Money Market 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 longterm 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 16

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 istered 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

Issuer

Treasury bill

Federal Government

Common Investors

Maturities

Households, firms 13 weeks, 26 and financial weeks or 1 Year institutions

Secondary Market Existence 1 year High

Retail certificates Banks and saving of deposit (CDs) institute

Households

7 Days to 5 Years or Long

Nonexistent

Negotiable Large Banks and certificates Saving Institutions of deposit (NCDs)

Firms

2 Week to 1Year

Moderate

Firms

1Days to 270 Days

Low

Commercial paper

Bank holding Companies , Finance Companies and Others

16

Eurodollar Deposit

Foreign Bank

Firms and Government

1 Days to 1 Year

Nonexistent

Banker’s acceptances

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

Firms

30 Days to 270 Days

High

Federal Funds

Depository 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 16

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 Firma. Investment Companies/Bank b. Finance Companies c. Insurance Companies

16

Who and How Can Invest: There was no secondary market for treasury securities until 2003,. Any investor (institution or individual), with a current 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 ). 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 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. 16

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)

16

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.

16

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 16

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.

16

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. 16

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.

16

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.

16

Capital Market 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

        

16

Leasing companies Investment banks & companies Investment clubs Pension funds Stock ex-changes Security companies Underwriters Portfolio-managers Insurance companies

Types of Financial 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 s 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.

16

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.

Stock 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. 16

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 who are appointed by the government for a period of three years as per law, and 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 directs the activities of DSE. Out of them, 12 directors are elected by direct votes of DSE and other 12 directors are nominated by the elected from non-DSE upon approval of the Commission. At present, there are 238 in DSE of which 22 are ed 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.

16

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 directs the activities of CSE. Out of them, 12 directors are elected by direct votes of CSE and other 12 directors are nominated by the elected from non-CSE upon approval of the Commission. Now there are 135 in CSE of which 120 are ed 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-theCounter) 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 .



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 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

Properties

Number of Companies FY 2010-2011

Holding Annual Meetings (AGM) and have A

declared dividend at the rate 10 percent or more

235

in a calendar year Holding Annual Meetings (AGM) and have B

declared dividend less at the rate 10 percent or

7

G

more in a calendar year Greenfield companies. All new listed companies except Greenfield

0

N

Z

companies. Have failed to hold the AGM or fail to declare any dividend or which are not in operation continuously.

5

20

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.

T ot

al

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 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 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 201011)

The financial market contribution in capital market in of market capitalization has increased significantly in FY 2010-11. In this year the banks, insurance including mutual funds have tly contributed 53 percent of market capitalization whereas pharmaceuticals and chemicals, textile industries, food and allied products and engineering have tly 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 Listed Securities DSE General Index (DGEN) Opening Index Closing Index % of change Highest Index Lowest Index

2009

2010

2011

2012

415

445

501

515

2,807.61 4,535.53 61.54 4,535.53 2,408.67

4,535.53 8,290.41 82.79 8,918.51 4,568.40

8,290.41 5,257.61 (36.58) 8,304.59 4,649.33

5,257.61 4,219.31 (19.75) 5,502.30 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 50008900. 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 BDT 1,903

2010 BDT 3,508

Billion BDT 1,475

Billion BDT 4,009

Total Listed Securities

Billion 415

Billion 445

Total Listed Companies

236

218

231

IPO

18 Securities

15 Securities

12 Securities

Total Paid up Capital of IPO

BDT 8.3 billion

BDT 6.5 billion

BDT 15.38 billion

New Mutual funds floated

7

12

7

Total Market Capital Total Turnover

2011 (up to 20 Nov) BDT 2,639 Billion BDT 1,456 Billion 494

Bond 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.

T-Bonds (More than 10-year)

Bonds

Issued by Governmen t Municipal Bonds Corporate Bonds

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

Securities

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

× 17% Baximco Pharma Debenture × 17% Baximco limited Debenture × 17% Baximco Infusion Debenture × 17% Bangladesh Chemical Debenture × 17% Baximco Synthetic Debenture 17% Baximco Knitting Debenture 17% Baximco Fisheries Debenture × 15% Eastern Housing Debenture 14% Baximco Textile Debenture 14% BD Zipper Debenture 14% Baximco Denims Debenture 14% BD Luggage Debenture 14% Aramit Cement Debenture 15% BD Welding Electrodes Debenture IBBL Mudaraba Perpetual Bond ACI Zero Coupon Bond Sub Bonds Of BRAC Bank Ltd

Year of issue 1988 1989 1992 1993 1993 1994 1994 1994 1995 1995 1995 1996 1998 1999 2007 2010 2011

Features 20% Convertible

20% Convertible 20% Convertible 10% Convertible 20% Convertible 20% Convertible 20% Convertible Profit Sharing 20% Convertible 25% Convertible

Size(BDT million) 40 60 45 20 375 240 120 800 250 40 300 150 110 20 3,000 1,070 3,000

Note: × marked debentures are not available at present. Source: SEC, DSE and CSE report.

Government Debt Market in Bangladesh Bangladesh 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 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 Bangladesh Bank 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 Instruments Deposits Bank Loans Term loans (as of June 2011)

Nominal Amount(Billions of BDT) 4032 3501 1333

Relative size % 37.20% 32.30% 12.30%

Government saving certificates Government bonds Treasury bills Equity (issued value) Private placement Debentures & bonds

965 534 271 192 Not publicly available 11

8.90% 4.93% 2.50% 1.77% -0.10%

Problems The 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 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.