Term Paper

on

“Money Market Contribution in a Developing Economy like Bangladesh”

Submitted To:

Ms. Fatema Afreen

Lecturer

Discipline of Finance

Premier University Chittagong

Submitted by:

Fahim Malek

ID: 1503210108658

Batch – 32nd

Discipline of Finance

Premier University Chittagong

Date of Submission: Saturday, May 19, 2012

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 Letter of Transmittal

22th April, 2020

To

Ms. Fatema Afreen

Lecturer

Discipline of Finance

Premier University Chittagong

Subject: Submission of the Term Paper.

Honorable Madam,

This is a great pleasure for me to submit the Term Paper on “Role of Money Market in an
Economic Development Country Like Bangladesh” a partial requirement of the BBA program in
Premier University Chittagong.

Writing this paper has been a great pleasure & an interesting experience. It enabled me to know
about the current situation of Bangladesh’s Money Market and its role in the economy. It has
also shaped my knowledge how the Money Market helps to bring solvency in Bangladesh. If I
have any inadvertent error and omission that may have entered into this paper will be considered
with sympathy.

Therefore, I beg your kind consideration in this regard, I will be very grateful if you accept my
term paper and oblige there by.

Yours Sincerely,

Fahim Malek
ID: 1503210108658

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 Acknowledgement

I would like to pay my gratitude to all of the related books, authors and related Web Sites that
helped me a lot for the completion of this ‘Term Paper’ before, during, and after the working
period. At first, I would like to acknowledge Almighty Allah, who helped me every time and
was with me and gave me moral support and strength every moment.

Basically, this Term Paper helps me to be apprised of our current state of Money Market and its
scenario. I am very pleased and happy having such a significant Term Paper to prepare.

I am especially grateful to my honorable course teacher Ms. Fatema Afreen for giving me
valuable suggestions and support to prepare this Paper. Without her advice and support, it would
hardly be possible for me to prepare this Paper.

Thanking you,

Fahim Malek
PART TITLE PAGE NO.

INTRODUCTION 01

OBJECTIVES OF THE MONEY MARKET 02

SCOPE OF THE STUDY 02

METHODOLOGY 02

LIMITATIONS OF THE STUDY 02

THEORETICAL ASPECT 02

ORGANIZED MARKET 03

UNORGANIZED MARKET 03

CONSTITUENTS OF MONEY MARKET 03

FEATURES OF CALL MONEY RATE 04

CHARACTERISTICS OF BANGLADESH MONEY 04

MARKET
PARTICIPANTS OF BANGLADESH MONEY 04

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MARKET PARTICIPANTS
NATURE OF THE PARTICIPANTS IN THE MONEY 05
MARKET
MONEY MARKET SECURITIES 05

TREASURY BILLS 05

HOW TO CALCULATE RETURN ON T BILLS? 06

CERTIFICATE OF DEPOSIT 07

COMMERCIAL PAPER 08

MATURITY PERIOD OF COMMERCIAL PAPER 08

08
WHO CAN ISSUE COMMERCIAL PAPER?

09
WHO INVESTS IN COMMERCIAL PAPER
REPURCHASE AGREEMENT (REPO) 10

BANKERS ACCEPTANCE 11

12

SECONDARY MARKET FOR THE BANKER’S 13

ACCEPTANCE
EURODOLLARS DEPOSITS 14

FEDERAL FUNDS 15

SWOT ANALYSIS OF BANGLADESH MONEY 25

MARKET
SIGNIFICANCE OF MONEY MARKET IN 28

BANGLADESH ECONOMY

PROBLEMS/DRAWBACKS OF BANGLADESH’S 38
MONEY MARKET
40
RECOMMENDATIONS FOR MONEY
MARKET IN BANGLADESH

45
CONCLUSIONS

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BACKGROUND OF THE STUDY
 INTRODUCTION
Money market means market where money or its equivalent can be traded. Money is synonym of
liquidity. Money market consists of financial institutions and dealers in money or credit who
wish to generate liquidity. It is better known as a place where large institutions and government
manage their short-term cash needs. For generation of liquidity, short term borrowing and
lending is done by these financial institutions and dealers. Money Market is part of financial
market where instruments with high liquidity and very short-term maturities are traded. Due to
highly liquid nature of securities and their short-term maturities, money market is treated as a
safe place. Hence, money market is a market where short term obligations such as treasury bills,
commercial papers and bankers’ acceptances are bought and sold.

Money markets exist to facilitate efficient transfer of short-term funds between holders and
borrowers of cash assets. For the lender/investor, it provides a good return on their funds. For the
borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term
liabilities. One of the primary functions of money market is to provide focal point for RBI’s
intervention for influencing liquidity and general levels of interest rates in the economy. RBI
being the main constituent in the money market aims at ensuring that liquidity and short-term
interest rates are consistent with the monetary policy objectives.

Money markets evolved initially to finance short-term assets with short-term securities. Bills of
exchange have been employed for centuries to finance international trade. Commercial paper
originated in the 19th century to enable businesses to finance working capital such as accounts
receivable and inventory in the capital market. Until recently, there was relatively little “maturity

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 transformation.” Since the 1980s, long-term, illiquid cash flows have been increasingly
“securitized” and funded in the money markets, where investors accept low pecuniary interest in
exchange for the “implicit monetary services” that money market instruments offer.

 OBJECTIVES OF THE MONEY MARKET

1. Providing borrowers such as individual investors, government, etc. with short-term funds
at a reasonable price. Lenders will also have the advantage of liquidity as the securities in the
money market are short-term.

2. It also enables lenders to turn their idle funds into an effective investment. In this way,
both the lender and borrower are at a benefit.

3. RBI regulates the money market. Therefore, in turn, helps to regulate the level of
liquidity in the economy.

4. Since most organizations are short on their working capital requirements. The money
market helps such organizations to have the necessary funds to meet their working capital
requirements.

5. It is an important source of finance for the government sector for both national and
international trade. And hence, provides an opportunity for the banks to park their surplus funds.

6. To provide borrowers with short-term funds at reasonable rates. And since the securities
are all short-term the lenders will also have the benefit of liquidity.

7. Turns savings and idle funds of the public into effective investments. This is beneficial for
the entire economy.

8. Helps the government implement monetary policies via their open market operations
which are direct and effective in nature.

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9. Companies and corporations have short-term deficits from time to time. They may also
need help with their working capital requirements. The money market will facilitate the funds
necessary.

 SCOPE OF THE STUDY:

• General purpose of the study: The study is being conducted for determining the
Contribution of Money Market in Bangladesh.
• Subject matter of the study: Contribution of money market in a developing economy
like Bangladesh is the subject matter of the study.
• ‘Topics’ that will be discussed: The study will be focused on the current scenario of
Bangladesh Money Market and their methods and strategies, facilities, finding the
problems and recommend the solution of those problem.
• Population of the study: The Central Bank, Microfinance Institutions, Co-operative
Bank, Credit Rating and Stock Exchange, Nationalized Commercial Bank, Private
Commercial Bank, Foreign Commercial Bank, State Owned Specialized Bank, Non-Bank
Financial Institutions, Commercial Banks, Co-operative Banks, Finance, industrial and
service companies, Money market mutual funds and Primary Dealers are allowed to
borrow and lend.
• The duration of the study: The duration of the study is 2019-2020 financial year.

 METHODOLOGY:
An exploratory research has been conducted in preparing the paper. Pure basic research has been
used. Theoretical and practical studies have also been incorporated. All the data are used in the
study are secondary data. Relevant literature survey, observation method was used extensively.
The study can be used for educational purpose. Data used in this term paper can also be used to
analyze the contribution of Money Market. This study will help financial or market analysts in
order to diagnoses of money market performance. There is no use of primary data in the
research. All the data are collected from secondary sources.

 LIMITATIONS OF THE STUDY:

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• Sample Size: Over the 100 companies/institutions are involved in this system but this
study will be conducted only few (5-10) institutions.
• Sample Profile: In this study I have to use many secondary data. There are many
advantages for this, such as easy access and low costs for data collection. But those
data are also extremely limiting because the population of the study is comprised of
people with varies profiles.
• Method: Very often, a method is accurate for a research aim, but it also includes
many limitations. In this study I intend to understand the contribution of Money
Market in economic development of the country. But some respondent may feel
uncomfortable to share their institutions position and information with me. May be
that information is confidential.
• Time: I have a deadline to complete my task. If I had unlimited time to do research
and collect data, I Would do better work. “Time” was a very common limitation.
• Timing of Study: I did not investigate a matter long after it happened. I also collected
some data in a period that was not exactly suitable for respondents for some specific
reason.
• Financial Resources: Money is always a problem. I had to purchase an internet
connection which was very expensive for me. Also, collection of data is a matter of
money. Consequently, such limitations might be reflected in the results of study.

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 Theoretical Aspect

 STRUCTURE OR COMPOSITION OF MONEY MARKET

Money
Market

Unorganiz
Organized Banglades
ed Sector
Sector h Bank

Co-operative Commerci
Banks & al Bank
Credit
Institutions

Public Private
Sector Sector

4 Regional
Nonschedu
Nationalized Rural
led Bank
Bank Bank

Scheduled
Bank

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Bangladesh
Foreign
i
 STRUCTURE OF MONEY MARKET

A. Organized market

Organized market is that part which comes under the regulatory purview of Bangladesh Bank.
The nature of the money market transactions is such that they are large in amount and high in
volume. Thus, the entire market is dominated by small number of large players.

B. Unorganized market

Unorganized market is old Indigenous market mainly made of

1. Indigenous bankers

2. Money lenders

3. Individuals

4. NBFIs

5. Friends

Constituents of money market

The five distinct components under the organized segment of money market in Bangladesh are:

1) INTER-BANK MARKET

2) CALL MONEY MARKET

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3) BILL MARKET

4) REPO MARKET AND

5) REVERSE REPO MARKET

1) Inter-bank market: The interbank market is a network of international banks operating

in financial centers around the world. Currency trading today is largely concentrated in
the hands of about a dozen major global financial firms, such as UBS, Deutsche Bank,
Citibank, JPMorgan Chase, Barclays, Goldman Sachs, and Royal Bank of Scotland, to
name just a few. Hundreds of other international banks and financial institutions trade
alongside the top banks, and all contribute liquidity and market interest.

These banks maintain trading operations to facilitate speculation for their own accounts,
called proprietary trading (or prop trading for short), and to provide currency trading
services for their customers. Banks’ customers can range from corporations and
government agencies to hedge funds and wealthy private individuals.

2) Call money market was initially a part of inter-bank market. In 1980s, banks
participated in a limited scale in the call money market mainly to wipe out the temporary
mismatch in their assets and liabilities. Formation of private banks during the 1980s
provided new opportunities to develop the call money market. In 1985, two investment
companies and in 1989, one leasing company were allowed to participate in the call
money market. But at present, all banks including specialized banks and non-bank
financial institutions are allowed to participate in this market.

 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

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 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.

In Bangladesh changes in the inter-bank call money rate were more pronounced than the bank rate. The
rate at which the central bank lends to the scheduled banks. The inter-bank call money rate (from 06
April, 2020 to 23 March, 2020) are shown in Table:
Table: Call money rate

Rate of Interest
Lending Volume
Serial no. Date Weighted
Highest Lowest (Crore Taka)
average
1 06 April, 2020 5 5 5 3,267.00
2 05 April, 2020 5 4.5 4.99 4,132.00
3 02 April, 2020 5 5 5 135
4 01 April, 2020 5 5 5 650
5 31 March, 2020 5 5 5 55
6 24 March, 2020 5.5 4.4 5.17 1,386.33
7 23 March, 2020 5.5 4.25 5.16 1,406.52
Source: Bangladesh Bank

Features of Call Money Rate

a) Effects of High Call Money Rate in the Economy Increases the Cost of Fund: The
high interest rate in interbank money market increases the cost of fund of the weak banks
and NBFIs may incur loss by frequent borrowing at a high interest rate. Therefore, the
financial health of the weak NBFIs may be lost by the borrowing of money from the
inter-bank money market at a high interest rate.

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 b) Increases the Interest Rate in other financial markets: High interest rates in interbank
money market can push the interest rates in other financial markets, like borrowing from
foreign exchange market, financial derivatives and other instruments in financial markets.
Moreover, an increase in interest rate will negatively affect the investment.

c) Creates Volatility in Financial Market: High interest rates in interbank money market
increases the volatility in financial market. Borrowing money from interbank money
market at a high interest rate by the NBFIs may create panic in the financial sector which
may result a loss of credibility of NBFIs and may also create a liquidity crisis.
3) Bill market: Bill Market refers to the market for short-term bills generally of three
months maturity. A bill is a promise to pay a specified amount by the borrower (drawer)
to the creditor (drawee). Bills are of three types- (a) bills of exchange or commercial bills
used to finance trade; (b) finance bills or promissory notes; and (c) treasury bills used to
meet temporary financial needs to the government. These bills may be bought and sold in
the discount market which consists of commercial banks, discount houses and other
institutions.
4) Repo Market is a market in which securities are exchanged for cash with an agreement
to repurchase the securities at a future date. Repo is attractive as a monetary policy
instrument because it carries a low credit r5isk and serves as a flexible instrument of
liquidity management. Scheduled banks and financial institutions are the participants of
this market.

Table: Repo with Bangladesh Bank

Bids received Bids accepted

Auction Total amount Amount Cut-off
Tenor Int. rate Total
date Total bids rate
(cr Taka) (%) bids (cr Taka)
(%)
24/03/202
1 124 9813.12 6 124 9788.57 6
0
  Total 124 9813.12   124 9788.57  
23/03/202
1 121 7324.64 6 122 7253.36 6
0

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   Total 121 7324.64   122 7253.36  
Source: Bangladesh Bank

5) Reverse Repo auctions were introduced in FY 2003 as a counterpart of repo auctions

with the view to limiting excess funds that the banks offered in the reverse repo auctions.
The reverse repo auctions are used as a fine-tuning supplement to the weekly treasury
bills auctions to mop up excess liquidity.

Table: Reverse Repo with Bangladesh Bank

Bids received Bids accepted

Auction
Tenor Total Amount Range of Total Amount Cut-off
date (cr Taka) (cr Taka) rate (%)
bids rate (%) bids
15/11/201
1 15 7058 5.25 15 2046.5 5.25
5
  Total 15 7058   15 2046.5  
12/11/201
1 12 6474 5.25 12 2105 5.25
5
  Total 12 6474   12 2105  
11/11/201
1 15 7627 5.25 15 2136 5.25
5
  Total 15 7627   15 2136  
Source: Bangladesh Bank

 Characteristics of Bangladesh Money Market

The central bank controls the entire operation of the organized sector of the Money Market. Over
the years both commercial banks and other banks have come to depend more and more on the
rediscounting and borrowing facilities provided by central bank (CB), especially during the busy
season. Moreover, the CB supervises their lending policies from time to time. The main
characteristics of money market of Bangladesh are as follows.
1. It is not a single market but a collection of markets for several instruments
2. It is wholesale market of short-term debt instruments
3. Its principal feature is honor where the creditworthiness of the participants is important.
4. The main players are: Reserve bank of India (RBI), Discount and Finance House of India
(DFHI), mutual funds, banks, corporate investor, non-banking finance companies (NBFCs), state

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governments, provident funds, Primary dealers. Securities Trading Corporation of India (STCI),
public sector undertaking (PSUs), non-resident Indians and overseas corporate bodies.
5. It is a need-based market wherein the demand and supply of money shape the market.

 Participants of Bangladesh Money Market Participants

It is usually well known that in money market there are two main participants: Supplier and
demander of money market securities. It is quite natural that participants in the money market
acts both supplier and demander of loans and securities. Generally, the participants in money
market are:
i Individual
ii Business and
iii Governments.

More specifically we can identify different participants as:

1. Commercial Banks, Co-operative Banks, Finance, industrial and service companies,

Money market mutual funds and Primary Dealers are allowed to borrow and lend.

2. Financial Institutions, Mutual Funds, and certain specified entities are allowed to
access to Call/Notice money market only as lenders.

3. Individuals, firms, companies, corporate bodies, trusts and institutions can purchase
the treasury bills, CPs and CDs.

4. All other financial institutions (investing)

5. Short-term investing for income and liquidity

6. Short-term financing for short and permanent needs

7. Large transaction size and telecommunication network

Money market securities:

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 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 Issuer Common Maturities Secondary Market

securities Investors Existence
Treasury bill Federal Households, 13 weeks, 26 weeks or 1-year High
Government firms and 1 Year
financial
institutions
Retail Banks and Households 7 Days to 5 Years or Nonexistent
certificates saving institute Long
of deposit (CDs)
Negotiable Large Banks and Firms 2 Week to 1Year Moderate
certificates Saving
of deposit Institutions
(NCDs)
Commercial Bank holding Firms 1 Days to 270 Days Low
paper Companies,
Finance
Companies and
Others
Eurodollar Foreign Bank Firms and 1 Days to 1 Year Nonexistent
Deposit Government
Banker’s Bank (Exporting Firms 30 Days to 270 Days High
acceptances firm can sell the
acceptance at a
discount obtain

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 funds)
Federal Funds Depository Depository 1 Days to 7 Days Nonexistent
institutions Institutions
Repurchase Firm and Firms and 1 Days to 15 Days Nonexistent
agreements Financial Financial
Institutions Intuitions

1) TREASURY BILLS

Treasury Bills issued by the government as an important tool of raising public finance were of
three types, although all of them were 90-day bills. Among these three types, bulk was
represented by ad-hoc treasury bills issued to meet the cash balance need of the government. A
second type was the 3-months treasury bills on tap introduced in August 1972 and their
purpose was to mop up the excess liquidity of banks. The third type was the 3-months treasury
bills introduced for subscription exclusively by the NON-BANK FINANCIAL INSTITUTIONS, non-
financial enterprises and the public.

TYPES OF T-BILL

• Three-months (12-Weeks / 90-days)

• Six-months (24-Weeks)
• Twelve-months (one-year)

Treasury bills are sold at a discount to the par value, which is its actual value. For example, a
Treasury bill with a par value of $10,000 may be sold for $9,500. The US Government, through
the Department of Treasury, promises to pay the investor the full-face value of the T-bill at its
specified maturity date. Upon maturity, the government will pay the investor $10,000, resulting
in a profit of $500. The amount of profit earned from the payment is considered the interest
earned on the T-bill.

 HOW TO CALCULATE RETURN ON T-BILLS?

As we have studied earlier that T-Bills do not carry any interest rate but instead are sold at a
discount from their par value or face value. Thus, their yield is based on their appreciation in
price between time of issue and the time they mature or are sold by the investor.

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T-bills do not carry a promised interest rate. Instead, they are sold at a discount from their par or
face value. Bill yields are determined by the bank discount method, which does not compound
interest rates and uses a 360-day year for simplicity. The bank discount rate (DR) on T-bills:

Par value – Purchase value 360

= Par value * Days¿
maturity ¿

2) CERTIFICATE OF DEPOSIT

A certificate of deposit (CD) is a product offered by banks and credit unions that provides an
interest rate premium in exchange for the customer agreeing to leave a lump-sum
deposit untouched for a predetermined period of time. Almost all consumer financial
institutions offer them, although it’s up to each bank which CD terms it wants to offer, how
much higher the rate will be compared to the bank’s savings and money market products, and
what penalties it applies for early withdrawal.
A certificate of deposit (CD) is an interest-bearing receipt for funds left with a depository
institution for a set period of time. CD interest rates are computed as a yield to maturity (YTM)
on a 360-day basis.

Term∈days
Interest income = 360
* Deposit Principal * Promised YTM

3) COMMERCIAL PAPER
Commercial paper is a commonly used type of unsecured, short-term debt instrument
issued by corporations, typically used for the financing of payroll, accounts payable and
inventories, and meeting other short-term liabilities. Maturities on commercial paper
typically last several days, and rarely range longer than 270 days. Commercial paper is
usually issued at a discount from face value and reflects prevailing market interest rates.

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  CALCULATION OF RATE OF RETURN ON COMMERCIAL PAPER

DRCP = (PAR VALUE – PURCHASE PRICE) / PAR VALUE * 360 / DAYS TO MATURITY

4) REPURCHASE AGREEMENT (REPO)

Repurchase agreements are agreements between a borrower and a lender where the borrower,
in effect, sells securities to the lender with the stipulation that the securities will be repurchased
on a specified date and at a specified, higher price. The securities serve as collateral for the
loan. Most Repo agreements mark the collateral to market daily. If the value of the collateral
drops below the required margin, then the borrower must send more securities to the lender to
maintain margin or some money to reduce the principal outstanding.

 MAJOR BORROWERS AND LENDERS

Major borrowers include government bond dealers of Treasuries and federal agency
securities, and large banks. Government securities are the main collateral for most
repos, along with federal agency securities and mortgage-backed securities etc.
Active lenders include state and local governments, insurance companies, non-
financial corporations, and foreign financial institutions who find the market a
convenient, relatively low risky way to invest temporary surplus cash that may be
retrieves quickly when the need arises.

 CALCULATION OF REPO INTEREST INCOME

Usually the securities pledged behind a Repo are valued at their current market price
plus accrued interest on security less a small “haircut” (discount) to reduce the lender’s
exposure to market risk. Longer the term and riskier or less liquid the security pledged;
larger the “haircut” will be charged. Interest income from repurchase agreement can be
determined by this formula:

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RP Interest income = Amount of loan x Current Repo Rate x (Repo Term in days/360
days)

5) BANKERS ACCEPTANCE

The literal meaning of the term acceptance is approval. In financial terms acceptance means a
vow to pay a definite amount of money. The person who will pay is called as the promissory
while the one who will receive is the beneficiary.

The document which is the evidence of this promise is called a draft. When this draft tells the
promissory to pay the money on a predetermined specified date then this draft is termed as a
time draft. The promissory puts his

• Signature
• The word accepted on top of his signatures and the date on which
the amount will be paid.

Now the promissory is legally obliged to pay the amount as mentioned in the draft to the
beneficiary because it has been accepted properly by him according to all requirements of
official acceptance. If the time draft is formally accepted by a bank then it becomes a banker’s
acceptance.

In case of a banker’s acceptance the initial promissory is obliged to pay the sum of money and
the interest money charged before or on the maturity date to the bank while the bank is obliged
to pay the money to the beneficiary. The bank becomes the primary obligor.

Banker’s acceptance is usually used in trade; mostly for international business but is also
frequently used for domestic dealing as well. The maturities of banker’s acceptance mostly
range from 30 to 180 days. It allows the international as well as national dealers to trade with
each other. As the dealing firms have not met or may even never meet; have a problem of
trusting each other. So, banker’s acceptance minimizes their risk. Meanwhile the promissory
also gets more time to make the payments.

6) EURODOLLARS DEPOSITS

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Eurodollars are the leading component of the Eurocurrency markets today. There is a need for
Eurocurrency markets because funds are required in international currencies worldwide mainly
in Dollars, Euros and Pounds. Eurodollars are the Eurodollars of US dollars in banks which are
located outside United States.
These can also be the branches of the US banks located outside US. The deposits are recorded
in the denomination of dollars rather than their home currency. Generally, the "euro" prefix can
be used to indicate any currency held in a country where it is not the official currency.
These deposits are loaned to the home offices of the banks in US, lent to business enterprises
that have to make their payments in dollars. It can be retained as well to meet the reserve
requirements and to maintain liquidity. These can be lent to government if it needs dollars and
to private investors as well. The Eurodollar deposits are always moving in the form of loans.

7) FEDERAL FUNDS
Federal funds refer to the overnight borrowings which are undertaken in order to meet the state
bank’s reserve requirements. These are transferred from the lending institution’s account to the
borrowers account.
The funds are not physically transferred. When they are repaid then an entry in books satisfies
the whole loan. The most important borrower in the federal funds market is the commercial
banks. Other financial institutions, security dealers, business corporations and the local
government provide readily available funds for lending in the federal market.
The banks and DFIs are legally obliged to keep a certain amount of funds in the reserve
account which is kept with the state bank of Pakistan. This is equal to the fraction of the
deposits which are kept with a bank.
To meet the requirement of this legal reserve ratio the banks borrow funds mostly on overnight
basis from the federal funds market. Most federal funds are for overnight basis and they have a
fixed interest rate.
Today the online system has made it very easy to know that which institutions are short of
funds and which have surplus. The one who is short gets the benefit that its immediate
requirement of money is fulfilled while the one with surplus gets interest income on its funds
and thus earns it through the federal fund market.

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The interest rates which are levied on these funds highly fluctuate daily. It depends on the
volume of funds which is surplus in the market and the volume of fund needed by the market.

SWOT analysis of Bangladesh Money Market

 Strength
• Ability to issue paper
• Help for the Government
• A Great Place to Park Money
• Highly Liquid

 Weakness

• Shortage of Investment Instruments

• Opportunity Lost
• Expenses Can Take a Toll
• Lack of Organized Banking System
• Risk of alienating banks whose loans may be needed when an emergency develops.

 Opportunity

• The new taxation policy can significantly impact the way of doing business and can open
new opportunity for established players such as Financial Institutions, Inc. to increase its
profitability.
• Lower inflation rate – The low inflation rate brings more stability in the market, enable
credit at lower interest rate to the customers of Financial Institutions.
• Bank management has to ensure profit in line with the target set by the board, said
Rahman, also the managing director of Dhaka Bank.

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 • New customers from online channel

 Threat
• Insufficient Funds or Resources
• Purchasing Power Can Suffer
• Less number of Dealers

 SIGNIFICANCE OF MONEY MARKET IN BANGLADESH

ECONOMY

In normal times, money markets are among the most liquid in the financial sector. By providing
the appropriate instruments and partners for liquidity trading, the money market allows the
refinancing of short and medium-term positions and facilitates the mitigation of business’
liquidity risk. Importance of a developed money market are discussed below:

1) Risk sharing: The intermediate case in which markets and institutions co-exist is rarely
analyzed in the context of growth models because the addition of markets can destroy the
risk-sharing opportunities provided by intermediaries. In addition, studies focus on the
role of financial systems that face diversifiable risks. The implications for financial
development and financial structure on economic growth are potentially quite different
when markets cannot diversify away all of the risks inherent in the economic
environment. One importance of risk sharing on economic growth comes from the fact
that savers generally do not like risk, high-return projects tend to be riskier than low
return projects. The ability to hold a diversified portfolio of innovative projects reduces
risk and promotes investment in growth-enhancing innovative activities.
2) Financing Trade: Money Market plays crucial role in financing both internal as well as
international trade. Commercial finance is made available to the traders through bills of
exchange, which are discounted by the bill market
3) Producing information and allocating capital: Money Market develop models where
financial intermediaries arise to produce information and sell this information to savers.
Financial intermediaries can improve the extant assessment of investment opportunities

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 with positive ramifications on resource allocation by economizing on information
acquisition costs
4) Liquidity: Money market funds provide valuable liquidity by investing in commercial
paper, municipal securities and repurchase agreements: Money market funds are
significant participants in the commercial paper, municipal securities and repurchase
agreement (or repo) markets. Money market funds hold almost 40% of all outstanding
commercial paper, which is now the primary source for short-term funding for
corporations, who issue commercial paper as a lower-cost alternative to short-term bank
loans. The repo market is an important means by which the Federal Reserve conducts
monetary policy and provides daily liquidity to global financial institutions.
5) Profitable Investment: Money market enables the commercial banks to use their excess
reserves in profitable investment. The main objective of the commercial banks is to earn
income from its reserves as well as maintain liquidity to meet the uncertain cash demand
of the depositors.
6) Self-Sufficiency of Commercial Bank: In the situation of emergency, when the
commercial banks have scarcity of funds, they need not approach the central bank and
borrow at a higher interest rate. On the other hand, they can meet their requirements by
recalling their old short-run loans from the money market.
7) Encouragements to saving and investment: Money market has encouraged investors to
save which results in encouragement to investment in the economy. The savings and
investment equilibrium of demand and supply of loanable funds helps in the allocation of
resources.
8) Helps in correcting the imbalances in economy: Financial policy on the other hand, has
longer term perspective and aims at correcting the imbalances in the economy. Credit
policy and the financial policy both balance each other to achieve the long-term goals
strong-minded by the government. It not only maintains total control over the credit
creation by the banks, but also keeps a close watch over it. The instruments of financial
policy counting the repo rate cash reserve ratio and bank rate are used by the Central
Bank of the country to give the necessary direction to the monetary policy.

 Problems of Bangladesh’s Money Market

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Though the Bangladeshi money market is considered as the advanced money market among
developing countries, it still suffers from many drawbacks or defects. These defects limit the
efficiency of our market.

1) Absence of Integration: The money market of Bangladesh is broadly divided into the
Organized and Unorganized Sectors. The former comprises the legal financial institutions
backed by the central bank. The unorganized statement of it includes various institutions
such as indigenous bankers, village money lenders, traders, etc. There is lack of proper
integration between these two segments.
2) Shortage of Capital: Bangladesh is a labor intensive. Always have been shortage of
capital prevail in the market.
3) Inelasticity and Instability: There are always instability prevail in the money market of
Bangladesh. A stable market can secure the elasticity of the market. But Bangladesh have
limitation on that occasion.
4) Shortage of Investment Instruments: In Bangladesh, various investment instruments
such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers,
etc. are used. But taking into account the size of the population and market these
instruments are inadequate.
5) Shortage of Commercial Bill: In our country, as many banks keep large funds for
liquidity purpose, the use of the commercial bills is very limited. Similarly, since a large
number of transactions are preferred in the cash form the scope for commercial bills are
limited.
6) Lack of Organized Banking System: In Bangladesh, even though we have a big
network of commercial banks, still the banking system suffers from major weaknesses.
The absence of the organized banking system is major problem for Indian money market.
7) Less number of Dealers: There are poor number of dealers in the short-term assets who
can act as mediators between the government and the banking system. The smaller
number of dealers leads to the slow contact between the end lender and end borrowers.
8) Multiple rate of interest: In the Bangladeshi money market, especially the banks, there
exists too many rates of interests. These rates vary for lending, borrowing, government
activities, etc. Many rates of interests create confusion among the investors.

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  RECOMMENDATIONS FOR MONEY MARKET IN BANGLADESH

The following recommendation can make our money market more active and smarter.

• Diversifying the Market

• Access to bill rediscounting market increasingly
• Unique role for all bank for lending and borrowing of money
• Denationalization of state-owned banks can influence the money market.
• The micro finance institutions should move forwards to regulate the money market.
• Weekly performing banks must be broad under the Bangladesh Bank.
• Reducing monetary shortages through open market operations

 CONCLUSIONS
Money markets originated long ago as a dull corner of the capital market where businesses
financed short-term trade and working capital. They’ve since grown in size with the help of
securitization and structured finance to rival the volume of credit intermediated through the
banking system, taking on massive maturity mismatch, credit risk, and liquidity risk in the
process. The modern transformation of the money market was facilitated by a series of
permissive regulatory rulings most importantly exempting money market mutual funds from
marking their shares to market, exempting repurchase agreements from the stay in bankruptcy,
allowing depository institutions to guarantee asset backed commercial paper without setting
aside regulatory capital, and allowing rating agencies to qualify asset backed commercial paper
for financing in money market mutual funds on the basis of non-binding voluntary credit
guarantees by depository sponsors. The result was a credit cycle fueled by money market
finance that collapsed with runs in asset backed commercial paper, tri-party repo, and money
market mutual funds. The disastrous role of money market finance in the credit cycle should
prompt a reconsideration of the permissive regulatory rulings above so that money markets do
not again become the financial fuel for a future catastrophe.

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Reference:

 Money and Capital Market (Peter S. Rose / Milton H. Marquis)

 Capital Budgeting and long-term Financing Decisions (Neil Seitz) (Mitch Ellison)

 www.investopedia.com/university/moneymarket

 Bangladesh Bank Website www.bb.org.bd

 ‘Wage earners' remittance inflow’ From July, 2016 Statistics Department, Bangladesh
Bank & Up to June, 2016 Foreign Exchange Policy Department, Bangladesh Bank.
 Remittances to Bangladesh, Wikipedia
 "Study About Characteristics of Money Market Instruments Finance Essay."
https://essays.pw/essay/study-about-characteristics-of-money-market-instruments-
finance essay-

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