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Financial System:
The Financial System is a set of institutional arrangement through which surplus units transfer
their fund to deficit units. The financial system is a set of organized institutional set-up through
which surplus units transfer their funds to deficit units.
Define a financial system fair narrowly, to consist of a set of markets, individuals and institutions,
which trade in those markets and the supervisory bodies responsible for their regulation. The end-
users of the system are people and firms whose desire is to lend and to borrow.
At present the financial system in Bangladesh is mainly composed of two types of institutions like
banks and non-bank financial institution (NBFIs). The formal financial sector in Bangladesh
includes: (a) Bangladesh Bank as the central bank, (b) 48 commercial banks, including 4
Government owned commercial banks, 30 domestic private banks (PCBs) (of which 6 banks are
operating under Islamic Shariah), 9 foreign banks (FCBs) (of which 1 bank is operating as Islamic
bank); and 5 government-owned specialized banks (DFIs); (c) 28 non-bank financial institutions
(NBFIs) – licensed by the Bangladesh Bank); (d) 2 large government- owned insurance
companies (life and general) and 60 private owned (17 life and 43 general) insurance companies;
(e) 2 stock exchanges and, (f) some co-operative banks. Besides, a good number of semi-formal
micro finance institutions (MFIs) also are operating in Bangladesh.
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FINANCIAL SYSTEM IN BANGLADESH
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FINANCIAL SYSTEM IN BANGLADESH
Financial Institutions
The modern name of Financial Institution is Financial Intermediary (FI), because it mediates or
stands between ultimate borrowers and ultimate lenders and helps transfer funds from one to
another.
The Financial system helps production, capital-accumulation and growth by
i) encouraging savings and
ii) allocating them among the alternative uses and users.
Financial Instruments
Financial Instruments are of two types:
i) Primary (or Direct)
ii) Secondary (or Indirect)
Financial Markets
Financial markets facilitate the flow of funds in order to finance investments by governments,
corporations, and individuals. It transfers funds from those who have excess funds (surplus units)
to those who need funds(deficit units).
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 (02) 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).
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FINANCIAL SYSTEM IN BANGLADESH
One of the important requisite for the accelerated development of an economy is the existence of
a dynamic financial market. A financial market helps the economy in the following manner.
Saving mobilization: Obtaining funds from the savers or surplus units such as
household individuals, business firms, public sector units, central government, state
governments etc. is an important role played by financial markets.
Investment: Financial markets play a crucial role in arranging to invest funds thus
collected in those units which are in need of the same.
National Growth: An important role played by financial market is that, they contributed
to a nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of
funds for productive purposes is also made possible.
Entrepreneurship growth: Financial market contribute to the development of the
entrepreneurial claw by making available the necessary financial resources.
Industrial development: The different components of financial markets help an
accelerated growth of industrial and economic development of a country, thus contributing
to raising the standard of living and the society of well-being.
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FINANCIAL SYSTEM IN BANGLADESH
Financial Functions
o Providing the borrower with funds so as to enable them to carry out their
investment plans.
o Providing the lenders with earning assets so as to enable them to earn wealth by
deploying the assets in production debentures.
o Providing liquidity in the market so as to facilitate trading of funds.
Primary market: Primary market is a market for new issues or new financial claims.
Hence it’s also called new issue market. The primary market deals with those securities
which are issued to the public for the first time.
Secondary market: It’s a market for secondary sale of securities. In other words,
securities which have already passed through the new issue market are traded in this
market. Generally, such securities are quoted in the stock exchange and it provides a
continuous and regular market for buying and selling of securities.
Money market: Money market is a market for dealing with financial assets and securities
which have a maturity period of up to one year. In other words, it’s a market for purely
short term funds.
Capital market: A capital market is a market for financial assets which have a long or
indefinite maturity. Generally it deals with long term securities which have a maturity
period of above one year. Capital market may be further divided in to: (a) industrial
securities market (b) Govt. securities market and (c) long term loans market.
o Equity markets: A market where ownership of securities are issued and
subscribed is known as equity market. An example of a secondary equity market
for shares is the Bombay stock exchange.
o Debt market: The market where funds are borrowed and lent is known as debt
market. Arrangements are made in such a way that the borrowers agree to pay the
lender the original amount of the loan plus some specified amount of interest.
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FINANCIAL SYSTEM IN BANGLADESH
Derivative markets: Derivative securities are financial contracts whose values are
derived from the underlying assets. And derivative markets are Markets that allow for
buying & selling of derivative securities.
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 (02) 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).
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FINANCIAL SYSTEM IN BANGLADESH
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.
The money market is used by a wide array of participants, from a company raising money by
selling commercial paper into the market to an investor purchasing CDs as a safe place to park
money in the short term. The money market is typically seen as a safe place to put money due
the highly liquid nature of the securities and short maturities, but there are risks in the market
that any investor needs to be aware of including the risk of default on securities such as
commercial paper. 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.
The developed money market has the following characteristics:
The common types of money market securities traded in Bangladesh are given below:
i) Treasury Bills(T-Bills)
ii) Repurchase Agreements( Repo or Reverse Repo)
iii) Commercial Papers
iv) Certificate of Deposit
v) Banker's Acceptance
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Treasury Bills, one of the safest money market instrument, are short term borrowing instruments
of the Central Government of the country issued through the Central Bank. They are zero risk
instruments. It is available both in the primary market as well as secondary market. T-bills are
short-term securities that mature in one year or less from their issue date. They are issued with
three-month, six-month and one-year maturity periods.
The Central Government issues T-Bills at a price less than their face value (par value). They are
issued with a promise to pay full face value on maturity. So, when the T-Bills mature, the
government pays the holder its face value. The difference between the purchase price and the
maturity value is the interest income earned by the purchaser of the instrument.
T-Bills are issued through a bidding process at auctions. The bid can be prepared either
competitively or non-competitively. In case of competitive bidding, the return on maturity is
specified in the bid. In case the return specified is too high then the T-Bill might not be issued to
the bidder. In case of non-competitive bidding, return required is not specified and the one
determined at the auction is received on maturity.
Commercial paper:
Commercial paper is short term debt instruments issued by well known, credit worthy firms. It is
generally not issued in Bangladesh. But only types of commercial papers available are- the bills of
exchange and promissory notes, mutual funds etc.
Negotiable Certificates of Deposit (NCDs):
NCDs are certificates that are issued by large commercial banks as a short term source of fund.
The nonfinancial corporations often purchase NCDs. The minimum denomination is not fixed in
Bangladesh. Maturities on NCDs normally range from 15 to 1 years. It provides return in the form
of interest along with the difference between the price at which NCDs is redeemed and the
purchase price.
Repurchase Agreements:
With RA or repo one party sells securities to another party with an agreement to repurchase it
back at a specific date and price. Financial institutions often participate in RA.
Banker’s Acceptance:
It indicates that a bank accepts responsibility for a future payment which is commonly used for
international trade. Maturity of it is ranged from 30 to 270 days. The return from it is above t-bill
yield.
capital markets. This is also true when a country's government issues Treasury bonds in the bond
market to fund its spending initiatives.
A. Regulatory Bodies
The Securities and Exchange Commission (SEC) exercise powers under the Securities and
Exchange Ordinance 1969, Securities and Exchange Commission (SEC) Act 1993, Depository Act,
1999. It regulates institutions engaged in capital market activities.
The SEC has issued licenses to institutions to act in the capital market of these, 52 institutions
are Merchant Banker & Portfolio Manager while 16 are the Asset Management Companies and 9
(one) acts as Security Custodians beyond these institutions SEC issuing 9 (nine) registration
certificate for Credit Rating Companies.
C. Stock Exchanges
There are two stock exchanges: a) The Dhaka Stock Exchange (DSE) and b) The Chittagong
Stock Exchange (CSE) which deals in the secondary capital market. DSE was established as a
Public Limited Company in April, 1954 thereafter CSE in April, 1995. As on June 15, 2012 the total
number of enlisted securities with DSE and CSE were 237 and 204 respectively. Out of 281 listed
securities including mutual fund with the DSE, 237 were listed companies, 41 mutual funds.
D. Intermediaries
1. Stock Exchanges: Apart from Dhaka Stock Exchange, there is another stock exchange in
Bangladesh that is Chittagong Stock Exchange established in 1995.
2. 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.
3. 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.
4. 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.
5. 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.
6. Credit Rating Companies (CRCs): CRCs in Bangladesh are licensed under Credit Rating
Companies Rules, 1996 and now, 5 CRCs have been accredited by SEC.
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FINANCIAL SYSTEM IN BANGLADESH
7. 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.
8. 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:
Bonds :
Bonds are long term debt securities issued by corporations & government agencies to support
their operations.
Mortgages :
Mortgages are long term debt obligations created to finance the purchase of real estate.
Stocks:
It is also called equity securities. Stocks are certificates representing ownership in the
corporations that issued them. It has higher rate of return but also exhibit a higher degree of risk.
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FINANCIAL SYSTEM IN BANGLADESH
In Bangladesh now different commercial banks and the non banking financial organizations are
operating their business. And every organization now involved attracting the retail customers that
means the middle income group people of the country. To draw their attention the sells persons
of different organization try to knock every possible door. These activities of different organization
increase the interest about this sector. As both commercial banks and the non financial institutes
are in the market, so it makes confusion to the general people about the activities of these
organizations. This article helps the customers to makes differentiate between these.
After the independence, banking industry in Bangladesh started its journey with 6 Nationalized
commercialized banks, 2 State owned Specialized banks and 3 Foreign Banks. In the 1980's
banking industry achieved significant expansion with the entrance of private banks. Now, banks in
Bangladesh are primarily of two types:
Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991
(Amended in 2003) are termed as Scheduled Banks.
Non-Scheduled Banks: The banks which are established for special and definite objective
and operate under the acts that are enacted for meeting up those objectives, are termed
as Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks.
There are 56 scheduled banks in Bangladesh who operate under full control and supervision of
Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank
Company Act, 1991. Scheduled Banks are classified into following types:
State Owned Commercial Banks (SOCBs): There are 4 SOCBs which are fully or majorly
owned by the Government of Bangladesh.
Specialized Banks (SDBs): 4 specialized banks are now operating which were
established for specific objectives like agricultural or industrial development. These banks
are also fully or majorly owned by the Government of Bangladesh.
Private Commercial Banks (PCBs): There are 39 private commercial banks which are
majorly owned by the private entities. PCBs can be categorized into two groups:
Conventional PCBs: 31 conventional PCBs are now operating in the industry. They
perform the banking functions in conventional fashion i.e interest based operations.
Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and
they execute banking activities according to Islami Shariah based principles i.e. Profit-Loss
Sharing (PLS) mode.
Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of
the banks which are incorporated in abroad.
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FINANCIAL SYSTEM IN BANGLADESH
Central bank
Bangladesh Bank
Pursuant to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the Dhaka
branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh
Bank with retrospective effect from 16 December 1971.
Banks
After the independence, banking industry in Bangladesh started its journey with 6 Nationalized
commercialized banks, 2 State owned Specialized banks and 3 Foreign Banks. In the 1980s
banking industry achieved significant expansion with the entrance of private banks. Now, banks in
Bangladesh are primarily of two types:
Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991
(Amended in 2003) are termed as Scheduled Banks.State-owned commercial banks, private
commercial banks, Islamic commercial banks, foreign commercial banks and some specialized
banks are Scheduled Banks.
Non-Scheduled Banks: The banks which are established for special and definite objective and
operate under the acts that are enacted for meeting up those objectives, are termed as Non-
Scheduled Banks. These banks cannot perform all functions of scheduled banks. Grameen
Bank, Probashi Kallyan Bank, Karmasangsthan Bank, Progoti Co-operative Land Development
Bank Limited (progoti Bank) and Answer VDP Unnayan Bank are Non-Scheduled Banks.
1. Sonali Bank
2. Janata Bank
3. Agrani Bank
4. Rupali Bank
Private banks are the highest growth sector due to the dismal performances of government banks
(above). They tend to offer better service and products. Here is the list -
1. AB Bank Limited
2. Bangladesh Commerce Bank Limited
3. Bank Asia Limited
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FINANCIAL SYSTEM IN BANGLADESH
1. Bank Alfalah
2. Citibank NA
3. Commercial Bank of Ceylon
4. Habib Bank Limited
5. HSBC ( The Hong Kong and Shanghai Banking Corporation Ltd. )
6. National Bank of Pakistan
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FINANCIAL SYSTEM IN BANGLADESH
Specialized banks
Specialized Banks (SDBs): 4 specialized banks are now operating which were established for
specific objectives like agricultural or industrial development. These banks are also fully or majorly
owned by the Government of Bangladesh.
Non-banking financial institutions which are not banks.These institutions cannot perform all
functions of banks, which get license to operate under Financial Institution Act, 1993 are termed
as Non-banking financial institutions.
Non Bank Financial Institutions (FIs) are those types of financial institutions which are regulated
under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 34 FIs are
operating in Bangladesh while the maiden one was established in 1981. Out of the total, 2 is fully
government owned, 1 is the subsidiary of a SOCB, 13 were initiated by private domestic initiative
and 15 were initiated by joint venture initiative. Major sources of funds of FIs are Term Deposit
(at least six months tenure), Credit Facility from Banks and other FIs, Call Money as well as Bond
and Securitization.
The major difference between banks and FIs are as follows:
Credit unions:
Finance companies:
Organisations
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FINANCIAL SYSTEM IN BANGLADESH
a) Insurance Companies
The insurance sector is regulated by the Insurance Act, 1938 with regulatory
oversight provided by the Controller of Insurance on authority under the Ministry of
Commerce. A separate Insurance Regulatory Authority is being established. A total of
62 insurance companies have been operating in Bangladesh, of which 19 provide life
insurance and 43 are in the general insurance field. Among the life insurance
companies, except the state-owned Jiban Bima Corporation (GBC) foreign owned American
Life Insurance Company (ALlCO), and the rest of the private. Among the general insurance
companies, state-owned Shadharan Bima Corporation (SBC) is the most active in the
insurance sector. A total of 31 insurance companies are listed in the capital market, of
which 8 offer life insurances.
1. Life insurance,
2. General Insurance,
3. Reinsurance,
4. Micro-insurance,
5. Takaful or Islami insurance.
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FINANCIAL SYSTEM IN BANGLADESH
e) Mutual Funds
Mutual funds are portfolios of different securities such as stocks, bonds, treasuries,
derivatives, etc. Mutual funds pool money of both individual and institutional investors
allowing the funds to achieve: (i) economies of scale by reducing costs and increasing
investment returns; (ii) divisibility and diversification; (iii) active management with superior
stock picking and market timing; (iv) reinvestment of dividends, interest and capital gains;
(v) tax-efficiency; and (vi) buying and selling flexibility. There might be varieties of mutual
funds that differ in terms of their investment objectives, underlying portfolios of shares, risks
and returns, fees and expenses, etc.
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f) Pension Funds
Pension funds are analyzed as financial intermediaries using a functional approach to finance,
which encompasses traditional theories of intermediation. Funds fulfill a number of the
functions of the financial system more efficiently than banks or direct holdings. Their growth
complements that of capital markets and they have acted as major catalysts of change in
the financial landscape. Financial efficiency in this functional sense is not the only reason
for growth. It is also a consequence of fiscal incentives and benefits to employers, as well as
growing demand arising from the ageing of the population.
Employers, such as companies, public corporations, and industry or trade groups, typically
sponsor pension funds; accordingly, employers as well as employees typically
contribute. Funds may be internally or externally managed. Returns to members of
pension plans backed by such funds may be purely dependent on the market (defined
contribution funds) or may be overlaid by a guarantee of the rate of return by the sponsor
(defined benefit funds).
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Banks
As on June 2011
Deposits Advances Total Capital* No. of
Branches
4115855.50 3212848.70 461697.00 7772
Million Million Million
FIs
As on December 2010
Deposits Loans and Assets Share Capital & No. of
leases Reserve Branches
94374.80 321284.87 251527.34 44689.29 Million 115
Million Million Million
Insurance
As on December 2009
Asset Share Capital Reserve
Life 118020.15 Million 1245.54 Million 106098.88 Million
Insurance
Non-Life 42622.90 Million 6653.83 Million 12133.30 Million
Insurance
Capital Market
Market Capitalization of Dhaka Stock Exchange
As on September 2011
All Listed Securities 2,782,901Million
All Listed Companies Shares 2,202,274 Million
All Listed Mutual Funds 35,733 Million
All Debentures 576 Million
All Listed Govt. T-Bonds 537,381 Million
All Listed Corporate Bonds 6,937 Million
MFIs
As on June 2009
Number of Number of No. of
Total Clients Borrowers Branches
Outstanding
1,21,881.85 24.77 Million 19.50Million 18,022
Million
* Sum of Tier-I, Tier-II and Tier-II Capital Components.
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FINANCIAL SYSTEM IN BANGLADESH
The member-based Microfinance Institutions (MFIs) constitute a rapidly growing segment of the
Rural Financial Market (RFM) in Bangladesh. Microcredit programs (MCP) in Bangladesh are
implemented by various formal financial institutions (nationalized commercial banks and
specialized banks), specialized government organizations and Non-Government Organizations
(NGOs). The growth in the MFI sector, in terms of the number of MFI as well as total
membership, was phenomenal during the 1990s and continues till today.
Despite the fact that more than a thousand of institutions are operating microcredit
programs, but only 10 large Microcredit Institutions (MFIs) and Grameen Bank represent 87% of
total savings of the sector and 81% of total outstanding loan of the sector.
Credit services of this sector can be categorized into six broad groups:
Currently, 599 institutions (as of October 10 2011) have been licensed by MRA to operate
Micro Credit Programs. But, Grameen Bank is out of the jurisdiction of MRA as it is operated under
a distinct legislation- Grameen Bank Ordinance, 1983.
The member-based Microfinance Institutions (MFIs) constitute a rapidly growing segment of the
Rural Financial Market (RFM) in Bangladesh. Microcredit programs (MCP) in Bangladesh are
implemented by various formal financial institutions (nationalized commercial banks and
specialized banks), specialized government organizations and Non-Government Organizations
(NGOs). The growth in the MFI sector, in terms of the number of MFI as well as total
membership, was phenomenal during the 1990s and continues till today.
Despite the fact that more than a thousand of institutions are operating microcredit programs, but
only 10 large Microcredit Institutions (MFIs) and Grameen Bank represent 87% of total savings of
the sector and 81% of total outstanding loan of the sector. Through the financial services of
microcredit, the poor people are engaging themselves in various income generating activities and
around 30 million poor people are directly benefited from microcredit programs.
Credit services of this sector can be categorized into six broad groups: i) general microcredit for
small-scale self employment based activities, ii) microenterprise loans, iii) loans for ultra poor, iv)
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agricultural loans, v) seasonal loans, and vi) loans for disaster management. Currently, 599
institutions (as of October 10 2011) have been licensed by MRA to operate Micro Credit Programs.
But, Grameen Bank is out of the jurisdiction of MRA as it is operated under a distinct legislation-
Grameen Bank Ordinance, 1983.
Banks
As on June 2011
Deposits Advances Total Capital* No. of
Branches
4115855.50 3212848.70 461697.00 7772
Million Million Million
FIs
As on December 2010
Deposits Loans and Assets Share Capital & No. of
leases Reserve Branches
94374.80 321284.87 251527.34 44689.29 Million 115
Million Million Million
Insurance
As on December 2009
Asset Share Capital Reserve
Life 118020.15 Million 1245.54 Million 106098.88 Million
Insurance
Non-Life 42622.90 Million 6653.83 Million 12133.30 Million
Insurance
Capital Market
Market Capitalization of Dhaka Stock Exchange
As on September 2011
All Listed Securities 2,782,901Million
All Listed Companies Shares 2,202,274 Million
All Listed Mutual Funds 35,733 Million
All Debentures 576 Million
All Listed Govt. T-Bonds 537,381 Million
All Listed Corporate Bonds 6,937 Million
MFIs
As on June 2009
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FINANCIAL SYSTEM IN BANGLADESH
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