Progress and Prospect of Bangladesh Money Market and Capital Market Security In Bangladesh Prepared for: Mr. Md. Mahbubul Haque Khan Lecturer Department of Business Administration East West University Prepared By: N.M. Baki Billah 2008-2-10-071 Anwer Hossan 2008-1-10-090 Nazia Choudhury 2008-2-10-068 Syeda Samia Akbar 2009-1-10-026 Amatul Gous 2007-1-10-092 Date of Submission: 21 April, 2011
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Progress and Prospect of Bangladesh Money Market and Capital Market Security in Bangladesh
Bird's-eye view of the capital & money market of Bangladesh. One will get information about existing stocks in DSE & CSE and bond market. Moreover, here we tried to show comparison amid different stock markets of South Asian countries. We also gave some recommendations to rebuild bond market.
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Progress and Prospect of Bangladesh Money Market and Capital Market
Security In Bangladesh
Prepared for:
Mr. Md. Mahbubul Haque Khan
Lecturer
Department of Business Administration
East West University
Prepared By:
N.M. Baki Billah
2008-2-10-071
Anwer Hossan
2008-1-10-090
Nazia Choudhury
2008-2-10-068
Syeda Samia Akbar
2009-1-10-026
Amatul Gous
2007-1-10-092
Date of Submission:
21 April, 2011
Letter of Transmittal
21April, 2011
Mr. Md. Mahbubul Haque Khan
Lecturer
Department of Business Administration
East West University
Dear Sir
It is a pleasure to submit the term paper on “Progress and Prospect of Bangladesh Money Market and Capital Market Security” by today.
It is a fantastic opportunity for us to prepare the individual term paper under your guidance, which really is a great experience.
We have worked hard and tried our best, in order to prepare the term paper. We believe that it is encouragement for us to get involved with such process of reporting and a way to enrich financial knowledge. It will be a privilege for us to provide further clarification on this report whenever it is necessary.
Thank you.
Sincerely.
Anwer Hossan
2008-1-10-090
N. M. Baki Billah
2008-2-10-071
Nazia Choudhury
2008-2-10-068
Syeda Samia Akbar
2009-1-10-026
Amatul Gous
2007-1-10-092
AA Acknowledgement A
It really was a great challenge for us to prepare the term paper. First of all, we present our due
regards to the Almighty, who has provided us the brilliant opportunity to build and complete this
report successfully with good health & sound mind.
Our course instructor, Mr. Md. Mahbubul Haque Khan, Lecturer, Department of Business
Administration, East West University helped us all the way through. He also gave proper
guideline about this term paper and also by not getting irritated with our unlimited questions. We
really want to express our gratitude to him for giving valuable advice and time, which helped
immensely in preparing this term paper.
We also like to thank Shokil Alam Chaklader and Naimul Ehasan, two of our friends who helped
us immensely in this term paper.
Table of Contents
Content Page numberIntroduction 1Money Market Securities 1T-Bill progress in Bangladesh 2Issuer 2Types 3Participants 3Who and How Can Invest 3Schedule for Issuance 3Selling System 4Secondary Market for T-Bill 4Procedure to Allot T-bills 5T-bill Yield 5Call Money Rate 7Repo 7Reverse Repo 8Capital market in Bangladesh History of Capital Market 9The Capital market, an important ingredient of the financial system, plays a significant role in the economy of the country & Regulatory Bodies
9
2. Participants in the Capital Market i) Stock Exchanges The Dhaka Stock Exchange (DSE)
10
The Chittagong Stock Exchange (CSE) 11Compliance Officer 11Book Building Method 11Trading of Securities in the Exchanges 11O-T-C Market 11Settlement of Securities Transaction in the Exchanges 12Securities Trading in the Exchange through Borrowing 12Securities Issue through Private Placement 12Rights Issue,ICB,Specialized Bank,Products,Players,Parameters 13
Capital Market Development14
Measures Supporting Capital Market Development:15-16
Indicators of capital market development17
Capital Market Securities17
Bond Market in Bangladesh17
Bangladesh Government Treasury Bonds 18
(BGTBs) Auctions18
Bangladesh Government Islamic Investment Bond (Islamic Bond) 19
Corporate bond19
ACI Bond19
Mudaraba Perpetual Bond (MPB) of Islami Bank Bangladesh Limited.20-21
Purpose of the Issue 22Salient Features Of Mudaraba Perpetual Bond of Islami Bank Bangladesh Ltd. (IBBL)
22-23
Profit Distribution Features of MPB 23Risk Factors 24BRAC Bank 25% Subordinated Convertible Bonds 24-25
Mutual Funds 25
Debentures26
Capital market securities (DSE)27
Sectorial performance (DSE)28-30
Capital market securities (CSE)30
Problems31-34
Prospect34-35
Overview of SAARC Markets35
Recommendations36-38
Conclusion39
Introduction
The Bangladesh economy is within the mainstream of the continuously changing global financial
system. Domestic as well as international trade also characterizes Bangladesh economy. Hence a
financial system has developed here consisting mainly of the capital and the money market. For
any underdevelopment country the existence of a well functioning money market is of
paramount importance. The money market currently existing has also developed due to certain
needs. In general, these needs can be termed as need for short term liquidity within our financial
system, to carry out the day to day economic activities and obviously to meet and match need for
short term lending and borrowing of the participants within the financial system. T-bill market is
by far the largest component of the money market in Bangladesh.
Capital markets are essentially about matching the needs of investors with those that need capital
for development. Bangladesh has no shortage of both such parties, a young and dynamic
population that increasingly wants, and is able to, make provision for lifetime events, to save for
children’s education, for the possibility of ill health and ultimately for old age and retirement. On
the other side of the equation, Bangladesh has a pressing need for investment resources to bolster
its stretched infrastructure resources, to build more power stations, bridges, ports and gas-
pipelines to empower the people in the development of enterprise and the creation of jobs. Debt
markets are an extremely effective mechanism for matching the long term needs of savers with
those of entrepreneurs. Like emerging-market countries around the world, Bangladesh could
benefit from having a local-currency, fixed-income securities market. At present, its main fixed
income financial products are bank deposits, bank loans, government savings certificates, term
loans, treasury bills, and government bonds and corporate debt (syndicated loans, private
placement, and debentures). But in general the corporate debt market is still very small compared
with the equity market.
Money market securities
are the debt securities that have a maturity one year or less. They generally have a relatively high degree
of liquidity. Money market securities tend to have a low expected return but also a low degree of risk.
Various types of money market securities are listed below.
Money Market Securities
Issued by Common Investors
Common Maturities
Secondary Market Activity
Treasury bills Federal Government
Households, firms and financial institutions
13 weeks, 26 weeks. 1 year
High
Retail certificates of deposit (CDs)
Banks and saving institutions
Households 7 days to 5 years or longer
Nonexistent
Negotiable certificates of deposit (NCDs)
Large banks and saving Institutions
Firms 2 weeks to 1 year Moderate
Commercial paper
Bank holding companies, finance companies and other companies
Firms 1 days to 270 days Low
Eurodollar Deposit
Banks located outside the country
Firms and government
1 day to 1 year Nonexistent
Banker’s acceptances
Banks ( exporting firm can sell the acceptance at a discount obtain funds)
Firms 30 days to 270 days
High
Federal Funds Depository institutions
Depository institutions
1 day to 7 days Nonexistent
Repurchase agreements
Firms and financial
Firms and financial
1 day to 15 days Nonexistent
institutions institutions
T-Bill Progress in Bangladesh
Issuer
Bangladesh Bank (BB), the central bank of Bangladesh, operates throughout the country with its
nine branches. Government receipts and payments are overseen and managed by
BANGLADESH BANK. Where there is no BANGLADESH BANK branch but transactions of
government occur, different branches of Sonali Bank (SB) are assigned to take part in these
transactions on behalf of BANGLADESH BANK. These branches are known as 'Chest
Branches'. In a district, there may be one chest and some sub-chests. BANGLADESH BANK
directly monitors Chest branches. This function is known as 'Feed'. The Bangladesh government
finances its expenditures in excess of tax receipts through the sale of debt obligations. Currently,
the total par value of outstanding Treasury bills stood at about Taka 22000 crore.
Types
Treasury bills are designated by the number of days to their maturity. There are six types of T-
bills that prevail in Bangladesh. These are
a) 28 days T-bill
b) 91 days T-bill
c) 182 days T-bill,
d) 364 days T-bill
e) 2 years T-bill
f) 5 years T-bill
Participants
The market for Bangladesh Treasury bills has a complex structure and involves numerous
participants--Ministry of Finance, Bangladesh Bank, government securities dealers and brokers,
and other holders of Treasury securities.
Who and How Can Invest
Until 2003, there was no secondary market for treasury securities. Any investor (institution or
individual), who maintains a current account with Bangladesh Bank, can invest in T-bills
through primary market auctions. Auction is held on every Sunday at 11 a.m. at the Motijheel
Branch of BB. If Sunday is a holiday, then the last working day before Sunday is used. All the
investors submit their bid unless otherwise pension or provident fund. After receiving the bid, the
auction committee decides how much T-bills will be offloaded. There is a high-powered
committee to oversee the treasury functions; which includes seven members.
Schedule for Issuance
Marketable Treasury securities are issued through regularly scheduled auctions in what is called
the primary market. The process importantly involves the Bangladesh Bank, which serve as
conduits for the auctions.
Selling System
Treasury bills are sold on a discount basis, which in simple terms means that we have to pay for
the bills less the interest receivable during the term of the bill and receive the face value of the
bill at the end of the period. Treasury bills are not listed at the Stock Exchange. If one wanted to
exit before maturity, rediscounting isn't possible at the Central Bank, rather he or she may take
part in the Repo auction.
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 crore
of 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.
Procedure to allot T-bills
To foster liquidity in the market, the Treasury issues securities consistently and predictably
through a regular schedule of auctions. In Bangladesh, Multiple-units Auction Model is
followed. Two types of bids may be submitted at the auction:
a) Competitive bids
b) Non-competitive bids
Competitive bids specify both the quantity of the security sought and a yield. If the specified
yield is within the range accepted at the auction, the bidder is awarded the entire quantity sought
(unless the specified yield is the highest rate accepted, in which case the bidder is awarded a
prorated portion of the bid. Noncompetitive bids specify only the quantity of the security sought.
Let us discuss the procedure that BANGLADESH BANK follows to allot T-bills to competitive
and non-competitive bidders through T-bill auctions. In Bangladesh, T-bills are quoted on a 364-
day discount basis. We define the bank discount rate (BDR) as BDR = D/M * 364/t, where t is
the number of days from settlement to maturity, and D is the discount from par, D = M - P, M
being the par or maturity value, and P being the price. Hence the discount from par is given by D
= BDR x M x t/364, while P = M - D. Example: The WSJ on Monday, Feb 7, 1994 gives the ask
quote on the May 05, '94 T-bill as 3.21%. (If we were to buy the bill, we would buy at the ask).
The quote is for Friday, February 4. The market convention used in the WSJ is that two days are
needed for settlement; under this convention settlement would take place on Tuesday, Feb 8.
There are 86 days between Feb 8 and May 5. The discount on a $10,000 par bill is D = 3.21% x
10, 000 x86/364 = 75.84, and the price is P = 10, 000 - 75.84 = 9924.16. Conversely, assume the
price of the T-bill were $9,900. The discount amounts to D = 10, 000 - 9, 900 = 100, and the
(3) The NAV per share as per last audited financial statements (2009) is Tk 156.16 and the
conversion strike price is Tk 171.78 as per announced formula, (4) If any bondholder gets
fraction or odd lot number of shares through conversion, the fraction or odd lot shares shall be
credited to suspense account and will be sold out in the market. The equivalent selling price
against the odd lot or fraction of shares will be paid to the respective bondholders and (5) After
record date of 1st Series of Bonds, the number of series in each lot will be reduced to four from
five. — DSE Online
Mudaraba Perpetual Bond (MPB) of Islami Bank Bangladesh Limited.
Brief Overview of the Bank
1. Date of Incorporation: March 13, 1983
2. Commencement of Business: March 30,1983
3. Authorized Capital: Tk. 5,000 million.
4. Paid up Capital: Tk. 3,456.00 million (Pre issuance of MPB)
5. No of Branches: 176
Table 1.2: Details of the Issue
Description No. of Units Offer Value In Taka
Amount Tk.
Pre-IPO Placement 1,500,000 1,000 1,500,000,000 Public Offering 1,500,000 1,000 1,500,000,000 Total Value of Bond after IPO 3,000,000 1,000 3,000,000,000
Table 1.3 Basic information of the Issue:
Sl No. Category Description
1
Name of the Bank Islami Bank Bangladesh
Ltd.
2
Size of the Issue Tk. 3,000 m (Tk. 1,500 m
private placement & Tk.
1,500 m IPO
3
Unit Price Tk. 1000
4
Market Lot 5
5
Term Perpetual (no maturity
period)
6
Profit Distribution
a) MPB will carry 1.25
weight ages for distribution
of profit.
b) Not less than 65% of the
income generated by
deployment of MPB fund
and
c) An additional rate of
profit equivalent to 10% of
the rate of dividend
declared by the Islami Bank
Bangladesh Limited every
year. No portion of
dividend will be distributed
to the MPB holders.
7 Minimum Subscription Tk. 5,000 or multiple of Tk.
5,000.
8 Credit Rating MPB has been rated as A+ by
Credit Rating Information and
Services Limited (CRISL)
9 Trustee Investment Corporation of
Bangladesh (ICB)
10 Manager to the Issue ICB Capital Management
Limited (A subsidiary
company of ICB)
Purpose of the Issue
The main purpose of the bond is to raise fund to meet the capital adequacy ratio of the Bank.
Since the raising of Tier-1 Capital has impact on share value dilution and dividend paying
capacity of the bank, the IBBL has been looking for alternate sources of Tier-2 Capital as a
subordinated investment instrument and identified the issuance of Mudaraba Perpetual Bond to
resolve the issue of capital adequacy.
Table 1.4: Dividend Information of the Bank
Year Cash (%) Bonus (%) Right (%) Total Dividends (%)
31.12.2006 15% 10% - 25%
31.12.2005 - 25% - 25 %
31.12.2004 - 20% - 20 %
31.12.2003 - 20% 200% 220 %
31.12.2001 - - 100% 100 %
Salient Features Of Mudaraba Perpetual Bond of Islami Bank Bangladesh Ltd. (IBBL)
1) It has no redemption facility & pre-determined interest rates.
2) MPB will share income derived from investment activities and also get an additional rate
of profit equivalent to 10% of the rate of dividend (no portion of dividend will be
distributed to the MPB holders.
3) MPB will be issued to meet the capital adequacy ratio of the Bank.
4) Term: Perpetual (no maturity period).
5) The Minimum subscription amount is Tk. 5,000 or multiple of Tk. 5,000.
6) MPB as a Mudaraba instrument it will get priority over the shareholders in respect of
getting profit and also refund of principal in case of liquidation of the bank.
7) The Bondholders will however stand subordinated to the Depositors in respect of the
payment of both profit and refund of principal.
8) MPB will be listed with both Bourses of the country and will remain freely transferable
depending on the market demand.
9) IBBL has already agreed to create floating charge to the extent of Tk. 3,000 million on the
present and future assets of the bank in favour of the trustee in order to secure the interest
of the Bondholders.
10) The bond will be further secured by the corporate guarantee of the IBBL.
11)MPB will be treated as a Tier-2 Capital as a subordinated investment instrument that will
save from dilution effect & enhance dividend paying capacity of the bank.
Profit Distribution features of MPB
All Mudaraba Fund holders/ Mudaraba depositors of the Bank will share income which is
derived from investment activities i.e., income from use of Mudaraba Funds. Income under
this category will mean and include profit, dividend, capital gain, rent and any other income
derived from investments.
Table 1.5: Example of estimated Rate of Profit on MPB for 2006 based on the actual
performance of the Bank for the last 5 years will be as follows:
Sl.
No.
Particulars 2006 2005 2004 2003 2002
1 Profit on Mudaraba
Savings Bond (8 years)
at 1.25 weightage
10.85
%
10.39% 8.81% 10.04% 10.79%
2 Dividend Declared 25% 25% 20% 20% 25%
3 10% of rate of dividend 2.50% 2.50% 2.00% 2.00% 2.50%
4 Estimated Rate of Profit
on MPB (1+3)
13.35
%
12.89% 10.81% 12.04% 13.29%
5 Remarks Based on Final Rate of Profit.
6 Entitlement Entitlement will be based on Record Date/Book Closure
Risk Factors
1) Rule and principles of utilization & distribution of profit of such funds as in vogue in
IBBL and shall be subject to change and modification from time to time.
2) There is a risk that the issuer may fail to satisfy the terms of the obligation with respect to
the timely payment of profit due to adverse market condition.
3) Entrance of a new competitor like new bank or financial institution or expanding services
of existing competitors may increase the market competitor and may adversely affect the
profitability of the bank.
4) Changes in Government policy, which are not conductive to financial and banking
business may hamper the future growth and profitability of the bank.
Table 1.6: BRAC Bank 25% Subordinated Convertible Bonds
BRAC Bank 25% Subordinated Convertible Bonds
Opening date for subscription December 5, 2010
Closing date for subscription December 9, 2010
For Non-Resident Bangladeshi Quota,
subscription closes on:
December 18, 2010
Issuer: BRAC Bank Limited
Purpose: To raise Tier 2 Capital (subject to regulatory
approval) and undertake normal commercial
banking activities with the proceeds as
permitted by the Bangladesh Bank.
Lead Arranger: RSA Capital Limited
Issue Manager: IDLC Finance Limited
Trustee: The City Bank Limited
Investors: 90% of the total Issue Size shall be offered to
institutional investors including onshore and
offshore investors and the remaining 10% shall
be offered to public through IPO.
Issue Size: BDT 3,000,000,000 (Bangladesh Taka Three
Billion)
Issue Type: Subordinated Convertible Bond Issue (“Bond”)
of BRAC Bank Ltd. with qualification as Tier 2
Capital.
Tenor: 84 Months from the date of issue,
Face Value: bullet repayment.
Market Lot: Each Bond will have a Face Value of BDT
1,000 (One Thousand).
Mutual Funds
Mutual funds are professionally managed investment schemes that collect funds from small
investors and invest in stocks, bonds, short term money market instruments, and other securities.
This ensures a diversified portfolio for the investors at much less efforts than through purchasing
individual stocks and bonds. Mutual funds are usually managed by fund managers who
undertake trading of the pooled money and are responsible for managing the portfolio of
holdings. Generally, mutual funds are organized under the law as companies or business trusts
and managed by separate entities. Mutual funds fall into two categories: open-end funds and
closed-end funds. In Bangladesh, the number of mutual funds is small having low issued capital.
At present, there are only 33 mutual funds
1JANATAMF( First Janata Bank Mutual Fund )1STBSRS( 1st Bangladesh Shilpa Rin Sangstha
M.F. ) 1STICB( 1st ICB M.F. )1STPRIMFMF( Prime Finance First Mutual Fund )
2NDICB( 2nd ICB M.F. )3RDICB( 3rd ICB M.F. )4THICB( 4th ICB M.F. )5THICB( 5th ICB
M.F. )6THICB( 6th ICB M.F. )7THICB( 7th ICB M.F. )8THICB( 8th ICB
M.F. )AIBL1STIMF( AIBL 1st Islamic Mutual Fund )AIMS1STMF( Aims 1st
M.F. )DBH1STMF( DBH First Mutual Fund )EBL1STMF( EBL First Mutual
Fund )GRAMEEN1( Grameen Mutual Fund One )GRAMEENS2( Grameen One : Scheme
Two )GREENDELMF( Green Delta Mutual Fund )ICB1STNRB( ICB AMCL 1st NRB Mutual
Fund )ICB2NDNRB( ICB AMCL 2nd NRB Mutual Fund )ICB3RDNRB( ICB AMCL Third
NRB Mutual Fund )ICBAMCL1ST( ICB AMCL 1st M.F. )ICBAMCL2ND( ICB AMCL Second