At a glance of Money Market:

The Bangladesh economy is the most growing economy in the world. With the changing

of the world financial market the Domestic as well as international policy for Bangladesh

upgrading gradually. Actually financial system mainly developed though the development of

domestic and foreign capital and the money market. For functioning the economic system money

market well-functioning perimeter is very important. For meeting short term liquidate demand

by lending and borrowing of the participants within the financial system is the mechanism of

money market. T-bill is the largest component of the money market in Bangladesh. Capital

markets are essentially about matching the needs of investors with those that need capital for

development. Debt markets are an extremely effective mechanism for matching the long term

needs of savers with those of entrepreneurs. Like emerging market countries around the world,

Bangladesh could benefit from having a local-currency, fixed income securities market. At

present, its main fixed income financial products are bank deposits, bank loans, government

savings certificates, treasury bills, and government bonds and corporate debt etc.

Background of Bangladesh Money Market:

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

superstructure 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. The market participants had to operate in an environment of

directed lending and loan disbursement goals, and predetermined rates of interest fixed by the

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Money Market

authority. However, rate of interest in the call market was flexible but due to prevalence of

liberal refinance facility at concessional rates from Bangladesh Bank, the activities of call money

market remained insignificant.

In the beginning of the 1980s, money market in Bangladesh entered a new era with the

denationalization of two nationalized banks and establishment of some private banks. With this

development money market assumed the characteristics of a competitive market in the country.

However, the administered interest rate structure and the government's policy of priority sector

lending continued to operate as factors that deterred the development of a liberalized money

market in the country.

Money market securities:

Debt securities having maturity one year or less is call money market securities. Money markets securities are relatively high degree of liquidate. Money market securities tend to have a low expected return but also a low degree of risk. Various types of money market securities are listed below.

Money-Market securities

IssuerCommon Investors

MaturitiesSecondary

Market Existence

Treasury billFederal

Government

Households, firms and financial institutions

13 weeks, 26 weeks or 1 Year

1 year High

Retail certificates of deposit (CDs)

Banks and saving institute

Households7 Days to 5 Years

or LongNonexistent

Negotiable certificates

of deposit (NCDs)

Large Banks and Saving Institutions

Firms 2 Week to 1Year Moderate

Commercial paper

Bank holding Companies ,

Finance Companies and

Others

Firms 1Days to 270 Days Low

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Eurodollar Deposit

Foreign BankFirms and

Government1 Days to 1 Year Nonexistent

Banker’s acceptances

Bank(Exporting firm can sell the acceptance at a discount obtain

funds)

Firms30 Days to 270

DaysHigh

Federal FundsDepository institutions

Depository Institutions

1 Days to 7 Days Nonexistent

Repurchase agreements

Firm and Financial Institutions

Firms and Financial Intuitions

1 Days to 15 Days Nonexistent

Treasury-Bill Progress in Bangladesh

Issuer: 

The central bank of Bangladesh (Bangladesh Bank) operates throughout the country with its nine branches. Government receipts and payments are overseen and managed by the central bank. Different branches of Sonali Bank (SB) are assigned to take part in these transactions on behalf of the central bank, where there is no Bangladesh Bank branch. These branches are known as 'Chest Branches'. In a district, there may be one chest and some sub-chests. Bangladesh Bank has directly monitors Chest branches. This function is called ‘Feed’. The Bangladesh government finances its expenditures in excess of tax receipts through the sale of debt obligations. Currently, the total par value of outstanding Treasury bills stood at about Taka 24.6 core up to July 2013 while in June, 2012 it was 147.8 core(Source: Bangladesh bank ).

Types:

Treasury bills are divided with its maturity by the number of days. There are six types of T- bills found in Bangladesh. These are

a) 30 days T-bill 

b) 91 days T-bill

c) 182 days T-bill

d) 364 days T-bill

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e) 2 years T-bill

f) 5 years T-bill

Participants:

The market for Bangladesh Treasury bills has a complex structure with numerous participants.

They are Ministry of Finance, Bangladesh Bank, government securities dealers and brokers, and

other holders of Treasury securities. Banks usually buy three kinds of T-bills — tenures of which

range between 91-day to 364-day — and four kinds of T-bonds — tenures of which range

between 5-year to 20-year — from the Bangladesh Bank. Generally, the participants in money

market are:

1) individual

2) Business and

3) Government

More specifically we can identify different participants as:

1) Government Treasury Department – They are the only demander of fund

2) Central Bank – They are both supplier and demander of fund

3) Commercial Bank – They are both supplier and demander of fund

4) Business – They are also both supplier and demander of fund

5) Investment and Securities Firm-

a. Investment Companies/Bank

b. Finance Companies

c. Insurance Companies

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Who and How Can Invest: 

There was no secondary market for treasury securities until 2003,. Any investor (institution or individual), with a current account with Bangladesh Bank, can invest in T-bills through primary market auctions. Auction is held on every Sunday at 11 a.m. at the Motijheel Branch of BB. If Sunday is a holiday, then the last working day before Sunday will be chosen. All the investors submit their bid unless otherwise pension or provident fund. After receiving the bid, the auction committee decides how much T-bills will be off loaded. There is a high-powered committee to oversee the treasury functions (which includes seven members).

Schedule for Issuance:

Treasury securities are issued through regularly scheduled auctions in the primary market. The process importantly involves the Bangladesh Bank, which serve as conduits for the auctions.

Selling System:

Treasury bills are not listed at the Bangladesh Stock Exchange. T- Bills are sold on a discount basis, with a terms means that we have to pay for the bills less the interest receivable during the term of the bill and receive the face value of the bill at the end of the period. If one wanted to exit before maturity, rediscounting isn't possible at the Central Bank, rather he or she may go for Repo auction.

Secondary Market for T-Bill: 

In 2003, government had decided to introduce the secondary T-bill market with a vision of broadening the government securities market. World's leading financial institution Citigroup's subsidiary Citibank, N.A. and local Prime Bank Limited had taken part in the first secondary transaction of T-bills in Bangladesh that year. Citibank, N.A. had sold a T-bill of 2 years maturity bearing Taka 3 crore of face value to Prime bank. Bangladesh Bank had taken necessary steps to assist this transaction. This was regarded the first secondary T-bill transaction in the country. Bangladesh Bank has selected eight banks and one non-bank financial institution as primary dealers (PDs) to handle secondary transactions of T-bills and other government bonds. The eight banks are Sonali Bank, Janata Bank, Agrani Bank, Prime Bank Ltd, Uttara Bank Ltd, South-East Bank Ltd, Jamuna Bank Ltd, and NCCBL, and the only NBFI is International l Leasing and Financial Services Ltd. The inter-bank Repo is one kind of secondary market for T- bills and government securities, which was introduced from July 27, 2003. The selected banks and the NBFI have already ended all procedural eligibility requirements for being appointed and start operating as secondary bond market dealers. The Bangladesh Bank earlier invited applications from all scheduled banks and financial institutions and directed interested parties to drop applications to the FOREX Reserve and Treasury Management Department of the central bank latest by August 21, 2003. A total of 18 commercial banks and 1 non-bank financial institution filed their applications for receiving PD licenses during the stipulated time.

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Procedure to allot T-bills:

The Treasury issues securities consistently and predictably through a regular schedule of auctions. In Bangladesh, Multiple-units Auction Model Is followed. Two types of bids may be submitted at the auction:

a) Competitive bids &

b) Non-competitive bids

Competitive bids specify both the quantity of the security sought and a yield. If the specified yield is within the range accepted at the auction, the bidder is awarded the entire quantity sought (unless the specified yield is the highest rate accepted, in which case the bidder is awarded a prorated portion of the bid. Noncompetitive bids specify only the quantity of the security sought. Let us discuss the procedure that BANGLADESH BANK follows to allot T-bills to competitive and non-competitive bidders through T-bill auctions. In Bangladesh, T-bills are quoted on a 364-day discount basis. We define the bank discount rate (BDR) as BDR = D/M * 364/t, where it is the number of days from settlement to maturity, and D is the discount from par, D = M - P, M being the par or maturity value, and P being the price. Hence the discount from par is given by D= BDR x M x t/364, while P = M - D. Example: The WSJ on Monday, Feb 7, 1994 gives the ask quote on the May 05, '94 T-bill as 3.21%. (If we were to buy the bill, we would buy at order. The quote is for Friday, February 4. The market convention used in the WSJ is that two days are needed for settlement; under this convention settlement would take place on Tuesday, Feb 4.There are 87 days between Feb 4 and May 2. The discount on a $10,000 par bill is D = 3.21% x10, 000 x75/364 = 67.41, and the price is P = 10, 000 – 67.41 = 9932.59. Conversely, assume the price of the T-bill were $9,800. The discount amounts to D = 10, 000 - 9,800 = 200, and the bank-discount rate equals BDR =100/10000 * 364/75 = 4.85%.

Yield: 

The values of Treasury securities are often summarized by the yield curve, which plots the yields of all non-callable securities against their maturities. An example of the yield curve on July24, 2013 (Auction no #258) is given below. This curve has an upward-sloping, concave shape. Securities having maturities of less than five years are highly concentrated, because shorter-term securities are auctioned more frequently and because many previously issued longer-term securities fall in that maturity range.

Yield Volatility of T-bills in Bangladesh

(As of 24-06-2013 Auction no.259)

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T-Bill Yield

30 days 7.60%--

91 days 8.41% 0.68% --

182 days 10.16% 0.63% 0.63% --

364 days 10.42% 0.61% 0.61% 0.61% --

2 years 10.90% 0.86% 0.86% 0.86% 0.86% --

5 years 11.50% 0.07% 0.07% 0.07%0.07% 0.07% --

Source: Bangladesh bank 9 July, 2013(total=1 core (10 million))

This is an upward sloping yield curve or normal yield curve which indicates that the higher the maturity, the higher the yield.

That means, yield of 91-dayu T-bill is higher than that of 30-day T-bill and so on. Here the yield spread between the 91-day T-bills and 30-day T-bills is 1.68%, which is the maximum than those of others. The reason is that the demand of T-bills gradually decreases with term to maturity.

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Here shows how the curve of time going upward with the yield.

Call Money Rate:

The interest rate banks charge a broker for the funding of loans to investors who buy on margin is called call money rate or broker loan rate. In the call money market, participants enter in to lending and borrowing for overnight. The transaction takes place due to immediate liquidity need. This may arise from various sources like temporary inability to meet the mandatory 4%cash reserve requirement (CRR) demanded by the central bank, sudden shortage of fund to meet the liabilities like any prescheduled repayment etc. free from any specific regulation the participants determine the call money rate on a negotiated manner. The call money rate is a volatile rate in our country. It is quite affected by certain seasonality. During the Eid or special occasions especially when there is a surge of deposit withdrawals, the banks find themselves in immediate liquidity crisis. There is a direct and positive relationship between T-bill rate and call money rate. When there is a seasonal cash crisis, banks rush to the call money market. In this situation, call money rate peaks. Naturally investors of T-bills are not available at that time unless otherwise they are offered higher yield rate. Call money markets weight average interest rate on up to July, 2013 is 7.25 % with the limit of 1 Dollar=69.07 TK (Source: Bangladesh bank)

Call Money Market:

The volume of transactions and weighted average interest rates in the call money market showed mixed trend during FY06 (Table 1) reflecting some noise in the activities of money market. The call money rates witnessed some degree of fluctuations in the last two quarters of FY06 resulting from the recent pressure in the foreign European Journal of Business and Management exchange market and tight liquidity situation in the money market. This stemmed mainly due to the increased demand of Government’s credit that was met up from NCBs to finance the cost of imported petroleum products. Until the second quarter of FY06, the call money rates remained

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mostly stable but became somewhat volatile in the third quarter. At the beginning of the last quarter of FY06, the weighted average call money rate stood at 21.5 percent, substantially higher than 5.4 percent recorded in the beginning of the first quarter.

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Difference with the basic definition:

In Bangladesh, two and five year securities are also regarded as T-bills known as zero coupon securities.

REPO:

The commitment of the seller to the buyer to buy back the instrument as and when the buyer intends to sell is called Repo. This is an agreement between seller and buyer.

Before, there was a premature encashment facility for the investors of T-bills. Premature encashment facility is a procedure of buying back the security when cash is needed giving amount and accrued interest. This is also called discounting the T-bills. Currently, instead of Discounting Window, Repo facility is opened for the investors. Here instrument isn't required, rather it is lined. Investors can borrow either full or partial amount against the bill. If an investor borrows 100% against the bill, then maximum 95% discounted value will be provided. There is also a Repo auction that is held side by side of the T-bill auction. The yield rate of Repo is determined through bid received and bid acceptance, and this yield is higher than the yield of T-bill. For example, let us assume that, T-bill yield = 7%, Repo yield = 8%, then, Net yield = 1%. To whom Repo facility will be provided is dependent upon the liquidity in the market. Repo auctions held for 1 and 7 days tenure. Current special Repo with Bangladesh out of total 2 bids received amount (142 cr) and accepted amount (105 cr) with the range of rate 10.25 %( Source BB 9 July, 2013)

Reverse Repo:

When commercial bank has excess liquidity, it can deposit it to Bangladesh bank. This procedure is frequently known as Reverse Repo. There is also a Reverse Repo auction which held with the time of the T-bill auction. Reverse Repo auction is also held for 1 and 7 days tenure. Current special Repo with Bangladesh out of total 2 bids range of rate 5.25 %( Source BB 7 July, 2013)

Development:

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.

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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

outstanding amount of CDs was about Tk 1.05 billion in June 1988 and increased to Tk 2.91

billion in June 1992 and further, to Tk 3.44 billion in December 1998. The amount of resources

mobilized through issue of CDs was only 0.58 percent of total deposits at the end of December

1998.

A turning point was the denationalization of Uttara and Pubali Bank in 1983 and 1984

respectively and the government decision to allow private banks to operate in the country.

Formation of private banks during the 1980s provided new opportunities to develop this segment

of money market. In 1985, two investment companies and in 1989, one leasing company were

allowed to participate in the call money market. At present, all banks including specialized ones

and non-bank financial institutions are allowed to participate in this market.

The holdings of treasury bills by the deposit money banks (DMB) were only Tk 0.94 billion on

30 June 1973 and the rate of interest was 6%. Amidst fluctuations, the volume went up to Tk

9.54 billion at the end of June 1986. The rates of interest went up to 9% at that time. Although

the rate of interest declined to 8% at the beginning of 1987, the treasury bill holdings by the

DMBs went up substantially to Tk 12.51 billion at the end of June 1987. The treasury bill

holdings reached a peak of Tk 45.12 billion at the end of June 1993 and thereafter, it declined to

Tk 0.46 billion at the end of June 1995. However, the treasury bill holdings shoot up to Tk 49.73

billion by May 1999. It may be assumed that lower treasury rate as compared to higher yield on

Bangladesh Bank Bill might have induced the banks to shift their portfolio investments in favour

of the latter. However, due to suspension of auctioning of Bangladesh Bank Bills government

treasury bills, other than the commercial bill segment, have become the only instruments in the

bill market.

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Problems:

The online-based trader work station introduced by the Bangladesh Bank has so far failed to make the secondary bond market vibrant as clients are reluctant to invest in the treasury bills and treasury bonds through the system. A good number of sales orders through the TWS every day but clients were unwilling to participate in the system last 2013 auction. Hence, the majority of the clients including corporate business houses had not so far thought much about the secondary government securities market where their provident funds could be invested with proper security.

Recommendation:

New instruments will create adequate opportunity for investment of short-term. The excess fund will increase liquidity and further reduce dependency on the call money market. Introducing 15 Days T-Bill, a new maturity bill will give the investors greater liquidity preference in the short term. And give an out let for earning return on ideal excess fund. The commercial banks should take campaign programs to gear up the bond market and can give the knowledge more about online e-Tender system and its benefits.

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At a glance of Capital Market:

Capital Market mainly refers to the Stock and Share market of the country. When,

banking system cannot totally meet up the need for funds to the market economy, capital market

stands up to supplement it. Companies and the government can raise funds for long-term

investments via the capital market. The capital market includes the stock market, the bond

market, and the primary market. Securities trading on organized capital markets are monitored

by the government, new issues are approved by authorities of financial supervision and

monitored by participating banks. Thus, organized capital markets are able to guarantee sound

investment opportunities. This paper reveals the various aspects of the Capital Market in

Bangladesh

Definition:Capital market can be termed as the engine of raising capital, which accelerates industrialization

and the process of privatization. In other words, capital market means the share and stock

markets of the country. It is a market for long term fund. With the emergence of the need for

infrastructural development projects, for setting up of new industries for entrepreneurial attempts

now there are more frequent needs of funds.

Participants in the capital markets are many. They include the:

Commercial banks

Savings and loan associations

Credit unions

Mutual saving banks

Finance houses

Finance companies

Merchant bankers

Discount houses

Venture capital companies

Leasing companies

Investment banks & companies

Investment clubs

Pension funds

Stock ex-changes

Security companies

Underwriters

Portfolio-managers

Insurance companies

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Capital Market

1. Primary Market:

The primary market is where securities are created. It's in this market that firms sell (float)

new stocks and bonds to the public for the first time. For our purposes, you can think of the

primary market as being synonymous with an initial public offering (IPO). Simply put, an

IPO occurs when a private company sells stocks to the public for the first time.

IPOs can be very complicated because many different rules and regulations dictate the

processes of institutions, but they all follow a general pattern:

i. A company contacts an underwriting firm to determine the legal and financial details of

the public offering.

ii. A preliminary registration statement, detailing the company's interests and prospects

and the specifics of the issue, is filed with the appropriate authorities. Known as a

preliminary prospectus, or red herring, this document is neither finalized nor is it a

solicitation by the company issuing the new shares. It is simply an information

pamphlet and a letter describing the company's intent.

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Types of Financial Market

iii. The appropriate governing bodies must approve the finalized statement as well as a

final prospectus, which details the issue's price, restrictions and benefits and is issued to

those who purchase the securities. This final prospectus is legally binding for the

company.

2. Secondary Market:

The secondary market is what people are talking about when they refer to the "stock market".

The defining characteristic of the secondary market is that investor’s trade amongst

themselves. That is, in the secondary market, investors trade previously-issued securities

without the involvement of the issuing companies. For example, if you go to buy Microsoft

stock, you are dealing only with another investor who owns shares in Microsoft. Microsoft

(the company) is in no way involved with the transaction.

Bangladesh capital market is one of the smallest in Asia but the third largest in the south Asia

region. It has two full-fledged automated stock exchanges namely Dhaka Stock Exchange

(DSE) and Chittagong Stock Exchange (CSE) and an over-the counter exchange operated by

CSE.

Securities and Exchange Commission:Capital market plays a significant role in the economy as a source of long term financing. A fair,

efficient and transparent capital market is essential for a country for its industrialization and

economic development. To develop such a fair, efficient and transparent capital market, the

Securities and Exchange Commission was established as a regulator through enactment of the

Securities and Exchange Commission Act, 1993 in June 1993, with the following mission:

• Protecting the interest of investors in securities

• Developing the capital and securities markets, and

• Framing of securities rules concerning above.

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Stock

The Commission frames rules and regulations under the relevant laws ensure control of the

capital market through compliance of duties and responsibilities of the issuer, stock exchange

and market intermediaries.

The Commission consists of a chairman and four full time members who are appointed by the

government for a period of three years as per law, and terms of their service is determined by the

government. The Chairman is the chief executive officer of the Commission.

The Dhaka Stock Exchange (DSE):Dhaka Stock Exchange Ltd (DSE) is the oldest and largest stock exchange in Bangladesh.

Though DSE was established in 28 April 1954 but its commercial operation started in 1956. The

board of directors consisting of 24 members directs the activities of DSE. Out of them, 12

directors are elected by direct votes of DSE members and other 12 directors are nominated by the

elected members from non-DSE members upon approval of the Commission. At present, there

are 238 members in DSE of which 22 members are registered by the Commission for conducting

securities business. DSE has expanded its on-line trading network to many district towns like

Gazipur, Narayanganj, Comilla, Feni, Habiganj, Maulvibazar, Mymensingh, Chittagong, Khulna,

Sylhet, Kushtia, Barisal, Rajshahi and Bogra including the divisional towns. As on 30 June 2011

total number of listings in DSE was 490 against this issued capital wasTk. 80683.90 crore and

the market capitalization was Tk. 285389.22 crore.

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The Chittagong Stock Exchange (CSE):The Chittagong Stock Exchange Ltd (CSE), the second stock exchange, was established in 1995.

The board of directors consisting of 24 members directs the activities of CSE. Out of them, 12

directors are elected by direct votes of CSE members and other 12 directors are nominated by the

elected members from non-CSE members upon approval of the Commission. Now there are 135

members in CSE of which 120 members are registered by the Commission for conducting

securities business. As on June 30, 2011 total number of securities in CSE was 215 against which

issued capita was Tk. 20677.39 crore and market capitalization was Tk. 225978.00 crore.

Over -the-Counter Market or OTC Market:Securities are traded without intermediaries through mutual understanding in the OTC market,

which are outside the stock exchanges. In CSE stock exchange’s OTC market, there are

opportunities of securities trading. Under Securities and Exchange Commission (Over-the-

Counter) Rules, 2001, OTC market was established in CSE. Securities de-listed from the

exchanges and securities not listed with the exchanges but issued obtaining consent from the

Commission can be traded in the OTC market. Dhaka Stock Exchanges Ltd started OTC market

in line with the direction of the Commission on 6th September, 2009. Settlement procedure of

cthe OTC market is like the public market. The list of the companies trading in DSE OTC market

as on 30 June 2011 is furnished.

Vision of the stock exchange:

Regulating the market structure through proper rules and strict compliance by members.

Expansion of CSE trading network to cover 504 Thanas.

Introduce Book Building system in Bangladesh capital market.

Introducing derivative market.

Continuous promotion of stock investment throughout the country.

Create opportunity to cross border trading with SAFE countries.

Introduce global depository receipts (GDR).

Mission:

To create an efficient and transparent market facilitating entrepreneurs to raise capital so that it

accelerates industrial growth for overall benefit of the economy of the country.

Objectives:

Develop a strong platform for entrepreneurs for raising capital;

Provide an investment opportunity for small and large investors;

Develop a transparent market ensuring investor’s interest;

Provide a fully automated trading system with most modern amenities to ensure: quick

easy, accurate transactions and easily accessible to all;

Attract non-resident Bangladeshis to invest in Bangladesh stock market;

Attract foreign institutional investors to invest in Bangladesh;

Collect, preserve, disseminate date and information on stock exchange.

Scenario of Dhaka Stock Exchange:

1. MARKET CAPITALIZATION

The market capitalization refers the sum that derived from the current stock price per share times

the total number of shares outstanding. Although the market capitalization of a company is an

indication of the value of the company, it is only a temporary metric based on the current stock

market.

Market capitalization ratio equals the value of listed shares divided by GDP. This ratio are often

using as a measure of stock market size. In terms of economic significance, the assumption

behind market capitalization is that market size is positively correlated with the ability to

mobilize capital and diversify risk on an economy wide basis. So market capitalization to GDP

ratio can be used as an indicator of market development.

In FY 1995-96, total market capitalization of DSE was Tk. 7936.17 crore while in FY 2002-03, it

increased at Tk.7216.3 crore. In this time interval, the market capitalization remained at

approximately a constant level. But in FY 2003-04, the market capitalization increased rapidly

and stood at Tk.14185.1 crore, about 96.3 percent larger than that of the previous fiscal year.

This increasing trend has continued and finally reached at Tk. 232701.6 crore in FY 2010-11. In

the last five years, the market capitalization increased significantly. The turning year was in FY

2009-10, in this year, the market capitalization increased by 127.31 percent than that of the

previous fiscal year and reached from Tk. 100143.3 crore to Tk. 227640.8 crore.

2. TURNOVER

Turnover equals the value of total shares traded divided by market capitalization. High turnover

is often used as an indicator of high level of liquidity. Turnover also can be used as complements

of total value traded ratio. While total value traded and GDP ratio capture trading compared with

the size of the economy, turnover measures trading relative to the size of the stock market.

Therefore a small, liquid market may have a high turnover ratio but with a small total value

traded and GDP ratio.

Figure 4: Turnover of DSE during FY 1995-96 to FY 2010-11

In FY 1995-96, the turnover of DSE was Tk. 819.91 crore while in FY 1996-97, it reached at Tk.

6541.35 crore. ‘Fake’ demand mechanism during this period has led the general index price to

move vertically and hence increased the liquidity of capital market. But the following year in FY

1997-98, the turn over reduced at a significant rate and a total of Tk. 5279.66 crore fell short

from the previous fiscal year and the turn over became Tk. 1261.69 crore. In FY 2005-06, the

turnover was Tk. 4599.36 crore. In FY 2009-10, the turnover again increased dramatically and

reached at Tk. 256353.55 crore.

3. CAPITAL MARKET VOLATILITY

Volatility is a measure of the degree of price movements of a stock. It shows how active a stock

price typically is over a certain period of time. In general, the volatility of stock return is

determined by the fluctuations in stock index. Fluctuation in the stock index also depends on the

demand and supply of securities traded in the stock exchange.

The market estimate of volatility can be used as the barometer of the vulnerability of the stock

market. Stock return volatility represents the variability of day-to-day stock price changes over a

period of time, which is taken as a measure of risk by the relevant agents. High volatility,

unaccompanied by any change in the real situation, may lead to a general erosion of investors’

confidence in the market and redirect the flow of capital away from the stock market. The

excessive level of volatility also reduces the usefulness of stock price as a reflector of the real

worth of the firm.

Figure 6: DSE general index during 2004 to 2011

The volatility in stock return in DSE seems to follow clustering at particular points; there are

periods of high volatility followed by periods of low volatility. Many events and random shocks

are responsible for the index price fluctuations. For example declaration of lucrative incentives in

FY 2003-04 national budget, floatation of shares of some profitable companies through Initial

Public Offer (IPO) along with several important reform measures initiated by the Securities and

Exchange Commission (SEC) helped regain investor’s confidence back to the capital market.

The downward drive of capital market in 1996 was created by fake demand mechanism resulting

to short term price volatility in the capital market. In FY 2010-11, the ‘game plan’ is different

from 1996 and the index volatility has a similar shape for a sudden time (about one year) before

the downturn of the market.

4. CAPITAL MARKET SIZE

One of the important indicators of the capital market is the number of listed companies. The rationale

of including this measure is that as the number of listed company increases, available securities and

trading volume also increases. In basis of the properties of the companies, the companies are divided

into five groups; A, B, G, N and Z. The properties of these companies are shown in the table below :

Company PropertiesNumber of Companies

FY 2010-2011

A

Holding Annual Meetings (AGM) and have

declared dividend at the rate 10 percent or more

in a calendar year

235

B

Holding Annual Meetings (AGM) and have

declared dividend less at the rate 10 percent or

more in a calendar year

7

G Greenfield companies. 0

NAll new listed companies except Greenfield

companies.5

Z Have failed to hold the AGM or fail to declare 20

any dividend or which are not in operation

continuously.

Capital Market Company Category and Characteristics

The number of listed companies has grown from 149 to 268 with an average annual growth rate

of 2.99 and a standard deviation of 43.39 from fiscal year 1990-91 to FY2010-11. In FY 1990-91

the number of listed companies of DSE was 149 while in FY 2001-02, the number of listed

companies was increased to 248 and finally in FY 2010-11, the listed companies of DSE stood at

268.

To

tal

number of DSE listed companies

Derivatives:

Derivative products are necessary for reducing the risk of investors through creating alternative

investment opportunities in the capital market. At present there exists no rule for trading of

derivative products and knowledge about derivatives are also limited among the intermediaries

and investors. CSE is imparting training on derivative products. The Commission is now looking

at the legal issues related to this matter so that it can frame necessary rules for introducing this

instrument.

5. SECTOR WISE PERFORMANCE

In FY 2010-11, there was an upward trend in terms of sector wise performance; all sectors

experienced an upward trend with a few exception. On the basis of market capitalization of

ordinary shares of companies listed with DSE, total market capitalization of banking sector in

FY 2010-11 was Tk. 68061.9 crore which was 5.67 percent higher than that of previous fiscal

year. In this fiscal year total market capitalization of mutual fund was Tk. 3595.5 crore; 32

percent higher than that of previous fiscal year. In general the investment in mutual fund is

normally assumed to safe investment due to volatility in capital market but the market

capitalization of mutual fund was comparably lower than other sector. In FY 2010-11 the market

capitalization of fuel and power sector was Tk. 28931.4 crore which was 4 percent lower than

that of previous fiscal year on the other hand the market capitalization growth of insurance sector

accumulated 32.28 percent in terms of previous fiscal year. But real sector components of

economy such as jute industry although gained a positive market capitalization growth but the

total market capitalization were lower and in last fiscal year it was only Tk. 79 crore.

Telecommunication sector started it activities in capital market in FY 2009-10 with a total

market capitalization of Tk. 31826.6 crore. But in the following fiscal year, the market

capitalization of this sector dropped down about 30.46 percent and became Tk. 22131.4 crore.

Sector-wise contribution in market capitalization (FY 1995-96 to FY 2010-11)

The financial market contribution in capital market in terms of market capitalization has

increased significantly in FY 2010-11. In this year the banks, insurance including mutual funds

have jointly contributed 53 percent of market capitalization whereas pharmaceuticals and

chemicals, textile industries, food and allied products and engineering have jointly contributed

21 percent of total market capitalization. The short term larger profit of financial sector has

induced the investors to make a larger investment in financial sector than those of real sectors.

Therefore in short run the profit has been maximized but in the long run it can make a disturbing

effect on the economy which has already been observed through capital market downward trend

and zero recovery in the capital market in this year.

Sector Wise Performance in FY 2011-12

6. TREND OF GENERAL INDEX

The trend of general index of DSE during July 2009 to August 2010 shows that the general index

of DSE has increased smoothly. In July 2009 the general index of DSE was 2914.53 while in

April 2010 it increased to 5654.88. During this time period, there was an increasing trend of

general index. In August 2010 the general index of DSE stood at 6657.97 and finally in

November 2010, it reached the peak and became 8602.44. After this general index has started to

fall down and in February 2011 it reached to 5203.08.

The trend of general index of DSE during capital market downturn in 2011

Particulars 2009 2010 2011 2012

Listed Securities 415 445 501 515

DSE General Index (DGEN)

Opening Index 2,807.61 4,535.53 8,290.41 5,257.61

Closing Index 4,535.53 8,290.41 5,257.61 4,219.31

% of change 61.54 82.79 (36.58) (19.75)

Highest Index 4,535.53 8,918.51 8,304.59 5,502.30

Lowest Index 2,408.67 4,568.40 4,649.33 3,616.24

Current Scenario of Bangladesh Capital Market

Bangladesh capital market has experienced bullish ride during 2007-2010 except a slight

deviation in the last half of 2008. In 2010, DSE General Index rose by almost 90% from 5000-

8900. 

However from beginning of 2011 market went into correction mode and fallen sharply and came

down to 5000 level by the end of 2011. Unlike normal falling market, the bearish mode of 2011

was quite different. During the fall quite a number of times market experienced 15-25%

fluctuations. Only very few number of institutions and individuals can gain positively from those

fluctuations. At present market is continuing with that bearish trend with the same bumpy

fluctuations now and then.

Following table shows the key statistics of Dhaka Stock Exchange Ltd. (DSE) for last three

years:

 

2009 2010 2011 (up to 20 Nov)

Total Market Capital BDT 1,903 Billion BDT 3,508 Billion BDT 2,639 Billion

Total Turnover BDT 1,475 Billion BDT 4,009 Billion BDT 1,456 Billion

Total Listed Securities 415 445 494

Total Listed Companies 236 218 231

IPO 18 Securities 15 Securities 12 Securities

Total Paid up Capital of

IPOBDT 8.3 billion BDT 6.5 billion BDT 15.38 billion

New Mutual funds floated 7 12 7

Bond Market:A bond is debt instrument issued for a specific period for the purpose of raising capital by

borrowing. A bond is a long-term obligation. Generally, a bond is fixed interest financial

instrument issued by Government, Corporate, and other large entities. In other words, a bond is

an agreement to repay the principal along with the interest or coupon. There are some bonds

which carry a zero coupon or interest but have fixed term. These bonds are called as zero coupon

bond or deep discount bond bonds. These bonds are sold at a price which will be far below the

face value of the bond depending on the risk characteristics and prevailing interest rates in the

market.

Bonds are tradable and basically the price of a bond depends on the existing interest rates

in the market for a equally risky instrument and the coupon on the bond. A bond market has the

role to facilitate the flow of long-term funds from surplus units to deficit units.

Thus bond acts as a loan where the buyer or holder of the bond is the lender or creditor, the

issuer is the borrower or debtor and the coupon is the interest.

Types of Bonds:A simple way to classify bonds is based on the different kind of the issuers. The three

main issuers are government, governmental agencies, and corporations.

Bond

Bonds

Issued by Governmen

tMunicipal

Bonds

Corporate Bonds

T-Bonds (More than 10-year)

T-Notes (More than 1-year & Less than

10-year)

T-Bills (Less than 1-year)

I. Government Bonds:According to the length of duration, government bonds can be classified into three main

categories. They are as follows.

Bills: debt securities whose maturity period is less than one year.

Notes: debt securities whose maturity period is 1 to 10 years.

Bonds: debt securities whose maturity period is more than 10 years.

II. Municipal Bonds:These are called governmental agency bonds. These bonds are not issued directly by the

government but with the backing of the government. In most countries, the returns from

municipal bond are free from government tax. Because of this tax advantage, the interest on a

municipal bond is normally lower than that of a taxable bond. Thus, a municipal bond can be a

great investment opportunity on an after-tax basis.

III. Corporate Bonds:A company can issue bonds like stocks. Corporate have many options to increase its capital from

the market, the perimeter is whatever the market will bear. Corporate may issue short-term (less

than 5 years), medium-term (5 to 10 years) and long-term (more than 10 years) bonds. Corporate

bond may be convertible i.e. the holder can convert it into stock. It can be callable also, which

allows the company to redeem an issue prior to maturity.

There are some other types of bonds such as lottery bond, war bond, serial bond, revenue bond,

climate bond etc.

The capital market of Bangladesh is predominantly an equity based securities market. Number of

bonds and other debt instruments are insignificant. At present, there is Tk 140 million of

debentures of 8 companies listed in the stock exchanges. In order to popularize the government

bond and to increase the depth of market, trading of government treasury bonds have been

introduced in stock exchanges with effect from 1 January 2005.

As on 30 June 2011, 212 government treasury bonds, 3 corporate bond, 8 debentures were listed

in DSE whose market capitalization was Tk 39401.30 crore. But bonds are not yet popular.

Finance Division-Ministry of Finance, Bangladesh Bank, Securities and Exchange Commission

and National Board of Revenue are working together for development of the bond market.

Issue of Corporate Debt Securities in Bangladesh

SL SecuritiesYear of

issueFeatures

Size(BDT

million)

1 × 17% Baximco Pharma Debenture 1988 20% Convertible 40

2 × 17% Baximco limited Debenture 1989 60

3 × 17% Baximco Infusion Debenture 1992 45

4 × 17% Bangladesh Chemical

Debenture

1993 20% Convertible 20

5 × 17% Baximco Synthetic Debenture 1993 375

6 17% Baximco Knitting Debenture 1994 20% Convertible 240

7 17% Baximco Fisheries Debenture 1994 120

8 × 15% Eastern Housing Debenture 1994 10% Convertible 800

9 14% Baximco Textile Debenture 1995 250

10 14% BD Zipper Debenture 1995 20% Convertible 40

11 14% Baximco Denims Debenture 1995 300

12 14% BD Luggage Debenture 1996 20% Convertible 150

13 14% Aramit Cement Debenture 1998 20% Convertible 110

14 15% BD Welding Electrodes

Debenture

1999 20

15 IBBL Mudaraba Perpetual Bond 2007 Profit Sharing 3,000

16 ACI Zero Coupon Bond 2010 20% Convertible 1,070

17 Sub Bonds Of BRAC Bank Ltd 2011 25% Convertible 3,000

Note: × marked debentures are not available at present.

Source: SEC, DSE and CSE report.

Government Debt Market in BangladeshBangladesh Bank Order-1972, article 20 and Treasury rules-1998 (Appendix-1, Section-3)

empowers Bangladesh Bank for the issue and management of Government securities. As per the

above mentioned laws and regulations, Bangladesh Bank (BB) acts as the banker and debt

manager to Government of Bangladesh (GOB). Tax is the main source of government’s revenue.

Government meets its deficit through sale of debt securities when expenditures exceed its tax

receipts.

In the past the financing of budget deficit for Government of Bangladesh was being done

through issuance of ‘ad hoc’ Treasury Bills. Bangladesh Bank subsequently partially offloads

these ‘ad hoc’ Treasury Bills through the issuance of Treasury Bills and Bonds to the market,

leaving the Government’s cash position unaffected. ‘Ad hoc’ Treasury Bills were thus accessed

both to meet cash mismatches as well as for financing the budget deficit. Issuance of ‘ad hoc’

Treasury Bills has been discontinued now. Financing budget deficit for Government of

Bangladesh takes place through the issuance of (i) Special bonds, (ii) Bangladesh Government

Treasury Bonds (BGTBs), and (iii) savings instruments (NSD).

However, for small deficit, Bangladesh Bank maintains a pretty cash account named ‘Ways and

Means Advance’ (WMA). Normally, government borrows from WMA first and then through

Treasury Bills. For this advance a floating interest rate (bank rate + 1%) is charged. At present

the bank rate is 5%.

Corporate Debt Market in BangladeshBank loans are the main source of finance for corporate (Table-3.3). The corporate bond market

in Bangladesh is very small in size. Banking sector is dominating corporate finance since other

sources of corporate debt instrument are underdeveloped. Alternative sources of finance other

than bank loans should be developed by diversifying the debt instruments in order to establish

sound financial market in Bangladesh. A complete set of guidelines on bonds and debentures

must be developed to promote the corporate bond market. The government has to reduce the

interest rate on national savings certificates in order to a favorable environment for developing

corporate bonds.

Table: 3.3 Instruments Available in Bangladesh

InstrumentsNominal Amount(Billions of

BDT)Relative size %

Deposits 4032 37.20%

Bank Loans 3501 32.30%

Term loans (as of June 2011) 1333 12.30%

Government saving certificates 965 8.90%

Government bonds 534 4.93%

Treasury bills 271 2.50%

Equity (issued value) 192 1.77%

Private placement Not publicly available --

Debentures & bonds 11 0.10%

ProblemsThe sluggish growth of the bond market in Bangladesh has been recognized due to a number of

factors. They are discussed below.

Limited number of investor: Only limited number of investors compared to total

population is interested in investing in bond or stock market.

Capital gain: Impact of cliental effect, most of the investors in Bangladesh look for

capital gain rather than fixed flow of income while making their investment decision. In case of

bond chance of capital gain is limited.

High return in risk free government bond: Rate of return in case of risk free

government bond is too highs so corporate bonds have to offer even higher rate for covering

additional risk to the investors which make the rate non-viable for the issuers.

Alternative sources of debt financing: Other sources of debt financing, especially

borrowings from commercial bank are very easy and widely used in Bangladesh. The charged by

bank is less than borrowing rate through bond issuance. Besides these, borrowing from bank is

flexible and quick. So, issuers don’t have to depend on bond issue only to design their capital

structure and to generate tax benefit from use of debt.

Limited private management of pension fund: In Bangladesh private management of

long-term pension fund is very limited. State owned bodies & government organizations do not

raise fund through issue of debt instrument. They depend on deficit financing & printing money

from central bank for financing their projects. So, all these factors make secondary market for

bonds very illiquid & discourage issuance of Bond.

Weak regulations and market infrastructure: Laws & regulations regarding

governance of bond market are inadequate. Market failure is common scenario in Bangladesh.

Risk free investors just prefer government bonds while risk takers go for investment in stock

market. There are not enough investors for corporate bond market.

Underdeveloped tax system: Tax system in Bangladesh is not properly developed. Tax

can be evaded through unfair means (bribe and other means). So, tax incentive for issuing bonds

is not very high which causes underdeveloped corporate bond market.

Illiquid secondary market: Illiquidity in secondary market of government debt

securities makes constraints on determining proper pricing of the treasury bonds in the primary

market.

High interest rate: Individual savings are attracted by national saving scheme due to its

high interest rate (Table-3.2). National saving certificates are risk free though its interest rate is

high; consequently other saving products are crowded out from the market. Thus a company has

to propose a higher coupon rate to attract investors which might become unviable for the

corporate.

High transaction cost of bind issuance: The high transaction cost of bond issuance is

considered as constraint. Particularly, the registration fees, stamp duties, ancillary charges and

annual trustee fees on outstanding amount put forth to diminish the bond issue.

Cheap syndicated loans: It is a common phenomenon that a syndicate is formed by a

number of banks to finance large project. Syndicated loan is cheap as well custom-made and

flexible which makes bonds non-attractive to the corporate issuers.

Default on interest payment: In early 1990s, the interest payments of some corporate

debenture were defaulted. In the 90s, the regulations of financial market were not adequate and

credit rating was not mandatory. Besides, investors’ confidence was eroded due to the failure of

trustees to protect the debenture holders’ rights which makes the investors averse to invest in

corporate bonds.

Inexperienced investor: In Bangladesh most of the investors are inexperienced. They are

very much familiar with the bonds. They consider that return (interest) on debt instrument is very

small with no chance of capital gain. Therefore, they take investment decision in stocks for

abnormal capital gain.

High inflation: Comparatively high inflation has been prevailing since last decade,

which has made potential investors introverted to invest in corporate securities.

Recommendation: We suggest following recommendations for stronger capital market in Bangladesh.

Demutualization of stock exchanges,

Strengthening of the market surveillance systems,

Ensuring integrity and efficiency of the SEC members and staff,

Co-ordination between the SEC and the stock exchanges,

Bank financing in capital market,

Proper monitoring and immediate action by SEC,

Introduction of asset revaluations policy,

Consistency in regulation, supply of adequate securities and

Transparency in listing procedure,

Solve the market imperfection problem,

Make the information available and reliable to all.