Table of Contents

INTRODUCTION
Money Market:
Money market means market where money or its equivalent can be traded. Money is
synonym of liquidity. Money market consists of financial institutions and dealers in money or
credit who wish to generate liquidity. Money Market an integral part of the financial market of a
country. It provides a medium for the redistribution of short-term loanable funds among financial
institutions, which perform this function by selling deposits of various types, certificate of
deposits and discounting of bills, treasury bills etc. The participants in the money market are: the
central bank, commercial banks, the government, finance companies, contractual saving
institutions like the pension funds, insurance companies, savings and loan associations etc. The
instruments that are generally traded in the money market constitute: treasury bills, short-term
central bank and government bonds, negotiable certificates of deposits, bankers acceptances and
commercial papers like the bills of exchange and promissory notes, mutual funds etc.

Function of Money Market:

The money market, like all financial markets, provides a channel for the exchange of
financial assets for money. To meet short-term cash needs
The money market is the mechanism through which holders of temporary cash
surpluses meet holders of temporary cash deficits.

Money Market of Bangladesh:

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).
The money market in Bangladesh is in its transitional stage. The various constituent parts of it
are in the process of formation, while continuous efforts are being made to develop appropriate
and adequate instruments to be traded in the market. At present, government treasury bills of
varying maturity, Bangladesh Bank Bills and Certificates of Deposits etc in limited supply are
available for trading in the market. However, the short-term CREDIT market of the banking sector
experienced a tremendous growth since liberation. In 1999, a total of about 6000 branches of the
scheduled banks provided short-term credit throughout the country in the form of cash credit,
overdraft and demand loan. The rates of interest are determined by the individual banks and as
such the market is quite competitive. Each bank maintains its liquidity and supply of fund is
arranged throughout the country with the help of an interconnected network of
branches. BANGLADESH BANK as central bank of the country exercises its role in this market
through the use of instruments such as bank rate, open market operations and changes in
statutory liquidity requirements.

Money Market Segment

Dealing in Money market instruments: Subordinated, Zero Coupon Bond, Term Deposit
Receipt
ICB provides several money market services like investing in subordinated bond, zero coupon
bond and accept TDR. These services have enriched the diversified arena in our portfolio.
Attractive rate is offered for these products. ICB receives deposit in the form of TDR from
institutions/ individuals offering attractive and negotiable interest rate which helps to make
investment in profitable securities.
Fixed Deposit Receipt
Providing a tailored solution is the essence of our services. ICB recognizes that a customized
solution like FDR is another instrument for the success of our business. Whether it is a Project
Finance or Term Loan, ICB offers the right solution from where applicants find top-class skills
and in-depth knowledge of market trends from our specialists - altogether a gratifying
experience.
Issuing Bank Guarantee
ICB introduced Bank Guarantee scheme in 2002-03. ICB provides (i) Bid bond for enabling the
business people to participate in any tender or bidding; (ii) Performance bond for helping the
business community to continue their business smoothly by fulfilling their obligations promised
by them to their clients; (iii) Customs guarantee for solving different disagreements between the
customs authority and the business classes at the initial stage. The limit of guarantee would be
issued against at least 20.0 per cent cash and 80.0 per cent easily en- cashable securities or
against 100.0 per cent cash margin.
Consumer Credit Scheme
ICB has introduced "Consumer Credit Scheme" in 2003-04 to meet the needs of various
household appliances of different professionals of govt., semi-govt., autonomous bodies and
some established private sector organizations. Operation of the scheme has been kept stopped for
a certain period.
Corporate Financial Advice
Companies and Government enterprises intending to off- load shares frequently seek
professional & financial advice on corporate restructuring & reengineering from ICB Capital
management Ltd. As a professional, ICB provides such services to their clients.
The Goals of Money Market Investors:
Money market investors seek mainly safety and liquidity, plus the opportunity to earn some
interest income. Because funds invested in the money market represent only temporary cash
surpluses and are usually needed in the near future to meet tax obligation, cover wage and salary
costs, pay stockholder dividends, and so one.

Constituents of money market: Despite a large scale expansion of banking sector as

well as non-bank financial institutions, the country's money market is still segmented into two
groups: formal and informal. The formal institutions (up to 2010) include the Bangladesh Bank
at the apex, 4 states owned commercial banks, 30 domestic and 9 foreign private commercial
banks, 5 specialised (development) banks, 29 NON BANK FINANCIAL INSTITUTIONS, a
number of non-scheduled banks. Informal institutions comprised mainly the moneylenders and
small co-operative organisations, which are not under the control of the central bank. The four
distinct components of organised segment of money market of Bangladesh are the inter-bank
market, Call money market, Market for Repo and Reverse Repo, and Bill market.

Inter-bank Market
The interbank lending market is a market in which banks extend loans to one another for a specified term.
Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made
at the interbank rate (also called the overnight rate if the term of the loan is overnight). Interbank deposit
is A temporary deposit to prevent default. Also called hot money.

Call money market

The transactions of call money market are mainly Dhaka based. Since, the head offices of all
banks and financial institutions are located in Dhaka, the branches of the banks and financial
institutions from all over the country remit their excess funds to their respective head offices at
Dhaka for investment. The head offices, after meeting their usual liquidity requirement invest the
surplus funds in the call money market. As there is no brokerage house or intermediary
organisation, the transactions in call money market usually take place on the basis of bilateral
negotiations. Since call loans are made on clean basis, ie, without any security, lending
institutions/banks are always cautious in the selection of borrowing banks/institutions.

Foreign banks are the main source of liquidity in the call money market. Cost of funds for
foreign banks are very low as compared to the indigenous banks and as such they can hold a
substantial amount of excess liquidity for lending in the call money market. In case of borrowing
they are also at a very advantageous situation as compared to the local banks. Foreign banks
have in their portfolio lower amount of non-performing loans compared to domestic private banks
and nationalised banks. Local private banks appear to be the regular borrowers in the call money market. The
transactions and the rate of interest are largely linked with government treasury bill market, seasonality in
demand for bank loans, central bank's monetary policy, variation in discount rate, open market operations,
changes in statutory reserve requirements, excess liquidity position of the banks etc. The transactions and the
variations of the rate of interest in call money market normally remain high during November to April and as
such the rate of interest during this period also goes up.

Market for Repo and Reverse Repo

Repurchase Agreements (Repo)

Repurchase Agreements which are also called as Repo or Reverse Repo are short term loans that
buyers and sellers agree upon for selling and repurchasing. Repo or Reverse Repo transactions
can be done only between the parties approved by central bank and allowed only between central
bank-approved securities such as state and central government securities, T-Bills, PSU bonds and
corporate bonds.

BB’s Repo and Reverse Repo Auctions A repo (reverse repo) is a financial transaction, where
banks borrow (lend) money from (to) the central bank, usually overnight, at a pre-determined
policy rate set by Bangladesh Bank against the collateral face value of government treasury bills
and bonds. Current repo and reverse repo rates stand at 7.25% and 5.25% respectively.

Bill Market:
Bangladesh Bank Bill Auctions:

Bangladesh Bank bills are mainly used to sterilize the impact of foreign exchange purchases.
They have a maturity of 30 days. Interest paid by Bangladesh Bank on these instruments
currently amounts to 5.25%. Bangladesh Bank introduced its own security, the 91-day
Bangladesh Bank Bill in December 1990. This added a new dimension in the bill market of
Bangladesh. The bill was issued at a discount at par value of Tk 100 through monthly auctions
held at the Bangladesh Bank. Banks, financial institutions and others including individuals,
firms, companies and corporate bodies were eligible to invest in the Bangladesh Bank Bill. The
bill was introduced primarily to control liquidity of the banking system in accordance with the
requirement of monetary policy. The ultimate objective was the development of a workable
secondary market for successful open market operations by the Bangladesh Bank. Later,
Bangladesh Bank introduced 30-day Bangladesh Bank Bills. The frequency of auctions of these
bills was also increased.

BB Treasury Bills Auctions: Treasury bills is short-term obligations issued by Bangladesh Bank
on behalf of the Government of Bangladesh. The objectives of issuing these securities are
twofold: i) to finance the government deficit and ii) to reduce excess liquidity in the market. The
different maturities of treasury bills are 3 months, 6 months and one year. . On the other hand,
the auctions of the four categories of government treasury Bills i.e, 30-day, 90-day, 180-day and
1-Year Bills were held on weekly basis regularly up to August 1998. The newly introduced 28-
day, 91-day, 182-day, 364-day, 2-year and 5-year government treasury bills replaced these
treasury bills later since September 6, 1998.

In auction procedure, the Treasury Bills are issued through treasury style French auction
whereby the allotments are awarded to the bids which fulfill the notified issue amount starting
from the lowest yield. Pro-rata partial allotments are also made for bids at the cut-off-yield.

The market based system of auction of Treasury Bills through publishing auction calendar
containing date and amount was introduced in FY 2007. However, for matching the tenor of
Treasury Bills with international convention, auctioning of 2-year Treasury Bills had been
dropped. Moreover, the auctioning of 28-day treasury bills had been discontinued to avoid the
overlapping with 30-day Bangladesh Bank Bill from 1st July 2008. With these, at present the
treasury bills of 91-day, 182-day and 364-day are being continued for sale/purchase in the
market.

Besides, to mobilise long term fund from domestic sources for financing government
expenditure programme Bangladesh Government Treasury Bonds (BGTB), bearing half yearly
interest coupons, with tenors of 5-year, 10-year, 15-year 20-year have been introduced which are
being traded in the money market. These bonds are issued at par through yield based multiple
price auction mechanism held in Bangladesh Bank with effect from 2007. These bonds can be
used in the market to avail repo facilities.
Bangladesh Bank treasure bills are issued in one three, six, twelve month and two year maturity.
They pay a set amount at maturity. Tax revenues or any other source of government funds may
be used to repay the holders of these financial instruments. They carry great weight in the
financial system due to their zero (or nearly zero) default risk, ready marketability, and high
liquidity. Types of Treasury Bills: Regular-series bills are issued routinely every week or month
in competitive auctions with original maturities of three months (13 weeks), six months (26
weeks), and one year (52 weeks). Irregular-series bills are issued only when the Treasury has a
special cash need. These instruments include strip bills and cash management bills. Primary
Issue/Auction of 30-day BB Bill, 91-day, 182-day & 364-day T-Bills scenario in Bangladesh. T-
bills do not carry a promised interest rate. Instead, they are sold at a discount from their par or
face value.

CommercIal bill market:

Bill market is restricted to buying and selling of government treasury bills. In the past, it was
basically concentrated in transaction of government treasury bills of 3-month maturity at
predetermined rates. Commercial banks were obliged to buy these bills as approved security to
meet their statutory liquidity requirement (SLR) under the Banking Companies Act. Moreover,
these instruments were being used to mop up excess cash from the banking sector and help
government to borrow money from banks to meet its budgetary shortfall. In fact it was a guilt-
edged market where both the principal and interest was guaranteed by the government.
Bangladesh Bank, on behalf of the government, was entirely responsible for arranging buying
and selling of treasury bills. However, the availability of the government treasury bills depended
only on the fiscal consideration of the government. Bangladesh Bank had no scope of its own to
increase or decrease their supply. Besides, interest rates were not market based and were fixed
arbitrarily by the government from time to time. In addition to the commercial banks,
Bangladesh Bank also had to hold a portion of government treasury bills.

Secondary Market for T-Bill

Until 2003, there was no secondary market for T-bills transaction in Bangladesh. Government
had decided to introduce the secondary T-bill market with a vision of broadening the government
securities market. World's leading financial institution Citigroup's subsidiary Citibank, N.A. and
local Prime Bank Limited had taken part in the first secondary transaction of T-bills in
Bangladesh that year. Citibank, N.A. had sold a T-bill of 2 years maturity bearing Taka 3 croreof
face value to Prime bank. BANGLADESH BANK had taken necessary steps to assist this
transaction. This was regarded the first secondary T-bill transaction in the country. a. Primary
Dealers: Bangladesh Bank has selected eight banks and one non-bank financial institution
as primary dealers (PDs) to handle secondary transactions of T-bills and other government
bonds.The eight banks are Sonali Bank, Janata Bank, Agrani Bank, Prime Bank Ltd, Uttara Bank
Ltd, South-East Bank Ltd, Jamuna Bank Ltd, and NCCBL, and the only NBFI is International
Leasing and Financial Services Ltd. The inter-bank Repo is one kind of secondary market for T-
bills and government securities, which was introduced from July 27, 2003. The selected banks
and the NBFI have already ended all procedural eligibility requirements for being appointed and
start operating as secondary bond market dealers. The BANGLADESH BANK earlier invited
applications from all scheduled banks and financial institutions and directed interested parties to
drop applications to the FOREX Reserve and Treasury Management Department of the
central bank latest by August 21, 2003. A total of 18 commercial banks and 1 non-bank financial
institution filed their applications for receiving PD licenses during the stipulated time.
The central bank earlier issued a guideline for the PDs with a view to activating and streamlining
the country's secondary bond market. Under the guideline, the PDs will subscribe and
underwrite primary issues and make secondary trading deals with 2-way price quotes. A PD
won't short sell any particular issue and won't carry a short position in secondary dealings. The
PDs won't act as inter-bank or inter-dealer brokers; it was specified in the guidelines.

Other money market instruments are:

a) Commercial Paper: Commercial paper consists of short term, unsecured promissory notes
issued by a corporation to raise short term cash, often to finance working capital requirements.
Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount
from face value. Commercial paper is traded mainly in the primary market. Opportunities for
resale in the secondary market are more limited. Commercial paper is rated prime, desirable, or
satisfactory, depending on the credit standing of the issuing company. Types of Commercial
Paper: There are two major types of commercial paper. Direct paper is issued mainly by large
finance companies and bank holding companies directly to the investor. Dealer paper, or
industrial paper, is issued by security dealers on behalf of their corporate customers (mainly
nonfinancial companies and smaller financial companies). Maturities & Rate of Return
Maturities of commercial paper range from three days (“weekend paper”) to nine months. Most
commercial paper is issued at a discount from par, and yields to the investor are calculated by the
bank discount method, just like Treasury bills.

b) Certificate of deposit Time deposit: Certificate of deposit was introduced as a money market
instrument in Bangladesh in 1983. Its objective was to strengthen the money market and bring
idle funds, including those arising from black money and unearned incomes, within the fold of
the banking system. The Bearer of Certificate of Deposits (BCD) with a fixed maturity is issued
by and payable at the bank to Bangladeshi nationals, firms and companies. The certificate does
not contain the name of the purchaser or holder. The interest rate is not fixed as in the case of
other deposit resources accepted by the banks at present.
The interest is determined on the date of issue of CDs based on the demand and supply of funds
in the money market. The difference between the face value of CDs and the prepaid interest is
received by the bank from the purchaser of CDs at the time of issue. The bearer of CDs can sell
the same to another purchaser. The bank maintains no record other than the Certificate No., rate
of interest allowed, and the date of sale and encashment. A bank does not issue certificate of
deposits for the value exceeding the limit prescribed for it by the Bangladesh Bank. commonly
offered to consumers by banks, thrift institutions, and credit unions. It is a short term borrowing
more like a bank term deposit account to raise the fund. It is a promissory note issued by a bank
in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity
date, the fixed rate of interest and the value. It can be issued in any denomination. They are
stamped and transferred by endorsement. Its term generally ranges from three months to five
years and restricts the holders to withdraw funds on demand. However, on payment of certain
penalty the money can be withdrawn on demand also. The returns on certificate of deposits are
higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit,
return method should be seen. The principal buyers of negotiable CDs include corporations, state
and local governments, foreign central banks and governments, wealthy individuals, and a
variety of financial institutions. Most buyers hold CDs until they mature. However, prime-rate
CDs are actively traded in the secondary market.
c) Bankers’ Acceptances: It is a short term credit investment created by a non financial firm and
guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and
accepted by a bank. It is a buyer’s promise to pay to the seller a certain specified amount at
certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the
goods as collateral. The person drawing the bill must have a good credit rating otherwise the
Banker’s Acceptance will not be tradable. The most common term for these instruments is 90
days. However, they can vary from 30 days to180 days. For corporations, it acts as a negotiable
time draft for financing imports, exports and other transactions in goods and is highly useful
when the credit worthiness of the foreign trade party is unknown. The seller need not hold it until
maturity and can sell off the same in secondary market at discount from the face value to
liquidate its receivables. A bankers’ acceptance is a time draft drawn on and endorsed by an
importer’s bank. Acceptances are used in international trade because most exporters are
uncertain of the credit standing of their importers. The issuing bank unconditionally guarantees
to pay the face value of the acceptance when it matures, thus shielding exporters and investors in
international markets from default risk. Acceptances carry maturities ranging from 30 to 270
days, with 90 days being the most common. They are traded among financial institutions,
industrial corporations, and securities dealers as a high-quality investment and source of ready
cash.

Drawbacks of Bangladesh’s Money Market

Though the Bangladeshi money market is considered as the advanced money marketamong
developing countries, it still suffers from many drawbacks or defects. Thesedefects limit the
efficiency of our market.
A. Absence of Integration
The money market of Bangladesh is broadly divided into the Organized andUnorganized
Sectors. The former comprises the legal financial institutions backed bythe central bank. The
unorganized statement of it includes various institutions such asindigenous bankers, village
money lenders, traders, etc. There is lack of properintegration between these two segments.

B. Multiple rate of interest

In the Bangladeshi money market, especially the banks, there exists too many rates of interests.
These rates vary for lending, borrowing, government activities, etc. Many rates of interests create
confusion among the investors.

C.Insufficient Funds or Resources

The economy with its seasonal structure faces frequent shortage of financial recourse. Lower
income, lower savings, and lack of banking habits among people are some of the reasons for it.

D. Shortage of Investment Instruments

In Bangladesh, various investment instruments such as Treasury Bills, Commercial Bills,
Certificate of Deposits, Commercial Papers, etc. are used. But taking into account the size of the
population and market these instruments are inadequate.

E. Shortage of Commercial Bill

In our country, as many banks keep large funds for liquidity purpose, the use of the commercial
bills is very limited. Similarly, since a large number of transactions are preferred in the cash form
the scope for commercial bills are limited.

F. Lack of Organized Banking System

In Bangladesh, even though we have a big network of commercial banks, still the banking
system suffers from major weaknesses. The absence of the organized banking system is major
problem for Indian money market.
G. Less number of Dealers
 There are poor number of dealers in the short-term assets who can act as mediators between the
government and the banking system. The less number of dealers leads tc the slow contact
between the end lender and end borrowers.

Recommendations:
1. Regulatory policies should be framed with long term vision. In recent months,
some policy decisions are being taken to address current problems at the cost of long
term marketinterest. These policy changes include fixation of minimum size of new
public issue, imposingrestriction on private placements, disqualifying private sector
companies under direct listing anddiscouraging new mutual funds.

2. There is a serious risk factor for the inexperienced investors. Entry of new companies in
the market can help reduce gap between demand and supply and help bring stability in
the market.

3. Private placements have been stopped in case of smaller companies. It is true that scope
of private placement has been misused in some cases recently and the problem called
for intervention.
Conclusion:
The money market is a wholesale market for funds – most trading occurs in multiples of amillion
dollars.The market is dominated by a relatively small number of large financial institutions
thataccount for the bulk of federal funds trading.Securities also move readily from sellers to
buyers through the market-making activitiesof major security dealers and brokers.And, of course,
governments and central banks around the world play major roles in themoney market as the
largest borrowers and as regulators. The money market supplies thecash needs of short-term
borrowers and provides savers who hold temporary cashsurpluses with an interest-bearing outlet
for their funds.

Reference:
1. https://www.bb.org.bd/fnansys/finmarket.php
2.http://www.academia.edu/34526081/Money_Market_in_Bangladesh._Characteristics_Structur
e_Importance_Drawback_and_Recommendation
3. www.investopedia.com/university/moneymarket/
4. http://en.wikipedia.org/wiki/Money_market
5. http://www.caalley.com/ 15 Money Market @ Amanullah Trino, Finance and Banking,
Rajshahi University www. http://trinobest.blogspot.com
6. https://icb.gov.bd/money_market_segment.php