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.

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.

The money market of Bangladesh reached its present phase through a series of changes and evolution. Initially, after liberation, money market was the major constituent part of the financial market of the country. Capital market, its other segment was a relatively smaller part. All financial institutions of the country were nationalised after liberation. The growth and evolution of money market in the country took place during the period from 1971 to the early eighties under various sets of interventionist rules and regulations of the government and as such it could hardly reflect the actual market conditions. However, in this period a vast financial superstructure with large network of commercial bank branches was established in the country. Simultaneously, specialised financial institutions under government sector also emerged with the objective of mobilising financial resources and channelling them for short, medium and long-term credit and investments. The market participants had to operate in an environment of directed lending and loan disbursement goals, and predetermined rates of interest fixed by the authority. However, rate of interest in the call market was flexible but due to prevalence of liberal refinance facility at concessional rates from Bangladesh Bank, the activities of call money market remained insignificant.

In the beginning of the 1980s, money market in Bangladesh entered a new era with the denationalisation of two nationalised banks and establishment of some private banks. With this development money market assumed the characteristics of a competitive market in the country. However, the administered interest rate structure and the government's policy of priority sector lending continued to operate as factors that deterred the development of a liberalised money market in the country.

Constituents of money market Structurally, money market in Bangladesh is composed of two broad groups of institutions: formal and informal. The formal institutions (up to 1999) include the Bangladesh Bank at the apex, 4 natioanlised commercial banks, 27 domestic and 12 foreign private commercial banks, 9 specialised (development) banks, 24 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 three distinct components of organised segment of money market of Bangladesh are the inter-bank market, call money market and bill market.

The year 1990 may be treated as a landmark in the evolution of money market in Bangladesh. This year a comprehensive Financial Sector Reform Programme (FSRP) was undertaken to establish a market oriented financial structure in the country. The objectives of FSRP were to deregulate lending activities, replace the refinance facilities with rediscount facility, and abolish the administered interest rate regime. Subsequently, introduction of new money market instruments such as certificate of deposits (CDs), Bangladesh Bank bills of 91-days and 30-days maturity and some new government treasury bills were introduced to accelerate the pace of development of money market in the country.

Inter-bank market operates within a limited scale in the form of inter bank deposits and borrowings and has virtually no fixed price fixing mechanism. Traditionally, scheduled commercial banks lend to each other when they are in need of temporary funds. Sometimes, banks also keep a part of their resources to other banks as deposits and borrow as and when needed against the lien of those deposits. Small banks usually keep their funds as deposits with large banks for safety.

Non-bank financial institutions also take part in inter-bank market operations in Bangladesh by way of lending their fund to the deficit banks. The inter-bank transactions are concentrated mainly in Dhaka city but may also be found in other parts of the country. As part of fund management, branch offices of banks, which can not send their surplus funds to their respective head offices, usually keep them in their nearest big branch or in other banks and draw the funds back as and when needed.

Inter-bank transactions, although constitute an integral part of money market, comprise a small portion of total banking activities. Inter-bank deposits as percent of total deposits varied between 2 and 5 percent during 1986-99. This indicator was between 1.6 and 2.5 percent during the FSRP period of 1990-96. Historically, there appears to be a positive correlation between growth of inter-bank deposits and excess cash reverses of the banking system. Total inter-bank deposits increased from Tk 3.4 billion in June 1986 to Tk 25 billion in December 1998. Excess cash reverses increased during this period from Tk 1.3 billion to Tk 21.5 billion.

The deposit resources of banks registered an increase of Tk 122.6 billion or an yearly average growth of 22% during the period between June 1986 to June 1991 and 18% during June 1991- June 1998. That the money market is not much developed in Bangladesh is depicted from the growth pattern of deposits of the country.

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. The outstanding amount of CDs was about Tk 1.05 billion in June 1988 and increased to Tk 2.91 billion in June 1992 and further, to Tk 3.44 billion in December 1998. The amount of resources mobilised through issue of CDs was only 0.58 percent of total deposits at the end of December 1998.

Call money market is the most sensitive part of money market, in which a good number of players from the banking as well as the non-bank financial sector actively participate on a regular basis. Initially, this market developed as an inter-bank market where the banks in temporary deficit of cash resorted to borrowing from other banks having surplus funds. As banks were in the public sector until the beginning of the 1980s, the Bangladesh Bank provided them with liberal refinance facilities at concessional rates. There was hardly any need for raising funds from the call money market during this period. Moreover, administered interest rate regime, easy availability of borrowing from central bank and its directive to provide credit to priority sectors were the major impediments in development of a call money market in the country. Notwithstanding the fact, banks participated in a limited scale in the call money market mainly to wipe out the temporary mismatch in their assets and liabilities.

A turning point was the denationalisation of Uttara and Pubali Bank in 1983 and 1984 respectively and the government decision to allow private banks to operate in the country. Formation of private banks during the 1980s provided new opportunities to develop this segment of money market. In 1985, two investment companies and in 1989, one leasing company were allowed to participate in the call money market. At present, all banks including specialised ones and non-bank financial institutions are allowed to participate in this market.

Basic features 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.

Information systems of banks in Bangladesh are outdated. Market players therefore, do not know much about the demand for and supply of fund. Banks and financial institutions having surplus funds take advantage of the market imperfection of domestic deficit banks.

Bangladesh Bank has circulated some guidelines to the lending and borrowing banks and financial institutions regarding operations in the call money market. Although it is not compulsory for banks to participate in the call market, they are advised to provide call loans considering liquidity, solvency and sources of repayment of borrowings by the borrowing institutions.

The demand for and supply of funds in the call market remains volatile throughout the year with some occasional turbulence. 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 remains high during November to April and as such the rate of interest during this period also goes up.

The underdeveloped nature of the inter-bank market in Bangladesh is evident from the large spread between the highest and lowest rates in the call money market. The lowest call money market rate always remained higher than the Bank Rate during the period from September 1985 to June 1992. One notable feature of the call money market is that the spread between lowest and highest call money market rate has been larger during the reform period. It is because of the fact that with the implementation of FSRP, the need for funds of banks other than the Bangladesh Bank increased with abolition of easy refinance facility from the central bank. Thereafter, the lowest inter-bank call money rate remained lower than the bank rate. The inter-bank call money rate varied with rise in excess cash reserves of banks.

Experience suggests that when there was sufficient excess reserves with banks, the inter-bank rate came down but the rate denoted increase with the accentuation of short-fall in reserves position of banks. Compared to nationalised banks and domestic private banks, the foreign banks in general, and Islami banks in particular, held higher excess reserves with them. Foreign banks are the major sources of supplier of funds to the inter-bank market in recent years. Before the introduction of financial sector reforms, foreign banks preferred preserving excess liquidity to lending to inter-bank market partly because of lack of confidence and partly because of instructions from their head office. In addition, the information gap between borrowing and lending banks also discouraged transactions in the inter-bank market.

The rate of interest in the inter-bank call money market reached a maximum of 21% in November 1997. During the first half of 1998, there was a tremendous pressure in the call money market of the country. The rate of interest reached 27% in February 1998. A large number of domestic private and foreign banks borrowed at the rates of 20% and above up to April 1998. During 1997-98, Bangladesh Bank followed a restrictive monetary policy. In view of expansion of domestic credit, bank rate was raised to 8% from 7.5% in November 1997 and tightened the discount window for the banks. The government also borrowed substantial amount of funds from the banking sector to meet its budgetary shortfall in the second half of 1997-98. Total outstanding treasury bill holding by the scheduled banks which was only Tk 11.48 billion at the end of June 1997, reached the level of Tk 25.11 billion at the end of January 1998, and further to Tk 27.94 billion at the end of June 1998. However, during 1998-99, the pressure in call money market eased substantially.

The rates of interest amidst fluctuations reached a maximum of 17% during 1998-99. Due to prolonged and devastating floods at the beginning of 1998-99, the country's monetary policy was relaxed to enable banks to provide necessary credit for early recovery of economic activities. Easy access of the scheduled banks to the discount window of the Bangladesh Bank helped them holding liquidity position at a comfortable level. The banks borrowed an amount of Tk 9.15 billion from the Bangladesh Bank during 1998-99 as compared to a much lower amount of Tk 1.13 billion during 1997-98. Moreover, excess reserve position of the banks increased by Tk 4.96 billion during 1998-99 as compared to an increase of Tk 9.78 billion in the preceding year. As a result, the call money market witnessed a lower pressure during 1998-99.

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.

The commercial bill market remained very narrow in the country largely due to a low level of industrialisation and a slow growth of trade and commerce. Banks traditionally financed two broad categories of commercial bills viz. inland bills and export bills. These bills are marketable papers and can be resold in the market at a competitive rate. Usually, the holders of these bills sell them for cash to the banks, which pays the holder the face value of the bills less collection charges and the interest for the remaining period of the bill. Prevalence of cash credit system of the banks is a major hindrance in the way of the development of an active commercial bill market in the country. Stamp duty, procedural difficulties and reluctance of the drawees of bills to undertake the additional paper work involved in handling documents etc hindered the development of commercial bill market. With the introduction of FSRP, the commercial bill market is gradually developing in the country. The amount of commercial bill financing by the Deposit Money Bank (DMB) was only Tk 8.60 billion at the end of January 1991. This rose to Tk 36.20 billion at the end of December 1998.

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.

Despite regular auction of Bangladesh Bank Bills, government treasury bills continued its normal transaction in the market. However, following the declaration of Bangladesh Bank Bills as approved securities for the SLR purposes, the effectiveness of the bills weakened as an instrument of monetary control. The auctions of Bangladesh Bank Bills were, therefore, suspended from March 1997. On the other hand, the auctions of the four categories of government treasury Bills ie, 30-day, 90-day, 180-day and 1-Year Bills were held on weekly basis regularly up to August 1998. These treasury bills were replaced later by the newly introduced 28-day, 91-day, 182-day, 364-day, 2-year and 5-year government treasury bills since September 6 1998.

The main features of the bill market are as follows:

It is still a captive market. Banks and financial institutions having SLR obligation are the only participants in this market. Financial institutions having no obligation of SLR, corporate or non-corporate firms, semi-government or autonomous bodies having temporary surplus funds do not invest in government treasury bills.

Bangladesh Bank is the main holder of treasury bills. These are sold to the banks and financial institutions on the basis of requirement through auctions.

The rates of interest of treasury bills are now competitive and flexible. Treasury bill rates largely influence the market rate in the other segment of the money market, particularly, the rate of interest in the call money market.

There is no secondary market for trading of these bills. However, in case of need of funds the holders of bills can get them rediscounted with the Bangladesh Bank.

The sale of treasury bills depends on the budgetary requirements of the government. Moreover, due to SLR obligations banks are compelled to hold a certain amount of treasury bills. As a result, treasury bill market of Bangladesh turned to be a non-liquid market.

The holdings of treasury bills by the deposit money banks (DMB) were only Tk 0.94 billion on 30 June 1973 and the rate of interest was 6%. Amidst fluctuations, the volume went up to Tk 9.54 billion at the end of June 1986. The rates of interest went up to 9% at that time. Although the rate of interest declined to 8% at the beginning of 1987, the treasury bill holdings by the DMBs went up substantially to Tk 12.51 billion at the end of June 1987. The treasury bill holdings reached a peak of Tk 45.12 billion at the end of June 1993 and thereafter, it declined to Tk 0.46 billion at the end of June 1995. However, the treasury bill holdings shoot up to Tk 49.73 billion by May 1999. It may be assumed that lower treasury rate as compared to higher yield on Bangladesh Bank Bill might have induced the banks to shift their portfolio investments in favour of the latter. However, due to suspension of auctioning of Bangladesh Bank Bills government treasury bills, other than the commercial bill segment, have become the only instruments in the bill market.
[Syed Ahmed Khan and Abdus Samad Sarker]

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