MONEY MARKET AND CAPITAL MARKET

1.0 Introduction 1.1Origin of the Report
This report is prepared with the respect to course of Financial Institutions and Markets. We are assigned to prepare a term paper by our honorable course instructor Mr. Md. Md. Mahbubul Haque Khan. Our task is to make a report on money market and capital market overview of Bangladesh and complete a study that covers all important factors.

1.2 Objective of the report
1.2.1 General Objective
The general objective of our report is to discuss the recruitment and selection process of money market and capital market of Bangladesh. We have focused on different steps of money market and capital market.

1.2.2 Specific Objective
 To explore different terms of money market and capital market  Analyze the market conditions  To find out how market perform

1.3 Scope of the report
This report is created on the overview of money market and capital market of Bangladesh. This report will help people understand the process of money market and capital market.

1.4 Limitation and Delimitation
•

To learn about the money market and capital market process we needed to go all the places. For time limit and cost limit we had to visit only the Dhaka stock exchange but from here we got almost all kinds of information we needed

•

Both markets had followed some privacy policy. For that reason they did not tell us all the information we needed but we found most of the data that was needed.

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1.5 Overview of the Report
A healthy, transparent and dynamically evolving financial system helps mobilize savings and allocate resources, ensure safe and efficient payment and settlement arrangements and ease financial crisis management. Efforts are being put to establish a healthy and transparent financial system in the country. Financial market is an organizational framework within which financial instruments can be bought and sold. Financial market of an economy comprises the banking sector, other financial institutions and capital market. The Bangladesh economy is within the mainstream of the continuously changing global financial system. Domestic as well as international trade also characterizes Bangladesh economy. Hence a financial system has developed here consisting mainly of the capital and the money market. For any underdevelopment country the existence of a well functioning money market is of paramount importance. The money market currently existing has also developed due to certain needs. Money market, the important segment of financial market that basically channelizes the short term fund in the country was quite active and vibrant with the participation of both banks and non-bank financial institutions. The major participants in the money market were commercial banks, development finance institutions (DFIs) and nonbank financial institutions operating in the country. Bangladesh Bank, as the leader of the money market and armed with the instruments of monetary management, effectively controlled and guided the institutions of the money market. With limited diversified instruments, the organized money market in Bangladesh achieved a remarkable development in the recent years. Capital markets are essentially about matching the needs of investors with those that need capital for development. Bangladesh has no shortage of both such parties, a young and dynamic population that increasingly wants, and is able to, make provision for lifetime events, to save for children’s education, for the possibility of ill health and ultimately for old age and retirement. On the other side of the equation, Bangladesh has a pressing need for investment resources to bolster its stretched infrastructure resources, to build more power stations, bridges, ports and gas-pipelines to empower the people in the development of enterprise and the creation of jobs. Debt markets are an extremely effective mechanism for matching the long term needs of savers with those of entrepreneurs. Like emerging-market
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countries around the world, Bangladesh could benefit from having a local-currency, fixedincome securities market. At present, its main fixed income financial products are bank deposits, bank loans, government savings certificates, term loans, treasury bills, and government bonds and corporate debt (syndicated loans, private placement, and debentures). But in general the corporate debt market is still very small compared with the equity market.

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2.0 Money Market
Money market is an integral part of the financial market of a country. It provides a medium for the redistribution of short term loan-able funds among financial institutions, which perform this function by selling deposits of various types, certificate of deposits and discounting of bills, treasury bills etc. The participants in the money market are: the central bank, commercial banks, the government, finance companies, contractual saving institutions like the pension funds, insurance companies, savings and loan associations etc. The instruments that are generally traded in the money market constitute: treasury bills, shortterm central bank and government bonds, negotiable certificates of deposits, bankers acceptances and commercial papers like the bills of exchange and promissory notes, mutual funds etc. 2.1 Development of Money Market in Bangladesh The money market in Bangladesh is in its transitional stage. The various constituent parts of it are in the process of formation, while continuous efforts are being made to develop appropriate and adequate instruments to be traded in the market. At present, government treasury bills of varying maturity, Bangladesh Bank Bills and Certificates of Deposits etc in limited supply are available for trading in the market. However, the short-term market of the banking sector experienced a tremendous growth since liberation. In 1999, a total of about 6000 branches of the scheduled banks provided short-term credit throughout the country in the form of cash credit, overdraft and demand loan. The rates of interest are determined by the individual banks and as such the market is quite competitive. Each bank maintains its liquidity and supply of fund is arranged throughout the country with the help of an interconnected network of branches. Bangladesh Bank as central bank of the country exercises its role in this market through the use of instruments such as bank rate, open market operations and changes in statutory liquidity requirements. 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,
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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 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. 2.2 Money Market Securities Money market securities are the securities that have a maturity one year or less. They generally have a relatively high degree of liquidity. Money market securities tend to have a low expected return but also a low degree of risk. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities, but there are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper. Various types of money market securities are listed below. Money Market Securities Treasury bills
Government Households, and firms 13 weeks,

Issued by

Investors

Maturity

Secondary Market Activity
26 High

financial weeks. 1 year 7 days to 5 years Not exists or longer 2 weeks to 1 Moderate year

Retail deposit (CDs) Negotiable deposit (NCDs) Commercial paper

institutions Banks and saving Households

certificates of institutions
Large banks and Firms Institutions Bank finance companies and 5 other companies holding Firms

certificates of saving

1 days to 270 Low days

companies,

Eurodollar Deposit Banker’s acceptances

Banks outside country Banks

located Firms the government Firms the obtain Depository

and 1 day to 1 year

Not exists

30 days to 270 High days

( exporting firm can sell acceptance at a discount funds) Depository institutions Firms financial institutions

Federal Funds Repurchase agreements

1 day to 7 days

Not exists Not exists

institutions and Firms and financial 1 day to 15 days institutions

2.2.1T-Bill in Bangladesh: It is still a captive market. Banks and financial institutions having SLR obligation are the only participants in this market. Financial institutions having no obligation of statutory liquidity requirement (SLR), corporate or non-corporate firms, semi-government or autonomous bodies having temporary surplus funds do not invest in government treasury bills. Issuing of T-Bill in Bangladesh:  Issuer: Bangladesh Bank is the main holder of treasury bills. Bangladesh Bank operates throughout the country with its nine branches. Government receipts and payments are overseen and managed by Bangladesh Bank. Where there is no Bangladesh Bank branch but transactions of government occur, different branches of Sonali Bank are assigned to take part in these transactions on behalf of Bangladesh Bank. These branches are known as 'Chest Branches'. In a district, there may be one chest and some sub-chests. Bangladesh Bank directly monitors Chest branches. This function is known as '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 22000 crore.
 Participants:

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The market for Bangladesh Treasury bills has a complex structure and involves numerous participants--Ministry of Finance, Bangladesh Bank, government securities dealers and brokers, and other holders of Treasury securities.
 Schedule of issuance:

Marketable Treasury securities are issued through regularly scheduled auctions in what is called the primary market. The process importantly involves the Bangladesh Bank, which serve as conduits for the auctions. Types of T-Bill: Treasury bills are designated by the number of days to their maturity. There are six types of T-bills that prevail in Bangladesh. These are: a) 28 days T-bill b) 91 days T-bill
c) 182 days T-bill

d) 364 days T-bill e) 2 years T-bill f) 5 years T-bill

Bangladesh Bank introduced its own security, the 91-day Bangladesh Bank Bill in December 1990. Selling of T-Bill: Selling system: Treasury bills are sold on a discount basis, which in simple 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. Treasury bills are not listed at the Stock Exchange. If one wanted to exit before maturity, rediscounting isn't possible at the Central Bank, rather he or she may take part in the Repo auction.
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How T-Bills are allotted: To foster liquidity in the market, 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:  Competitive bids  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. Secondary Market for T-Bill: Until 2003, there was no secondary market for T-bills transaction in Bangladesh. 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. a. Primary Dealers: 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 Leasing and Financial Services Ltd. The interbank 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
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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. The central bank earlier issued a guideline for the PDs with a view to activating and streamlining the country's secondary bond market. Under the guideline, the PDs will subscribe and underwrite primary issues and make secondary trading deals with 2-way price quotes. A PD won't short sell any particular issue and won't carry a short position in secondary dealings. The PDs won't act as inter-bank or inter-dealer brokers; it was specified in the guidelines. Investment in T-Bill:  Making an investment: Any investor (institution or individual), who maintains 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 Bangladesh Bank. If Sunday is a holiday, then the last working day before Sunday is used. 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 offloaded. There is a high-powered committee to oversee the treasury functions; which includes seven members.  Investment 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 August 27, 2009 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.

T-Bill

Yield

91 days

8.52%
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182 days 364 days

9.15% 9.76%

2.2.2 Call Money Market
Call money market is the most sensitive part of money market, in which a good number of players from the banking as well as the non-bank financial sector actively participate on a regular basis. Initially, this market developed as an inter-bank market where the banks in temporary deficit of cash resorted to borrowing from other banks having surplus funds. As banks were in the public sector until the beginning of the 1980s, the Bangladesh Bank provided them with liberal refinance facilities at concessional rates. There was hardly any need for raising funds from the call money market during this period. Moreover, administered interest rate regime, easy availability of borrowing from central bank and its directive to provide credit to priority sectors were the major impediments in development of a call money market in the country. Notwithstanding the fact, banks participated in a limited scale in the call money market mainly to wipe out the temporary mismatch in their assets and liabilities. Call money market is the interest rate banks charge a broker for the funding of loans to investors who buy on margin. This is also known as broker loan rate. In the call money market, participants enter into 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 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.
2.2.3 Repurchase Agreement (REPO) 10

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest. Earlier in Bangladesh, 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 offer and bid acceptance, and this yield is higher than the yield of T-bill. For example, let us assume that, T-bill yield = 8%, Repo yield = 9%, then, Net yield = 1%. To whom Repo facility will be provided is dependent upon the liquidity in the market. Repo auction is held for 1 and 7 days tenure. Reverse Repo: Reverse Repo means purchase of securities with an agreement to resell them at a

higher price at a specific future date. This is essentially just a loan of the security at a specific rate. It is also called reverse repurchase agreement. When a bank or financial institution 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 that is held side by side of the T-bill auction. Reverse Repo auction is also held for 1 and 7 days tenure.

2.3 Suggestions and Recommendations for Money Market
Introducing new instruments will create adequate opportunity for investment of short-term excess fund, which in turn will increase liquidity and further reduce dependency on the call money market.
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The instruments may be introduced be as new Instruments in Bangladesh Money Market are explained here. 21 days T-bills: this new lesser 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.

3.0 Capital Market in Bangladesh
Capital is the lifeblood of business and industry and capital market is the main source for raising capital. It provides long-term fund for industries and creates investment scope for the mass. Capital market plays a vital role in industrial, and thus overall economic, development of a country. Bangladesh stock market seems to be extremely volatile; the price fluctuations
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of this market are so high. As a result, confidence of investors in the market place fell drastically during the two bubbles-burst episodes. Market insiders said that this lack of confidence following the ongoing liquidity crisis in the market is due to lower participation of investors. This upward and downward swing is a characteristic feature of the market and is termed as stock market volatility. The year 2010 was noticed as the abnormal bullish trend with all the barometers touched the historical height, consequences has been happened in year 2011 as all the barometers gone to the bearish condition. As a result most of the individual investors who are the middle class earning investors lost their valuable money. The origin of stock market in Bangladesh goes back to April 28, 1954 when a stock exchange was formed under the name East Pakistan Stock Exchange Association at Narayanganj. Trading started in 1956. It was renamed East Pakistan Stock Exchange Ltd. Transferred to Dhaka in 1958 and again renamed Dhaka Stock Exchange Ltd in 1964. Product of capital market: a) Shares, b) Debentures, c) Mutual funds, d) Bonds, e) Derivatives, f) Future and options. But in Bangladesh there are no future and option securities in the capital market. Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

3.1 Capital market participants:
An exchange is an institution, organization, or association which hosts a market where stocks, bonds, options and futures, and commodities are traded. Buyers and sellers come together to trade during specific hours on business days. Exchanges impose rules and regulations on the firms and brokers that are involved with them. If a particular company is traded on an
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exchange, it is referred to as "listed”. There are two stock exchanges available in Bangladesh: i) Dhaka Stock Exchange (DSE), and ii) Chittagong Stock Exchange (CSE). Companies that are not listed on a stock exchange are sold OTC (short for Over-The-Counter). Companies that have shares traded OTC are usually smaller and riskier because they do not meet the requirements to be listed on a stock exchange. There is also an active OTC market in Bangladesh. • • • • • • SEC Bangladesh bank ICB Specialized bank Stock exchanges Companies • • • • • Individuals Government Other banks Investment firms Dealer, broker, speculators etc

3.2 Regulatory Body: Overview of Securities and Exchange Commission (SEC)
Securities and Exchange Commission is the regulatory body of the capital market of Bangladesh. SEC was established on 8th June, 1993 under the Securities and Exchange Commission Act, 1993. The commission ensures compliance of capital market related laws, rules and regulations etc. by the intermediaries and persons and institutions related with capital market. Basic laws of the capital market are as follows; a. Securities Act, 1920 b. Securities and Exchange Ordinance, 1969 c. Securities and Exchange Commission Act, 1993 and d. Depository Act, 1999 Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions engaged in financing activities including leasing companies and venture capital companies. The Chairman and Members of the Commission are appointed by the government and have overall responsibility to administer securities legislation. The Commission is a statutory body and attached to the Ministry of Finance. SEC in comprised of two stock exchanges (DSE and CSE) and 52 registered banks.
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3.3 Stock Exchanges of Bangladesh
There are two stock exchanges in Bangladesh: 1. Dhaka Stock Exchange (DSE) 2. Chittagong Stock Exchange (CSE)

3.3.1 Dhaka Stock Exchange
Dhaka Stock exchange is the main stock exchange in Bangladesh. It is located in Motijheel at the heart of the Dhaka city. It was incorporated in 1954. Dhaka stock exchange is the first stock exchange of the country. It was first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and started formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June 1962.Again renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the liberation war in 1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh, on 16 September 1986 DSE was started. The formula for calculating DSE all share price index was changed according to IFC on 1 November 1993. The automated trading was initiated in 10 August 1998 and started on 1 January 2001. Central Depository System was initiated in 24 January 2004. As of November 16, 2009, the benchmark index of the Dhaka Stock Exchange (DSE) crossed 4000 points for the first time, setting another new high at 4148 points. In 2010, the index crossed 8500 points and finally crashed in the first quarter of 2011. Millions of investors lost their money and came out onto the street blaming the speculators and regulators for the bubble that finally burs.

3.3.2 Chittagong Stock Exchange (CSE)
The Chittagong Stock Exchange (CSE) began its journey in 10th October of 1995 as the second stock exchange of the country from Chittagong City through the cry-out trading system with the promise to create a state-of-the art bourse in the country. The office of CSE is in Agrabad, Chittagong. Founder members of the proposed Chittagong Stock Exchange approached the Bangladesh Government in January 1995 and obtained the permission of the Securities and Exchange
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Commission on February 12, 1995 for establishing the country's second stock exchange. The Exchange comprised of twelve Board members, presided by Mr. Amir Khosru Mahmud Chowdhury (MP) and run by an independent secretariat from the very first day of its inception. CSE was formally opened by then Hon'ble Prime Minister of Bangladesh on November 4, 1995

3.3.3 Over-the-Counter Market (OTC Market)
Initially with 51 companies, Dhaka Stock Exchange Ltd. Over-the-Counter (DSE-OTC) has started its journey on October 01, 2009.Among 51 issues, trading of the shares of United Commercial Bank Ltd. has been resumed in the main market of DSE from 13 June 2010 under "Z" category. There are 29 more companies have been added with the existing list of OTC instruments with effect from 01 October and 20 October 2010 respectively. Out of 25 issues (which have been delisted from the main market for failure to demat their securities within 30 September 2010) only 10 issues are declared eligible for demat securities by Securities and Exchange Commission (SEC) and subsequently these are transferred to the main market for transaction, as the securities of those companies have been dematerialized. Thus, total number of securities stood at 69 (sixty-nine) under OTC facility as on 14 February 2011. Total number of share was 214,245,860 and its share capital was Tk. 6,580.93 million. The market capital was Tk.7943.68 million under OTC facility as on 14 February, 2011.Presently there are 68 companies in OTC market Indicators No. of companies No. of mutual funds No. of debentures No. of treasury bonds No. of corporate bonds Total No. of Listed Securities Dhaka Stock Exchange 270 14 8 75 1 368 Chittagong Stock Exchange 215 14 1 230

3.4 Settlement of Securities transaction in the Exchanges
Mechanism of settlement of securities transactions is elaborately specified in DSE and CSE settlement of Stock Exchange Transactions Regulations, 1998. It also categorizes securities into A,B, G,N and Z based on profitability, operation and failure to hold AGM and sustaining loss that ultimately exceeds paid up capital. This categorization helps investors to know about the fundamental and attractiveness of security.
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During the FY 2006-07, governance scenario of listed company improved remarkably. In this period number of “A” category companies increased and number of “B” and “Z” category companies decreased and increased respectively. Securities Trading in the Exchange through Borrowing In a bullish market securities price continues to increase and the investors may opt for investing more than his equity availing loan from the brokers. A per DSE/CSE (Member’s margin) Regulations, 2000 investors could invest more than his own resources and help reaping profit from the bullish market. Likewise supply of securities could also be increased through short-sale mechanism. Shortsale refers to selling of securities that the seller does not own. As per Dhaka Stock Exchange (Short-sale) Regulations, 2006 any person with a securities borrowing arrangements could sale securities without owning it. This mechanism helps increasing supply of securities and could be a win-win situation for seller, lender and brokerage firm.

Securities Issue through Private Placement Rules that are required to be complied with for issuance of securities through private placement is Securities and Exchange Commission (Issue of Capital) Rules, 2001 under which applicants has to furnish certain information and documents to the commission. While according consent the commission imposes conditions that include timely preparation of financial statements and furnishing of the same to the commission, execution of all transactions except petty cash items through company’s bank account. These conditions help issuer companies elevate their corporate governance status and make them ready for raising capital through public offering. i) Rights Issue Share issue to existing shareholders by listed companies in proportion to their capital is approved by the commission under Securities and Exchange Commission (Rights issue) Rules, 2006. As per the said rules, such rights issue and price are required to be approved by the shareholders in general meeting.

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ii) Investment Corporation of Bangladesh (ICB) The Investment Corporation of Bangladesh was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programs, and maintains investment accounts, floats and manages closed-end & open-end mutual funds & closed-end unit funds to ensure supply of securities as well as generate demand for securities. ICB also operates in the DSE and CSE as dealers. iii) Specialized Banks Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), BASIC Bank Ltd., some Foreign Banks and NCBs are engaged in long term industrial financing.

3.5 Development of Capital Market
Presently, Bangladesh capital market has achieved phenomenal growth in size, depth and maturity. All indicators of capital market showed an increasing trend during last couple of years. Increased investors' participation, demand for stocks is pumping to price hike in the market. Other indicators of the capital market also recorded a significant growth. Market capitalization of DSE, a remarkably increased during last three years that reflected in the ratios of market capitalization to the country's GDP at current market price. The ratio of market capitalization of DSE to GDP rose to 39.1 percent in end FY10 from 5.2 percent in FY06 and from 2.3 percent of FY00. Except 13.1 percent of 1996's bubble, the ratio was almost in horizontal level with around below 3 percent up to FY04. The capital market developments and its sustainability depend on market fundamentals at least in the medium term, and the fundamental strength of the market essentially comes from financial strength of the listed companies. Also, strong regulatory environment created and maintained by the regulatory bodies and participation of institutional investors and professional market analysts help orderly market operations. The market witnessed that last few years many fundamental companies with strong financial strength have been listed in the market. The main regulatory body SEC and the Government of Bangladesh and others related regulatory authorities have continued their all efforts to develop the Bangladesh capital market that reflected in the market trends. The Bangladesh capital market is now maturing gradually in terms of depth and breathe and approaching to more shock resistant operational mode. Table: Indicators of capital market development
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FY 03 Number of listed securities Isuued capital & debt (billion taka) Market capitalization (billion taka) Turnover (billion taka) General price index GROWTH IN PERCENTAGE Number of listed securities Isuued capital & debt Market capitalization Turnover General price index 260 36.1 69.2 30.6 830 1.2 3.1 5.6 12.3 4.7

FY04 267 46.8 142.4 24.8 1319 2.69 29.64 105.7 8 -18.95 58.92

FY05 259 52.8 213 74.1 1713 -3 12.82 49.58 198.79 29.87

FY06 277 64.7 205.3 46 1339.5 6.95 22.54 -3.62 -37.92 -21.8

FY07 281 83.7 412.2 164.7 2149.3 1.44 29.37 100.78 258.04 60.46

FY08 294 109 789.4 209.2 3000.5 4.63 30.2 91.51 204.51 39.6

FY09 308 147.18 1001.9 892.79 3010.26 4.76 35.05 26.92 326.76 0.33

FY10 279 213.11 2276.98 2714.28 6153.68 -9.42 44.8 127.27 204.02 104.42

3.6 Types of Market
•

An initial public offering (IPO) or stock market launch is the first sale of stock by a company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises. Many companies that undertake an IPO also request the assistance of an investment banking firm acting in the capacity of an underwriter to help them correctly assess the value of their shares. In 2010 the number of IPOs were 18 with an amount of Tk 26,536.59 million whereas in 2011, 14 companies floated IPOs worth Tk 18791.60 million. The number of IPO is decreased in the year 2011 compared to the year 2010. However in 2011 of the total IPO amount Tk, 19,914.15 million was offered for public and Tk 6850.79 million for sponsors.

•

The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds are bought and sold. The secondary segment of capital market is institutionalized by two (02) stock exchanges-Dhaka Stock Exchange and Chittagong Stock Exchange. The instruments in these exchanges are equity securities (shares), debentures, corporate bonds and treasury bonds. The capital market in Bangladesh is governed by Securities and Commission (SEC).

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3.7 Capital Market Securities in Bangladesh
1. 2. 3. 4. Shares Debentures Bonds Commercial Papers

Situation of Capital Market (as of 2011)
Total Number of Listed Securities Total Number of Companies Total Number of Mutual Funds Total Number of Debentures Total Number of Treasury Bonds Total Number of Corporate Bonds 476 229 33 8 203 3

Total number of Shares/Certificates: Total Number of Shares & Mutual Fund Certificates of All Listed Securities* Total Number of Shares of All Listed Companies Total Number of Certificates of All Listed Mutual Funds

(No. in mn) 15,673

13,268 2,393 (No. in ' 000)

Total Number Debentures

of

All

Listed

409 4,672 7,336

Total Number of All Listed Gov. TBonds Total Numberof Corporate Bonds All Listed

Total Issued Capital of : All Listed Securities All Companies Shares All Mutual Funds

(Figure Tk.in mn) 719,316 220,543 23,183 20

(FigureUS$ in mn) 10,105.59 3,098 326

All Debentures All Listed Govt. T-Bonds All Listed Corporate Bonds

140 468,113 7,336

2 6,576 103

Total Market Capitalization of: All Listed Securities All Listed Companies Shares All Listed Mutual Funds All Debentures All Listed Govt. T-Bonds All Listed Corporate Bonds Conversion Rate: BDT against USD

(Figure Tk.in mn) 2,349,353 1,843,471 30,477 576 468,113 6,716 71.18

(FigureUS$ in mn) 33,006 25,899 428 8 6,576 94

3.8 Performance of the Stocks of Different Industries over last two years:
Table: Sector wise P/E ratio P/E ratio Sectors Banks Financial Institutions Mutual Funds Insurance Engineering Food and Allied Fuel and Power Jute Textile 2010 25.14 47.27 17.53 64.64 50.1 27.3 21.57 55.66 52.44
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2011 10.5 12.15 6.24 20.37 26.4 16.41 13.95 32.64 22.66

Change (%) -58.2% -74.3% -64.4% -68.5% -47.3% -39.9% -35.3% -41.4% -56.8%

Pharmaceuticals Paper and Printing Service and Real Estate Cement IT Tannery Ceramics Telecommunications Travel and Leisure Miscellaneous Overall Market

34.12 126.9 3 43.93 33.44 64.91 20.66 106.8 6 20.35 65.45 19.54 29.16

22.52 42.23 25.82 21.6 38.93 15.6 30.2 20.62 23.07 8.02 13.68

-34.0% -66.7% -41.2% -35.4% -40.0% -24.5% -71.7% 1.3% -64.8% -59.0% -53.1%

In the year 2010, the P/E ratio of the overall market was 29.14 which decreased by 53.1% in the next year and P/E ratio of the overall market was 13.68 in 2011. Banks, Mutual Funds, Telecommunication, Tannery, Fuel and Power and Miscellaneous had P/E ratio below the market average. In the year 2011 P/E ratio in all the sectors decreases significantly as overall market P/E ratio decreased by 53.1%. P/E ratio of telecommunication sector was 20.62 which has increased slightly compared to the last year. Table: Sector wise EPS
EPS Sectors Banks Financial Institutions Mutual Funds Insurance Engineering Food and Allied Fuel and Power Jute Textile 2010 37.78 58.72 22.98 21.85 41.17 124.63 63.22 43.12 18.72 2011 43.69 72.6 21.37 30.5 39.83 134.83 62.23 52.82 23.31 Change (%) 15.6% 23.6% -7.0% 39.6% -3.3% 8.2% -1.6% 22.5% 24.5%

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Pharmaceuticals Paper and Printing Service and Real Estate Cement IT Tannery Ceramics Telecommunications Travel and Leisure Miscellaneous Overall Market

67.54 5.23 35.68 30.9 6.97 170.62 12.85 110.85 5.3 167.99 46.5

65.88 9.64 24.8 67.63 7.19 181.93 20.7 79.28 9.72 149.01 49.5

-2.5% 84.3% -30.5% 118.9% 3.2% 6.6% 61.1% -28.5% 83.4% -11.3% 6.5%

From the above table we can see that EPS of the companies in the Dhaka Stock Exchange has increased by 6.5% in the year 2011 compared to the year 2010. EPS of all the financial sectors has increased notably except mutual funds in 2011. Tannery sector has the highest EPS in both of the last two years.

3.9 Record of Securities Trading in Capital Market
Changes in Trade Value

Figure: Changes in Trade Value The above graph shows month wise daily average trade value (Tk in mn). In January 2010 the average daily turnover in DSE was Tk 12517.59 million and it falls in March but from April turnover in DSE increases radically and DSE experienced highest record turnover Tk 32496 million in December 05, 2010. Again from December 2010 it started to decline radically and it continues in 2011. However in June-July of 2011 it increased and again decreased in August. The daily average turnover in 2011 was Tk 6642 million. In March 2012 the average daily turnover was Tk 4206.15 million.
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Changes in Average Trade Volume

Figure: Changes in Average Trade Volume The above graph shows the average volume of the trade from January 2010 to March 2012. From the graph we can see that from the beginning of 2010 the volume of turnover increased and in the end of 2010 it was 108355932.7 million. It decreased sharply in the beginning of the year 2011 but there were ups and downs throughout the year. In July 24, 2011 the volume of trade goes 19579.28 million which is the highest so far in Dhaka Stock Exchange.

Changes in Number of Trade of Securities

Figure: Changes in Number of Trade of Securities From the above graph we can see the month wise average number of daily trade occurred in Dhaka Stock Exchange. In November 2010 the daily average number of trade was 316926.5 which is highest monthly average and in September 2011 the daily average number of trade 86628.85 which was the lowest monthly average. In March 2012 the daily average number of trade was 116317.8.

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3.10 Structural Problems of Capital Market of Bangladesh
The recent performance of the capital markets in Bangladesh, notably from December 2010 till February of 2011, has been very poor compared with its performance over the last five years. The index fell from a high of around 8,900 points to 5,200 points, a drop of almost 42 percent in just three months. Bangladesh capital markets have been in the top three best performing markets in the world over the last three years. However, its recent performance has cast a big doubt about its future performance. It is a case of “too much money chasing too few stocks”. This correction in the market has been long overdue because there was too much money in the stock market in too few stocks. This inflationary pressure was finally controlled by the central bank by raising its cash reserve ratio (CRR) and statutory liquidity ratio (SLR) thus resulting in limiting the liquidity flow into the capital market. The interbank call money rate (DIBOR Dhaka Interbank Offer Rate) went up by 189 percent. One of the main reasons for this was that the domestic banks had too much of their money invested in the stock market, for quick and easy profit taking and as a result caused the stock market to rise even higher. So, to control the excess money in the capital market the central bank took these drastic measures, as it is within their right to do so, to control inflation. The problems of the capital markets in Bangladesh are structural, and, actually quite farreaching than what meets the eye. As we all know, the capital markets here, notably the Dhaka Stock Exchange (DSE), is way overvalued due to, firstly, the DSE index calculations being incorrect. Secondly, there are big syndicates acting together to artificially influence the prices resulting in huge profits for them at the expense of the average investors who put in their hard earned lifetime savings. And last, but definitely not least, is the Securities and Exchange Commission (SEC) whose total policy and regulations favors’ the syndicates which primarily consists of high net worth people and the stock exchange members resulting in an “artificial demand driven market”. Until and unless these fundamental issues are addressed the capital markets here will fail to see the light of the day.

3.11 Prospects of Bangladesh Capital Market
Bangladesh Capital market is pregnant with prospects and opportunities. Local and foreign investment is gradually increasing in this market. Effort is being continued to bring the government, private and multinational profitable company’s’ share in the capital market to increase securities supply. To increase the depth of Bangladesh capital market, the
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Commission in association with stock exchanges and market intermediaries is trying to bring new issues and to create alternate investment opportunity through introduction of new instruments like derivatives, and have introduced book building method for attracting companies with good fundamentals in the capital market. As the daily transaction in the capital market is being increased significantly, the Commission has already given necessary instruction to the depository to upgrade its server and storage system into higher capacity including all other associated equipment to match the needs of the market. At the same time, the central depository is also given necessary guidelines to appoint high level officers and advised to develop human resources in order to render better services. Besides, the Commission is working for implementation of the following issues: • Elevating corporate governance scenario in issuer companies and other market intermediaries of capital market. • Establishment of clearing corporation for quick settlement of securities transaction through on-line automated transaction system in association with stock exchanges. • Establishment of a regulatory body to ensure preparation of financial statement by the companies based on facts and to ensure proper examination of the statements by the auditors. • Making and issuing a comprehensive bond issue rules for issuance of bond/debentures in the market. • Finding ways and initiating activities to popularize government bond and corporate bond in the capital market. • Preparation of legal framework for introducing derivatives and its trading in the market. • Assisting to make unified listing regulations for cross–border listing of companies of SARRC region. • Bringing the SoE, private and multinational profitable company’s shares in the capital market to increase supply of quality securities. • Continual examination of securities laws and issuance of new rules or amendment of existing rules in consultation with all market intermediaries including issuers. • Strengthening surveillance system of SEC to enhance transparency in securities market.
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• Building capacity of existing staff members, and recruiting new professionals staff for effective and smooth discharging of duties reposed on the Commission.

3.12 Recommendation for the stabilization and betterment of Capital Market
Investing in stock market is very rewarding financially but also very risky. Many people lose their money in this particular investment because they do not have any knowledge about picking the right stocks. Most of the time, making investment decisions based on emotion rather than strategy can be a costly mistake. Most of the investors don't know when to sell their shares and take a profit, which can turn profits into losses (sometimes massive losses). Finally, lack of knowledge, not having a proper trading plan, and no knowledge about fundamental and technical analysis can cause a loss in the market. Investment should be based on decisions on real facts and analysis rather than risky, speculative forecasts. Investment is not gambling in truth. It requires planning and patience and long term forecasting. Here are some recommendations to make the capital market stable:
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SEC should be restructured to stabilize the capital market. Being a regulatory body there are evidence that decisions taken by SEC were manipulated by the players in the capital market. Again in some cases SEC allowed some institutions to do illegal activities. Hence for the greater interest of the capital market, SEC should be reformed.

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It must be taken into consideration that demand-supply gap is already in existence and there is huge demand of good shares in the capital market in Bangladesh. There are a number of companies outside the capital market having strong fundamentals and very good track records. Care should be taken to ensure entry of these good and potential shares into the market. At the same time, restrictions should be imposed and risky shares should be less privileged for IPO so that small shareholders do not lose money eventually.

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Two stock exchanges DSE and CSE should be demutualized. Major players of the capital market are the controllers of the DSE and CSE. Demutualization is the process of transformation from members associations into for-profit corporations. Operation of the directors should be separated from the management operations.
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•

SEC should provide advisory support to the individual investors. Again Training institute should be established to provide proper knowledge to the general investors. That advisory support will aware the investors about the risk attached with every investment decisions so that investors cannot blame for their investment further.

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SEC should initiate awareness, educational and promotional programs through institutional training for a vibrant market with active presence of issuers and investors. Bangladesh Bank needs to strictly monitor the activities of commercial banks specially their activities leading to stock market exposure.

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Pending applications for IPOs also deserve such scrutiny so that it cannot be approved at higher price without the solid grounds and fundamentals. If new companies with healthy fundamental come it will increase the market capitalization and surely it will effect positively in the market trend. The example we have seen in the 2099 when Grameenphone entered into the capital market and the DSE indices started to go high.

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Bangladesh Bank may relax its recent policies regarding commercial banks' exposure in share market; institutional investors may be motivated or compelled if necessary to increase their investment in the market at least at that level of their participation before the crash of the market. It may not be possible to restore confidence in the market if the institutions remain inactive. CRR may be reduced and liquidity support by the central bank may also be considered for the time being so that commercial banks can inject more funds in investment of shares.

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Shareholders should be made aware as to the role of the regulatory bodies. Shareholders should know and understand the procedures for upholding their rights, registering complaints/actions against a public company, its board, or any other entity, if those rights are abused. Regulatory bodies should disseminate the "Rights and Responsibilities of Shareholders" in the public sphere, or ensure that companies include a Shareholders' Handbook in the prospectus for an IPO, so that potential shareholders may take an informed decision to subscribe.

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There are gap between P/E ratio and the dividend yield in the recent years. From 2010 the gap seems increasing. As the gap is bigger the possibility of crash is higher. Hence to reduce the risk of the investors the gap should be reduced. Companies should maintain higher payout ratio so that the investors feel confidence in the market.
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•

In the last two years, many government officials and army person were seen to involve directly in the capital market which surely created the manipulation in the market. This issue should be highly monitored by the government so that no manipulation can happen again. If the manipulators are brought to book the capital market will be stabilize hopefully.

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According to the Capital Market Inquiry Report 2011, there are powerful ‘Game Planners’ and ‘Inside Trader’ who manipulated and control the market trend. Hence insider trading should be stopped through proper investigation.

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Due to the increasing complications of the share market in Bangladesh, it has become obligatory to introduce the latest and modern devices to intensify market monitoring. India, our next-door neighbor, has streamlined the stock market with the help of modern supervision technology and tracing down criminals. Bangladesh should adopt those modern technologies also.

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Time has come to contemplate to establish ‘Derivative market’ in Bangladesh. Derivative products such as options, futures and forward contracts will allow investors to hedge the risk associated with the stocks. An effective derivative market will assist the capital market in a positive way and keep it stable.

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Capital market is a very sensitive place, even a single comment can effect significantly on the market. Negative public statements regarding the market debacle because they further demoralize investors about the market should be carefully made. Statements from ministers, advisors and regulators should be very limited.

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Pre-IPO placement is one of the major reasons for the debacle. Consider the rules and regulations of pre-IPO placement which has to be differentiated from IPO where the offer is made public. As it is a non-public event happening before the IPO, you make the offer privately to your near or dear ones or to those with whom you have strong business links. Transparency and accountability should be established in the Pre-IPO process.

•

Omnibus accounts were used by the gamblers to manipulate the market. By the omnibus account major players made the trigger bye and sale. Again many individuals made ‘Shadow Trade’ through omnibus account which caused the high
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volatility in the market. Activities in the omnibus account are not transparent, so it needs to be regulated carefully. • A healthy stock market requires engagement of competent professionals by a wide range of market actors. Among the positions which require the services of people with adequate knowledge of the principles of corporate governance as well as security laws and regulations are the members of company boards, company secretaries, officials of the share departments of companies, authorized representatives of brokers, compliance officers of market intermediaries etc. Academic institutions or the professional bodies in the country do not produce enough people to fill up such positions. SEC has constituted a Steering Committee for preparing suggestions to set up a stock market training institute to bridge the gap. Asian Development Bank is expected to assist in this endeavor. SEC's investors' education program has been intensified to enable investors to make informed decisions concerning their portfolio. • Investors should understand that a fundamental analysis includes three steps: economy analysis, industry analysis and company analysis. Often much importance is given to the company analysis. But investors should give emphasis to the economy and industry as well. Good understanding of the state of the economy and stage of the industry will help investors generate useful insight about future price movement of a particular company’s stock.
•

Recently Bangladesh Government has initiated some stimulus packages for the investors to recover their losses. The stimulus packages have experienced some positive effect also, as the interest waiver for the investors who have taken margin loan lifted the index somewhat. But yet a lot of stimulus packages for short term, medium term and short term, should be taken by the regulatory bodies.

•

Investors want is a fair probe of the market manipulation. Moreover, the investors want positive assurance from the authorities concerned which will bring back the confidence of the investors and make the capital market vibrant again.

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Presently overall market P/E ratio has been decreased to 13.68 in 2011 from 29.16 in 2010. So individual investors should buy more shares and it will be less risky now. Also institutional investors can buy shares now to stabilize the market.

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•

Bangladesh Bank and Securities and Exchange Commission both are frequently changing policy and rules that is not good for the market stability. For example margin loan ratio. No stock market regulator in any country fixes loan margin ratio but that was done in Bangladesh. On February 01, 2010, SEC, as a bolt from the blue, fixed loan margin ratio at 1:1.5. Just two days after, it reversed its decision to 1:1 which was in existence for months and years. SEC again increased this ratio to 1:1.5 on March 15, 2010, then again reduced this to 1:1 in July, 2010; and 1:0.5 in October, 2010. SEC never explained proper reasons for such frequent revisions. It has now rectified those errors, increasing margin loan ratio to 1:1, to 1:1:5 and 1:2 on January 10, 2010 but with little effect. It is not SEC's business to dictate to whom, when, and how much the loan is to be given. It is a bilateral decision between the lender and the borrower. Such over-regulations created constant imbalance between demand for, and supply of, shares/funds, and over-heating or overcooling of the market.

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Adopt steps to attract buyers back into the market. Companies could choose to declare special or bonus dividends, make rights issues at very attractive prices or even give bonus shares so that investors hold on their shares, or buy them for ‘dividend shopping’ or ‘bonus shopping’.

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A legitimate logistic and human resource support system is essential for detecting and confectioning gross inconsistency in the stock market of Bangladesh. Ideally, a means or system should be found to detect the minimum (and maximum) of market movements.

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Investors should discard “four-day” gain attitude. This is not possible anywhere in the world. One is gaining because the others are losing. This type of trading drives the price to such a level that is far beyond the fundamentals of a company. People making investment at should least wait for a quarter to realize the gains, as the price of a stock goes up after the declaration of the quarterly news, if the company does well during that particular period.

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4.0 Conclusion:
For any underdevelopment country the existence of a well functioning money market is of paramount importance. The money market currently existing has also developed due to certain needs. With limited diversified instruments, the organized money market in Bangladesh achieved a remarkable development in the recent years. Introducing new instruments will create adequate opportunity for investment of short-term excess fund, which in turn will increase liquidity and further reduce dependency on the call money market. At present, the capital market of Bangladesh is passing through a critical situation. In the backdrop of recent volatility and economic scenario look at national and global levels, concerted efforts are needed to restore the confidence of investors and bringing stability in the market. All market participants such as merchant bankers, brokers/dealers, asset management companies, auditors, credit rating agencies, private entrepreneurs, state owned enterprises, stock exchanges and regulatory organizations have to work together more professionally in order to achieve the ultimate goal of the Capital Market. Likewise, investors have to be more aware about the capital market and need to enhance their knowledge in related areas.
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5. Bibliography
• • • • • • •

www.dsebd.org www.bangladesh-bank.org http://at-capital.com/at/AT%20Capital%20Research%20-%20Bangladesh%20%20Growth,%20Investment,%20Opportunity.pdf http://www.unnayan.org/reports/meu/mar_11/meu_Mar_2011.pdf http://www.dsebd.org/download/Annual_Report.zip http://dspace.bracu.ac.bd/bitstream/handle/10361/1508/Monetary%20Policy%20and %20Money%20Supply%20Process-Aminul%20Islam.pdf?sequence=1 Financial Market and Institutions By Jeff Madura

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