AN OVERVIEW OF FINANCIAL SYSTEM IN BANGLADESH

Course: Financial Institutions and Markets (F403)

Submitted to Syeda Mahrufa Bashar Lecturer

Submitted by Deepan Kumar Das (Roll: ZR-10) MBA (47th Batch)

Institute of Business Administration University of Dhaka

Date of Submission: February 07, 2013

Introduction
The financial system is the system that allows the transfer of money between savers (and investors) and borrowers. A financial system can operate on a global, regional or firm specific level. Gurusamy, writing in Financial Services and Systems has described it as comprising a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions.

Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow inter-temporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks.

Overview of Financial System in Bangladesh

The financial system of Bangladesh is comprised of three broad fragmented sectors:

1. Formal Sector 2. Semi-Formal Sector 3. Informal Sector

These sectors have been categorized in accordance with their degree of regulation.

The formal sector includes all regulated institutions such as Banks, Non-Bank Financial Institutions (FIs), Insurance Companies, Capital Market Intermediaries i.e., Brokerage Houses, Merchant Banks etc., and Micro Finance Institutions (MFIs).

The semi-formal sector includes those institutions which are regulated otherwise but do not fall under the jurisdiction of Central Bank, Insurance Authority, Securities and Exchange Commission or any other enacted financial regulator. This sector is mainly represented by

Specialized Financial Institutions such as House Building Finance Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank etc., and NonGovernmental Organizations (NGOs) and discrete government programs.

On the other hand, the informal sector includes private intermediaries which are completely unregulated.

Figure 1: Overview of Financial System in Bangladesh

As it is seen from the chart that the formal sector has been bifurcated into Financial Market and Regulators & Institutions.

The Financial Market consists of

1. Money Market: The primary money market is comprised of banks, FIs and primary dealers as intermediaries and savings & lending instruments, treasury bills as instruments. There are currently 15 primary dealers (12 banks and 3 FIs) in Bangladesh. The only active secondary market is overnight call money market which is participated by the

scheduled banks and FIs. The money market in Bangladesh is regulated by Bangladesh Bank (BB), the Central Bank of Bangladesh.

2. Capital Market: The primary segment of capital market is operated through private and public offering of equity and bond instruments. The secondary segment of capital market is institutionalized by two stock exchanges- Dhaka Stock Exchange and Chittagong Stock Exchange. The instruments in these exchanges are equity securities (shares), debentures, corporate bonds and treasury bonds. The capital market in Bangladesh is governed by Securities and Commission (SEC). 3. Foreign Exchange Market: Bangladesh Bank, the regulator of foreign exchange market, remains vigilant over the developments in the foreign exchange market and intervenes by buying and selling foreign currencies whenever it deems necessary to maintain stability in the foreign exchange market. The foreign exchange market consists of the authorized dealers.

The Regulators and Institutions can further be classified into the following segments: