debt securities with average maturities of one year or less. The market
enables governments, banks, and other large institutions to sell short-term securities to fund
their short-term cash flow needs. It also allows individual investors to invest small amounts of
money in a low-risk market. Large corporations with short-term cash flow needs can borrow
from the market directly through their dealer while small companies with excess cash can
borrow through money market mutual funds. Individual investors who want to profit from the
money market can invest through their money market bank account or a money market mutual
fund. A money market mutual fund is a professionally managed fund that buys money market
securities on behalf of individual investors.

Bangladesh has a very active money market, where a host of instruments are traded. The
money market in Bangladesh is in its transitional stage. The various constituent parts of it are in
the process of formation, while continuous efforts are being made to develop appropriate and
adequate instruments to be traded in the market. However, the short-term credit market of the
banking sector experienced a tremendous growth since liberation .

The money market of Bangladesh reached its present phase through a series of changes and
evolution. Initially, after liberation, money market was the major constituent part of the
financial market of the country. The growth and evolution of money market in the country took
place during the period from1971 to the early eighties under various sets of interventionist
rules and regulations of the government and as such it could hardly reflect the actual market
conditions. Bangladesh Bank as central bank of Bangladesh exercises its role in this market
through the use of instruments such as bank rate, open market operations and changes in
statutory liquidity requirements.
 2

Money Market:
Money market means market where money or its equivalent can be traded. Money is synonym
of liquidity. Money market consists of financial institutions and dealers in money or credit who
wish to generate liquidity. It is better known as a place where large institutions and government
manage their short term cash needs. For generation of liquidity, short term borrowing and
lending is done by these financial institutions and dealers. Money Market is part of financial
market where instruments with high liquidity and very short term maturities are traded. Due to
highly liquid nature of securities and their short term maturities, money market is treated as a
safe place. Hence, money market is a market where short term obligations such as treasury
bills, commercial papers and bankers acceptances are bought and sold. Money markets exist to
facilitate efficient transfer of short-term funds between holders and borrowers of cash assets.
For the lender/investor, it provides a good return on their funds. For the borrower, it enables
rapid and relatively inexpensive acquisition of cash to cover short-term liabilities.
 3

Characteristics of Bangladesh’s Money

Market
The central bank controls the entire operation of the organized sector of the Money Market.
Over the years both commercial banks and other banks have come to depend more and more
on the rediscounting and borrowing facilities provided by central bank (CB), especially during
the busy season. Moreover, the CB supervises their lending policies from time to time.

Even today, a large portion of Bangladesh’s money market remains unorganized. They also do
not always specify the purposes of finance, that is, whether finance is required for genuine
productive purposes or for indulging in speculative activities. The unorganized sector of
Bangladesh’s money market consists of a wide range of non-banking financial institutions. Such
institutions resemble banks very closely and compete with banks in attracting public deposits.
But they are not under the control of the CB. So, their presence reduces the effectiveness of the
central bank’s control over the money market. The main characteristics of money market of
Bangladesh are as follows.

 Existence of Unorganized Money Market:

The Major defect of the Bangladeshi money Market has always been the existence of the
indigenous bankers who do not distinguish between short-term and long-term finance. During
the last decades, there is a whole lot of non-banking financial companies who raise funds from
the general public but who are generally outside the control and supervision of central bank of
Bangladesh.

 Absence of Integration:

An important defect of the Indian money market at one time was the division of the money
market into several segments or sections, loosely connected to each other. Each part of the
money market carry on a particular type of banking business or provide a specific type of
financial service. Each financial institution acts independently.
 4

 Diversity in Money Rates of Interest:

Another defect of the Bangladeshi money market related to the existence of too many rates of
interest – the borrowing rate of the Government, the deposit and lending rates of commercial
banks, deposit and lending rates of cooperative banks, etc. The basic reason for the existence of
so many rates of interest simultaneously is the immobility of funds from one section of the
money market to another.

 Seasonal Stringency of Money:

A very striking characteristic of the Bangladeshi money market is the seasonal monetary
stringency and high rates of interest during a part of the year.

 Absence of the market:

The existence of an organized bill market is absolutely essential for linking various credit
agreements with the central bank in an effective manner. No doubt there is a Treasury bill
market in Bangladesh. But the commercial bill market has not been fully developed.

 Limited Instruments:

It is in fact a defect of the Bangladeshi money market. In our money market the supply of
various instruments such as the Treasury Bills, Commercial Bills, Certificate of Deposits,
Commercial Papers, etc. is very limited. In order to meet the varied requirements of borrowers
and lenders, it is necessary to develop numerous instruments.

 Volatile call money market:

The inter-bank call money market is the market for short-term funds, known as ‘money at call
and short notice’. Two components of this market are the call market or overnight market and
short notice market. The borrowing rate in this market is known as the call money rate. This
rate is determined by the market forces, that is, by the forces of demand and supply. The
demand or short-term funds originates from all types of banks — nationalized, private and
foreign
 5

Money Market Participants:

In money market there are generally two main participants: Supplier and demander of money
market securities. Participants in money market acts both supplier and demander of loan and
securities. Generally the participants in money market are: ①Individual ②Business
③Government

In the perspective of Bangladesh the money market participants are :

 Government treasury department – They are only demander of fund

 Central Bank/Bangladesh bank – They are both supplier and demander of fund
 Commercial Bank-- They are both supplier and demander of fund
 Business
 Investment and Security Firms
 Investment companies/Bank
 Finance companies
 Insurance companies
 Pension funds
 Individuals
 6

MONEY MARKET INSTRUMENTS IN

BANGLADESH
A variety of instruments are available in Bangladesh money market. They were

1. Treasury Bills (T-bills)

2. Commercial Paper
3. Certificate of deposit
4. Bankers‟ Acceptances
5. Repurchase Agreements (Repo)
6. Federal funds

1. Treasury Bills (T-bills)

Treasury Bills are one of the safest money market instruments as they are issued by Central
Government. Government used to finance fiscal deficits. They are zero-risk instruments, and
hence returns are not that attractive. T-Bills are circulated by both primary as well as the
secondary markets. They come with the maturities of 3-month, 6-month and 1-year.They pay a
set amount at maturity. Tax revenues or any other source of government funds may be used to
repay the holders of these financial instruments. They carry great weight in the financial system
due to their zero (or nearly zero) default risk, ready marketability, and high liquidity. T-bills do
not carry a promised interest rate. Instead, they are sold at a discount from their par or face
value. Bill yields are determined by the bank discount method, which does not compound
interest rates and uses a 360-day year for simplicity. Price of treasury bill is determined by the
market. Treasury bill Issued in scrip less form. The central Bank releases monthly calendar
through BB website. Weekly (usually on Sunday) auctions of Treasury Bills are held following a
pre-announced auction calendar with a specified amount. Bidders quote their prices. The
Auction Committee determines the cut-off price from the offered prices. Primary Dealers (PDs)
can place bids in auction. Other commercial banks and Non-Bank Financial institutions,
 7

Insurance companies, corporate, individuals, provident fund etc. can also participate in auction
through PDs. Minimum bid amount is Taka one lac and its multiples.

2. Commercial Paper
Commercial Paper (CP) is defined as a secured/ unsecured promissory note which
has an original maturity between a minimum of seven days and a maximum of one
year. Commercial paper consists of short term, unsecured promissory notes issued by a
corporation to raise short term cash, often to finance working capital requirements. Unsecured
promissory notes with a fixed maturity of one to 270days; usually sold at a discount from face
value. Commercial paper is traded mainly in the primary market. Opportunities for resale in the
secondary market are more limited.

Types of Commercial papers:

There are two major types of CPs

Direct paper : This paper is issued mainly large finance companies and bank holdings
companies directly to the investor.

Dealer Paper or industrial paper: This paper is issued by security dealers on the behalf of their
corporate customers (mainly non-financial companies and smaller financial companies)
 8

Issuer of Commercial Papers Investors in Commercial Papers

Direct or Finance paper

Finance companies Money market fund

Bank holdings companies Bank

Nonfinancial Firms Papers dealer Insurance companies

Houses Pension Fund

Dealer or Industrial
paper

Features of Commercial Paper

 Commercial paper is a short-term money market instrument comprising promissory

note with a fixed maturity.
 It is a certificate evidencing an unsecured corporate debt of short term maturity.
 Commercial paper is issued at a discount to face value basis but it can be issued in
interest bearing form.
 The issuer promises to pay the buyer some fixed amount on some future period but
pledge no assets, only his liquidity and established earning power, to guarantee that
promise.
 Commercial paper can be issued directly by a company to investors or through
banks/merchant banks
 9

Guideline Set by Bangladesh Bank for Commercial Paper

 Banks are allowed to invest in CPs, provide credit enhancements to CP issuers and act as
an issuing and paying agent of CPs as per the guideline.
 However, banks shall not issue CPs in any form or provide any guarantee for CPs. Banks
will have to ensure that they have written guidelines approved by their board of
directors for dealing with CPs.
 The net worth of the issuer should not be less than Tk 30 crore as per the latest audited
balance sheet and the net profit after tax shall be positive for the last three years,
according to the guideline.
 The current status shown in the Credit Information Bureau report of the issuer company
shall be 'standard' and have no track record of classified status for last two years.

Advantages of Commercial Paper

Simplicity: The advantage of commercial paper lies in its simplicity. It involves hardly any
documentation between the issuer and investor.

Flexibility: The issuer can issue commercial paper with the maturities tailored to match the
cash flow of the company.

Easy to Raise Long Term Capital: The companies which are able to raise funds through
commercial paper become better known in the financial world and are thereby placed in a
more favorable position for rising such long them capital as they may, from time to time, as
require. Thus, there is in inbuilt incentive for companies to remain financially strong.

High Returns: The commercial paper provides investors with higher returns than they could get
from the banking system.

Movement of Funds: Commercial paper facilities securitization of loans resulting in creation of

a secondary market for the paper and efficient movement of funds providing cash surplus to
cash deficit entities.
 10

3. Certificate of Deposits (CDs):

 Certificate of Deposit is like a promissory note issued by a bank in form of a certificate entitling
the bearer to receive interest. It is similar to bank term deposit account. Certificate of deposit
was introduced as a money market instrument in Bangladesh in 1983. Its objective was to
strengthen the money market and bring idle funds, including those arising from black money
and unearned incomes, within the fold of the banking system. The Bearer of Certificate of
Deposits (BCD) with a fixed maturity is issued by and payable at the bank to Bangladeshi
nationals, firms and companies. The certificate does not contain the name of the purchaser or
holder. The interest rate is not fixed as in the 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 of
funds in the money market. The difference between the face value of CDs and the prepaid
interest is received by the bank from the purchaser of CDs at the time of issue. The bearer of
CDs can sell the same to another purchaser. The bank maintains no record other than the
Certificate No., rate of interest allowed, and the date of sale and encashment. A bank does not
issue certificate of deposits for the value exceeding the limit prescribed for it by the Bangladesh
Bank. The certificate bears the maturity date, fixed rate of interest and the value. These
certificates are available in the tenure of 3 months to 5 years. The returns on certificate of
deposits are higher than T-Bills because they carry higher level of risk .The principal buyers of
negotiable CDs include corporations, state and local governments, foreign central banks and
governments, wealthy individuals, and a variety of financial institutions. Most buyers hold CDs
until they mature. However, prime-rate CDs are actively traded in the secondary market.
 11

Market structure for Negotiable CDs

Issue primary market CDs

Large Depositors
Money
(Corporations & other
Center
customers)
Banks
Funds raised to meet legal reserve
requirements and other bank cash needs

Sale of
negotiable
CDs Immediately
available
Redemption funds
of CDs at
maturity

Buyers in the
secondary CD market

4. Bankers’ Acceptances
A bankers acceptance (BA, aka bill of exchange) is a commercial bank draft requiring the
bank to pay the holder of the instrument a specified amount on a specified date, which is
typically 90 days from the date of issue, but can range from 1 to 180 days. The bankers
acceptance is issued at a discount, and paid in full when it becomes due — the difference
between the value at maturity and the value when issued is the interest. If the bankers
acceptance is presented for payment before the due date, then the amount paid is less by
the amount of the interest that would have been earned if held to maturity.

A bankers acceptance is used for international trade as means of ensuring payment. For
instance, if an importer wants to import a product from a foreign country, he will often get
a letter of credit from his bank and send it to the exporter. The letter of credit is a
 12

document issued by a bank that guarantees the payment of the importer's draft for a
specified amount and time. Thus, the exporter can rely on the bank's credit rather than the
importer's. The exporter presents the shipping documents and the letter of credit to his
domestic bank, which pays for the letter of credit at a discount, because the exporter's
bank won't receive the money from the importer's bank until later. The exporter's
domestic bank then sends a time draft to the importer's bank, which then stamps it
"accepted" and, thus, converting the time draft into a bankers acceptance. This negotiable
instrument is backed by the importer's promise to pay, the imported goods, and the bank's
guarantee of payment.

Acceptance financing is the financing of commercial transactions, usually involving

import/export businesses, by using bankers acceptances. However, it may involve trading
within the same country. Sometimes, a bankers acceptance, is created to ship between
countries where neither the importer nor the exporter is located, called a third-country
acceptance.

Bankers acceptances have low credit risk because they are backed by the importer, the
importer's bank, and the imported goods. Hence, BAs offer slightly higher yields than
Treasuries of the same terms. Major investors of these money market instruments naturally
include money market mutual funds, and municipalities. However, as other forms of
financing have become available, the secondary market for BAs has declined considerably.

What a bank charges for a BA depends not only on its own fees and commissions for
creating the BA, but is also commensurate with general market yields of other money
market instruments. For BAs that are ineligible as collateral for Federal Reserve loans, the
Fed imposes reserve requirements on the amount of ineligible BAs — hence, ineligible BAs
are discounted more, with the result that the borrower receives less money for the initial
loan, but the investor receives a higher yield.

5. Repurchase Agreements (Repo):

 13

Repurchase agreements are short-term collateralized loans used by major financial

institutions to obtain short-term funding by pledging their assets for short-term loans or to
earn interest by lending cash collateralized by those assets. Central banks uses these
agreements to provide credit for major financial institutions and to manage interest rates.

In Bangladesh, the repo rate is the central bank policy rate (CBPR), which is the rate that is
used to implement or signal the monetary policy stance. Under the repo programme the
repayment duration of the repo is between one day and 28 days as per the central bank's
regulations. Bangladesh Bank keeps the short-term, risk-free rate at 4.75 percent, there
should be an adequate flow of private sector credit, and the markets of financial assets
and real assets should get a much-needed respite. The previous overnight repo rate was
5.25 percent which will now be 4.75 percent and reverse repo rate was 4.75 percent and
reduced now to four percent.

Central banks use reverse repos to add money to the money supply via open market
operations.

The central bank has used its available monetary policy instruments – such as: repo facility
(interest rate and tenor to inject necessary liquidity into the market. This includes the
recent formation of a credit guarantee scheme to support cottage, micro and small
enterprises that lack adequate assets to pledge for bank loans.

Repurchase agreements are agreements between a borrower and a lender where the

borrower, in effect, sells securities to the lender with the stipulation that the securities will
be repurchased on a specified date and at a specified, higher price. The securities serve as
collateral for the loan. The difference between the repurchase price and the amount
loaned is the amount of interest paid by the borrower to the lender, which is found by the
following formula (repo formulas use a banker's year of 360 days):

 Dollar Interest = Principal × Repo Rate × (Repo Term in days/360 days)

The repo rate is the annualized interest rate of the transaction:

 14

 Repo Rate = Dollar Interest/Principal × 360/(Repo Term in days)

The main purpose of repos is to finance the purchase of securities by government bond
dealers until they can be sold to customers. These are private trades for which there are
no public quotes. For instance, since the United States Treasury sells its securities by
auction, dealers must bid by specifying the price and quantity, and pay for successful bids
by the settlement date. However, the dealer may not have all the money on the
settlement date, so if a dealer successfully bids for $1 billion worth of Treasuries, the
dealer may pay $100,000,000 on the settlement date and finance the rest from the
Treasury with the stipulation that they will be repurchased after the dealer receives
payment from his customers. As the dealer sells more securities, more of the collateral is
repurchased from the Treasury for the bid price plus accrued interest on the security plus
the interest that the Treasury charges for carrying the inventory. Because most dealers can
sell most of their inventory quickly, they only need to borrow money for a day or a few
days at most, which is why the terms of most repos is very short.

6. Federal funds 

Federal funds are the funds that depository institutions keep in their accounts at the Federal
Reserve bank in their district. Depository institutions are financial institutions that accept
deposits and make loans, which include commercial banks, savings banks, savings and loan
associations, credit unions, thrifts and other domestic banking entities that finance
international transactions. Commercial banks are the largest holders of federal funds. Money
is kept in these accounts because the Federal Reserve requires that a certain percentage of
the institution's deposits be kept in its Federal Reserve account (reserve requirements), and
because this money is used to clear transactions with other banks.
 15

 The federal funds are simply commercial banks' reserves (reserve money - a component of
the monetary base) which are available for borrowing overnight by banks in reserve
deficiency or for other exigencies. This reserve market is called the federal funds market -
analogous to the call money market in Bangladesh banks vocabulary. They're called federal
funds because the Fed facilitates inter-bank borrowing of these reserves and the interest
rate on the funds is called federal funds rate. The Fed sets a range of variability of the
Federal Fund Rate. The current Federal Fund Rate target range is 2.00-2.25 per cent. On a
given day or hour the exact rate within this range depends on the supply and demand for
funds by banks. If the Federal Fund Rate tiptoes outside the range, the Fed's open
market managers would pursue Repo and Reverse Repo to restore Federal Fund rate
within the range. The interest rate targeting approach may require the Bangladesh
Bank conduct the Repo and Reverse Repo operations daily if the Call money slides off
target.
 16

ROLE AND IMPORTANCE OF MONEY MARKET

IN THE ECONOMY OF BANGLADESH
A money market plays a significant role in the developing country like Bangladesh. The
following are the important roles of a money market.

1. Money market facilitates the working of capital market, because the institutions
operating in the capital market often make use of funds obtained in the money market
2. Money market provides not only short-term funds to businessman but also to the
government. It supplies the government with short term funds and helps to trade with
temporary financial difficulties. The government can obtain temporary short-term
accommodation by means of treasury bills in the money market without interfering with
the normal functioning of the banking and credit system. Money market gives stability
to the government security market and strengthens the credit of the government.
3. Opportunities are provided by the money market though commercial banks for
investing their funds in proper channels.
4. Money market can properly managed money, a monetary management is done by the
monetary authority through the operations of money market. In fact, the progress of
money economy largely depends on progress of money market.
5. Money market is a channel for mobilizing the resources and funds for more productive
investment.
6. Money market finances industry, trade and commerce. It is also helpful for the central
bank for purchasing its monetary policy and program of monetary management.
7. Monetary market gives an opportunity to the surplus fund-holders to invest their funds
in more productive and profitable channel.
8. Money market uses near money assets, and therefore, there can be economy in the use
of money proper.
9. Money market helps in the transfer of funds from one part of the country to the other.
Hence, a money market is helpful mobilization of funds or for financial mobility.
 17

10. Saving and investment can be encouraged by a money market by ensuring liquidity and
safety to the financial assets.
11. Money market is a Centre for bringing about monetary equilibrium between the
demand for and supply of loan able funds. Thus it is clear that the money market plays a
vital role by helping the government, the business sector and the personal sector by
providing the necessary funds required in the short-term. It also helps the central bank
in implementing its monetary policy. In this way, the money market exerts its influence
in the monetary economy.
 18

DRAWBACKS OF MONEY MARKET IN

BANGLADESH
There are many constraints held in money market in Bangladesh. Some are stated below-

 Loose and Disjoined Structure: Money market in Bangladesh has loose and disjoined
connection through to the money market. Con not easily connect to one part to another.
 Wasteful Competition: Competitive market are held in money market in Bangladesh. But it
remain in waste.
 Shortage of Capital: Bangladesh is a labour intensive. Always have been shortage of capital
prevail in the market.
 Inadequate Banking Facilities: In banking there have been a long process for loan
disbursement or deposit that loses the intensity of money borrowing from the banking
system.
 Disparity in Interest rates in Different Centers: The interest rate are not unique for all type
of people or all types of loans.
 Inelasticity and Instability: There are always instability prevail in the money market of
Bangladesh. A stable market can secure the elasticity of the market. But Bangladesh have
limitation on that occasion.
 In Bangladesh Money market, flexible rules regarding the lending and borrowing activities.
No rigid rules are followed regarding the lending and borrowing activities.
 Inadequate instrument are held in money market in Bangladesh
 19

RECOMMENDATIONS FOR MONEY MARKET IN

BANGLADESH
 Steps has been taken to establish relations between indigenous bankers and commercial
banker
 Reducing monetary shortages through open market operations
 Diversifying the Market
 Access to bill rediscounting market increasingly
 Unique role for all bank for lending and borrowing of money
 An organized sector needed consists of the central bank, state owned and private
commercial bank, specialized banks, scheduled and non-scheduled banks and other NBFIs
etc.
 20

CONCLUSIONS
The money market of Bangladesh reached its present phase through 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 segment was a relatively smaller part.
All financial institutions of the country were nationalized after liberation. The growth and
evolution of money market in the country took place during the period from 1971 to the early
eighties under various sets of interventionist rules and regulations of the government and as
such it could hardly reflect the actual market conditions. However, in this period a vast financial
super structure with large network of commercial bank branches was established in the
country. Simultaneously, specialized financial institutions under government sector also
emerged with the objective of mobilizing financial resources and channeling them for short,
medium and long-term credit and investments.
 21

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