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competitive. The difference between two is only of degree rather than of kind. Certain
institutions operate in money markets as well as capital markets. For example, commercial banks
operate in money market as well as in Capital Market. Money Market and Capital Market are
interdependent. The activities and policies of one market have their impact on those of the other.
Capital Market of Bangladesh is still highly speculative and lacks transparency due to poor
regulatory framework.
i. What is the relation between Money market & Capital market in Bangladesh?
ii. What is the impact of this relationship on the economic growth of Bangladesh.
iv. How could this relationship through its crucial role stimulate economic growth in
Bangladesh?
The hypothesis that would be tested in the course of this research is stated below as:
H0: That there is interrelation between Money market and Capital market.
Money Markets:
The organization for the lending of short-term fund, through the use of such instruments as
commercial bills of exchange, short-term government securities and bankers acceptance.
A Certificate of Deposit (CD) is a time deposit with a bank. CDs are generally issued by
commercial banks but they can be bought through brokerages. They bear a specific maturity date
(from three months to five years), a specified interest rate, and can be issued in any
denomination, much like bonds. Like all time deposits, the funds may not be withdrawn on
demand like those in a checking account.
Capital Market:
A market in which individuals and institutions trade financial securities
Organizations/institutions in the public and private sectors also often sell securities on the capital
markets in order to raise funds. Thus, this type of market is composed of both the primary and
secondary markets.
Structure of Capital Market Structure of Money Market Organized Sector Individual Investors
Investment Intermediaries Financial Institutions Commercial Bank Government Unorganized
Sector Agricultures Private Individual
The various institutions in the money market generally include the following:
1. Central Bank:
It is naturally to be the leader of all banks. It is the bank, which is entrusted with the task of
controlling the issue of money and funds to the market and regulates credit facilities provided by
various other institutions.
2. Commercial Banks:
They play a vital role in the money market. They make advances, discount bills and lend against
the promissory notes and the like. They also take help of the market in solving their liquidity
problems.
3. Discount Houses:
Discount houses are special institutions for rediscounting the bills of exchange. They usually
deal in three kinds of bills.
The discount houses borrow huge funds for short periods from the commercial banks and RBI
and Sinvest them in discounting bills. But before discounting a trade bill of exchange, the
Discount House insists that it should be accepted by an Acceptance House.
4. Acceptance Houses:
Acceptance Houses are institutions which specialize in accepting bills of exchange. Generally
they are merchant bankers. They act as second signatories on the bills of exchange. That is they
guarantee the bills of a trader whose financial standing is not known, for making the bill
negotiable.
They maintain correspondents in important towns of various places within and outside the
country to collect information about the creditworthiness and financial position of the customers,
who seek the assistance of the Acceptance Houses. For their service, they charge a small amount
of commission but ensure great security for the bills discounted by the Discount Houses.
5. Bill Brokers:
The "Bill Brokers" intimately know their customers and act as intermediaries between the sellers
and buyers of bill for a small commission. Sometimes, these bill brokers discount bills on their
own account.
The money market includes the following important sub-markets in the traditional sense:
Money Market
v. Money is lent mainly to the bill brokers and stock exchange dealers.
Merits
v. The main operators in this market are the 'Acceptance houses' and the commercial banks.
Demerits
Bill Market
Merits
iii. The loans and advances are covered by collaborates like government securities, gold silver,
stocks of corporations, merchandise, etc.
A financial market is a market that brings buyers and sellers together to trade in financial assets
such as stocks, bonds, commodities, derivatives and currencies. The purpose of a financial
market is to set prices for global trade, raise capital and transfer liquidity and risk. Although there
are many components to a financial market, two of the most commonly used are money markets
and capital markets.
Money markets are used for a short-term basis, usually for assets up to one year. Conversely,
capital markets are used for long-term assets, which are any asset with maturity greater than one
year. Capital markets include the equity (stock) market and debt (bond) market. Together the
money and capital markets comprise a large portion of the financial market and are often used
together to manage liquidity and risks for companies, governments and individuals.
1.1.2 Inter relation between money market and capital market
a) Capital market is a market for financial assets which have a long or indefinite maturity and
money market is the mechanism whereby funds are obtained for short periods of time (from
one day to one year).
b) Two markets are inter-related. They will buy treasury bills at relative.
c) In Money Market, short-term funds are used whereas the Capital Market deals in long term
fund required.
d) Capital Market is not as sensitive to change in demand and supply as are the money market
components.
e) Change of interest rate in both market affect each other.
f) Money markets facilitate the sale of short-term securities, while capital markets facilitate the
sale/buy of long term securities.
The relationship between the money market and capital market helps explain the basic
framework of the financial system. Under this framework, businesses and government agencies
access sources of short-term and long-term funds to generate immediate cash flow or finance
long-term projects. Both markets have a particular role in how money flows from savers to
businesses and government to finance operations and investment. As a result, both markets
provide investors with opportunities to generate earnings and premiums from risky ventures.
To examine the relationship between demographic factors and aspects closely related with
capital market. Another area that the study will try to identify the rule of regulators behind
the recent capital market crash and focus on developing a road map for promoting
Sustainable capital market regulatory framework in Bangladesh.
ii. To analyze and identify the reasons (Esp., regulatory rules.) for recent stock market
crash in Bangladesh.
iii. To find out the problems and hindrances associated with capital market;
iv. To show the impact of the capital market on the economy and
v. To give suggestions for the development of the capital market and recommend some
guidelines for better regulations to strengthen the capital market in Bangladesh
This study is basically descriptive in nature. Data is collected from both Primary (Stock Exchange, SEC)
and secondary sources like different publications of DSE, Bangladesh Bank, annual reports of the
respective Stock Exchanges, and from respective websites of the Stock Exchanges and or Central Banks.
Some other research papers in this line will also be used.
In my study, I will also use quantitative techniques to analyze data. Softwares like SPSS, STATA, and
Excel might be helpful for me.
Brief conceptual descriptions and operational definition of the key variables used are as follows:
Broad money is a measure of the money supply that includes more than just physical
money such as currency and coins (also termed narrow money). It generally includes
demand deposits at commercial banks, and any monies held in easily accessible
accounts. Components of broad money are still very liquid, and non-cash components can
usually be converted into cash very easily. The most commonly used measure of broad
money is M2, which includes currency and coins, and deposits in checking accounts, savings
accounts and small time deposits, overnight repos at commercial banks, and non-
institutional money market accounts. This is the main measure of the money supply,
and is the economic indicator usually used to assess the amount of liquidity in the economy,
as it is relatively easy to track (Wikipedia, 2011).
The reserve requirements is a central bank regulation that sets the minimum reserves each
commercial bank must hold to customer deposits and notes i.e. the amount that the bank
surrenders with the central bank. It would normally be in the form of flat currency stored
in a bank vault (vault cash), or with a central bank. The reserve ratio is sometimes used as
a tool in the monetary policy, influencing the country's economy, borrowing, and
interest rates. Statutory Liquidity Ratio (SLR) restricts the banks leverage in pumping more
money into the economy. On the other hand, Cash Reserve Ratio (CRR) is the portion of
deposits that the banks have to maintain with the Central Bank. To meet SLR, banks can
use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is
maintained in cash form with central bank, whereas SLR is maintained in liquid form with
banks themselves (Wikipedia, 2011).
Stock Market Index or Share Index refers to the statistical indicator used in measurement
and reporting of changes in the market value of a group of stocks/shares. Different stock
indices track the market differentlydepending on (1) which averaging method is used to
establish the index, (2) whether the index is broad based or narrow based, and (3) whether
the averaging method assigns weights on the basis of market price or market capitalization
(Business Dictionary, 2011).
Turnover refers to the volume or value of shares traded on a stock exchange during a day, month,
or year (Business Dictionary, 2011). A stock markets turnover ratio measures how often shares change
hands and is simply a relative measure of the supply and demand relationship which tells us how
volatile a stock will trade given an imbalance in supply or demand either to the upward or downward.