1.

Primer
Money market is the center of dealing in short term monetary assets like bill of
exchange, short term govt. securities and other short-term loans. It basically refers to a
section of the financial market where financial instruments with high liquidity and
short-term maturities are traded. Money market has become a component of the
financial market for buying and selling of securities of short-term maturities, of one
year or less, such as treasury bills and commercial papers. It is generally considered to
be the more active place, where government and other securities of very smaller
duration time frame are traded. Bangladesh has a very active money market, where a
host of instruments are traded. 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. However, the short-term credit market of the banking sector
experienced a tremendous growth since liberation. 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. 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.

2. Characteristics
The central bank controls the entire operation of the organized sector of the Money
Market. Over the years both commercial banks and other banks have come to depend
more and more on the rediscounting and borrowing facilities provided by central bank
(CB), especially during the busy season. Moreover, the CB supervises their lending
policies from time to time.
Even today, a large portion of Bangladesh’s money market remains unorganized. They
also do not always specify the purposes of finance, that is, whether finance is required

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for genuine productive purposes or for indulging in speculative activities. The
unorganized sector of Bangladesh’s money market consists of a wide range of non-
banking financial institutions. Such institutions resemble banks very closely and
compete with banks in attracting public deposits. But they are not under the control of
the CB. So, their presence reduces the effectiveness of the central bank’s control over the
money market. The main characteristics of money market of Bangladesh are as follows.

A. Existence of Unorganized Money Market

The Major defect of the Bangladeshi money Market has always been the existence of the
indigenous bankers who do not distinguish between short-term and long-term finance.
During the last decades, there is a whole lot of non-banking financial companies who
raise funds from the general public but who are generally outside the control and
supervision of central bank of Bangladesh.

B. Absence of Integration
An important defect of the Indian money market at one time was the division of the
money market into several segments or sections, loosely connected to each other. Each
part of the money market carry on a particular type of banking business or provide a
specific type of financial service. Each financial institution acts independently.

C. Diversity in Money Rates of Interest

Another defect of the Bangladeshi money market related to the existence of too many
rates of interest – the borrowing rate of the Government, the deposit and lending rates
of commercial banks, deposit and lending rates of cooperative banks, etc. The basic
reason for the existence of so many rates of interest simultaneously is the immobility of
funds from one section of the money market to another.

D. Seasonal Stringency of Money

A very striking characteristic of the Bangladeshi money market is the seasonal
monetary stringency and high rates of interest during a part of the year.

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E. Absence of the market
The existence of an organized bill market is absolutely essential for linking various
credit agreements with the central bank in an effective manner. No doubt there is a
Treasury bill market in Bangladesh. But the commercial bill market has not been fully
developed.

F. Limited Instruments

It is in fact a defect of the Bangladeshi money market. In our money market the supply
of various instruments such as the Treasury Bills, Commercial Bills, Certificate of
Deposits, Commercial Papers, etc. is very limited. In order to meet the varied
requirements of borrowers and lenders, It is necessary to develop numerous
instruments.

G. Volatile call money market

The inter-bank call money market is the market for short-term funds, known as ‘money
at call and short notice’. Two components of this market are the call market or overnight
market and short notice market. The borrowing rate in this market is known as the call
money rate. This rate is determined by the market forces, that is, by the forces of
demand and supply. The demand or short-term funds originates from all types of
banks—nationalized, private and foreign.

3. Composition of Money Market

The structure of money market comprises credit instruments, components of sub
markets and institutions.

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 Fig: Structure of money market
On the other hand, money market of Bangladesh is divided into organized and
unorganized segments.
A. Organized market
Organized market is that part which comes under the regulatory purview of
Bangladesh Bank. The nature of the money market transactions is such that they are
large in amount and high in volume. Thus, the entire market is dominated by small
number of large players. The key players in the organized money market include
1. Central Bank
2. Commercial Banks, Cooperative Banks, Finance, Industrial and Service companies.
3. Financial Institutions, Mutual Funds and certain specific entities
4. Discount Houses and Bill Brokers
5. Acceptance Houses
6. Large Transactions and Telecommunication Network.
7. Firms, Companies, Corporate Bodies, Trusts.
B. Unorganized market
Unorganized market is old Indigenous market mainly made of
1. Indigenous bankers
2. Money lenders
3. Individuals
4. NBFIs
5. Friends

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4. Types of Money Market Instruments
Money Market Instruments (MMI) provide the tools by which one can operate in the
money market. These instruments tend to have lower returns than higher-risk
investments, but are much safer due to being backed by the resources and reputation of
an institution, state, or sovereign. The most common money market instruments are
Treasury Bills, Certificate of Deposits, Commercial Papers, Repurchase Agreements and
Banker's Acceptance.
A. Treasury Bills (T-Bills)
Treasury Bills are one of the safest money market instruments as they are issued by
Central Government. They are zero-risk instruments, and hence returns are not that
attractive. T-Bills are circulated by both primary as well as the secondary markets. They
come with the maturities of 3-month, 6-month and 1-year.

B. Certificate of Deposits (CDs)

Certificate of Deposit is like a promissory note issued by a bank in form of a certificate
entitling the bearer to receive interest. It is similar to bank term deposit account. The
certificate bears the maturity date, fixed rate of interest and the value. These certificates
are available in the tenure of 3 months to 5 years. The returns on certificate of deposits
are higher than T-Bills because they carry higher level of risk.

C. Commercial Papers (CPs)

Commercial Paper is the short term unsecured promissory note issued by corporates
and financial institutions at a discounted value on face value.
They come with fixed maturity period ranging from 1 day to 270 days. These are issued
for the purpose of financing of accounts receivables, inventories and meeting short term
liabilities.

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D. Banker's Acceptance
Banker's Acceptance is like a short-term investment plan created by non-financial firm,
backed by a guarantee from the bank. It's like a bill of exchange stating a buyer's
promise to pay to the seller a certain specified amount at a certain date.
And, the bank guarantees that the buyer will pay the seller at a future date. Firm with
strong credit rating can draw such bill. These securities come with the maturities
between 30 and 180 days and the most common term for these instruments is 90 days.
Companies use these negotiable time drafts to finance imports, exports and other trade.

E. 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.

5. Drawbacks of Bangladesh’s Money Market

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

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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.

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6. Importance of Money Market in Bangladesh Economy

A well-developed money market is essential for a modern economy. Though,

historically, money market has developed as a result of industrial and commercial
progress, it also has important role to play in the process of industrialization and
economic development of a country. Importance of a developed money market and its
various functions are discussed below:

A. Financing Trade

Money Market plays crucial role in financing both internal as well as international
trade. Commercial finance is made available to the traders through bills of exchange,
which are discounted by the bill market. The acceptance houses and discount markets
help in financing foreign trade.

B. Financing Industry

Money market contributes to the growth of industries in two ways:

(a) Money market helps the industries in securing short-term loans to meet their
working capital requirements through the system of finance bills, commercial papers,
etc.

(b) Industries generally need long-term loans, which are provided in the capital market.
However, capital market depends upon the nature of and the conditions in the money
market. The short-term interest rates of the money market influence the long-term
interest rates of the capital market. Thus, money market indirectly helps the industries
through its link with and influence on long-term capital market.

C. Profitable Investment

Money market enables the commercial banks to use their excess reserves in profitable
investment. The main objective of the commercial banks is to earn income from its
reserves as well as maintain liquidity to meet the uncertain cash demand of the

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depositors. In the money market, the excess reserves of the commercial banks are
invested in near-money assets (e.g. short-term bills of exchange) which are highly liquid
and can be easily converted into cash. Thus, the commercial banks earn profits without
losing liquidity.

D. Self-Sufficiency of Commercial Bank

Developed money market helps the commercial banks to become self-sufficient. In the
situation of emergency, when the commercial banks have scarcity of funds, they need
not approach the central bank and borrow at a higher interest rate. On the other hand,
they can meet their requirements by recalling their old short-run loans from the money
market.

E. Help to Central Bank

Though the central bank can function and influence the banking system in the absence
of a money market, the existence of a developed money market smoothens the
functioning and increases the efficiency of the central bank.

Money market helps the central bank in two ways:

(a) The short-run interest rates of the money market serves as an indicator of the
monetary and banking conditions in the country and, in this way, guide the central
bank to adopt an appropriate banking policy,

(b) The sensitive and integrated money market helps the central bank to secure quick
and widespread influence on the sub-markets, and thus achieve effective
implementation of its policy.

7. Recommendations
Money market in Bangladesh still in vulnerable position although considerable number
of development has done in the last decades. The following recommendation can make
our money market more active and smart.

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 A. Denationalization of state owned banks can influence the money market.
B. The micro finance institutions should move forwards to regulate the money
market.
C. The weekly performing banks must be broad under the Bangladesh Bank.
D. Social awareness easy-lending facilities also work in money market.

8. Conclusion
Although banks have managed to control some of the critical monetary crises the
situation has not been completely eradicated. Due to the complexity of the monetary
field and the entire field that is attached to it, banks and other bodies have been forced
to adopt mechanisms that serves in reducing the would be catastrophic effects of
recession. Policies have been laid down and various methods formulated to enable the
players in this field to see and objectively decide on the correct measures to take at any
given situation.

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9. References

1. "Study About Characteristics of Money Market Instruments Finance Essay."

https://essays.pw/essay/study-about-characteristics-of-money-market-instruments-
finance-essay-155852. Accessed 4 Sep. 2017.

2. "Structure & Functions of Money Market in India- General ... - GKToday." 23 Mar.
2015, https://www.gktoday.in/structure-functions-of-money-market-in-india/.
Accessed 4 Sep. 2017.

3. “Assignment on Money Market-slideshare” 17 Apr. 2016,

https://www.slideshare.net/mobile/amanullahtrino/assingment-on-money-market.
Accessed 13 Sep. 2017.

4. "What are the functions and importance of Money Market?."

http://www.preservearticles.com/201012281812/functions-and-importance-of-money-
market.html. Accessed 10 Sep. 2017.

5. "Bangladesh money market - VERONETWORK - WordPress.com." 30 Jun. 2013,

https://veronetwork.wordpress.com/2013/06/30/bangladesh-money-market/.
Accessed 11 Sep. 2017.

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