Financial system of Bangladesh (By Bangladesh Bank)

The financial system of Bangladesh

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

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

The sectors have been categorized in accordance with their degree of regulation.
The formal sector includes all regulated institutions like Banks, Non-Bank Financial Institutions (FIs), Insurance Companies, Capital Market Intermediaries like Brokerage Houses, Merchant Banks, etc.; 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 like House Building Finance Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank, etc., Non Governmental Organizations (NGOs and discrete government programs.

The informal sector includes private intermediaries which are completely unregulated.

The financial market in Bangladesh is mainly of following types:

1. Money Market: The money market comprises banks and financial institutions as intermediaries, 20 of them are primary dealers in treasury securities. Interbank clean and repo based lending, BB's repo, reverse repo auctions, BB bills auctions, treasury bills auctions are primary operations in the money market, there is also active secondary trade in treasury bills (upto 1 year maturity).
2. Taka Treasury Bond market: The Taka treasury bond market consists of primary issues of treasury bonds of different maturities (2, 5, 10, 15 and 20 years), and secondary trade therein through primary dealers. 20 banks performing as Primary Dealers participate directly in the primary auctions. Other bank and non bank investors can participate in primary auctions and in secondary trading through their nominated Primary Dealers. Non-resident individual and institutional investors can also participate in primary and secondary market, but only in treasury bonds.
   Monthly data on primary and secondary trade volumes in treasury bills and bonds and data on outstanding volume of treasury bonds held by non residents can be accessed at Monthly data of Treasury Bills & Bonds .
3. Capital market:The primary issues and secondary trading of equity securities of capital market take place through two (02) stock exchanges-Dhaka Stock Exchange and Chittagong Stock Exchange. The instruments in these exchanges are equity securities (shares), debentures and corporate bonds. The capital market is regulated by Bangladesh Securities and Exchange Commission (BSEC).
4. Foreign Exchange Market:Towards liberalization of foreign exchange transactions, a number of measures were adopted since 1990s. Bangladeshi currency, the taka, was declared convertible on current account transactions (as on 24 March 1994), in terms of Article VIII of IMF Article of Agreement (1994). As Taka is not convertible in capital account, resident owned capital is not freely transferable abroad. Repatriation of profits or disinvestment proceeds on non-resident FDI and portfolio investment inflows are permitted freely. Direct investments of non-residents in the industrial sector and portfolio investments of non-residents through stock exchanges are repatriable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly. Bangladesh adopted Floating Exchange Rate regime since 31 May 2003. Under the regime, BB does not interfere in the determination of exchange rate, but operates the monetary policy prudently for minimizing extreme swings in exchange rate to avoid adverse repercussion on the domestic economy. The exchange rate is being determined in the market on the basis of market demand and supply forces of the respective currencies. In the forex market banks are free to buy and sale foreign currency in the spot and also in the forward markets. However, to avoid any unusual volatility in the exchange rate, 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.

1. Capital Market

After the independence, establishment of Dhaka Stock Exchange (formerly East Pakistan Stock Exchange) initiated the pathway of capital market intermediaries in Bangladesh. In 1976, formation of Investment Corporation of Bangladesh opened the door of professional portfolio management in institutional form. In last two decades, capital market witnessed number of institutional and regulatory advancements which has resulted diversified capital market intermediaries. At present, capital market intermediaries are of following types: Stock Exchanges: Apart from Dhaka Stock Exchange, there is another stock exchange in Bangladesh that is Chittagong Stock Exchange established in 1995. Central Depository: The only depository system for the transaction and settlement of financial securities, Central Depository Bangladesh Ltd (CDBL) was formed in 2000 which conducts its operations under Depositories Act 1999, Depositories Regulations 2000, Depository (User) Regulations 2003, and the CDBL by-laws. Stock Dealer/Sock Broker: Under SEC (Stock Dealer, Stock Broker & Authorized Representative) Rules 2000, these entities are licensed and they are bound to be a member of any of the two stock exchanges. At present, DSE and CSE have 238 and 136 members respectively. Merchant Banker & Portfolio Manager: These institutions are licensed to operate under SEC (Merchant Banker & Portfolio Manager Rules) 1996 and 45 institutions have been licensed by SEC under this rules so far. Asset Management Companies (AMCs): AMCs are authorized to act as issue and portfolio manager of the mutual funds which are issued under SEC (Mutual Fund) Rules 2001. There are 15 AMCs in Bangladesh at present. Credit Rating Companies (CRCs): CRCs in Bangladesh are licensed under Credit Rating Companies Rules, 1996 and now, 5 CRCs have been accredited by SEC.  Trustees/Custodians: According to rules, all asset backed securitizations and mutual funds must have an accredited trusty and security custodian. For that purpose, SEC has licensed 9 institutions as Trustees and 9 institutions as custodians. Investment Corporation of Bangladesh (ICB): ICB is a specialized capital market intermediary which was established in 1976 through the ordainment of The Investment Corporation of Bangladesh Ordinance 1976. This ordinance has empowered ICB to perform all types of capital market intermediation that fall under jurisdiction of SEC. ICB has three subsidiaries: 8.1. ICB Capital Management Ltd., 8.2. ICB Asset Management Company Ltd., 8.3. ICB Securities Trading Company Ltd. Government Securities Market Government securities market of Bangladesh is consist of tradable and non tradable securities. Non-tradable securities include National Savings Certificates i.e. Sanchayapatras and Sanchayabonds which are only for retail investors. The tradable securities include Treasury Bills (T-Bills) of 91, 182 and 364 days maturities and Bangladesh Government Treasury Bonds (BGTB) of 2, 5, 10, 15 and 20 years maturities. T-Bills and BGTBs are issued through auctions. Only Primary Dealers (PD) can submit bids in the auctions. Other institutions and individuals can submit bids in auction but through the PDs. At present 20 banks are performing as Primary Dealer. T-Bills and BGTBs can be sold in the secondary market. Non-resident individual and institutional investors also eligible to buy BGTBs through a Non-Resident Foreign Currency Account and Non-Resident Investor's Taka Account maintained with commercial banks of Bangladesh. Bangladesh Bank have its own depository system for the transaction and settlement of Government securities in the Market Infrastructure (MI) Module. In 2011 BB introduced this automated system to expedite the primary auction and secondary market