Money Market is 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 and non-financial institutions. Participants in the money market are: central bank, commercial banks, 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, banker’s 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, Certificates of Deposits etc. in limited supply are available for trading in the market. 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.
Components of money market: 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 are also active secondary trade in treasury bills.
Bangladesh's money market is 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 specialized (development) banks, 29 non-bank financial institutions, a number of non-scheduled banks. Informal institutions comprised mainly the moneylenders and small co-operative organizations, which are not under the control of the central bank.
The four distinct components of organized segment of money market of Bangladesh are:
• the inter-bank market,
• Market for Repo and Reverse Repo,
• Call money market,
• Bill market.
Inter-bank market: This 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 through the lending of their funds to deficit banks.
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 2009-2010.
Certificate of deposit: CD 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.
Bill market: is restricted to buying and selling of government treasury bills. These bills are marketable papers that 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. Net issuance outstanding for treasury bill in 2017-18 was tk.1795 crore.
The T-bill market is still a largely captive market by financial institutions having no SLR obligations and corporate or non-corporate firms. Semi-government or autonomous bodies having temporary surplus funds or the institutions having pension funds are investing in government treasury bills /bonds through auction mechanism under non-competitive bid. Thus, the scope of bill/bond market is growing in the recent year. Secondary market of this segment is increasing gradually which will largely remove the illiquidity of the instrument.
Recent trends: Last year, the money market in Bangladesh experienced a less liquidity pressure during FY 2017-18 as evident from a downward trend of moving interbank repo and call money rate. Bangladesh Bank (BB) provided Repo facility on rare occasions as well as BB also decreased the repo rate several times in accordance to the adjustment with the market. The call money market plays a significant role in day-to-day liquidity management of the money market in Bangladesh. The call money rate, unlike the interbank repo rate, includes a risk premium for being an unsecured type of instrument. An increased activity in the interbank call money and interbank deposit market was observed along with a almost stable call money rate since July, 2015. State-owned commercial banks (SCBs) were the top lenders in the call money market while PCBs and NBFIs remained top borrowers.
Inter Bank Repo Transactions: The interbank repo rate represents the money market rate as it is determined by the demand and supply of funds in the financial sector. Overall interbank repo transactions, which amounted to BDT 144,862.09 crore in FY 2017-18, showed a 24% decreased from FY 2016-17. The declining trend in interbank repo is consistent with the trend in the issuance of government treasury securities. Since interbank repo transactions are collateral based and government securities comprise bulk of those collaterals, adequate supply of government securities is required for smooth functioning of this market.
Reverse Repo: BB uses reverse repo operations as a monetary policy instrument which is used to control the money supply in the economy and it is provided overnight (one day) basis. Investment of banks in the reverse repo started to increase in the FY 2015-16 to sweep up the additional liquidity. In FY 2016-17, through focusing more on the BB Bills in parallel with reverse repo, helped to manage inflationary pressure and reduced excess liquidity in banks. BB issued BB bills worth for sterilization purpose as well as to manage liquidity in the banking system to keep reserve money growth in line with the program level. BB bills with different maturities such as 07, 14 and 30-days respectively were issued in this regard.
Call money market: The call money market is an essential part of our Money Market, where the day-to-day surplus funds (mostly of banks) are traded. Call money rate is the rate at which short term funds are borrowed and lent in the money market. The duration of the call money loan is 1 day. Demand and supply of liquidity affect the call money rate. A tight liquidity condition leads to a rise in call money rate and vice versa. The transactions in call money market usually take place on the basis of bilateral negotiations. Since call loans are made on clean basis, i.e, without any security, lending institutions/banks are always cautious in the selection of borrowing banks/institutions.