STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH INTERNATIONAL ISLAMIC UNIVERSITY CHITTAGONG Assignment On ISLAMIC FINANCIAL SYSTEM Topic: Structure of Financial

System in Bangladesh Submitted To: MR. ABDULLAHIL MAMUN LECTURER DEPARTMENT OF BUSINESS ADMINISTRATION INTERNATIONAL ISLAMIC UNIVERSITY CHITTAGONG. Submitted By: MUHAMMAD SHAHINUR EKRAM CHOWDHURY ID No: R093117 RMBA, 4th Trimester, Section (B). Submitted Date: 22 February, 2010. 1

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH Financial System: The financial system is a set of organized institutional set-up through which su rplus units transfer their funds to deficit units. Define a financial system fai r narrowly, to consist of a set of markets, individuals and institutions, which trade in those markets and the supervisory bodies responsible for their regulati on. The end-users of the system are people and firms whose desire is to lend and to borrow. A financial system is a system that to channels funds from lenders t o borrowers, to creates liquidity and money, to provides a payments mechanism, t o provides financial services such as insurance & pensions and to offers portfol io adjustment facilities. In Finance, the financial system is the system that al lows the transfer of money between savers and borrowers. It comprises a set of c omplex and closely interconnected financial institutions, markets, instruments, services, practices and transactions. An economys financial system exists to orga nize the settlement of payments, to raise and allocate finance and to manage the risks associated with financing and exchange. So, the government sector and the corporate sector are the users of financial surplus of household sector and tha t the financial sector performs this vital function of intermediation. Empirical evidence shows that the growth of financial markets and development of the econ omy are complementary to each other. A developed financial system is one that ha s a secure and efficient payment system, security market and financial intermedi aries that arrange financing and derivative markets & financial institutions tha t provide access to risk management instruments. Thus, A financial system consis ts of a set of organized markets and institutions together with regulators of th ose markets and institutions. Their main function is to channel funds between en d users of the system: from lenders (surplus units) to borrowers (deficit units). In addition, a financial system provides payments facilities, a variety of service s such as insurance, pensions and foreign exchange, together with facilities, wh ich allow people to adjust their existing wealth portfolios. 2

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH Background of financial system in Bangladesh: The financial system in Bangladesh includes Bangladesh Bank (the Central Bank), scheduled banks, non-bank financial institutions, Microfinance institutions (MFI s), insurance companies, co-operative banks, credit rating agencies and stock ex change. Among scheduled banks there are 4 Nationalised commercial banks (NCBs), 5 stateowned specialized banks (SBs), 30 domestic private commercial banks (PCBs ), 9 foreign commercial banks (FCBs) and 29 non-bank financial institutions (NBF Is) as of December 2006 after that total number of institutions are increasing r apidly. However, Rupali Bank, an NCB is being sold to a foreign buyer, and once this transaction is completed, the country will have only 3 NCBs., which are bei ng corporative. Over and above the institutions cited above, three development f inancial institutions namely House Building Finance Corporation (HBFC), Ansar-VD P Unnayan Bank and Karma Shangsthan Bank are operating in Bangladesh, all of whi ch are state owned. The financial system of Bangladesh is mainly bank dependent. Though in the recent years, a number of non-banking financial institutions (lea sing and merchant banks) have been established, yet the banking sector still cap tures the lion share of the financial market. Financial Sectors in Bangladesh: Bangladesh Bank is the key player for the financial sector of Bangladesh as well as for the economy. Bangladesh Bank is the banker to the government as well as to other banks. It formulates and implements monetary policy, manages foreign ex change reserve and is the authority to supervise and regulate other banks and no n-bank financial institutions. The financial sector of Bangladesh has gone throu gh a lot of reforms in the past two decades and central bank reform was a key el ement of the reform agenda. This study maps the various reforms that have taken place so far. Bangladesh Bank has improved in certain areas and yet there are av enues where more can be done. The bank plays a dual role in the economy. Banglad esh Bank supervises and regulates the countrys banking sector where it has signif icant improvements. On the other hand, the bank underachieves in terms of autono mous formulation and implementation of monetary policy in coordination with the government. 3

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH Structure of Financial System: The Main Constituents of Our Countries Financial System Are: 01. Financial Insti tutions/Intermediaries. 02. Financial Instruments. 03. Financial Markets. Structure of Financial System 01-(i). Banks: a) b) c) d) Private Commercial Banks Public Commercial Banks Private Foreign Com mercial Banks Specialized Financial Institutions 01-(ii). Non-Bank Financial Institutions: a) b) c) d) e) f) Insurance Companies Security Firms Investment Banks Financial Companies Mutual Funds Pension Funds 01. Financial Institutions 02-(i). Money Market Instruments: a) Treasure Bills Commercial Paper Negotiable Certificate of deposits d) Banker Acceptances 02-(ii). Capital Market Instruments: a) b) c) d) e) f) Bonds Stocks Govt. Securities Bank & Consumer Commercial Paper Debentures Mortgages 02. Financial Instruments b) c) 03-(i). Primary Market Secondary Ma rket 03. Financial Markets 03-(ii). 03-(iii). Mon ey Mark et 03-(iv). Capital Market 4

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH 01. Financial Institutions/Intermediaries: An organization which borrows funds from lenders and lends them to borrowers on terms which are better for both parties than if they dealt directly with each ot her. Financial institutions as intermediaries: As a general rule, financial instit utions are all engaged to some degree in what is called intermediation. Rather o bviously intermediation means acting as a go-between for two parties. The parties here are usually called lenders and borrowers or sometimes-surplus sectors or un its, and deficit sectors or units. As a general rule, what financial intermediar ies do is: to create assets for savers and liabilities for borrowers which are m ore attractive to each than would be the case if the parties had to deal with ea ch other directly. There are two general consequences of financial intermediatio n. The first is that there will exist more financial assets and liabilities than would be the case if the community were to rely upon direct lending. The second general consequence of the intervention of financial institutions is that lendi ng and borrowing have become easier. It is now no longer necessary for savers to search out borrowers with matching needs. In this sense financial intermediarie s have lowered the transaction costs of lending and borrowing. 01-(i). Banks: Banking is essentially based on the debtor-creditor relationship between the dep ositors and the bank on the one hand and between the borrowers and the bank on t he other. Interest is considered to be the price of credit, reflecting the oppor tunity cost of money. The commercial banking system dominates Bangladesh s finan cial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief reg ulatory authority in the sector. The banking system is composed of four Public c ommercial banks, five specialized development banks, thirty private commercial B anks and nine foreign commercial banks. Out of 6562 scheduled bank branches oper ating in the country, up to end December 2006 the NCBs operate 3384 branches, of which 2146 are in rural areas and 1238 are in urban areas; SBs have 1354 branch es of which 1200 are in rural areas and 154 are in urban areas; PCBs have 1776 b ranches of which 488 are in rural areas and 1288 are in urban areas; and FCBs ha ve 48 branches exclusively in urban areas. Out of 30 PCBs, six have been operati ng as Islamic banks. After the year 2006 that total number of branches are incre asing rapidly up to 2009. List of All types of banking sectors are: Central Bank Private Commercial Banks Public Commercial Banks Foreign Commercial Banks Speci alized Development Banks 5

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH a) Private Commercial Banks: Even with all the provisions at hand, during the in terviews many experts opined that there could be separate agencies to regulate a nd supervise the private sector banking activities in Bangladesh. A number of ag encies can be set up and each would look into a number aspects related to privat e sector banking. Under the current system, the commercial banks and financial i nstitutions have to report to and are to a certain extent supervised by the Secu rities and Exchange Commission, when they register with the stock exchange. Priv ate banks are the highest growth sector due to the dismal performances of govern ment banks (above). They tend to offer better service and products. AB Bank Ltd Aziz Co-op Commerce & Finance Bank Ltd. BRAC Bank Limited Eastern Bank Limited E astern Bank Limited Social Investment Bank Limited Dutch Bangla Bank Limited Utt ara Bank Limited Dhaka Bank Limited Islami Bank Bangladesh Ltd Pubali Bank Limit ed Uttara Bank Limited IFIC Bank Limited National Bank Limited United Commercial Bank Limited NCC Bank Limited Prime Bank Limited SouthEast Bank Limited Al-Araf ah Islami Bank Limited Social Islami Bank Limited Standard Bank Limited One Bank Limited Exim Bank Limited Mercantile Bank Limited Bangladesh Commerce Bank Limi ted Mutual Trust Bank Limited First Security Islami Bank Limited The Premier Ban k Limited Bank Asia Limited Trust Bank Limited Shahjalal Islami Bank Limited Jam una Bank Limited ICB Islami Bank Moon Bank Limited United Commercial Bank Limite d 6

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH b) Public Commercial Banks: The Basel Committee on Banking Supervision published guidance in 1999 to assist banking supervisors in promoting the adoption of sou nd corporate governance practices by banking organizations in their countries. T his guidance drew from principles of corporate governance that were published ea rlier that year by the Organization for Economic Co-operation and Development (O ECD) with the purpose of assisting governments in their efforts to evaluate and improve their frameworks for corporate governance and to provide guidance for fi nancial market regulators and participants in financial markets at public commer cial banks. Sonali Bank Limited Janata Bank Limited Agrani Bank Limited Rupali B ank Limited c) Private Foreign Commercial Banks: The state and nature of corporate governanc e has been studied under five general headings. Three types of foreign commercia l banks or companies were studied: a) the public corporations - these are mainly private utility companies operated by the government with a board of director c onsisting of the people of Bangladesh and few experts, b) financial institutions like banks which are listed in the Dhaka Stock Exchange but related with govern mental condition about share distribution and c) non-financial limited companies also listed in the stock exchanges in the country but related with governmental condition about share distribution. Citibank HSBC Standard Chartered Bank Comme rcial Bank of Ceylon State Bank of India Habib Bank National Bank of Pakistan Ba nk Alfalah d) Specialized Financial Institutions: Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to me et the credit needs of the agricultural sector while the other two ( Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) are for extending term loans to the industrial sector. The Specialized banks are: Grameen Bank Banglade sh Krishi Bank Bangladesh Development Bank Ltd Rajshahi Krishi Unnayan Bank Basi c Bank Ltd (Bank of Small Industries and Commerce) Bangladesh Somobay Bank Limit ed (Cooperative Bank) Ansar VDP Unnyan Bank 7

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH 01-(ii). Non-Bank Financial Institutions: Non-Bank Financial Institutions (NBFIs) are an important part of financial syste m in Bangladesh. NBFIs operations are regulated under the Financial Institutions Act, 1993. The NBFIs consist of investment, finance, leasing companies etc. The re were 29 financial institutions operating in Bangladesh as of 31 December 2006 . Of these one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation. Bangladesh Bank has introduced a policy for loan and lease classification and provisioning for NBFIs from December 2000 on a half-yearly basis. Among the 29 financial institutions, 12 have been listed in the stock exchanges up to 31 December 2006 to strengthen financial capability and the rest are under process to be listed in due course after the year 2006 that the total number of institutions are increasing rapidly . Products and Services Offered by NBFIs Non-Bank Financial Institutions play a key role in fulfilling the gap of financial services that are not generally prov ided by the banking sector. The competition among NBFIs is increasing over the y ears, which is forcing them to diversify to a wider range of products and servic es and to provide innovative investment solutions. NBFIs appear to offer flexibl e options and highly competitive products to help customers meet their operation al and financial goals. The table below provides a summary of the product range offered by existing NBFIs of Bangladesh. Different Products and Services of NBFI s 8

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STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH a) Insurance Companies The insurance sector is regulated by the Insurance Act, 1 938 with regulatory oversight provided by the Controller of Insurance on authori ty under the Ministry of Commerce. A separate Insurance Regulatory Authority is being established. A total of 62 insurance companies have been operating in Bang ladesh, of which 19 provide life insurance and 43 are in the general insurance f ield. Among the life insurance companies, except the state-owned Jiban Bima Corp oration (GBC) foreign owned American Life Insurance Company (ALlCO), and the res t of the private. Among the general insurance companies, state-owned Shadharan B ima Corporation (SBC) is the most active in the insurance sector. A total of 31 insurance companies are listed in the capital market, of which 8 offer life insu rances. i) Life Insurance Company (Public) Jiban Bima Corporation ii) Life Insurance Com pany (Foreign) American Life Insurance Co. iii) Life Insurance Company (Private) Progressive Life Insurance Co. Ltd. National Life Insurance Co. Ltd. Rupali Lif e Insurance Co. Ltd. Delta Life Insurance Co. Ltd. Fareast Islami Life Insurance Co. Ltd. Sun Life Insurance Co. Ltd. Homeland Life Insurance Co. Ltd. Meghna Li fe Insurance Co. Ltd. Padma Islami Life Insurance Co. Ltd. Sandhani Life Insuran ce Co. Ltd. Sunflower Life Insurance Co. Ltd. Baira Life Insurance Co. Ltd. Gold en Life Insurance Co. Ltd. Progoti Life Insurance Co. Ltd. Prime Life Insurance Co. Ltd. Popular Life Insurance Co. Ltd. 11

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH iv) General Insurance Company (Public) Sadharan Bima Corporation v) General Insu rance Company (Private) Agrani Insurance Company Limited. Bangladesh Co-operativ e General Insurance Ltd. Bangladesh General Insurance Co. Ltd. Bangladesh Nation al Insurance Co. Ltd. Central Insurance Co. Ltd. City General Insurance Co. Ltd Eastern Insurance Co. Ltd Eastland Insurance Co. Ltd Federal Insurance Co. Ltd G reen Delta Insurance Co. Ltd Janata Insurance Co. Ltd Karnafully Insurance Co. L td Meghna Insurance Co. Ltd Mercantile Insurance Co. Ltd Northern General Insura nce Co. Ltd People s Insurance Co. Ltd Phoenix Insurance Co. Ltd Pioneer Insuran ce Co. Ltd Prime Insurance Co. Ltd Progoti General Insurance Co. Ltd Provati Ins urance Co. Ltd Purabi General Insurance Co. Ltd Reliance Insurance Co. Ltd Rupal i Insurance Co. Ltd United Insurance Co. Ltd Takaful Islami Insurance Company Li mited Crystal Insurance Co. Ltd Republic Insurance Company Limited Global Insura nce Company Limited Paramount Insurance Co. Ltd. Standard Insurance Co. Ltd. Asi a Pacific Insurance Co. Ltd. South Asia Insurance Co. Ltd. Express Insurance Ltd . Continental Insurance Ltd. Desh General Insurance Ltd. 12

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH b) Security Firms Financial institutions that underwrite securities and engage i n related activities such as securities brokerage, securities trading and making a market in which securities can trade. Nabiul Karim Securities Ltd. Haji Moham mad Ali Securities Ltd. GMF Securities Limited Quaiyum Securities Ltd. Dragon Se curities Ltd. TA Khan Securities Co. Ltd., Md. Fokhrul Islam Securities Limited. Shahiq Securities Ltd. Habibur Rahman Securities Limited Ershad Securities Ltd. Mian Abdur Rashid Securities Ltd. Khurshid Securities Ltd. Rapid Securities Lim ited Dawn Securities Limited. Arafat Securities Ltd. Shahed Securities Ltd. Toba rak Securities Ltd. Midway Securities Ltd. Parkway Securities Ltd. HR Securities & Investment Limted Kazi Feroz Rashid Securities Ltd. MAH Securities Ltd. DMR S ecurities Services Ltd. Alhaj Jahanara Securities Ltd. RNI Securities Ltd. GQ Se curities Ltd. Crest Securities Limited. Asenz Securities Ltd. Finvest Securities Ltd. MAH Securities Limited Nabiul Karim Securities Limited Jalalabad Securitie s Limited Haji Mohammad Ali Securities Akij Securities Limited Mian Abdur Rashid Securities 13

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH c) Investment Banks It primarily helps net suppliers of funds transfer funds to net users of funds at a low cost and with maximum degree of efficiency. Bay Leas ing & Investments Limited. Union Capital Ltd. First Lease International Limited Phoenix Leasing Co. Ltd. Peoples Leasing & Financial Services Ltd. d) Financial Companies The primary function of finance companies is to make loans to both ind ividuals and business. Finance companies provide such services as consumer lendi ng, business lending and mortgage financing. Industrial Development Leasing Comp any of Bangladesh (IDLC) Infrastructure Development Company Limited (IDCOL) GSP Finance Limited Delta Brac Housing Finance Corporation Ltd. Fidelity Assets & Se curities Company Limited. Fareast Finance & Investment Ltd. LankaBangla Finance Ltd. Prime Finance & Investment Limited Bangladesh Industrial Finance Co. Ltd. e ) Mutual Funds Mutual funds are portfolios of different securities such as stock s, bonds, treasuries, derivatives, etc. Mutual funds pool money of both individu al and institutional investors allowing the funds to achieve: (i) economies of s cale by reducing costs and increasing investment returns; (ii) divisibility and diversification; (iii) active management with superior stock picking and market timing; (iv) reinvestment of dividends, interest and capital gains; (v) tax-effi ciency; and (vi) buying and selling flexibility. There might be varieties of mut ual funds that differ in terms of their investment objectives, underlying portfo lios of shares, risks and returns, fees and expenses, etc. Mutual funds are prof essionally managed investment schemes that collect funds from small investors an d invest in stocks, bonds, short term money market instruments, and other securi ties. This ensures a diversified portfolio for the investors at much less effort s than through purchasing individual stocks and bonds. Fund managers who underta ke trading of the pooled money and are responsible for managing the portfolio of holdings usually manage mutual funds. Generally, mutual funds are organized und er the law as companies or business trusts and managed by separate entities. Mut ual funds fall into two categories: open-end funds and closedend funds. 14

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH Some categories of mutual funds are: ICB, 1st ICB Mutual Fund, 2nd ICB Mutual Fu nd, 3rd ICB Mutual Fund, 4th ICB Mutual Fund, 5th ICB Mutual Fund, 6th ICB Mutua l Fund, 7th ICB Mutual Fund ICB Mutual Fund 1st BSRS Mutual Fund AIMS First Gran ted Mutual Grameen Mutual Fund One Grameen One: Scheme Two ICB AMCL 1st Mutual F und ICB AMCL Islamic Mutual Fund ICB AMCL Unit Fund ICB AMCL Pension Holder Unit Fund ICB AMCL First NRB Mutual Fund ICB AMCL Second NRB Mutual Fund f) Pension Funds Pension funds are analyzed as financial intermediaries using a functional approach to finance, which encompasses traditional theories of intermediation. F unds fulfill a number of the functions of the financial system more efficiently than banks or direct holdings. Their growth complements that of capital markets and they have acted as major catalysts of change in the financial landscape. Fin ancial efficiency in this functional sense is not the only reason for growth. It is also a consequence of fiscal incentives and benefits to employers, as well a s growing demand arising from the ageing of the population. Employers, such as c ompanies, public corporations, and industry or trade groups, typically sponsor p ension funds; accordingly, employers as well as employees typically contribute. Funds may be internally or externally managed. Returns to members of pension pla ns backed by such funds may be purely dependent on the market (defined contribut ion funds) or may be overlaid by a guarantee of the rate of return by the sponso r (defined benefit funds). 15

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH 02. Financial Instruments: A financial instrument is any contract that gives rise to a financial asset of o ne entity and a financial liability or equity instrument of another entity. A fi nancial asset is any asset that is: (i) Cash; (ii) An equity instrument of anoth er entity; A contractual right: (i) To receive cash or another financial asset f rom another entity; or (ii) To exchange financial assets or financial liabilitie s with another entity under conditions that are potentially favorable to the ent ity. A contract that will or may be settled in the entitys own equity instruments and is: (i) A non-derivative for which the entity is or may be obliged to recei ve a variable number of the entitys own equity instruments; or (ii) A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entitys own equity instrume nts. For this purpose the entitys own equity instruments do not include instrumen ts that are themselves contracts for the future receipt or delivery of the entit ys own equity instruments. The specific form, which a claim takes, is a financial instrument. The range of instruments is existence and also because it enables u s to distinguish certain broad categories of instrument. Selections of instrumen ts are: Treasure Bills Commercial Paper Negotiable Certificate of deposits Banke r Acceptances Bonds Stocks Govt. Securities Bank & Consumer Commercial Paper Deb entures Mortgages Company shares and government stock, for example, once created can be bought and sold in organized markets without their original issuers ever again being involved. Instruments that are issued with a fixed rate of interest for as long as they exist government bonds, for example from those assets whose yield varies according to market conditions. The latter category includes a wid e range of claims from bank deposits to company shares. A very popular basis for distinguishing types of instrument is maturity. This means the length of time, which has to elapse before the claim is repaid. This may be very long. With comp any shares, for example, it is theoretically infinity. Some government stocks ar e issued with twenty-five years to maturity. Contrast this with treasury bills, which are issued for ninety-one days or even bank deposits that can be demanded immediately or at sight. 16

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH 02-(i). Money Market Instruments: The Money Market is an instrument of the fixed income market. Generally speaking , the term "fixed income" is synonymous with bonds. In reality, a bond is just o ne type of fixed income security. The difference between the money market and th e bond market is that the money market specializes in very short-term debt secur ities (debt that matures in less than one year). Money market investments are al so called cash investments because of their short maturities, and their near-liq uid nature (almost immediate access upon request). Money market securities are e ssentially IOU s issued by governments, financial institutions, and large corpor ations. These instruments are very liquid and considered extraordinarily safe. B ecause they are extremely conservative, money market securities offer significan tly lower return than most other securities. One of the main differences between the money market and the stock market is that most money market securities trad e in awfully high denominations. This limits the access of the individual invest or. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to t he stock market where a broker receives commission to acts as an agent, while th e investor takes the risk of holding the stock. Another characteristic of a deal er market is the lack of a central trading floor or exchange. Deals are transact ed over the phone or through electronic systems. The easiest way for us to gain access to the money market is with a money market mutual funds, or through money market bank account, which are offered at this website.. These accounts and fun ds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments, like treasury bills, may be purchased directly. Failing that, they can be acquired th rough other large financial institutions with direct access to these markets. Ca ll money rate -the rate at which short term funds are lent and borrowed among ba nks- is the core of an overnight money market for credit. Volatility of the over night money market rate (call money rate) is a very usual phenomenon for a wellf unctioning market. Market participants determine the rate according to their per ceptions of the current and future liquidity condition in the market. Thus this rate reflects the supply and demand behavior of bank reserves, and hence, gives important signals to the central bank to understand the market pressure. Call mo ney rate in Bangladesh can be viewed as a market-clearing rate. Fluctuations in the overnight rates come mainly from supply and demand for liquidity in the mone y market. Periodic change in reserve requirements as well as economic and season al factors may cause the demand to rise. The overnight money market rate can als o be impacted on the days when Bangladesh Bank (BB) conducts open market operati ons. a) Treasure Bills Dept obligations of the Government used to finance fiscal deficits. Bangladesh Bank treasure bills are issued in one three, six, twelve m onth and two year maturity. They pay a set amount at maturity. 17

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH b) Commercial Paper It is an unsecured short-term promissory notes issued by a c orporation to raise shortterm cash, often to finance working capital requirement s. A Sample copy of Commercial Paper is given below: 01. PARTNERSHIP ACCOUNT: TERMS & CONDITIONS We request and authorize you until any one of us shall give you notice in writin g to the contrary, to honour and debit to the firms account all Cheques, Guarante es, Negotiable Instruments, or other Orders which may be drawn, or Bills Accepte d or Notes made or Receipts for Money owing by you to the firm signed by any one of us in the name or on behalf of the firm, whether the firms Account be for the time being in credit or overdrawn or may become overdrawn in consequence of suc h debit and we will be jointly and severally responsible for the repayment of an y such overdraft and interest there against. -We also request and authorize you to accept the endorsement of any one of us in the name or on behalf of the firm on Cheques, Orders, Bills, Notes or other Negotiable Instruments. -You are hereb y authorized to carry out any instruction in connection with the account (includ ing instruction of countermanding payment of Cheques, Bills of Exchange, Promiss ory Notes or order for payment) when such instructions are given by all or any o ne of us. -Any security or other property of or deposited in the name of the fir m may be withdrawn and any money may be borrowed from you in the name or on beha lf of the firm and may be secured in any manner upon any security money or prope rty of or deposited in the name of the firm by any one of us and we will jointly and severally be responsible for repayment of such money with interest, costs, charges and expenses. -Any liability whatsoever incurred in respect of the accou nt shall be joint and several. -This authority shall remain in force until revok ed notwithstanding any change in the constitution or name of the firm and shall apply notwithstanding any change in the membership of the firm by death, bankrup tcy, and retirement or otherwise or the admission of any new partner(s). (This a ccount opening form must be signed by all the Partners) Partners Signature Name: 02. LIMITED COMPANY: Partners Signature Name: Partners Signature Name: Partners Signature Name:

At General Meeting/a Meeting of the Board or Directors of Limited held at unt with ONE Bank Limited.. Branch and we have been authorized to advise the Bank ac ngly. We enclose the following Documents for the purpose: a. Certified copy of t he Memorandum & Articles of Association of the Company. b. Certificate of Incorp oration of the Company for inspection and return, and a duly certified photocopy for Banks record c. Certificate from the Registrar of Joint Stock Companies that the company is entitled to commence business (in case of Public Ltd. Co.) for i nspection and return, and a duly certified Photocopy for Banks record. d. Latest copy of Balance sheet. e. Extract of resolution of the Board/General Meeting of the Company for opening the account and authorization for its operation duly ce rtified by the Chairman/Managing Director of the Company. List of Directors with addresses (a latest certified copy of the form-xii) 18

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH We would now request you to open a Current/..Account in the name of the Company. We u ndertake to advise the Bank, of changes in the authorized signatures and these w ill be supported by further Resolution of the Company. We agree to comply with t he rules governing the account of ONE Bank Limited and agree to comply with the Schedule of Charges of the Bank. Authorized Signature Name: Authorized Signature Name: Authorized Signature Name: Authorized Signature Name: 03. GENERAL CONDITIONS OF GOVERNING ACCOUNTS: a) The law, rules and regulations of Bangladesh, usual customs and procedures common to Banks in Bangladesh will a pply to and govern the conducts of the account opened with the Bank. b) Any pers on opening an account will be deemed to have read, understood and accepted the r ules governing the account. c) A suitable introduction by an introducer acceptab le to the Bank is required prior to opening of any account. Recent photographs o f the account openers duly attested by the introducer must be produced. d) Each account will be given one account number. This number is to be properly quoted o n all letters and / or documents addressed to the Bank and on all deposit slips. The Bank will not be responsible for any loss or damage occurring as a result o f wrong quotation of account number. e) Interest/commissions/service or maintena nce of account charges will be levied by the Bank as determined by the Bank from time to time and as per Bangladesh Bank regulation. f) The funds available in a ny of the account holders account (the customer) with the Bank will be considered by the Bank to be a security for any commitment(s), the Bank is entitled withou t giving prior notice to the customer to utilize such funds against the obligati on(s) and/or commitment(s) of the customer to the Bank. g) Any statement of acco unt dispatched to the customer will be considered as approved unless any discrep ancy (-ies) is/are notified in writing to the Bank within 15 days from the date of dispatch. The Bank is not responsible for delays or non-delivery due to mail problems. Statement of account to be picked up will be considered as approved ev en if not picked up 15 days after the date they are produced. Statements of acco unt are not produced when there is no operation during the month. Those can be o btained on special request. h) Account holders must provide maximum security to the cheque books in their possession and the Bank is not responsible for any los s occurring due to inadequacy of security. Any chequebook loss or misuse must be immediately reported to the Bank and confirmed in writing without any delay. i) When cheque deposited are payable by other Banks or outstation, they are availa ble after clearing or collection only. Service charge will be charged @ Tk. 100/ - in Current A/C and Savings A/C Half yearly or as changed by the bank from time to time as and when required. j) The Bank reserves the right to close any accou nt without giving prior notice if the conduct of the account is unsatisfactory i n the opinion of the Bank or for any other reason(s) whatsoever. k) The balance in the account(s) is payable solely at ONE Bank Limited and shall be governed by and subject to laws in effect in Bangladesh. As used herein laws will include Ban k Circulars, Modifications, Regulations and Orders of the Government and Banglad esh Bank including practice of banking. l) The Bank reserves the right to amend the present rules at any time in any manner with or without giving prior notice to the account holder(s) separately or to the public. The chequebook will not be issued unless and until all the required formalities are completed. 04. AGREEME NT: I/We hereby agree to the above general conditions. Signature of the applicant/ Authorized signature Signature of the applicant/ Authorized signature Signature of the applicant/ Authorized signature Signature of the applicant/ Authorized signature 19

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH 20

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH c) Negotiable Certificate of deposits Negotiable certificate of deposit means a short-term security, typically issued by a bank to raise funds. A Negotiable Cer tificate of Deposit is a short-term investment in a security, being a negotiable certificate of deposit issued by NAB. If you choose to invest in a Negotiable C ertificate of Deposit, you pay the purchase price on the purchase date. On the m aturity date, NAB pays you the face value of the Negotiable Certificate of Depos it. The return on your investment is equal to the difference between the purchas e price and the face value. d) Banker Acceptances It is a time draft payable to a seller of goods, with payment guaranteed by a bank. Time drafts issued by a ba nk are orders for the bank to pay a specified amount of money to the bearer of t he time draft on a given date. 02-(ii). Capital Market Instruments: Capital Market Instruments are a number of capital market instruments used for m arket trade, including stocks, bonds, debentures, foreign exchange, fixed deposi ts, and others. The investors to make a profit out of their respective markets u se these. All of these are called capital market instruments because these are r esponsible for generating funds for companies, corporations, and sometimes natio nal governments. This market is also known as securities market because long-ter m funds are raised through trade on debt and equity securities. Both companies a nd governments may conduct these activities. This market is divided into primary capital market and secondary capital market. The primary market is designed for the new issues and the secondary market is meant for the trade of existing issu es. Stocks and bonds are the two basic capital market instruments used in both t he primary and secondary markets. There are three different markets in which sto cks are used as the capital market instrument: the physical, virtual, and auctio n markets. Bonds, however, are traded in a separate bond market. This market is also known as a debt, credit, or fixed income market. Trade in debt securities a re done in this market. There are also the Debentures that are used as capital m arket instruments by the investors. These instruments are more secured than the others, but they also provide less return than the other capital market instrume nts. While all capital market instruments are designed to provide a return on in vestment, the risk 21

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH factors are different for each and the selection of the instrument depends on th e choice of the investor. The risk tolerance factor and the expected returns fro m the investment play a decisive role in the selection by an investor of a capit al market instrument. Capital market instruments should be selected only after d oing proper research in order to increase one. Bangladesh Capital Market Summary (As on 31 March 2008) Indicators No. of companies No. of mutual funds No. of de bentures No. of treasury bonds No. of corporate bonds Total No. of Listed Securi ties Dhaka Stock Exchange 270 14 8 75 1 368 Chittagong Stock Exchange 215 14 1 230 a) Bonds Bond market links issuers having long term financing needs with investo rs willing to place funds in a long term, interest bearing securities. A matured domestic bond market offers wide range of funding for the government and the pr ivate sector. While fixed income instruments are the epitome of long term financ e options, the size of tradable government bonds is small, secondary trading is rare, and more critically, public issue of corporate bonds may remain suspended, as it has been the case in Bangladesh since 1996 [Hossain and Azim, 2005]. Bang ladesh Bank has taken a number of initiatives to promote bond market development , such as changing legal and regulatory framework and also the tax system for se curing, or issuing of zero-coupon bonds. But there are some major problems in de velopment of bond market in the country: weak governance at the institutional an d market levels; high non-performing assets of the nationalized commercial banks (NCBs); poorly defined and overlapping responsibilities of Securities and Excha nge Commission (SEC) and Ministry of Finance; and the lack of incentives and pri vate initiatives to drive market developments. The government is aware of these problems, and international organizations such as World Bank, IMF and some agenc ies such as IFC or ADB have been observing to push for possible solutions. 22

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH b) Stocks The stock market is an important ingredient of the financial system in Bangladesh. It is an important avenue for channeling funds to investors through mobilizing resources from individuals. In view of the rapidly increasing role o f the stock market, volatility in stock prices can have significant implications on the performance of the financial sector as well as the entire economy. There exists important link between stock market uncertainty and public confidence in the financial market. c) Govt. Securities The government has initiated reforms program in the area of debt management since 2005. It has enacted the Bangladesh Government Treasury Bo nds (BGTB) Rules, 2003 under which T. Bonds are being marketed on a regular basi s. Development of a primary market for buying and selling of Government bonds of varying maturity (5 year, 10-year, 15year and 20-year) to raise fund from the d omestic market is one of the significant achievements of such reforms initiative s. Treasury Bills and Treasury Bonds auctions are being held on the basis of a preannounced Auction Calendar. This ensures higher degree of competition resulting a steady decline in the cost of borrowing for the government from domestic sourc e. 23

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH d) Bank & Consumer Commercial Paper The paper intends to provide an overview of key issues pertaining to consumer confidence in financial markets in Bangladesh. The formal financial sector in Bangladesh includes: (a) Bangladesh Bank as the central bank (b) 43 commercial banks, including four nationalized commercial ban ks, 30 domestic private commercial banks, 9 foreign commercial banks (c) 5 gover nment-owned specialized banks (d) 28 non-bank financial institutions (e) one gov ernment-owned investment company (f) two government-owned insurance companies an d a quite good number of private insurance companies and (g) two stock exchanges . The banking sector, however, dominates the countrys financial system. Consumer confidence may be defined as the consumers appraisal of the current economic cond itions and his expectations of future economic conditions. A silent revolution h ad occurred in financial services legislation and regulation in the direction of building consumer confidence in the markets, it is felt that there is a need fo r exploring ways for further improvement of market conditions to meet the expect ation of consumers of financial services. In this backdrop the paper will discus s various factors undermining consumer confidence in the financial markets, retr ace the legislative and regulatory measures undertaken in the past to protect co nsumer interest and suggest further actions needed to enhance consumer confidenc e in the financial services sector in Bangladesh. e) Debentures When any duly st amped debenture is renewed by the issue of a new debenture in the same terms, th e Collector shall, upon application made within one month, repay to the person i ssuing such debenture, the value of the stamp on the original or on the new debe nture, Provided that the original debenture is produced before the Collector and cancelled by him in such manner as the Government may direct. A debenture shall be deemed to be renewed in the same terms within the meaning of this section no twithstanding the following changes: (a) The issue of two or more debentures in place of one original debenture, the total amount secured being the same; (b) Th e issue of one debenture in place of two or more original debenture, the total a mount secured being the same; (c) The substitution of the name of the holder at the time of renewal for the name of the original holder; and (d) The alteration of the rate of interest or the dates of payment thereof. 24

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH f) Mortgages Mortgage markets means lending institutions & mortgage brokers. Acc ording to Ministry of law, Bangladesh - Chapter IV: Sec. (58) Mortgage, mortgagor, Mo rtgagee, Mortgage-money and mortgage-deed defined as: Simple mortgage, mortgage by co nditional sale, usufructuary mortgage, english mortgage, mortgage by deposit of title deeds anomalous mortgage. Sec. (59) Mortgage when to be assurance. Sec. (5 9.A) References to mortgagors and mortgages to include persons driving title fro m them. Mortgage loan taken out to buy the family home from the mortgage market. Thirty years ago, such a loan would almost certainly have come from a building society. The borrower would probably have had to wait in a queue, which he or sh e could join only after having saved for some period with the society. The loan would have been in sterling and the borrower would have paid a rate of interest that varied at short notice (broadly) with changes in the level of official inte rest rates imposed by the monetary authorities. The interest would have been pai d monthly together with a small additional sum calculated to repay the loan over a scheduled period, such loans were instantly available from a range of institu tions. They could be repaid by the method described above or they could be intere st-only mortgages in which the borrower pays only the interest but makes simultan eous payments into a long-term savings scheme (typically an endowment insurance policy), which is designed to repay the mortgage when the policy matures. The mo rtgage may have a rate of interest that can be fixed for long periods. 25

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH 03. Financial Markets An organizational framework within which financial instruments can be bought and sold. In economics a market is an organizational device that brings together bu yers and sellers. Textbooks usually hurry on to point out that a market does not have to have a physical location, though plainly it could do so. In fact, finan cial markets offer some of the best examples of buyers and sellers interacting o ver a widely dispersed geographical area. Fina nc ial market of an economy comprises the banking sec tor, other financial institutions and capital market. At present, 4 SCBs, 5 nationalized specialized banks, 30 private commercial ba nks, 9 foreign co mmercial banks and 29 non-bank financial institutions, Investment Corporation of Bangladesh (ICB), Bangladesh House Building Finance Corporation (BHBFC), Dhaka Stock Exchange (DSE) and Chitt agong Stock Exchange (CSE) are working in the financial market of Bangladesh. 26

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH Banks and other financ ial institutions (OFIs) have been playing a key role in a ctivating the financial sector that in turn infuses dynamism to the economy. Ban ks are engaged in upgrading the socio-economic status of the co untry by investi ng money to productive sec tors. However, in the context of globali zation, impo rtance has bee n given to the devel opment of the financial market through banki ng sec tor. In order to uphold the rule of ba nking secto r in financial market development, the government ha s taken a range of measures, whic h include furth er deployment of bank branches and evaluation of their performance, classific at io n of loans following the international standards, assessment of capital adequ acy, determination of quality of assets and earning of impressive profit. 03-(i). Primary Market Means new capital rose in the financial markets. Primary market services are inc l uded: The investment banking & The financial intermediatio n etc. (Tk) 27

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH 03-(ii). Secondary Market Markets in whic h existing securities are traded; as opposed to a prima ry marke t where securities are sold for the first time. In most cases a stock exchange l argely fulfils the role of a secondary market, with the flotation of new issues representing only a small proportion of its total business. However, it is the e xistence of a flourishing sec ondary market, providing liquidity and the spreadi ng of risk. Means exchange of ownership in the financial markets. Se co ndary ma rket servic es included: Brokerage services Tk Tk 28

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH 03-(iii). Money Market Monetary polic y framework refers to a logic al and sequential set of actions th at a centra l bank has to design to conduct monetary polic y. The c entral bank wants to achieve certain goals but cannot directly influence the goals. It has a set of tools at its disposal that can affect the goals indirectly after long an d variable lags. So, if central bank waits to see the effect of the tools on the goals it will be too late to make any correction to the policy. That is why it aims at some variables that lie between tools and goals, whic h it can influence and monitor very shortly. Thus a c entral bank decides on the strategy for cond ucting monetary policy. The variables that the central bank addresses can be cla ssified as instruments, ta rgets and goals. If the framework is ex pressed in a flow chart instruments (i.e. tools) and goals are on the two ends and targets ar e in between. The targets are further classified as operational target and inter mediate target. The central bank also keeps an eye on some information variables to make any policy deci sion. 03-(iv). Capital Market The capital market in Bangladesh is regulated and supervised by the Securities a nd Exchange Commission (SEC) under the SEC Act, 1993. The SEC so far has issued licenses to 27 non-bank institutions to participate in the capital market of whi ch 19 institutions are Merchant Banker and Portfolio Manager while 7 are Issue M anagers and (one) acts as Issue Manager and Underwriter. The Dhaka Stock Exchang e (DSE), which was established as a public limited company in April 1954, and th e Chittagong Stock Exchange (CSE), established in April 1995, dealing in the sec ondary capital market. As of end December 2006 the total number of enlisted secu rities with DSE stood at 310 of which 255 are listed companies, 13 mutual funds, 8 debentures and 34 treasury bonds after the year 2006 that the total number of institutions are increasing rapidly. 29

STRUCTURE OF FINANCIAL SYSTEM IN BANGLADESH Recently, two (2)-power sector companies namely Dhaka Electric Supply Company (D ESCO) and Power Grid Company of Bangladesh (PGCB) have been listed in the capita l market under the newly introduced direct listing regulation. The Investment Co rporation of Bangladesh (ICB) was established in 1976 with the objective of enco uraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programs, and maintains in vestment accounts, floats and manages closed-end and open-end mutual funds and c losed-end unit funds to ensure supply of securities as well as generating demand for securities. ICB also operates in both DSE and CSE as dealer. Some SBs, such as Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), Banglad esh Small Industries and Commerce (BASIC) Bank Ltd. As well as NCBs and some for eign banks are engaged in long-term industrial financing. Capital Market product in Bangladesh: Share: Ordinary Share, Preference Share Mutual Fund Debt Securit ies Debenture Bond A well-developed tradable bond market is critical to ensuring stability and efficiency of the financial market in Bangladesh. In the country, most of the available savings are held by the banks in the form of deposits tha t are channeled through lending to the investors. The dominance of banks, with h igh bad loan portfolios and nontransferability of most of their debt/savings ins truments, is a prime hindrance to developing a well-performing bond market. The absence of such a market makes the financial market less competitive as it fails to generate market interest rates that reflect the opportunity cost of funds at different maturities and results in excessive reliance on the banking system. 30