COURSE: 515: COMPARATIVE FINANCIAL SYSTEM M. Muzahidul Islam Professor, Dept. of Banking University of Dhaka (L !

"u# 1$%& Fu'dam '"als () Fi'a'!ial S*s" m 1. C('! +" () (,' #shi+: Ca+i"alism: The concept of private ownership in capitalism is absolute. The ownership is unlimited and without any kind of control. The role of the state is to ensure unhindered acquisition of wealth by individuals. The success of the state machinery lies in protecting the interest of individual households or entities. The secret of individual prosperity and development lies in one s industriousness, effort, skill and capabilities that in turn uphold the theory of !survival of the fittest . S(!ialism: "n #ocialism, the first phase of $ommunism, is against all kinds of private ownership. "t believes in the dictatorship of the proletariat, which in turn gives birth to state ownership. "t considers the idea of ownership as a source of e%ploitation and root of all deprivation. &ccording to this doctrine all resources of the country would be owned, controlled by the state. &ll manual and material resources of the country will be planned and used for productive purposes under the direct supervision of the state. Islam: "slam is not in favor of absolute or limitless ownership like $apitalism. "t is also against ceasing private ownership and imposing state ownership like communism. 'ather "slam is in favor of limited and controlled private ownership, which may be termed as a synthesis of both the e%treme, namely, $apitalism (thesis) and #ocialism (anti*thesis). +wnership is controlled in "slam by imposing the in,unctions like -alal and -aram and thus limiting the scope for e%cessive and unnecessary income as well as illegal and harmful e%penditures. -h* is Islam )(# P#i.a" O,' #shi+: "slam is in favour of .limited and control ownership because of the following reason/ a. b. c. d. e. f. g. h. i. "t is compatible to the freedom and liberty of the human*being "t helps developing inner faculties and good qualities of the human being. "t ensures the best use of material and human resources0 "t ensures the growth and development of economy and couture in terms of region and the globe0 "t ensures competitiveness in both factor and product market. 1ntrepreneurship developed and industriali2ation3production process accelerated0 #kill of the production process and the quality of the produced improved0 $orruption, wastage and inefficiency minimi2ed. &ggregate production augmented and aggregate utility ma%imi2ed0

-h* Islam is a/ai's" a0s(lu" P#i.a" O,' #shi+1 a. 1conomic disparity among the members of the society grows and widened b. &ggregate production is not ma%imi2ed as an individual has got only a limited ability to control and supervise and productive use of his assets and properties. c. &ggregate utility is not ma%imi2ed as the marginal utility of an individual goes on diminishing with the increase of his consumption. d. "nhuman attitude towards the weaker section of the society as their right to survival is not ringside. e. $ooperation among different units of the society disappears and conflict and unrest goes on. C('!lusi(': The concept of ownership in capitalism can be compared to a vehicle without any brake that cause reckless and uncontrolled driving resulting accidents one after another. +n the other hand, the concept of ownership in #ocialism is comparable to traffic without any vehicle that makes life stop and the wheel of the civili2ation unmoved. "slamic concept of limited and controlled ownership is balanced in the sense that it suggests a vehicle with a brake for the purpose of control. +n the one hand, by allowing the private ownership to certain

e%tent "slam wants to take advantage of all resultant positive impact ownership, on the other hand, to get rid of all difficulties and demerits resulting from absolute and unlimited private ownership, "slam imposes some control and restrictions on it. %. C('! +" () dis"#i0u"i(' a'd # dis"#i0u"i(': Ca+i"alism: Based on the theory of concentration of wealth. "t has least consideration for distribution. Distribution is mainly based on price mechanism. Buy and sale, loan, micro finance etc. all is price based. Distribution of resources by govt ta% and e%penditure mechanism remains less effective because of the dominance of indirect ta%es and lu%ury e%penditure pattern. C(mmu'ism: Talks much about distributing of wealth. But all wealth is accumulated in the hands of the state led by a single party. Distribution without private ownership becomes a hand*to mouth e%ercise. 4o question of ta%es as there is no property in private sector. Islam: "slam discards the proposition that there is scarcity of wealth in this world. "slam submits that there is sufficient wealth in this world to meet the total need of mankind. "slam identifies the misdistribution as the root cause of all crises and discrepancies of the human society. "slam minimi2es disparity of resources among mankind and ensures proper distribution of wealth by so many ways like. Distribution through price mechanism/ a. Distribution through buy and sale Distribution without any consideration/ a. $ompulsory charity like 5akat, Usher, 6itr etc. b. 7oluntary charity. b. "slamic law of inheritance is an important means of redistribution of wealth. c. Diat, 8affara, d. #acrifice (9urbani) These are some of the effective "slamic means of redistribution of wealth. 2. C('! +" () )a!"(#s () +#(du!"i(' a'd "h i# # ,a#ds: Ca+i"alism: &ccording to capitalism there are four factors of production. 4amely land, labor, capital and organi2ation. +f these four factors capital is considered the most important factor. "f anybody has capital he can buy land, labor and other materials required for production. +rgani2ation is also considered as an indirect outcome of capital. #o $apital controls everything. R ,a#d "( )a!"(#s () +#(du!"i(' u'd # Ca+i"alis" s*s" m: a. Pa*m '" "( !a+i"al/ "nterest is the reward to capital. The rate of interest is prefi%ed. That is before supplying capital to the demander the owner of capital fi% up the rate of interest for a particular period of time, usually for one year. 6ro e%ample, :; percent interest means the borrower has to pay taka :; in e%cess to the principal of taka :;; for one*year period of time. Payment to capital under conventional system is unconditional. Payment of interest is not dependent on profit or loss of the venture. <hatever is the fate of the venture, the owner of the capital will get his interest as per contract. 0. Pa*m '" "( La0(#: .aborer gets wages under capitalist system. <ages are determined through market mechanism. #o because of huge supply of labor force wages fi%ed through market mechanism always goes against the interest of the laborers. &s a result they are e%ploited. !. Pa*m '" "( O#/a'iza"i(': &ll the risks are taken by the +rgani2ation or entrepreneurs. Payment to organi2ation under $apitalist system is conditional. That is if there is positive return from the venture then the entrepreneurs will get their share of profit. +n the other hand if there is loss then they have to suffer. d. Pa*m '" "( La'd: Payment to land under conventional financial system is also unconditional. .and does not mean only plain land but any space that could be rented. #o land is given rent. "n the capitalist system $apital is the most important factor of production $apital is classified as equity and debt. <hile the payment for equity is sub,ect to earn profit the payment for borrowed capital is certain and unconditional in the form of interest. "n capitalism organi2ation or entrepreneurs are deprived and laborers are e%ploited by irrational and manipulated behavior of the input market.

C(mmu'ism: $ommunism stands for re,ecting capital as a factor of production. "n fact three out of four factors recogni2ed as factors of production by the capitalist economists are not acceptable to communism. "t considers labor as the lone factor of production. $apital is nothing but the e%ploited part of the payment due for the laborers. &ccording to the so*called !Theory of #urplus 7alue, if a product is sold at tk. :;, all :; taka is to be paid to the laborer. "f the laborer is paid say = taka as wages then he is e%ploited by (:;*=)> ? taka. This one factor production function could be found in a very simple economy of the ancient time when there was no technology or industrial development. 1specially in a modern economy this theory is very much impractical and totally unacceptable. Islam: "slam #tands in between the $apitalist and @ar%ist view of factor of production. "t opposes the @ar%ist view that labor is the only means of production. "slam recogni2es all factors of production namely .and, labor, capital and organi2ation. But in order of preference labor comes first. That is why the Prophet (PBU-) ordered to pay the labor immediately after the work is finished without looking at the end result (profit or loss) of the venture. "slam refutes the proposition set by $apitalism that capitals can never loss. 'ather according to "slam $apital is rewarded only if it could add something to the net worth. C('! +" () ma#3 ": "slam encourages competitive market. @onopoly is discouraged by "slam. "slam does not allow monopoly because it is e%ploitative in nature. $apitalism on the other hand does not say anything about the nature of the market. That is in capitalism a market may be perfectly competitive, imperfectly competitive or monopoly. <hile $ommunism is against the market mechanism. $ommunism, theoretically does not allow market rather all goods and services are supplied by the state. FINANCIAL SYSTEM 4EFINE4 The financial system provides a mechanism whereby an individual, firm or household, who is a surplus spending unit (##U), may conveniently make funs available to a deficit spending units (D#Us) who intend to spend more than their current income. The key word !conveniently is important. "t means the financial system will be so developed and mechanism for transactions so designed and rule and regulations for dealings so formulated that both the supplier and demanders of funds will not face any difficulties while they will be transacting with each other. The financial system has two ma,or components. +ne is the Fi'a'!ial Ma#3 " where ##Us can invest or lend their funds directly to the D#Us. This is called 4i# !" Fi'a'! . &n e%ample is the market for corporate bonds. Purchase of #tock is another e%ample of direct finance. The other ma,or component of the financial system is made up of the Fi'a'!ial I'" #m dia#i s 5 various institutions such as banks, savings and loan associations and credit unions * that as go*betweens to link up ##Us and D#Us. -ere the linkage between saver and borrower is indirect. This is called I'di# !" Fi'a'! . 1ven though the ultimate lender is the ##U, the D#U owes repayment to the financial intermediary, and the financial intermediary owes repayment of the deposit to the ##U. FINANCIAL MAR6ET Fi'a'!ial Ma#3 " 4 )i' d: The institutions and procedures that facilitate the transaction of financial securities are called financial market. These securities may be short or long in terms of maturity. &gain the securities may be earning fi%ed income for certain period known as interest or may be participating in the profit and loss of the organi2ation. The fi%ed income securities are known as debenture whereas the profit and loss sharing securers are known as shares. Fi'a'!ial ma#3 " has ",( +a#"s: 1.M(' * Ma#3 ": & money market means the institutions and procedures that facilitate the transaction of short* term securities. #hort*term securities have the maturity of one year or less than one year. 1%amples of these securities are Aovt. treasury bonds, bills of e%change, commercial paper etc. The money market is a market for short term (less than one year) loan0 in fact it is money or near money that is being bought and sold. "t is not a place (like the stock market) but an activity.

BThe collective name given to the various firms and institutions that deal in the various grades of the near moneyB. ** Aeoffrey $rowther BThe center for dealings, mainly of short term character, in money assets0 it meets the short term requirements of borrowers and provides liquidity or cash to the lender.B ** 'eserve Bank of "ndia C('s"i"u '" () m(' * ma#3 " :.a) Bankers acceptance market :.b) $ommercial paper market :.c) Treasury Bill market :.d) $all money market :.e) The 1urodollar market :.f) The "nterest rate 6utures market. Su++li # () M(' * Ma#3 " a) "ndividual b) Banks c)6inancial "nstitution d) Aovt. Treasury Us #s () M(' * Ma#3 " #ame as suppliers plus f) bill broker 3 stock broker

e) Trading $ompanies

g) "ndustrial units

7E8AVIORAL C8ARACTERISTICS OF MONEY MAR6ET (:) @oney or near money is bought and sold. paper transacted not Aoods (C) $redit instruments of less than a year is transacted (=) Pricing of product is contrary to product market D inverse relation with product market pricing D vm > :3p (E) 1fficacy of the money market depends on a) +rgani2ed commercial banks b) &utonomy of the central banks c) &vailability of proper and sufficient credit instrument d) 1%istence of sub markets e) 7olume of trade and commerce. (F) @oney market is closely related with capital market (G) Price of money market is denoted with / (i) interest (ii) rate of return. %. Ca+i"al ma#3 " : & capital market includes the institutions and procedures that facilitates the transaction of long term securities. The maturity of long term securities are considered to be more than one year. 1%amples of long term securities are shares, debentures etc. CONSTITUTION OF A CAPITAL MAR6ET The constituents of a capital market are as follows / 1. Th S"(!3 9!ha'/ : <here share s and debentures of listed companies are traded formally under the supervision of stock e%change authority. "n Bangladesh there are two stock e%change. Dhaka #tock 1%change and $hittagong #tock 1%change. %. Th S !u#i"* a'd E9!ha'/ C(mmissi(' : The prime responsibility of #ecurity and 1%change $ommission is to consider the application of intending companies to float shares and debentures. The commission also formulate guidelines for smooth trading of shares and debentures in the stock e%change. 2. I'. s"m '" 7a'3s : These banks are established to promote investment in the country. They facilitates investment in tangible assets as well as in financial assets. +ne of the function of these banks is to advise and guide the investors in stock market. "nvestment $orporation of Bangladesh is an e%ample of investment bank. :. 4 . l(+m '" 7a'3s a'd Fi'a'!ial I's"i"u"i('s: The prime ob,ective of development banks and financial institutions is to provide long term credit for the establishment of industries. They also render advisory services to the entrepreneurs in appraising investment proposals. Bangladesh #hilpo bank (B#B) and Bangladesh #hilpo 'in #angstha (B#'#) are e%amples for development bank and development financial institution respectively. 5. Fi'a'! C(m+a'i s : These companies are meant for investment in terms of financial instruments. ;. 7#(3 #s : Brokers are middleman between the seller and buyer of a share. They get orders from the buyers and sellers of stocks and e%ecute them in the stock e%change. They are the authori2ed agents who are allowed to transact in the stock e%change. The broker en,oy a certain percentage of commission on sale or buy amount. <. Th i'. s"(#s: Persons or institutions who have current commitment of taka for a period of time to derive future payments to be compensated for the time of the funds are commited.

=. Th 8 d/ #s: Participants in financial futures markets who take positions in contracts to reduce their e%posure to risk.& perfect hedge is one that eliminates all possibility of gain or loss due to future movements of hedged variables. >. Th A#0i"#a/ #s: +ne who profits from the difference of price when the same of the e%tremely similar security, currency or commpdity is traded on two or more markets. The arbitrager profits by simulteneously purchasing and selling these securities to take advantage of pricing differentials (spreads) created by market conditions.