Forwarding Letter

To Course Instructor Central Banking & Monetary Policy School of Business Studies Subject: Submission of Assignment. Dear Sir, Here is the assignment that you have assigned us to prepare the function of Bangladesh Bank. In the preparation of this assignment, we tried to utilize the various related issues that are relevant for this chapter. However, it is an educational and interesting assignment. We are very much delighted to be able to work on such an assignment and learned a lot.

ACKNOWLEDGEMENT
First, we would like to thank all mighty Allah who has given us patient to complete this assignment successfully. We would also like to thank our course teacher Minhaz Ahmed. We want to give her thanks once again for her great consideration. Now we would like to thanks to our group members. Really, they were very helpful. We can complete this assignment by the group aid of our group members. That is why we all are grateful to each other.

Headquarters Dhaka Established 16 December 1971 Governor Dr.Salehuddin Ahmed Central Bank Bangladesh of Currency Taka ISO 4217 BDT Code Website http://www.bangladeshbank.org.bd

*** Bangladesh Bank:

The central bank and monetary authority of the country. It came into existence under the Bangladesh Bank Order 1972 (Presidential Order No. 127 of 1972) which took effect on 16 December 1971. Through this order, the entire operation of the former State Bank of Pakistan in the eastern wing was transferred to Bangladesh Bank. Bangladesh Bank has been entrusted with all the traditional central banking functions including the sole
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responsibilities of issuing currency, keeping the reserves, formulating and managing the MONETARY POLICY and regulating the credit system of Bangladesh with a view to stabilising domestic and external monetary value and promoting and maintaining a high level of production, employment and real income in the country. The bank acts as the banker to the government and accepts government deposits, cheques and drafts, and undertakes collection of cheques and drafts drawn on other banks. The government deposits all its cash balances with the Bangladesh Bank free of interest. The bank transfers government funds from one place to another as requested by the government and its agencies. It makes ways and means for advances to the government, which are repayable not later than three months. It acts as the public debt manager and runs a public debt office (PDO) within itself. The bank also sells government TREASURY BILLs on tender, PRIZE BONDs and different types of saving certificates (sanchayapatra). The bank acts as the clearing house of the scheduled banks The purchase, sale and rediscount of BILL OF EXCHANGE and promissory notes drawn on and payable in Bangladesh are also included in the activity of the bank. The bank acts as the lender of last resort for the government as well as for the country's scheduled banks. All scheduled banks are required to maintain a minimum reserve with the Bangladesh Bank. The present statutory liquidity reserve (SLR) requirement is 20% of total demand and time liabilities, 4% of which is to be maintained as cash reserve ratio (CRR), and the rest 16% as approved securities. The SLR requirement for Islamic banks is 10% and they are to keep 4% of this reserve as CRR and the rest 6% in approved securities. Bangladesh Bank exercises its wide range of power in credit control through different types of traditional and nontraditional methods. In addition to bank rate and open market operations, it uses a number of other weapons. It can vary the minimum reserve requirements of scheduled banks whenever circumstance so warrant. Being responsible for maintaining external value of Bangladesh currency, the bank also handles

the exchange control. It ensures that all foreign exchange inflows are accounted for, and surrendered to the authorised dealers. It allocates and rations foreign exchange in line with the set priorities. Bangladesh Bank is empowered to manage the country's international reserves, which represent aggregate of its holding of gold, foreign exchange, SDR and reserve position in the IMF. The bank also acts as the representative of the government in different international agencies and other forums such as World Bank, IMF, Asian Clearing Union, ADB, etc. Bangladesh Bank is empowered to act as the watchdog of the country's BANKING SYSTEM, and all scheduled banks are accountable to Bangladesh Bank, which has extensive powers to ensure soundness of the banking system. No bank can commence banking business in Bangladesh and no existing bank can open a new branch in or outside the country or shift any branch from one place to another without obtaining a licence/permission from the Bangladesh Bank. Bangladesh Bank runs a Deposit Insurance Scheme established under the Deposit Insurance Ordinance 1984. The objective of the scheme is to safeguard the deposits of the customers with both local and foreign deposit money banks doing business in Bangladesh. The deposits amounting up to Tk 100,000 of all customers in a scheduled bank are insured under the scheme. All scheduled banks in Bangladesh are required to be members of the scheme and pay premium on their deposits at a rate determined by the Bangladesh Bank from time to time. Bangladesh Bank accumulates the premiums in the Deposit Insurance Fund. The paid up capital of Bangladesh Bank is Tk 30 million divided into 300,000 shares of Tk 100 each that are fully paid up by the government. A nine-member board of directors comprising the governor as chairman, one deputy governor and seven members oversees the affairs of the bank. The governor and the deputy governors of the Bank are

appointed by the government for a period not exceeding five years and are eligible for reappointment. Bangladesh Bank has 9 branch offices, two in Dhaka city (SADARGHAT and Motijheel), and one each in CHITTAGONG, KHULNA, RAJSHAHI, SYLHET, BOGRA, RANGPUR and BARISAL. The head office discharges its duties with 28 departments. The departments are International, Law, Financial Institutions, Computer (2), Agricultural Credit, Agricultural Credit Inspection, Agricultural Credit Project, Credit Information Bureau, Research (3), Public Relations and Publications, Audit and Inspection, Statistics (2), Engineering, Problem Bank Monitoring, Administration, Training Academy, Foreign Exchange Policy, Foreign Exchange Inspection, Foreign Exchange Investment, Administration and Expenditure, Banking Inspection, Banking Regulation and Policy, Banking Operation and Development, Monetary Management and Technical Unit, Currency Management and Accounts, Industrial Credit, and Security Management. Bangladesh Bank has correspondent relationships with one international and 8 foreign central banks viz., the Federal Reserve Bank of New York, Bank of Canada, Bank of England, Bank De France, Deutsche Bundes Bank, Bank of Japan, Svereges Riks Bank of Stockholm, Reserve Bank of India and the Bank for International Settlements, Basle. Besides, Bangladesh Bank has now invested its foreign exchange reserves with 14 banks at different international financial centres. To reduce the huge costs of printing currency notes from foreign countries Bangladesh Bank had initiated a Security Printing Project, which was converted into a limited company of the name The Security Printing Corporation (Bangladesh) Ltd. on 18th October 1992. The corporation is now working as a commercial concern and prints all currency and bank notes in Bangladesh. Other security papers, such as judicial and non-judicial stamps, prize bonds, revenue stamps, postal envelope and stamps, band rolls for

customs and excise department, and cheque books of different private banks in Bangladesh are also printed by this company. The company however, does not have a minting plant and the country still remains dependent on foreign mint companies for minting the coinage. The powers and functions of Bangladesh Bank are governed by various laws and acts including the Banker's Books Evidence Act 1891, Insolvency Act 1920, Banking Companies Ordinance 1962, Bangladesh Bank Order 1972, Foreign Exchange (Regulation) Act 1986, Money Loan Court Act 1990, Banking Companies Act 1991, Financial Institutions Act 1993 and Rules 1994, Companies Act 1994 and Bankruptcy Act 199

Objectives Of Bangladesh Bank:

As the central Bank of Bangladesh, the broad objectives of the Bank are : a) To regulate currency issuance and to keep foreign exchange reserves; b) To manage the monetary and credit system of Bangladesh with a view to stabilizing domestic monetary value;
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c) To preserve the par value of the Bangladesh Taka; d) To promote and maintain a high level of production, employment and real income in Bangladesh; and to foster growth and development of the country's productive resources.

Functions Of Bangladesh Bank:

Bangladesh Bank performs all the functions, which a central bank of any country is expected to perform, and such functions include maintaining the price stability, supporting the economic and monetary policies of the central government, managing the countrys foreign exchange and the gold reserve. Like all other central bank across the globe, Bangladesh Bank is both the Governments banker and the bankers bank, a Lender of the Last Resort. Bangladesh Bank, like most of the central banks of different countries, exercises monopoly over the issue of currency and the banknotes. Except for the 1 and 2 taka notes, it issues all other denominations of Bangladeshi Taka. It also regulates the commercial Banks and other financial institutions of Bangladesh. There are various function of Bangladesh bank these are under bellow:

01.Monetary Policy: The policy adopted by the central bank for control of the supply of money as an instrument for achieving the objectives of general economic policy. As stated in the Bangladesh Bank Order 1972, the principal objectives of the country's monetary policy are to regulate currency and reserves; to manage the monetary and credit system; to preserve the par value of domestic currency; to promote and maintain a high level of production, employment and real
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income; and to foster growth and development of the country's productive resources in the best national interest. Although the long term focus of monetary policy in Bangladesh is on growth with stability, the short-term objectives are determined after a careful and realistic appraisal of the current economic situation of the country.

With the shifts of the policy stance of the government in various phases, necessary adjustments were made in the country's monetary policy. In the first years after liberation, the primary target of monetary policy was to regulate not the quantity of money, but the direction of the flow of money and credit in support of the government financial programme. In 1975, Bangladesh entered into a standby-arrangement with IMF and the country's monetary policy got a changed shape, which fixed an explicit target of safe limit of monetary expansion on annual basis. With this change, BANGLADESH BANK started setting short-term objectives of monetary policy in close collaboration of the government and tried to achieve the target by using the direct instrument of control. The principal target of monetary control was broad money (M2) ie, the sum of the currency in circulation and total deposits of money in banks. The targeted growth of M2 depended on a realistic forecast of the growth rate of real GDP, an acceptable rate of inflation and an attainable level of international reserves.

Bangladesh Bank took measures to monitor credit and monetary expansion keeping in view the price situation and international reserves position. Efforts were made to achieve the targeted growth of domestic credit and thereby, the money supply, through imposing ceilings on credit to the government, public, and private sectors. The major policy instruments available to Bangladesh Bank were to set credit ceiling on the banks and provide liberal refinance facility at
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concessional rate for priority lending. According to the national economic policy, the banks were to provide the desired volume of credit at an administered and low rate of interest. In that situation, Bangladesh Bank practically did not have any effective instrument for making adjustments in the growth of money supply or for transmitting market signals into changes in money supply. The monetary policy therefore, could not function in its true sense. As a result the BANKING SYSTEM could not play its role as an effective financial intermediary. In 1989, the government adopted a comprehensive Financial Sector Reform Programme (FSRP), following which the country's monetary policy assumed a new orientation towards promotion of market economy in a competitive environment. Bangladesh Bank started moving away from direct quantitative monetary control to indirect methods of monetary management since the beginning of 1990. Although, the fixation of target continued to remain as the central piece of exercise, the way to achieve it had been changed. Credit ceilings on individual banks and direct controls of interest rates were withdrawn. At present, the money supply is regulated through indirect manipulation of reserve money instead of credit ceiling. Major instruments of monetary control available with Bangladesh Bank are the bank rate, open market operations, rediscount policy, and statutory reserve requirement.

02. Bank rate:

Until 1990, the use of this instrument as the lending rate of the central bank for borrowings of the commercial banks to meet their temporary needs was virtually non-existent in Bangladesh. The rate was changed in a few occasions only to align it with the refixation of the rates of deposits and advances. Moreover, the existence of refinance facilities at rates lower than the bank rate substantially eroded

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its significance. However, since 1990, the instrument has been put in use to change the cost of borrowings for banks and thereby to affect the market rate of interest. Bank rate was gradually lowered from 9.75% in January 1990 to 5% in March 1994. It was raised to 5.75% from 10 September 1995 and further, to 7.5% and 8% from 19 May 1997 and 20 November 1997 respectively. The rate was lowered to 7% from 29 August 1999.

03.Open market operations (OMO):

These involve the sale or purchase of securities by the central bank to withdraw liquid funds from the banking system or inject the same into that system. OMO allows flexibility in terms of both the amount and timing of intervention, which did not exist in Bangladesh before 1990. Bangladesh Bank introduced a 91-day Bangladesh Bank Bill, a market-based tool for monetary intervention, in December 1990. The bank bill was subsequently withdrawn from the market. At present, OMO operations are conducted through participation of banks in monthly or fortnightly/weekly auctions of TREASURY BILLs.

04.Rediscount policy:
After the introduction of FSRP, the refinance facility was replaced by rediscount facility at bank rate to eliminate discrimination in access to central bank funds. Refinance facility is now available for agricultural credit provided by BANGLADESH KRISHI BANK and for projects of Bangladesh Rural Development Board financed by SONALI BANK. Banks are

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advised to extend relationship.

credit

considering

banker-customer

05.Statutory reserve requirement:

Cash reserve requirement (CRR) of the deposit money banks has a significant potential to regulate money supply through affecting money multiplier, while statutory liquidity requirement (SLR) is generally used to affect the lending capability of the bank. Bangladesh Bank used these two instruments very infrequently before 1990 and very often after 1990. The CRR and SLR were 8% and 23% respectively on 25 April 1991 and were reduced to 7% and 22% respectively on 5 December 1991. Later, these rates were changed twice and set at 5% and 20% respectively on 24 May 1992. The CRR was further lowered to 4% from 4 October 1999. The downward revision in CRR and SLR were made to enable the banks to increase their lending capacity. [Syed Ahmed Khan and Abdus Samad Sarker]

06.Treasury Bills:
Treasury bills issued by the government as an important tool of raising public finance and up to 1994, were of three types, although all of them were 90-day bills. Among these three types, bulk was represented by ad-hoc treasury bills issued to meet the cash balance need of the government. A second type was the 3-months treasury bills on tap introduced in August 1972 and their purpose was to mop up the excess liquidity of banks. The third type was the 3-months treasury bills introduced for subscription exclusively by the NON-BANK FINANCIAL INSTITUTIONS, non-financial enterprises and the public. Initially, a limit of Tk 250 million was set for the issue of such treasury bills. Later this limit was withdrawn and BANGLADESH BANK was empowered to issue any amount of treasury bills for the non-bank public. Despite the withdrawal of the limit, the holdings of non-banking sectors remained

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small and commercial banks comprised the main market for the treasury bills. These bills continued to be reissued in every ninety days. In December 1994, however, treasury bills on tap and the treasury bills for non-banks were abolished. The holdings of treasury bills by the deposit money banks generally did not exceed the amount needed to meet the liquidity requirement. A substantial part of the treasury bills issued, therefore, needed to be held by Bangladesh Bank. Of the total treasury bill holdings, the amount of holdings by the deposit money banks was 57% at the end of 1973 and amidst fluctuation, they came down to 27% at the end of June 1982. Later, the share started to rise and stood at 68% at the end of 1992. Thereafter, it fell sharply and came down to a lowest minimum of 4% at the end of June 1995. That the Bangladesh Bank bills were allowed as approved securities for the statutory liquidity requirement of the banks and these bills were of yields higher than the treasury bill rate, might have induced the banks to reduce their holdings of treasury bills. This trend continued up to February 1997. In March 1997, the auctioning of Bangladesh Bank bills was suspended and only the 90-day treasury bills were sold through auction. Up to 25 October 1995, the treasury bills of ninety days maturity were sold at predetermined rate, usually fixed time to time by the government. Thereafter, these were sold through auction at market determined rate of interest. Subsequently, on 7 February 1996, the government introduced 30-days and 180-days treasury bills and on 16 March 1997, 1-year treasury bills for auction. Up to August 1998, four categories of treasury bills viz, 30-day, 90-day, 180-day and 1-year bills were sold regularly through weekly auction basis. From 6 September 1998, these were replaced by newly introduced 28-days, 91days, 182-days, 364-days, 2-years and 5-years treasury bills. [Syed Ahmed Khan and Abdus Samad Sarker]

07.Prize Bond:

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st prize - Tk 50,000 (one for each series), second prize - Tk 10,000 (one for each series), third prize - Tk 1000 (four prizes for each series), With a view to mobilising domestic resources and providing incentive to the small savers, the government of Bangladesh introduced Bangladesh Prize Bond Scheme in June 1974. The bonds issued so far under this scheme are 'bearer' in nature and as such the holders are treated as the owners of the bonds. These bonds are in fact government debt and on behalf of the government, BANGLADESH BANK is responsible for entire management of the scheme. Prize bonds do not bear any interest. But there is a system of regular prize draw with a certain period of intervals and on the basis of the results the prizes are given as per the rules set for bonds concerned. The bonds can be purchased from the offices of Bangladesh Bank, branches of the authorised commercial and specialised banks, National Saving Bureau and the post offices. A scheme for sale of prize bonds in the United Arab Emirates and UK was introduced in November 1979 and October 1980 through JANATA BANK and SONALI BANK respectively. The first issue of prize bond was of 10-taka denomination, which was introduced in June 1974. Up to June 1995, 82 series of 10-taka prize bonds were put on sale and the progressive net sale of the bond stood at Tk 160 million as of end June 1995. A total of 110 draws of these bonds were held on bimonthly basis under the single common draw system. The prizes of the draws were: firfourth prize - Tk 500 (four prizes for each series), and fifth prize - Tk 100 (ninety prizes for each series). Sale of prize bonds of 10-taka denomination was suspended in July 1995, since then these bonds were being gradually withdrawn from the market. The outstanding amount stood at Tk 18.1 million at the end of June 2000. The second issue of prize bond introduced in 1985 was of 50-taka denomination. Up to 1995, 29 series of this bond were put on sale and the cumulative sale at the end of June 1995 stood at Tk 570 million. The system of prize draws for this bond was

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similar to that for 10-taka prize bonds. The prize money, however, was different: first prize, Tk 250,000 (one for each series); second prize, Tk 50,000 (one for each series); third prize, Tk 5000 (four prizes for each series); fourth prize; Tk 2500 (four prizes for each series); and fifth prize, Tk 500 (ninety prizes for each series). Sale of this bond was also suspended in July 1995 and the outstanding balances with holders stood at Tk 15.8 million at the end of June 2000. The third and on-going issue of prize bond of 100taka denomination was introduced on 2 July 1995. Prize draws of this series are held on three months basis and the prizes are: first prize, Tk 1,000,000 (one for each series), second prize, Tk 500,000 (one for each series); third prize,Tk 100,000 (two prizes for each series); fourth prize, Tk 50,000 (two prizes for each series); and fifth prize, Tk 10,000 (forty prizes for each series). The amounts of first and second prizes of the 100-taka bonds were reduced to Tk 600,000 and Tk 325,000 respectively in October 1996. In order that a bond is to be included in the draw, it must be purchased before two months of the draw date. The net sale of the bond was Tk 1,241.2 million in 1995-96 and increased to Tk 1,667.3 million at the end of financial year 1999-2000. The claims for prizes can be lodged within two years after draw. Bonds for which prizes are disbursed are bought back from their holders at their face value and are preserved at the Bangladesh Bank for up to two years. Prizes had been exempt of income tax up to June 1999, when the government levied income tax @ 20% on the prize money. [Syed Ahmed Khan and Md. A Samad Sarker]

08.Bill of Exchange:
Bill of exchange a negotiable instrument that contains an unconditional written instruction by the drawer (maker) to a certain person (drawee) to pay a certain amount of money either to the bearer of the bill, or to the order of the payee (a specified and stated person) on demand or at a specified future date. Negotiable instruments like bills of

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exchange, promissory notes, and cheques in Bangladesh are governed by the Negotiable Instruments Act 1881, which came into force in India on 1 March 1882.

The parties to a bill of exchange are the drawer, drawee, acceptor, payee, holder, endorser, endorsee, drawee in case of need, and acceptor for honour. The name of a person as a 'drawee in case of need' may be inserted either by the drawer or by any endorser to ensure resort for him if the bill is dishonoured either by non-acceptance or non-payment. Bills of exchange were originally instruments by which a trader used to pay intra-country and inter-country debts without physical transmission/transfer of money-currency or coins. The foreign bill of exchange, unlike the inland bill, is drawn in a set of three, known respectively as the first, second, and third bill of exchange. If the payment is made on any one of the three, the others become invalid upon the payment. A foreign bill of exchange must be protested for dishonour when such protest is required to be made by the law of the country where it is drawn. On the event of dishonour of a bill of exchange in the ordinary course, due notice of dishonour is to be given by the holder to the drawer and to the immediate endorsers. The circumstances under which a bill of exchange may be dishonoured and the effects of such an event are stated in sections from 61 to 82 of the Negotiable Instruments Act 1881. The period for which a foreign bill is drawn runs from the date of its acceptance. When a bill of exchange is drawn as a convenient mode of accommodating a friend, it is called an 'accommodation bill'. A demand draft drawn by a bank on another bank or by itself on its own branch is a bill of exchange but a cheque is not, as it does not contain an unconditional order for payment, and does not need to be accepted by signing.

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Bills of exchange are now used also for raising funds for financing trade and investment activities. When a borrower draws a bill on a bank and the bank accepts it, the borrower can sell it to an investor. At maturity, the borrower repays the investor. Institutions engaged in the bills market include acceptance houses, brokers, and discount houses. Bills of exchanges have to be presented to the drawee for acceptance and the presentment is deemed to be completed if the bill is exhibited to the drawee, who accepts it by putting his signature on its face. In case of death of the maker, acceptor, or drawee, presentment may be made to his legal representative. Bills of exchange are drawn usually for three months after date and fall due for payment three months and three days after date. The three extra days comprise a grace period. Hundi is a kind of local bill of exchange put in circulation in British India long before the Negotiable Instrument Act 1881. Hundis were usually written in only oriental native language and were regulated by the customs and usage of trade and commerce of that period. But the parties concerned in this indigenous form of bill of exchange confronted various problems in their operations. During the British period, hundis were widely used for the purpose of paying trading debts and transferring/remitting to the British Exchequer the revenue collected from different provinces of India. Various types of hundis such as, darshani hundi, muddati or meyadi hundi, shah jog hundi, nam jog hundi, dhani jog hundi, jakhami hundi, jawabi hundi, zikri chit, purja and farman jog hundi were in use in the sub-continent. Nowadays, the operations of bills of exchange follow the Uniform Customs and Practice of Documentary Credits (UCPDC) issued by the International Chamber of Commerce in Paris. [Abul Kalam Azad]

09. Banking System (Modern):

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Although there is no formal evidence of the existence of banks in Bengal during the period before 400 BC, traders of this period were known to have carried out activities to provide financial assistance among themselves. The wealthy people of that period used to put their surplus money and valuables under the soil in brass-made pitchers and maintained accounts for them by writing on the body of dishes made of gold or silver. The VEDAS mentions the practice of informal banking in the form of borrowing and lending during the Vedic period. Such activities, however, were centred in temples and other religious places. Borrowing and lending gave way to banking during the period of Manu, who believed that wise men should deposit money with a person bearing good moral character, having respectable and rich relatives, and well conversant with law. Koutilya's Artha Shastra also suggests the existence of banking and payment of interest on deposits in the Vedic period.

During the Mughal period, there were different types of gold coins in circulation that encouraged people to engage in monetary transactions and profit-motivated financial activities. Many individuals and some families attained special reputation in trading and in finance. One such family, that of JAGAT SHETH, had branches of its monetary business in DHAKA, Hughli and MURSHIDABAD. Mughal rulers patronised the banking business of Jagat Sheth family and others, and also used to borrow money from them when needed. People could convert their valuables, mostly gold and silver, into currency with minimum cost at Mughal mints. Monetary transactions and transfer through hundi (BILL OF EXCHANGE), along with cash transaction, was in vogue during the Mughal period. The revenue received from ZAMINDARs and dues therefrom were sent to the government treasury through family-based financial or banking institutions. People from different classes were also involved in monetary trading which helped the evolution of banking in that period. A major landmark was the

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establishment of the Hindustan Bank in 1700 AD at CALCUTTA. After the stewardship of Bengal, Bihar and Urissha was assumed by the EAST INDIA COMPANY, Jagat Sheth's family and other traders in money and finance suffered great losses in their business because of the activities of a new elite subservient to British rulers. The decline in banking brought some instability in the economy of that time and, upon quick realisation of the fact, the British set up the English Agency House. Established in 1784, the Bengal Bank was the first British-patronised modern bank in India. Dhaka Bank started to operate as a commercial bank in 1806. The Bengal Bank opened its first branch in Dhaka by purchasing Dhaka Bank in 1862. In 1873, it opened its two branches in SIRAJGANJ and CHITTAGONG. Another branch of Bengal Bank was opened in CHANDPUR in 1900. Six branches of Bengal Bank were in operation in the Bangladesh region until the PARTITION OF BENGAL in 1947 and these branches were located at Dhaka, Chittagong, MYMENSINGH, RANGPUR, Chandpur and NARAYANGANJ. The three Presidential banks that followed the establishment of the Bengal Bank were the Bank of Calcutta (1806), Bank of Bombay (1840) and Bank of Madras (1843). Combining these three banks, the Imperial Bank of India was set up in 1921. The Reserve Bank of India came into being in 1935. In addition to the above, there were other banking and financial institutions throughout British India, including the territory of Bengal. Other banking institutions established in East Bengal during the British period were the loan offices at FARIDPUR(1865), BOGRA (1872), BARISAL (1873), Mymensingh (1873), Nasirabad (1875), JESSORE (1876), MUNSHIGANJ (1876), Dhaka (1878), SYLHET (1881), PABNA (1882), KISHOREGANJ (1883), NOAKHALI (1885), KHULNA (1887), MADARIPUR (1887), TANGAIL (1887), NILPHAMARI (1894) and Rangpur (1894). Banks established in this period included the Kurigram Bank (1887), Kumarkhali Bank (1896), Mahaluxmi Bank, Chittagong (1910), Dinajpur Bank (1914), Comilla Banking Corporation (1914) and Comilla Union Bank (1922). Major Indian banks of

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the period having branches in the territory were the National Bank of India (1864), Bengal Central Bank (1918), New Standard Bank (1920), Imperial Bank of India (1921), Pioneer Bank (1923), Bank of Commerce (1929), United Industrial Bank (1940), Habib Bank (1941) and United Commercial Bank (1942). After the birth of Pakistan in 1947, the State Bank of Pakistan, the central bank of the country, came into being in 1948. Later, the National Bank of Pakistan, a commercial bank was set up in 1949. In all, 36 scheduled commercial banks were in operation throughout Pakistan. Most of these banks were owned by Pakistanis. Only three of them, namely, National Bank of Pakistan, Habib Bank, and the Australasia Bank had a branch in East Pakistan in 1949. During 1950-58, three other Pakistani-owned banks, the Premier Bank, Bank of Bawalpur and Muslim Commercial Bank had opened branch offices in East Pakistan. Four Pakistani-owned banks, the United Bank, Union Bank, Standard Bank and Commerce Bank conducted business in the province during 1959 - 1965. The province had only two banks owned by local business groups and with headquarters at Dhaka, the Eastern Mercantile Bank (now PUBALI BANK) and Eastern Banking Corporation (now UTTARA BANK), established in 1959 and 1965 respectively. The banking system in the territory of Bangladesh grew slowly during the British and Pakistan periods. There were only 25 bank branches in 1901 and the number grew to 668 in 1946. Creation of Pakistan was a deterrent in the sector as was evidenced by the closure of bank branches, which came down to 148 in 1950. In 1965, the number rose again to 545. Subsequent years, however, showed dramatic changes in the situation and the number of bank branches increased to 1,025 in 1970. The banking system in Bangladesh started functioning with 1,130 branches of 12 banks inherited from Pakistan. Subsequently, these banks were nationalised and renamed after being merged into six banks. The new names of the banks were the SONALI BANK (The

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National Bank of Pakistan, The Bank of Bawalpur, The Premier Bank), AGRANI BANK (Habib Bank, Commerce Bank), JANATA BANK (United Bank, Union Bank), RUPALI BANK (Muslim Commercial Bank, Standard Bank), PUBALI BANK (Australasia Bank, Eastern Mercantile Bank) and UTTARA BANK (Eastern Banking Corporation). the central bank of the country, was set up on 16 December 1971 by the Bangladesh Bank Order 1972. The government accepted the assets and liabilities of the Deputy Governor's office of the State Bank of Pakistan in Dhaka and declared the Bangladesh Bank as a fully effective and permanent central bank.
BANGLADESH BANK,

Bangladesh Bank is empowered to regulate the issue of currency, maintain reserves, and manage the monetary and credit system with a view to stabilising domestic currency, maintaining a high level of production, reducing UNEMPLOYMENT, and increasing real income. It is also responsible for fostering the growth and development of the country's productive resources. The bank has the responsibility of overseeing and regulating the country's banking system. In addition, the head office at Dhaka, Bangladesh Bank has nine branch offices, two in Dhaka city (Motijheel and Sadarghat) and one each in Chittagong, Khulna, RAJSHAHI, Sylhet, Bogra, Rangpur and Barisal. The paid up capital of Bangladesh Bank is Tk 30 million divided into 300,000 shares of Tk 100 each. The total share capital is fully paid by the government. A nine-member board of directors headed by a Governor as the chief executive oversees the affairs of the bank. To conduct banking in Bangladesh, all banks have to have licenses from the Bangladesh Bank under the Bank Companies Act 1991. To be able to get a license, all intending banks have to be registered with the Registrar of Joint Stock Companies under the COMPANIES ACT 1994, and collect Certificate of Incorporation. Moreover, to collect capital
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through public offerings of shares, intending banks have to obtain permission from the country's SECURITIES AND EXCHANGE COMMISSION. Banking institutions in Bangladesh can be classified under different groups. Most banks fall under the category of branch banking ie, the banks operate through branches at home and abroad under the control of their head offices. Foreign branches of Bangladeshi banks have to abide by home country regulations. Under the ownership-based classification, banks in Bangladesh are classified as government/nationalised, private, foreign, and joint ownership banks. The country had 6 nationalised commercial banks (NCB) until 1983, when one of them, the Rupali Bank was denationalised. Another government bank, the Pubali Bank, was denationalised in 1986. Domestic private banks are the International Finance and Investment Bank (IFIC BANK, estd. 1976), ISLAMI BANK BANGLADESH (1983), UNITED COMMERCIAL BANK (1983), CITY BANK (1983), NATIONAL BANK (1983), ARAB BANGLADESH BANK (1985), AL BARAKA BANK (1987), EASTERN BANK (1992), NATIONAL CREDIT AND COMMERCE BANK (1993), PRIME BANK (1995), SOUTHEAST BANK (1995), DHAKA BANK (1995), AL-ARAFAH ISLAMI BANK (1995), SOCIAL INVESTMENT BANK 1995), PREMIER BANK (1996), DUTCH-BANGLA BANK (1996), MERCANTILE BANK (1999), STANDARD BANK (1999), ONE BANK (1999), EXPORT IMPORT BANK (1999), BANGLADESH COMMERCE BANK (1999), MUTUAL TRUST BANK (1999), TRUST BANK (1999), BANK ASIA (1999) and FIRST SECURITY BANK (1999). The three NCBs now operating in the country are the Sonali Bank, Janata Bank and Agrani Bank. There is a special group of nationalised banks known as specialised or development financial institutions to support specific economic purposes of the country. These include two for agricultural development, the BANGLADESH KRISHI BANK (estd. 1973) and RAJSHAHI KRISHI UNNAYAN BANK (estd. in 1987 with branches of Bangladesh Krishi Bank in Rajshahi division), one for industrial development, the BANGLADESH SHILPA BANK (estd. 1972) and one for supporting unemployed youths in their self-

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employment activities, the EMPLOYMENT BANK (estd.1997). The country has a Co-operative Bank established in 1948, as the apex institution of all co-operative societies in Bangladesh. The main function of this bank is to mobilise small savings and assist members of co-operative societies to build up capital and provide them with loan/financial assistance for the development of AGRICULTURE, commerce, fisheries, urban and rural cottage industries, etc. It also provides loan to promote other income generating activities in the society. Foreign private banks which have branches in Bangladesh are the STANDARD CHARTERED GRINDLAYS BANK, AMERICAN EXPRESS BANK, STANDARD CHARTERED BANK, STATE BANK OF INDIA, CREDIT AGRICOLE INDOSUEZ, Hongkong and Shanghai Banking Corporation (HSBC), NATIONAL BANK OF PAKISTAN, CITIBANK N A, HABIB BANK, and HANVIT BANK. There is no independent merchant bank, investment bank or exchange bank in Bangladesh. However, some commercial banks carry out merchant banking in addition to their usual banking activities. Recently, the Securities and Exchange Commission of the country issued permission to 25 financial institutions to do merchant banking. Commercial and specialised banks invest their funds in different sectors of the economy. A total of 22 private leasing companies and financial institutions were given permission to conduct investment activities in various sectors of the economy. Some branches of both nationalised and private commercial banks have been permitted to conduct FOREIGN EXCHANGE business under the Foreign Exchange Regulation Act 1947. Such banks are called authorised dealers and their club or association bears the name BAFEDA - Bangladesh Foreign Exchange Dealers Association. Apart from the authorised dealers, more than 400 Money Changers throughout the country are engaged in buying and selling of foreign exchange. Depending upon the relationship with and the degree of control of the Bangladesh Bank banks in Bangladesh

23

are divided into scheduled and non-scheduled banks. Scheduled banks are enlisted by the Bangladesh Bank under the provisions of section 37 of the Bangladesh Bank Order 1972. They are promise bound to obey central bank instructions, rules and regulations especially, those relating to required capital and provisions, statutory liquidity reserves, audited returns etc. Through scheduling, banks gain special status and enjoy some special facilities from the central bank such as re-discounting, participation in the money market, membership of the clearing house and deposit insurance scheme. Non-scheduled banks do not enjoy such privilege. The list of non-scheduled banks in Bangladesh includes the Eden Bank, Saidpur Commercial Bank, Comilla Co-operative Bank, Dinajpur Industrial Bank, Rajshahi Bank, Shankar Bank, Faridpur Banking Corporation and Madaripur Commercial Bank. Banks in Bangladesh have correspondent relationship with other banks in foreign countries in order to sell their services or to purchase services from them. A summary picture of the country's commercial banks is presented in the table on Banks of Bangladesh.

10.Non-bank Financial Institutions:

Financial intermediaries that accumulate funds by borrowing from the general public and lend the same to meet specialised financing needs, but are prohibited to accept such deposits payable either on demand or by cheque, draft, etc, and operate checking accounts for which their liabilities are not a part of the money supply. The first non-bank financial

24

institution (NBFI) was a fire insurance company established in 1680 in London. Although all financial institutions have a common basis for their operations and some role with respect to lenderborrower relationships, there are some fundamental differences between the banks and NBFIs. The liabilities created by the banks are unique in that these liabilities are themselves 'spendable' i.e., the deposits in banks are used as money by the holders of the deposits whereas the liabilities of a NBFI, such as a building society cannot be used in this way. Banks can actually increase the total volume of spending in the economy by their capacity to add to the stock of credit in existence. But the non-bank financial institutions do not have that capacity and they are merely 'honest brokers' and transmitting funds, which have been created elsewhere, eg, by the BANKING SYSTEM. Banks now have less savings deposits and more demand deposits. The NBFI, such as a leasing company, receives additional funds and is capable of adding to its mortgage lending by withdrawing from its larger demand deposits kept with the deposit money bank. The leasing company thus adds to the volume of credit and enables additional spending (on house purchase) to take place. The combination of financial assets created by the banks and NBFIs for ultimate lender varies depending on the origin of the asset. The operations of NBFIs in Bangladesh are regulated by the BANGLADESH BANK. The grant of authority to engage in borrowing from the general public is normally based on such factors as minimum capital requirement, quality of management, compliance with the concerned laws, rules, and regulations, and stability of financial standing. NBFIs may grant loans to their members and the general public up to a certain amount and may also engage in trust functions with prior permission of the central bank. They are not allowed to engage in foreign exchange transactions.

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NBFIs are specialists of the intermediation process and their origins can be traced to the development of specialised financial institutions. Some survived centuries of changing economic and financial developments. Others appeared in response to special opportunities or needs and have disappeared just as quickly. Their survival and existence depend upon their ability to (a) offer contracts that serve the needs of specialised customers, (b) maintain a spread between the rate they pay for funds and the rate they receive that will support their costs, and (c) meet commitment to suppliers of funds. The non-bank financial sector has a wide diversity of institutions. Despite their importance as alternative sources of finance to the commercial banks, their liabilities may nevertheless be regarded as 'near money'. The most important NBFIs, among others, are the building societies, hire purchase companies, leasing companies, mortgage companies, insurance companies, saving banks, pension funds, investment companies, investment trusts, security dealer/brokers, pawn shops, central provident fund (CPF), post office saving banks, discount houses, securities companies, fund managers, venture capital companies, stock exchanges, and factoring companies. The non-bank financial institutions operating in East Pakistan were the Industrial Development Bank of Pakistan, Equity Participation Fund, Pakistan Industrial Credit and Investment Trust Corporation, Investment Corporation of Pakistan, National Investment Trust and insurance companies. Such institutions established in Bangladesh in the 1970s include the House Building Finance Corporation (1973) and the Investment Corporation of Bangladesh (1976). Other NBFIs established in the country up to 31 August 2000 are United Leasing Co., Industrial Development and Leasing Company, Industrial Promotion and Development Company, Saudi-Bangladesh Industrial and Agricultural Investment Company, Phoenix Leasing Company, Union Capital, Uttara Finance and Investment, UAE-

26

Bangladesh Investment Company, International Leasing and Financial Services, Prime Finance and Investment, Bahrain Bangladesh Finance and Investment Company, Bay Leasing and Investment, Delta-BRAC Housing Finance Corporation, Vanik Bangladesh, Peoples Leasing and Financial Services, Infrastructural Development Company, Bangladesh Industrial Finance Company, National Housing Finance and Investment, MIDAS Financing, First Lease International and Bangladesh Finance and Investment. These institutions extended their business in industrial, commercial and housing financing, and in the stock market activities. They are also granted permission by the Bangladesh Bank to participate in the interbank money market transactions. As on 31 December 1999, the total paid up capital and reserves of these NBFIs in Bangladesh stood at Tk 5.885 billion and their investment in different sectors totaled to Tk 12.087 billion. Bangladesh Bank is empowered to oversee and regulate the affairs of the NBFIs under the provisions of the Financial Institutions Act 1993 and the Financial Institutions Rules 1994. To improve the quality of financial intermediation and meet up the growing needs of funds for financing investments in different sectors of the economy, the government intends to intensify the financial market by granting permission to establish private NBFIs in conjunction with the private commercial banks. At present, non-bank financial sector of the country comprises investment and finance companies, merchant bankers, leasing companies, mortgage banks, insurance companies, and the CAPITAL MARKET. Although small, the NBFI sector in Bangladesh is a growing component of the entire financial sector and NBFIs as a group create an opportunity to improve financial intermediation for the economy. NBFIs account for only 4% of the assets of the financial sector, compared to 70% accruing to the nationalised commercial banks (NCB) and 25% to the local private banks. NBFIs, however, account for 25% of the term financing (FY 1998-99) through leasing, project finance and merchant banking activities. The volume of term finance they provided in the last four years increased at the rate of 41% per
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annum, while that of the NCB decreased by 40% between 1997 and 1999. [Abul Kalam Azad]

11. Capital Market:

Capital market is the market, or realistically, the group of interrelated markets, in which capital in financial form is lent or borrowed for medium and long term and, in cases such as equities, for unspecified periods. The capital markets, in distinction from other parts of the financial market ie, the MONEY MARKETs, are those for longterm government securities, corporate bonds, stocks, municipal bonds issued by state and local government units, and mortgages. INDUSTRY and commerce as well as government and local authorities raise capital from the capital market which performs several important functions in the process of economic development. Most important among them are the promotion of savings and investment and efficient allocation of funds among competing uses. Participants in the capital markets are many. They include the commercial banks, saving and loan associations, credit unions, mutual saving banks, finance houses, finance companies, merchant bankers, discount houses, venture capital companies, leasing companies, investment banks, investment companies, investment clubs, pension funds, stock exchanges, security companies, underwriters, portfolio-managers, and insurance companies. Capital market in Bengal was founded during the Mughal regime in the early 17th century. Although in a limited scale, there were money and capital market activities in Subae-Bangala throughout the 17th century. Bengal under the NAWABs was fairly developed in trade and communication. An historian characterised Bengal of the Nawabi period as 'easy in its finances, moderate in its expenditure, free from charges and cares of independent dominion, its inhabitants enjoying in
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the occupation of AGRICULTURE and commerce, public peace and abundance'. The prosperity of Nawabi Bengal was attributed to large investments by European nations and dispersal of Bengal raw SILK, cloths etc. in vast amounts to the west and north and inland as far as Guzrat, Lahore and even Ispahan. Bengal exported large volumes of agricultural and industrial products to Asia and Europe. Asian merchants and Europeans, especially the English and Dutch East India Companies, invested their money to buy exportable goods and sometimes provided local producers with loan funds. The volume of production of farmers and artisans were dependent on the supply of credit by local and foreign moneylenders and merchants. But the cost of borrowing money was very high. In 1720-21, the English companies' debt in Bengal amounted to Rs 2.4 million. The Dutch Company also borrowed from the local capital market. Its debt to the KASIMBAZAR merchants with interest amounted to about Rs 1.5 million in September 1724. In March 1754, Dutch borrowing in Bengal stood at Rs 2.83 million. JAGAT SHETH was the main creditor of the European companies. The French and the Ostend Companies also borrowed freely from the local money market. The Ostend Company borrowed money from local SARRAFs and merchants. In the three years between 1755 and 1757, the Dutch debt to the Houses of Jagat Sheth amounted to Rs 2.386 million. At the time of the fall of Chandranagar in March 1757, the French owed Rs 1.5 million to the Jagat Sheths. The capital market of the 17th century Bengal often faced scarcity of funds. Availability of investible funds depended on the exchange rate in Agra since local sarrafs and money merchants directed their money to Agra if the exchange rate there was higher than in the capital market of Bengal. Commercial banks established in the second half of the 17th century were engaged in providing short-term loans and trade financing. The growing trade of Bengal, the increase in activities of traders and mercantile communities, and the resultant increase in the circulation of money led to the

29

development of banking throughout Mughal Bengal. Generally, moneylenders, moneychangers, village merchants (mahajans) and shopkeepers performed the function of banks and advanced both long and medium term loans to rulers when the latter were in financial hardship. Indigenous bankers also issued and discounted hundies (bills of exchange) and bank drafts. Apart from their financial transactions with government, these banking houses also extended loans to private parties. They gave loans on mutual trust, sometimes without a document, or even a witness. Loans were also granted on mortgages of lands, ORNAMENTS and other property. The British EAST INDIA COMPANY controlled both the administration and trade of Bengal until 1813. Subsequently, other British companies were allowed to enter into and conduct business in the area. To operate and manage production, and trade and commerce, the Houses of Agencies came into being under the partnership arrangements of the British private traders and Calcutta-based merchants. As these houses and private traders did not have sufficient money, technical knowledge and expertise - huge amount of capital and also technical know-how was imported from Britain for investment in Bengal. All new firms, private traders and agency houses also borrowed large amount of money from local sources. Issuance of paper certificates or bonds by the East India Company made the transfer of money easier. The flow of long-term capital started to increase in Bengal with British investment in the RAILWAY sectors in 1854. Local moneylenders and landlords then lent their money to INDIGO PLANTERS. After 1850, banks in British India started to give long-term loans abreast of short-term lending. 17 loan offices were established throughout the Bangladesh region between 1850 and 1894. The capital was augmented significantly by the establishment of 15 new commercial banks in the region between 1896 and 1942. Following the emergence of Pakistan in 1947, the country inherited a banking and credit structure consisting of 631 branches of various banks, including some foreign ones.

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As the headquarters of most of these bank offices were located in India, 436 bank offices had to shut down within six month of partition. Until July 1948, the Reserve Bank of India performed central banking functions for both countries under the partition arrangement. The State Bank of Pakistan was established in July 1948. Along with the normal central banking activities, the State Bank was entrusted with the responsibility of operating and fostering the growth of the country's credit system. It took significant steps to develop the BANKING SYSTEM through setting up of commercial banks and credit institutions. Besides the progress in commercial banking, there has been other expansion to meet medium and long-term credit requirements of agriculture, industry, and HOUSING through setting up of several specialised financial institutions during the period from 1947 to 1971. With 81 companies including 40 indigenous ones, the INSURANCE industry was a substantial supplier of long-term funds in the capital market of Pakistan. Of the 40 indigenous insurance companies, 10 were registered in East Pakistan. Life insurance became an important source of capital formation in Pakistan. Total investment of all insurance companies was Rs 386.81 million at the end of 1964. The capital market in Pakistan included the following: (a) post office saving banks, postal life insurance, defense saving certificates and PRIZE BONDs; (b) the National Investment (Unit) Trust; (c) the Industrial Corporation of Pakistan; (d) specialised credit institutions for agriculture, industry, and house-building viz. the Agricultural Development Bank, Industrial Development Bank, Pakistan Industrial Credit and Investment Corporation, and the House Building Finance Corporation; (e) insurance companies; and (f) STOCK EXCHANGEs. There were two registered stock exchanges in Pakistan, one at DHAKA, and the other at Karachi. Some organised limited dealings took place in Lahore also. The really active market, however, was that at Karachi registered in 1949. It provided a market place for gilt-edged securities as well as for equity issues of public limited companies. The East

31

Pakistan Stock Exchange was established in Dhaka in 1954 but started functioning in 1956. It was later renamed as the Dhaka Stock Exchange (DSE) Ltd. on 23 June 1962. Following its emergence in 1971, Bangladesh inherited from Pakistan a very small capital market consisting of 1130 branches of 12 commercial banks, the Dhaka Stock Exchange (DSE), 10 insurance companies established between 1958 and 1971, and the Samabaya (co-operative) Bank Ltd. The activity of DSE remained suspended until 1976, when it renewed operations with nine listed companies having paid up capital of Tk 137.52 million. This, along with the establishment of the INVESTMENT CORPORATION OF BANGLADESH (ICB) in the same year, created a momentum in the country's capital market. The ICB was entrusted with the responsibility of accelerating the pace of industrialisation, developing a vibrant capital market and providing institutional support to meet the equity gap of public limited companies in the industrial sector. ICB now underwrites public issue of shares and provides bridging loans to priority sectors. It also participates in direct purchase of shares, and the underwriting, purchase, and sale of debentures, and bonds. It has been managing investors' accounts, mutual funds and unit funds and participating in trade in the stock exchanges. In the mid-1980s, two private investment companies namely, National Credit Ltd. and Bangladesh Commerce and Investment Ltd., were permitted to participate in the capital market, although their activities remained limited. The growth of capital market in Bangladesh was very slow because of the highly regulated economic regime and market imperfections. Long-term funds required by industrial enterprises were generally provided by government-owned development finance institutions (DFIs) at concessional and directed interest rates. The DFIs are the BANGLADESH SHILPA BANK, BANGLADESH SHILPA RIN SANGSTHA, BANGLADESH KRISHI BANK and the RAJSHAHI KRISHI UNNAYAN BANK. The Bangladesh

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Small & Cottage Industries Corporation (BSIC) is another institution that provides medium and long-term loans to small industries either directly or through a consortium of commercial banks. BANGLADESH HOUSE BUILDING FINANCE CORPORATION provides long-term loans for construction of residential houses. DFIs generate their investible funds through allocations from government sources, credit from international financial institutions, and borrowings from the BANGLADESH BANK. Co-operative banks in the country provide medium and long-term credit for purchase of land and agricultural equipment. During the early 1970s, the debt-equity ratio in borrowings from the DFIs was relatively high. Yet, in the absence of a securities market, companies had to borrow from the debt market. They avoided the securities market even after its revival. Also, small savers were reluctant to invest their surplus funds in the capital market. DFIs were preferred sources of capital for people having proximity to power and the intention to appropriate public funds through defaults in payment. They took advantage of the environment in which the loan recovery mechanism was ineffective. There were no stringent measures to recover overdue loans or prevent their turning into bad debts. The present day capital market in Bangladesh has an instrumental segment of securities market that includes two stock exchanges (one at Dhaka and the other at CHITTAGONG) and a non-instrumental segment of institutional investors such as commercial banks (45), investment bankers and companies, merchant bankers (26), insurance companies (39), pension funds and schemes, DFIs (5), postal saving schemes, postal life insurance, deposit pension schemes, employees insurance fund, security deposits, gift certificate deposits, sundry deposits, surcharge and development charges, leasing companies, NON-BANK FINANCIAL INSTITUTIONS, and co-operative land mortgage banks.

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At present, shares and debentures of 355 companies are traded in the equity market (211 in DSE and 144 in CSE. The number of mutual funds traded in the stock exchanges is 18 (9 in DSE and 9 in CSE) and that of debentures traded is also 18 (12 in DSE and 6 in CSE). Unit Certificates traded on 30 June 2000 numbered 42,985,690, the value of which was Tk 5.28 billion. The market capitalisation on 30 June 2000 in the two stock exchanges was Tk 80.86 billion and Tk 53.12 billion, equivalent to about $1.62 billion and $1.06 billion respectively. The securities market instruments in Bangladesh include shares, debentures, unit certificates of ICB, mutual certificates, wage earners development bond, Fixed Deposit Receipts, and various saving certificates under the National Savings Schemes (5-years Bangladesh Sanchaya Patra, 5years wage earners development bond, 3-years saving certificate, 3-years National Investment Bond, 5-years Family Saving Certificate, 8-years Pratirakkha Sanchaya Patra). Institutions allowed to conduct merchant banking operations in Bangladesh are the Industrial Development and Leasing Company of Bangladesh (IPDC), UTTARA FINANCE AND INVESTMENT, Banco Trans World (BD), Millennium Investment Management Company, Fidelity Assets and Security Company, Raspit Securities and Management Company, Capital Market Services, BAY LEASING AND INVESTMENT, Swadesh Investment Management, VANIK BANGLADESH, Grameen Securities Management, South Asia Capital, Saudi-Bangladesh Industrial and Agricultural Investment Company (SABINCO), PRIME FINANCE AND INVESTMENT, EC Securities, Mercantile Securities, Bangladesh Mutual Securities, AAA Consultants and Financial Adviser, Pangaca Partners, Paramount Securities, Equity Valuation Research and Distribution, Prime Securities and Financial Services, MFH Financial Services, Satcom Securities and Management, and First Securities and Investment. Non-bank financial institutions established under the Financial Institutions Act 1993 are the UNITED LEASING,

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Industrial Development and Leasing Company (IDLC), Industrial Promotion and Development Company (IPDC), SABINCO, PHOENIX LEASING, UNION CAPITAL, Uttara Finance and Investment, UAE-BANGLADESH INVESTMENT COMPANY, INTERNATIONAL LEASING AND FINANCIAL SERVICES, Prime Finance and Investment, BAHRAIN BANGLADESH FINANCE AND INVESTMENT COMPANY, Bay Leasing and Investment, DELTA-BRAC HOUSING FINANCE CORPORATION, Vanik Bangladesh, PEOPLES LEASING AND FINANCIAL SERVICES, Infrastructural Development Company, Bangladesh Industrial Finance Company, NATIONAL HOUSING FINANCE AND INVESTMENT, MIDAS Financing, FIRST LEASE INTERNATIONAL, and Bangladesh Finance and Investment. Securities business in Bangladesh is regulated by Capital Issues (Continuance of Control) Act 1947, COMPANIES ACT 1994, Securities and Exchange Ordinance 1969, Securities and Exchange Rules 1987, SECURITIES AND EXCHANGE COMMISSION Act 1993, Securities and Exchange Commission (Amendment) Act 1993, Securities and Exchange Commission (Brokers, Stock Dealers, Sub-Brokers) Regulation 1994, Securities and Exchange Commission (Insider Trading) Regulation 1994, Securities and Exchange Commission (Merchant Bankers and Portfolio Managers) Regulation 1994, Initial Public Offering (IPO) Rules 1998, The Central Depository Bill 1999, Margin Rules 1999, Trust Act 1882 and Securities and Exchange Commission (Mutual Funds) Regulation 1994. Moreover, there are specific rules and regulations for controlling the operation of stock exchanges. The Securities and Exchange Commission (SEC), established in 1993, regulates overall activities of the capital market in Bangladesh. The objectives of the SEC is to protect interests of investors in securities, develop the securities market, and ensure compliance of laws relating to proper issuance and exchange/trading of securities. The development of capital market got some momentum with shift in government policy towards PRIVATISATION. Key players in the capital market viz. the investors and the issuers responded positively and have

35

become active in expanding the market. Bangladesh securities market statistics have been included in the Emerging Markets Fact Book of the International Finance Corporation (IFC). But the market is still very small and continues to suffer from imperfections. [Abul Kalam Azad]

12. Stock Exchange:

Stock exchange organized market for trading of stocks and bonds. In early 1952, five years after the independence of Pakistan, the Calcutta Stock Exchange prohibited transactions in Pakistani stocks. This necessitated the formation of a stock exchange in East Pakistan and the East Pakistan Stock Exchange Association Ltd. was incorporated on 28 April 1954. It changed its name to East Pakistan Stock Exchange Ltd on 23 June 1962, and finally to Dhaka Stock Exchange (DSE) on 14 May 1964. Although incorporated in 1954, formal trading started in 1956 in Narayanganj. In 1958, the stock exchange was shifted to Narayanganj Chamber Building. DSE purchased its own land, and moved to its own premises at 9/F Motijheel C/A in 1959. Prior to independence in 1971, the number of listed companies in DSE was 196 with a total paid up capital of Tk 4 billion. The daily average transaction during that period was about 20,000 shares. After the Independence, the government of Bangladesh took charge of the abandoned industrial units and pursued a policy, under which large industrial units were nationalised. The trading activities of DSE remained suspended till 1975 and following change in the economic policy of the government, DSE resumed its activities in 1976 with only 9 listed companies, having a total paid up capital of Tk 137.52 million. The actual growth of the stock exchange in Bangladesh (the DSE) started since 1983, when the market capitalisation was Tk 812 million. The year 1987 experienced a relatively steep rise in the market with 92 listed companies.
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With the liberalisation of policies in the 1990's the stock market gradually started to prosper. On 30 June 2001, the number of securities listed in the DSE was 244, the number of listed companies 224, number of listed debentures 10, number of shares of all listed companies 666,553 and that of all mutual funds 72,250 and the market capitalisation Tk 72,168 million ($1226 million). Any individual of sound mind and over 21 years of age can apply to become a member of the stock exchange by purchasing a share of DSE and after obtaining dealer/broker license from the SECURITIES AND EXCHANGE COMMISSION (SEC). Since the incorporation of DSE, a typical cry out system, where each security is generally called only once for a trading day was followed. This cry out system was abolished and a fully automated computerised system was installed on 10 August 1998. The trading is now in continuous session from 10:30 am to 2:30 pm. The session is divided in 5 parts: preopening session, opening session, continuous or regular trading session, closing session, and post-closing session. All transactions of brokers are settled and cleared through the 3rd and 5th working day respectively, calculated from the date of contract (hawla) and the procedure followed is presented in chart I.

Chart I :

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The clearing house operates manually. Working hours of the clearing house are from 9:00am to 5:00pm. The Stock exchange remains open from Saturday to Thursday and remains closed on Friday. The management of DSE is vested on a 24-member council having a chairman, one senior vice chairman and one vice chairman. Among the 24 council members, 12 are elected and nominated by DSE members. The other members are representatives from the Bangladesh Bank, finance ministry, law ministry and ministry of industries, presidents of the CA institute, FBCCI, MCCI, DCCI, Supreme Court Bar Association and bankers/insurance corporations associations and the chairman of the Department of Finance and Banking/Economics of the University of Dhaka. The operational management of the DSE is headed by a CEO, who works as an independent entity under the general policy framework set by the council. The Securities and Exchange Commission approved formation of a second stock exchange at Chittagong in 1995. The Chittagong Stock Exchange (CSE), located at Agrabad, Chittagong has a policy making body of 18 members, 6 of whom are nominated by the SEC and 12 are elected by the
38

general body. The board elects its own president and 3 vice presidents. Trading operations in CSE has been fully automated since June 1998. The number of listed company in CSE is 150 and their total paid up capital is $515.00 million. Like in all other countries, the securities market in Bangladesh is linked with other financial institutions, many of which are directly linked for trading purposes at both the stock exchanges. These institutions include the scheduled banks, Investment Corporation of Bangladesh (ICB), merchant banks and investment institutions. Foreign banks also invest in IPO's. The securities market in Bangladesh is guided by the Security Act 1920, the Securities Ordinance 1969, and the Securities and Exchange Commission Act 1993. The DSE and CSE have their own internal rules, and regulations such as the DSE Automated Trading Regulations 1999, Dhaka Stock Exchange Investors Protection Fund Regulation 1999, the Margin Rules 1999, and Settlement of Stock Exchange Transaction Rules 1998. [Ishtiaque Ahmed Khan]

13.Securities and Exchange Commission:

It is a government body under the ministry of finance established to regulate the securities market in Bangladesh. It was established on 8 June 1993 under the Securities and Exchange Commission Act 1993. Prior to its establishment, the securities market was regulated under Capital Issues Act 1947. The main office of SEC is at Dilkusha Commercial Area, Dhaka. SEC is headed by a chairman appointed by the government and has four members under the chairman. Two of the members are full-time executives and are nominated directly by the government. Of the other two, one is a nominee of the BANGLADESH BANK and the other, of the ministry of finance. The members are responsible for registration, capital issue, corporate audit, administration and finance, supervision and monitoring the corporate and legal affairs,
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research and development, and education and training. In addition to members, there are four executive directors, one corporate accountant, and one legal counselor. The prime objectives of SEC are to protect integrity of the stock market and the interests of the investors in securities, to develop the securities market, to ensure proper issuance of securities, and to promulgate new laws, orders, rules and regulations for controlling, and guiding the securities market. SEC is to protect the interests of investors through regulating the market within the framework of the SEC Act. It approves capital issues and prospectus, restricts illicit transactions and insider trading, and controls the STOCK EXCHANGEs, securities related firms, and companies involved in the public issue of securities. As a part of these functions, SEC monitors disclosure functions of the companies, timely holding of annual general meetings by them, timely payment of dividends and timely issuance of allotment letters and refund warrants by security issuers. Since its inception in 1993, SEC plays a significant role in the securities market. A major function of SEC is to curb the irregularities prevailing in the market. To control and raise the efficiency of the market, SEC promulgated the following orders and regulations since 1993: (a) Securities and Exchange Commission (stock broker, stock dealer and authorised representative) Regulation 1994; (b) Securities and Exchange Commission (merchant banker and portfolio manager) Regulation 1995; (c) Securities and Exchange Commission (mutual fund) Regulation 1997; (d) Credit Rating Rules 1997; (e) Securities and Exchange Commission (control of insider trading) Regulation 1995; (f) Public Issue Rules 1998; (g) Right Issue Rules 1998; and (h) Depository Act 1999. SEC issues/cancels registration certificates to stock dealers, brokers, merchant banks, authorised representatives of members, and all intermediaries working in the securities market. Market surveillance is an essential activity of SEC. It analyses the price fluctuations in both Dhaka and Chittagong

40

Stock Exchanges. As part of supervision and regulation of markets and its intermediaries, SEC receives and takes initiatives to settle complaints against stockbrokers and firms/companies and takes actions, including charging fines and issuing warnings for detected irregularities. It also takes legal steps against the defaulting companies and firms. Up to July 2001, a total of 53 law suits were filed against various companies for violation of rules and regulations of SEC. SEC conducts research on the dealing behaviour in the securities market and regularly publishes the findings. SEC has a number of informative publications, which includes Annual Report of SEC, Quarterly Reviews and the SEC Parikrama (Bangla). It also periodically publishes manuals and handbooks. To educate the investors and intermediaries SEC implements some programmes including investors' training for corporate and individual investors and training programmes for authorised representatives of the members of DSE and CSE. [Ishtiaque Ahmed Khan]

14.Investment Corporation of Bangladesh (ICB):

It is established on 1 October 1976 under the Investment Corporation of Bangladesh Ordinance 1976. It is an investment bank established to accelerate the pace of industrialisation and develop a sound securities market in Bangladesh. Initially, the activities of ICB were limited to underwriting public issue of shares, bridge financing, debenture financing and opening/maintaining investors' accounts (Investors' Scheme). ICB had largely expanded its areas and scope of activities and now provides various types of investment and banking services. Added activities include providing debenture loans to companies and loans to investors on margin trading basis, providing advances against ICB unit certificates, leasing of industrial equipment, managing unit

41

fund and mutual funds, and participating in for trading securities.

STOCK EXCHANGE

Initially, the authorised and paid up capital of the corporation was Tk 200 million divided into 2 million shares of Tk 100 each, subscribed by the government of Bangladesh (27%), BANGLADESH BANK (12%), BANGLADESH SHILPA BANK (6%), BANGLADESH SHILPA RIN SANGSTHA (6%), Nationalised Commercial Banks (15%), SADHARAN BIMA CORPORATION (9%) and the general public (25%). The authorised and paid up capital of ICB was increased in 1999-2000 to Tk 1,000 million and Tk 466 million respectively. ICB is a listed company in both Dhaka and Chittagong Stock Exchanges. The reserve fund of the corporation was Tk 425.08 million on 30 June 2000 and the types of reserves were general reserves, building reserves and dividend equalisation reserves. Total fund of ICB during the year 1999-2000 was Tk 6,784.84 million which comprised shareholders' equity i.e., share capital, reserves and retained profits (Tk 894.97 million), long-term debts Tk 1,153.81 million, deferred interest (Tk 292.72 million), deferred liabilities (Tk 18.81 million), lease deposits (Tk 0.66 million), and other liabilities (Tk 4,423.83 million). On 30 June 2000, the total value of assets of ICB were valued at Tk 6,784.84 million comprising marketable securities (Tk 2,391.52 million), secured margin loans (Tk 1,503.40 million), unit advance account (Tk 19.60 million), bridging loan (Tk 339.44 million), debenture loans (Tk 4.40 million), leased equipment (Tk 7.95 million), and cash in hand and at banks, interest receivables and the premises and equipment under its own use. Since its inception up to 30 June 2000, ICB committed to provide a total of Tk 2,496.8 million in loans to 353 projects and it disbursed Tk 1,141.2 million to 307 of them. It acted as the trustee to the debenture issue for 12 companies and as manager to the issue for 39 companies. Advances Against Unit Certificate Scheme (introduced 1998)
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were Tk 43 million, cumulative amount of LEASE FINANCING amounted to Tk 73.9 million involving 14 companies, and total net underwriting cum bridging loan commitment was Tk 1,164.80 million to 306 companies. ICB committed to provide net assistance in the form of direct underwriting of shares of Tk 702.6 million of 37 projects and debentures of Tk 120 million of 5 projects. As on 30 June 2000, the total gross outstanding loans of ICB stood at Tk 4,775.1 million and it recovered Tk 1,315.70 million. Up to the date, ICB floated 8 closed-end Mutual Funds with total paid up capital of Tk 175 million. The dates of issue of these Mutual Funds were 25 April 1980, 17 June 1984, 19 May 1985, 6 June 1986, 8 June 1987, 16 May 1988, 30 June 1995, and 23 July 1996. As on 30 June 2000, the cumulative net sale of units amounted to Tk 5,280.8 million for 42,985,690 units. The ICB unit certificates earned a net income of Tk 528 million during the year 1999-2000. The total number of unit holders on 30 June 2000 was 43,433 of which 58% were salaried employees of government and private organisations. The corporation introduced its Investors' Scheme in 1977. Under the scheme, it received a total deposit of Tk 22,177.5 million up to June 2000, while loans sanctioned and investments made amounted to Tk 3,715.2 million and Tk 4,410.6 million respectively. During the year 1999-2000, the corporation invested Tk 978.9 million in securities and on 30 June 2000, the market value of its portfolio stood at Tk 1,945.9 million. During the fiscal year 1999-2000, the corporation earned a net profit of Tk 59.4 million Besides its head office and the local office in DHAKA, ICB has 6 branch offices, one each at CHITTAGONG, RAJSHAHI, KHULNA, BARISAL, SYLHET and BOGRA. The head office has 4 broad divisions/wings and 31 departments under them. In 2001, ICB had 394 employees including 242 officers and 152 other staff. The managing director is the chief executive officer

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of the corporation and an 11-member board of directors is its top policy making body. With the enactment of the Investment Corporation of Bangladesh (Amendment) Act, 2000, ICB became empowered to create and operate subsidiaries. ICB has a plan to form three separate subsidiary companies - ICB Capital Management Ltd, ICB Securities Trading Company, and ICB Asset Management Company Ltd. ICB is represented in the governing board of the South Asian Development Fund established in June, 1996 through the Dhaka Declaration of a meeting of the SAARC member countries. ICB is also associated with South Asian Regional Fund (SARF). [S M Mahfuzur Rahman]

15.Bangladesh House Building Finance Corporation (BHBFC):

It is a specialized public sector financial institution set up in 1973 under President's Order No. 7 of 1973, which repealed the House Building Finance Corporation Act XVIII of 1952. Its sole objective is to provide credit facilities for construction, repair and remodeling of dwelling houses and apartments in cities, towns and other urban areas. All inherited assets and liabilities of the erstwhile House Building Finance Corporation were vested in the reconstituted BHBFC. In 1973, the authorised capital of BHBFC was Tk 100 million. This was raised to Tk 1,100 million in 1992. In the beginning, the paid up capital of the organisation was Tk 50 million and was fully subscribed by the government of Pakistan. The paid up capital of HBFC rose to Tk 972.9 million on 30 June 2000 through capitalisation of interest accrued (in 1978) and by new subscription by the government of Bangladesh (in 1992, 1993 and 1994).

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BHBFC took over the principal objective of HBFC and to cope with increasing demand, the corporation extended the area of its financing up to some upazila headquarters. The lending policy of BHBFC has undergone changes over the years to cater to the funding needs of various types of HOUSING. For quite a long time, the corporation was engaged in giving loans such as general loans and multi-storied loans. Currently, it provides 5 types of loans: (a) general loans for construction of single or multi-storied residential houses on land/plots owned by a single person or by a husband and wife jointly; (b) group loans for the construction of flats by a group of borrowers on a plot owned jointly; (c) apartment loans for purchasing under-construction apartments in DHAKA and CHITTAGONG Metropolitan areas; (d) adjustment loans for completion of an under-construction house; and (e) loans for constructing semi-pucca houses in district and selected upazila headquarters. Side by side with expansion of areas of house building financing, the corporation has also increased its loan ceiling. The loan amount sanctioned now varies between Tk 0.27 million and Tk 2.5 million. The primary source of fund of BHBFC is its paid up capital. The corporation also raised funds by selling government guaranteed interest-bearing debentures to BANGLADESH BANK and public and private sector commercial banks. Further, it receives two kinds of deposits from the government, namely, fixed deposits and refundable deposits, the total amount of which stood at Tk 127.13 million at the end of 1999-2000. On 30 June 2000, the total capital and liabilities of the corporation was Tk 30,270.14 million as against Tk 29,722.36 million in 1998-99, and Tk 2,897.00 million in 1972-73. Major items in which the corporation applied/utilised its funds in 1999-2000 are loans and advances Tk 26,685.20 million (classified Tk 8,343.07 million and unclassified Tk 18,342.14 million), stocks Tk 0.91 million, advances to offices/branches Tk 205.94 million, and

45

investments in FDR with scheduled banks against debenture redemption Tk 2,312.65 million. The amount of loans sanctioned by the corporation in 1999-2000 was Tk 1,242 million, against which it disbursed Tk 993.59 million. During the year, the corporation recovered Tk 2,329 million. The outstanding balance of total loans and advances of the corporation on 30 June 2000 was Tk 27,236.97 million, of which classified loans accounted for Tk 8,343.07 million (substandard Tk 2,421.15 million, doubtful Tk 2,850.67 million and bad debts Tk 3,071.24 million). BHBFC has its head office at Dhaka. It has 21 offices in different parts of the country. Of them, 9 are zonal offices (4 in Dhaka and one each at Chittagong, KHULNA, RAJSHAHI, SYLHET and BARISAL) and 12 are regional offices located at different district headquarters. In addition, there are 6 BHBFC camp offices, one each at SAVAR, NARAYANGANJ, COX'S BAZAR, NARSINGDI, CHUADANGA and SATKHIRA. BHBFC runs its business under the overall guidance and supervision of a 6-member board of directors appointed by the government. The managing director is the chief executive of the corporation. The number of employees in the organisation is 605, and includes 296 executives and officers of different levels. Until 1978-79, the corporation could not contribute to the national exchequer. But since then it has regularly earned profits and generated revenue for the government at increasing rates. Provision requirement for its classified loans has, however, reduced the profitability of the corporation. The balance of interest suspense account of the BHBFC amounted to Tk 497.68 million on 30 June 2000. This also affects the growth of its profitability. [S M Mahfuzur Rahman]

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16.Foreign Exchange Market:

Foreign exchange market allows currencies to be exchanged to facilitate international trade and financial transactions. Evolution of the market in Bangladesh is closely linked with the exchange rate regime of the country. It had virtually no foreign exchange market up to 1993. BANGLADESH BANK, as agent of the government, was the sole purveyor of foreign currency among users. It tried to equilibrate the demand for and supply of foreign exchange at an officially determined exchange rate, which, however, ceased to exist with introduction of current account convertibility. Immediately after liberation, the Bangladesh currency taka was pegged with pound sterling but was brought at par with the Indian rupee. Within a short time, the value of taka experienced a rapid decline against foreign currencies and in May 1975, it was substantially devalued. In 1976, Bangladesh adopted a regime of managed float, which continued up to August 1979, when a currency-weighted basket method of exchange rate was introduced. The exchange rate management policy was again replaced in 1983 by the trade-weighted basket method and US the dollar was chosen as intervention currency. By this time a secondary exchange market (SEM) was allowed to grow parallel to the official exchange rate. This gave rise to a kerb market. Up to 1990, multiple exchange rates were allowed under different names of export benefit schemes such as, Export Bonus Scheme, XPL, XPB, EFAS, IECS, and Home Remittances Scheme. This led to a wide divergence between the official rate and the SEM rate. The situation also gradually gave rise to a number of conflicting regulations, poor risk management, and various types of implicit or explicit government guarantees to the users of foreign exchange. This resulted in a number of macro-economic imbalances prompting the government to adjust the official rate in phases and to liquidate its difference with the rate at SEM. The two rates were finally unified in January 1992. The first step towards currency convertibility was taken on 17 July 1993
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and this marked the beginning of a relatively open foreign exchange market in the country. Until then the Bangladesh Bank used to declare mid-rate along with the buying and selling rates for dollar applicable to authorised dealers. Initially the spread was Tk 0.10, which was gradually widened to Tk 0.30. At present, the system of exchange rate management in Bangladesh is to monitor the movement of the exchange rate of taka against a basket of currencies through a mechanism of real effective exchange rate (RFER) intended to be kept close to the equilibrium rate. The players in the foreign exchange market of Bangladesh are the Bangladesh Bank, authorised dealers, and customers. The Bangladesh Bank is empowered by the Foreign Exchange Regulation Act of 1947 to regulate the foreign exchange regime. It, however, does not operate directly and instead, regularly watches activities in the market and intervenes, if necessary, through commercial banks. From time to time it issues guidelines for market participants in the light of the country's MONETARY POLICY stance, FOREIGN EXCHANGE RESERVE position, BALANCE OF PAYMENTS, and overall macro-economic situation. Guidelines are issued through a regularly updated Exchange Control Manual published by the Bangladesh Bank. The authorised dealers are the only resident entities in the foreign exchange market to transact and hold foreign exchange both at home and abroad. Bangladesh Bank issues licenses of authorised dealership in foreign currencies only to scheduled banks. The amount of foreign exchange holdings by the authorised dealers are subject to open position limits prescribed by Bangladesh Bank, which itself purchases and sells dollars from and to the dealers on spot basis. The size of each such transaction with Bangladesh Bank is required to be in multiples of $10,000, subject to a minimum of $50,000. In addition to authorised dealers, there are registered moneychangers to buy foreign currencies from tourists and sell them to outgoing Bangladeshi travelers as per entitlement. Their excess holdings beyond the permitted

48

balance are required to be retained with authorised dealers. Some service institutions like hotels and shops have also obtained limited money changing licenses to accept foreign currencies the foreign tourists, but those are to be sold to authorised dealers. Transactions by customers take place mainly to satisfy customer demand for individual needs and to facilitate export, import, and remittances. The foreign exchange market of the country is confined to the city of DHAKA. The 32 scheduled banks operating as authorised dealers in the inter-bank foreign exchange market are not permitted to run a position beyond certain limits. In the event of speculation on an appreciation of the value, an authorised dealer may buy more foreign currencies than it needs, but at the end of the day it must maintain its limit by selling excess currencies either in the inter-bank market or to customers. Authorised dealers maintain clearing accounts with the Bangladesh Bank in dollar, pound sterling, mark and yen to settle their mutual claims. If there any excess foreign exchange holdings exist after these transactions, it is obligatory for them to sell it to the Bangladesh Bank. In case of shortfall of the limit, authorised dealers have to cover it either through purchase from the market or from the Bangladesh Bank. Before deregulation of foreign exchange market the volume of inter-bank transaction was low. The assured access to funds from Bangladesh Bank at known cost as well as the assured buy-sell margins and transaction fees contained in the pre-determined exchange rate provided little inducement for authorised dealers to engage in inter-bank transactions. However, the situation has been changing and the reliance of authorised dealers on the Bangladesh Bank is gradually declining. The average monthly transactions of foreign exchange in the inter-bank market accounted for $23.46 million in 1991-92 and crossed the $1 billion mark in 199899. The average monthly turnover for the six months between

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July and December 2000 was $1.5 billion. The phenomenal growth of inter-bank transactions was due mainly to relaxation of exchange control regulations and expansion of the activities of the Bangladesh Foreign Exchange Dealers Association (BAFEDA) formed on 12 August 1993. The-inter bank foreign exchange market of Bangladesh is still at its rudimentary stage. The market is an oligopolistic one and is dominated by a few relatively large banks, which have remained only as dealers instead of developing themselves into buyers or sellers. The most widely used practice is spot transaction; this covers 95% of the total transactions. Only forward transactions offer protection against foreign exchange risks. Deals in foreign exchange market are usually confirmed over telephone, followed by a written advice. Confirmed deals may be cancelled on payment of necessary costs.

There also exists a kerb market, where currency racketeers transact foreign currencies through a chain of middlemen. This market emerged in the restricted regime of foreign exchange transaction but continues to be active. This market operates in the alleys or lanes and by-lanes of Dhaka city around the foreign exchange branches of authorised banks. Dealers of hundi also form part of this market. A sizeable amount of foreign currencies is channeled through this market every year. [Syed Ahmed Khan and A Samad Sarker]

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17.Foreign Exchange Reserve:

The stock of foreign currencies a country holds to buffer out imbalances between foreign receipts and payments. BANGLADESH BANK, the central bank of the country, holds the stock of convertible foreign exchange reserve of the country in the form of liquid assets. In the first 2-3 years after liberation, the foreign exchange reserve of the country was composed mainly of aid/grants and export earnings. Subsequently, Bangladesh diversified export products and expanded its export base. It could also geographically diversify the direction of the export trade by exploring new areas. The export earnings gradually emerged as the main source of the country's foreign exchange reserves. In 1974, Bangladesh introduced the WAGE EARNERS' SCHEME, which, by now, has become a significant source of foreign exchange. Bangladesh receives financial assistance from IMF under various arrangements, which also constitutes an important source of the foreign exchange reserve of the country. Moreover, as its member, Bangladesh receives additional SDR allocations from IMF. Historically, the foreign exchange reserves of Bangladesh has been largely inadequate compared to its needs for financing imports, meeting debt service liabilities, and paying for factor earnings of the foreign nationals. A growing demand for foreign exchange emanated from people travelling abroad for education, training and medical service outside the country. Since liberation, Bangladesh had been following a very restrictive import policy and rationing scarce foreign exchange. In the process of economic reform and liberalisation, restrictive policies were gradually replaced by liberal policies. Generally, the reserve position of a country is determined by factors such as vulnerability in BALANCE OF PAYMENTS, the speed of reserve depletion, opportunity cost of holding reserves, and the international liquidity position. The supply of primary exportables from Bangladesh is inelastic in the short run and the country is dependent on imports for supply of industrial consumer goods, machinery and
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industrial raw materials. The prices of imported goods often fluctuate. As a result, the balance of payments situation remains under pressure. The balance is influenced by internal shocks generating from damages caused by floods or droughts as well external shocks originating from declines in prices of exportables or rise in prices of imported goods.

Bangladesh does not have easy access to international liquidity, particularly to commercial credit, and the availability of funds from official sources is subject to various conditionalities. This is why Bangladesh has to maintain a reasonable level of foreign exchange reserve equivalent to an amount that covers payment for at least about 3 months' imports. The trend of the reserve shows no uniform growth although there had been a rise in export earnings as well as workers' remittances. The reserves of $122 million recorded during 1981-82 were equivalent to less than a month's import payment. This occurred due to mainly a substantial decline in the prices of the country's exportables, suspension of IMF's Extended Fund Facility Programme, and lower aid disbursement. Amidst fluctuations, the reserves reached a peak level of $3.37 billion in April 1995 and then declined to $1.3 billion or equivalent to about 2 months' of import payment in DeceWage Earners' Scheme introduced in 1974 to provide incentives to the Bangladeshi nationals working abroad in remitting their earnings to Bangladesh through official channel. The scheme got prominence when the allocation of foreign exchange for importers at official rate was curtailed due to a fall in the FOREIGN EXCHANGE RESERVEs. The scheme aimed at conversion of remittances of the Bangladeshi workers at exchange rates corresponding approximately to the open market rate. Importers facing shortage of foreign exchange allocations tended to buy foreign exchange at rates higher than the official rate from the wage earners' market, which was popularly known as the secondary FOREIGN EXCHANGE MARKET. Remittances by workers from abroad play a significant role in minimising dependence on aid for foreign
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exchange. Remittances treated as earnings through 'manpower export' have become the largest foreign exchange earner among the items in the BALANCE OF TRADE. Starting with a small amount of $11.8 million in 1974-75, the size of remittances rose to $378.74 million in 1980-81 and to $764.00 million in 1990-91. The amount stood at $1.7 billion at the end of 1998-99. A new vista for employment opportunities in the Middle Eastern countries in the mid-1970s contributed to this growth. The number of overseas employment was only 17,000 persons in 1977-78 and increased to 38,456 persons in 1980-81. The number grew to 96,697 persons in 1990-91 and to 270,490 in 199899. The remittances-GDP ratio was 2.67% in 1980-81, 3.26% in 1990-91 and 4.68% in 1998-99. Remittances under the Wage Earners' Scheme were 14.09% of import payments in 1980-81. The ratio rose to 21.76% in 1990-91 and to 21.30% in 1998-99. The Kingdom of Saudi Arabia tops the list of sources of foreign remittances to Bangladesh. Its share was 36.35% of the total in 1983-84 and it rose to 40.15% in 199899. The share of remittances from Kuwait that occupies the second position was 13.50% in 1998-99. Remittances from some countries, such as Malaysia and England, however, did not increase over time.

18. Balance of Trade:

Balance of trade refers to the difference between the value of a country's merchandise exports and the value of its merchandise imports. The trade regime of Bangladesh has undergone many changes over the years. Initially, it followed a line of import substitution, implying a stress on restricting imports. The country also had difficulties in import financing during the 1970s. But with the change in government policy towards promoting a laissez faire economy and with inflows of FOREIGN AID in increased volumes, Bangladesh started to import more in the early 1980s. There was a marked

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departure in the trade policy of the country in the 1990s, when its trade regime was substantially liberalised with the implementation of the Financial Sector Reforms programme. The export policy of the country up to 1990 was characterised by adoption of ad hoc measures, which discouraged the growth of the manufacturing sector having high export potentialities. The two-year export policy announced in 1993 contained a lot of incentives. Later, the government announced a five-year export policy for 19972002, which aimed at increasing production and trade through attracting entrepreneurs to establish export-oriented industries, improving the BALANCE OF PAYMENTS through narrowing the trade gap with the diversification of exportables, and expanding the export base, developing marketability of export items, and establishing backward linkage with exportoriented industries. The new export policy contains an export development strategy leading to intensive export-oriented activities. Bangladesh has been experiencing deficits in her trade balance despite adoption of many export promotion measures during the 1980s and 1990s. The deficit in the trade balance of the country increased from 8.5% of the GDP in 1975-76 to 14.1% of the GDP in 1981-82, and then gradually declined to 6.6% of the GDP in 1991-92. The deficit remained at a moderate level during the 1990s and was 6.9% of the GDP in 1997-98 and 5.5% of the GDP in 1999-2000. The decline in deficits in the trade balance was due to faster growth of exports during 1984-85 to 1994-95. During this period, there was a significant shift in the structure of the export sector from primary goods to manufactured goods and from traditional to non-traditional items of exports. The percentage share in the value of traditional items of exports declined from 97.27 in 1972-73 to 68.99 in 1982-83, and further to 12.17 in 1994-95. The percentage share in the value of manufactured commodities, on the other hand, increased form 57.03 in 1972-73 to 64.58 in 1982-83 and further to 86.98 in 1994-95. This marked shift in the structure of exportable goods was due

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to the substantial growth of the readymade garments sector during this period. Along with the growth in exports, the import payments of Bangladesh also showed continuous increase. Export receipts as percent of GDP increased, amidst fluctuations, from 4.0 in 1974-75 to 6.9 in 1984-85, and further to 13.3 in 1994-95. Import payments as percent of the GDP, on the other hand, increased sharply from 8.0 in 197475 to 19.7 in 1984-85, and further to 22.6 in 1994-95. There were some structural changes in the composition of imports. Import payments in respect of major primary goods declined from $836 million in 1984-85 to $585 million in 1989-90, but rose to $868 million in 1994-95, and further to $1,448 million in 1998-99. On the other hand, import payments in terms of major intermediate goods increased from $433 million in 1984-85 to $567 million in 1989-90, to $924 million in 199495, and further to $1,104 million in 1998-99. Import of capital goods increased substantially from $691 million in 1984-85 to $1,296 million in 1989-90, $1,688 million in 1994-95, and further to $1,969 million in 1998-99. Despite the steep rise in import payments, a corresponding rise in export receipts helped in restricting the growth of the trade deficit. Bangladesh provided a series of incentives to augment her export earnings viz., duty drawback facilities, tax holidays, bonded warehouse facilities, income tax rebates, availability of credit to exporters at concessional rates, retention of foreign exchange by exporters, the EXPORT CREDIT GUARANTEE SCHEME, Export Development Fund, depreciation of taka against dollar, etc. Consequent upon taking all these measures, export receipts from traditional items of exports continued to decline while export of manufactured products continued to increase during the nineties. The percentage share of traditional exports in total export earnings declined from 25.51 in 1990-91 to 12.17 in 1994-95, to 8.41 in 199798 and further to 7.55 in 1999-2000. The percentage share of manufactured products increased from 82.18 in 1990-91 to 86.98 in 1994-95, to 90.27 in 1997-98, and further to 92.45

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in 1999-2000. The emergence of exportable goods like leather and leather goods and frozen foods in addition to readymade garments, added a new dimension to the export market of Bangladesh, leading to a rise in export earnings from manufactured goods. The rise in import payments was faster than the rise in export earnings, resulting in the persistence of the trade deficit in Bangladesh. Faster rise in import payments occurred due to the liberal import policy pursued by the government, rise in prices of petroleum products, rise in food imports from time to time and also due to increased imports of intermediate goods and capital goods during the 1980s and 1990s. [Syed Ahmed Khan and A. Samad Sarker] Foreign Aid any capital inflow or other assistance given to a country which would not generally have been provided by natural market forces. In Bangladesh, foreign aid serves to bridge the gap between savings and investments and make up the deficits in the BALANCE OF PAYMENTS. Foreign aid is a major means of financing the country's economic development. Economic literature generally classifies foreign aid into four main types. First, the long-term loans usually repayable by the recipient country in foreign currency over ten or twenty years. Secondly, the soft loans repayable in local currency or in foreign currency but over a much longer period and with very low interest rates. The softest are the straight grants often given to the less developed countries. Sale of surplus products to a country in return for payment in the country's local currency, e.g., food aid from the USA under PL480, is the third type and finally, the technical assistance given to the developing countries comprises the fourth type of foreign aid.

Foreign aid is essentially economic aid and is provided on a governmental basis. In Bangladesh the standard practice is to treat only the loans received on concessional
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terms and grants as foreign aid. Excluded from the category are fund transfers in the form of military assistance, aid provided by foreign private agencies, suppliers credit, export credit, foreign portfolio investment, FOREIGN DIRECT INVESTMENT and hard-term borrowing with an interest rate of 5% and above and/or a repayment period of less than twelve years. The donors of foreign aid to Bangladesh include individual countries, multinational financial institutions and international agencies and organisations. Foreign aid to Bangladesh is classified on the basis of terms and conditions, source, and use. Accordingly, the various types foreign aid are loans and grants, or bilateral aid and multilateral aid, or food aid, commodity aid, project aid and technical assistance. Food aid is the supply of food from the donor countries and organisations or payment to suppliers of food to Bangladesh by them. Donor payments of costs associated with food supply such as transport, storage, distribution, etc. are also considered as food aid. Likewise, commodity aid represents donor funding of the acquisition of commodities including consumer items, intermediate inputs and industrial raw materials. Sale of food and commodities imported under aid arrangements generates a counterpart taka fund in the government treasury. Projects or activities implemented with the help of that fund also fall under food or commodity aid programmes. Major commodities imported into Bangladesh under commodity aid programmes are edible oil, seeds, FERTILISERs and chemicals. Project aid is the provision of grants and loans for the financing of project costs. It also finances the import of equipment and commodities related to projects. In Bangladesh project aid relates to a large extent to the financing of projects included in the ANNUAL DEVELOPMENT PROGRAMME (ADP). Technical Assistance, often seen as a part of project aid refers generally to foreign aid for the improvement of the institutional capacity, transfer of technology, import of expertise (foreign consultants and technicians), and development of human resources by providing training facilities, including foreign fellowships.

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Foreign aid to Bangladesh The emergence of Bangladesh as an independent state was accompanied by a devastation of the economy. In the very early years of independence, the country's industrial production had almost come to a halt, agricultural output had declined and the normal trading activities had virtually ceased. Without the help of the international community and massive inflow of foreign aid, it was almost impossible for the new nation to survive. Bangladesh started receiving foreign aid largely in the forms of food aid and disaster relief. Aid inflows gradually increased with growth in the country's development needs and along with the increase in volume, the aid became diversified. The aid committed to Bangladesh by donor countries and international agencies and organisations up to 30 June 1999 was $42.54 billion of which 14.08% was food aid, 24.42% was commodity aid and 61.50% was project aid. From a modest beginning with the disbursement of $270.8 million in 1972, the aid disbursed rose to $901.3 million in 1975, $1.27 billion in 1985, $1.81 billion in 1990 and $1.5 billion in 1999. Total foreign aid disbursed to Bangladesh during the period from 1972 up to 1999 amounted to $34.76 billion of which 48.2% was grants and 51.78% was loans. As a percentage of the country's GDP in current prices, foreign aid was 9.3% of the GDP in 1975, 7.0% in 1982, 6.76% in 1993, 4.53% in 1996, 3.67% in 1998 and 4.22% in 1999. The gradual decline in the foreign aid-GDP ratio during 1972 -99 despite the consistent increase in the volume of foreign aid took place because of the increase in GDP during the same period. The per capita GDP has increased from $102.98 in 1976/77 to $284.11 in 1998/99 but the per capita debt obligation of the country however, has increased from $6.59 in 1973/74 to $115.9 in 1998/99. The progressive increase in per capita debt obligation is partly attributable to a shrinking of the share of grant in the external aid package. Food aid received by Bangladesh in 1973 was $182.55 million; it doubled within two years and continued to remain at that level up to 1980, since when it showed a declining trend and the annual inflows remained well below
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the $200 million level. However, there had been some individual years when the food aid inflows were relatively higher because of greater food shortages due to natural calamities. Because of this and due to the higher amount of food aid inflows in the early years, the annual average inflow during 1972-1999 accounted for $216 million. The food aid inflows accounted for $187.48 million in 1990, $137.43 million in 1995 and $176.94 in 1999. The total food aid in the 27 years between 1972 and 1999 was 16.8% of the foreign aid of all types on a cumulative basis. Statistics of the 19-year period between 1981-82 and 1999-2000 indicate that on an average, the country had to import 2.09 million metric tons of food in a year, of which 50% of it came under food aid. Figures for the period 1992 - 2000, however, suggest that the average annual food import requirements were much higher, 2.4 million MT. The share of food aid in food imports during this period significantly declined and accounted for just 785,000 MT per year and on average, the country imported the additional 1.61 million MT every year under cash purchase. Nearly the whole (more than 99%) of the food aid disbursed to Bangladesh comes as wheat and all the food aid is committed and disbursed as grants. The leading food aid donors include the UN system (mainly, World Food Programme), the USA, EEC/EU, Canada, Japan and Australia. Commodity aid has been used in Bangladesh to meet the gap of balance of payments and also to generate local currency in the form of counterpart funds for financing development. The commitment of total commodity aid during 1972-1999 amounted to $10.39 billion, while disbursement was $10.09 billion and commodity aid accounted for 29% of total aid disbursement during the reference period. The disbursement of commodity aid continuously increased up to 1994 and then declined. The volume was $288.9 million in 1973, $378.48 million in 1980 and $456.71 in 1990, $333 million in 1995 and $324 million in 1999. Commodity aid received by Bangladesh is almost evenly distributed between grants and loans and during the 1990s, the average annual share of loans in commodity aid was 48%. Major commodity
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aid donors to Bangladesh Netherlands, UK and USA.

include

Japan,

Germany,

Project aid comprises the largest share of foreign aid inflows into Bangladesh. Total commitment of project aid to the country during 1972-1999 was $26.17 billion, of which $18.84 billion was disbursed during the same period. The share of project aid in the cumulative amount of foreign aid to Bangladesh in the reference period ($34.76 billion) accounted for 54.19%. Technical assistance claimed approximately 4% of the total aid disbursed over the period. On an average, 63% of the annual project aid was received as loan and the rest as grants. ADB, IDA, IFAD and OPEC are the major multilateral project aid donors and Japan is the single leader in the list of bilateral ones. Worth mentioning among others are France, Saudi Arabia and China. Over the years the share of food and commodity aid in the total foreign aid to Bangladesh declined, while that of project aid including technical assistance experienced a substantial increase. This was basically a demand pool phenomenon although donor driven projects also had some role in it. Three-fourths of the total ADP allocation of 1972-73 was supported by foreign aid. The share of foreign funds in financing ADP had dropped to about 64% in the first two years of the eighties but increased again to about 80% in the next three years. However, the situation has improved significantly in the 1990s, when dependence on aid in the implementation of development projects has been significantly reduced. The development budget of 2000-2001 planned to finance 43% of the total ADP expenditures by foreign aid. A major weakness of the government of Bangladesh is its historical inability to properly utilise project aid and for many years the project aid disbursement averaged less then 20% of the opening pipeline. This was due to delays in identification, preparation and approval of projects, slow release of funds, poor infrastructure support, inefficiency in project management, the tied nature of aid and institutional weaknesses in meeting donor conditionalities.

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There had been significant changes in the structure of aid to Bangladesh in the three decades after its independence. The share of grants was 89.0% in 1971-73 but it declined to 53.2% in 1979-80 and to 43.6% in 1998-99. Consequently, the aid volume contained increased amount of loans leading to increased debt-service liability. Bilateral aid, which was 73.9% of the total aid during 1971-76, has decreased to 42.6% in 1998-99 and accordingly the multilateral aid has increased from 26.1% to 57.4%. The share of food and commodity aid in the total flow of foreign aid showed a declining trend. Food aid has declined from 47.9% of total aid in 1971-72 to 11.5% in 1998-99. Similarly, commodity aid has fallen from 50.8% to 21.15% during the same period. And this has taken place along with a sharp increase in the share of project aid from just 1.35% in 1971-72 to 67.4% in 1988-99. A special group of the recipients of foreign aid in Bangladesh is the NON-GOVERNMENT ORGANISATIONs. They are receiving increasingly large amount of funds from donor agencies and organisations. These funds are almost exclusively grants and are channeled through the NGO Affairs Bureau of the government. According to the Bureau sources, the donor fund received by the NGOs up to 30 June 1999 amounted to $180 million. Most major donors of foreign aid to Bangladesh are now members of an Aid Consortium, often referred to as the Aid Group, which meets every year to review developments in the economy of Bangladesh and to pledge aid according to the judgements on its aid requirements. Members of the Aid Group include Australia, Belgium, Canada, Denmark, France, Finland, Germany, Italy, Japan, Netherlands, Norway, Sweden, Switzerland, UK, USA, IDA, ADB, EU, IFAD, UN agencies, the Ford Foundation and Asia Foundation. Non-Aid Group donors of foreign aid to Bangladesh include China, India, Kuwait, Pakistan, Saudi Arabia, South Korea, Spain, UAE, the IDB and OPEC.

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The aid package, covering both grants and loans, has undoubtedly contributed to the development of the economy, but it is also leading to growing indebtedness. The country's growing trade deficit and savings investment gap, slow growth of revenues and rapid growth of current public expenditure have contributed to the increase in public debt. The external borrowing of Bangladesh consists mainly of medium and long-term debt acquired from both bilateral and multilateral sources on concessional terms with an average grace period of 10 years and a repayment period of 20 years. Besides, there are loans from IMF and IDB, as well as other creditors for the purchase of crude oil, ships, aircraft and foodgrain on deferred payment terms. The country's debt obligation belongs mainly to the public sector. The share of private sector borrowing is negligible. The total public sector debt has increased from $501.4 million in 1973/74 to $14.84 billion in 1998/99. Debt service payments on the total public sector debt rose from $19.0 million in 1973/74 to $773.1 million in 1998/99. Bangladesh is facing an increasingly competitive aid environment. Donors often face budget constraints due to an increase in the number of countries requiring aid, especially after the collapse of the Soviet Union. Further, donors' assistance to Bangladesh is now contingent on implementation of reform programmes and efficient utilisation of foreign aid. Coordination with the donors has an important bearing on the mobilisation of economic assistance. It is secured through a variety of means such as holding frequent dialogues with the development partners and inter-ministerial consultations on a regular basis. Projects having co-financiers are usually more complex, and demand greater attention than those which are financed from a single source. [S M Mahfuzur Rahman]

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19.Export Credit Guarantee Scheme:

A government programmed implemented in Bangladesh since 1978 for providing various forms of INSURANCE against risks undertaken by the country's exporters. The principal risks covered include insolvency of the buyers and political restrictions delaying payment. The scheme was undertaken at the initiative of the Export Promotion Bureau and the ministries of commerce, industry and finance. A programmed of the same name was undertaken in Pakistan in 1962 and the basis was the experience of the Export Credit Guarantee Scheme first introduced in the United Kingdom in 1919. In Bangladesh, the scheme is administered by the SADHARAN BIMA CORPORATION, a state run general insurance enterprise. The scheme encourages exporters to initiate exports of new products and/or to enter new markets through covering the risk of insolvency of buyers and political risks inherent in FOREIGN TRADE. The scheme also provides a guarantee for bank loans taken by the exporters for meeting their financial needs during the production time and between exporting of goods and receiving of payment from foreign buyers. Exporters of Bangladesh can enjoy credit for a maturity of up to 180 days. During the period between 1990 and 1995, exporters of raw JUTE, jute goods, leather products, frozen foods, readymade garments, HANDICRAFTS and naphtha availed themselves of the facility of the scheme. Both preshipment and post-shipment guarantees are made. Risks covered include insolvency and protracted default. Percentage of cover is 75 to 80% in case of commercial and 95% in case of political risks. Guarantee issues during 1978-1995 numbered 5,223 covering an amount of Tk 64.23 billion. The premium income was Tk 2.28 billion, claims paid amounted to Tk 1.18 billion and claims outstanding accounted for Tk 1.64 billion. Claims relating to the Export Credit Guarantee Scheme are settled by a government appointed committee of

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ten members. The management, however, requires improved professional skill and manpower to run the scheme. The exporters and commercial banks also do not have adequate orientation. Proper functioning of the scheme is hampered by concerns about product quality and promptness of service delivery. [M Habibullah]

20.Balance of Payments:
It is a record of official estimates of all transactions between two countries during a year. It shows the sum total of all external transactions arising from export and import of goods and services and transfers, such as remittances and capital inflows and outflows (transactions on capital account). Bangladesh has experienced deficits in its BALANCE OF TRADE since its independence and the problem became chronic because of the country's heavy dependence on imports and at the same time, its requirement for running development programmes. The sharp increase in oil prices during the early 1970s enhanced the import payments for crude oil, petroleum products and FERTILISERs. Due to crop failures caused by devastating FLOODs that occurred off and on during the last three decades, Bangladesh had to import large amount of FOODGRAIN, which resulted in further deterioration of the balance of payments situation of the country. In addition, the terms of trade consistently deteriorated due to rising import prices and instability in export earnings, causing continuous deficits in trade accounts of balance of payments. Despite adoption of various export promotion measures and rising trend in wage earners remittances, the disequilibrium in the balance of payments position persisted. The increased liberalisation of the external sector during the 1990s might have worked as reason for widening the gap in the trade balance of the country.

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The BANGLADESH BANK prepares balance of payments positions (BOP) of the country following the IMF Balance of Payments Manual. The data are derived from various sources such as foreign exchange transaction records of authorised dealers, documents of the Ministry of Food on import of food grain by the government, documents of Ministry of Finance on imports financed through foreign loans and grants, and custom records for the preparation of BOP. The deficit in the current account of balance of payment in 1972-73 was $370 million. It rose to a record level at $1,003 million in 1974-75 or 7.08% of GDP. Bangladesh received a substantial amount of assistance under various facilities of the International Monetary Fund to correct her balance of payment disequilibrium position. The amount drawn by Bangladesh from IMF under a stand-by arrangement in June 1974 and July 1975 stood at SDR 93.75 million. Bangladesh received SDR 62.50 million under Compensatory Financing Facility for export shortfall in December 1972. This stand-by programme was attributed to declines in the current account deficit of $881 million or 12.33% of the GDP in 1975-76, to $439 million or 6.42% of the GDP in 1976-77. Devaluation of Bangladesh currency in terms of US dollar by 61% in May 1975 and further, by 10% and 11% within June to December 1975, and January to December, 1976, had a positive impact on the balance of payments situation of the country. Bangladesh also undertook other internal corrective measures during that period like adoption of restrictive monetary and fiscal policies. These were reflected in the raising of bank rate from 5% to 8%, reduction of subsidies, and upward adjustment of prices of some public utilities. Along with these measures, policies for export promotion and import substitution were undertaken by the government to correct imbalances in payments situation. The current account deficit of BOP of Bangladesh reached $1,436 million or 11.23% of the GDP in 1979-80, but

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gradually declined to $1,055 million or 6.85% of the GDP in 1985-86, and further to $981 million, or 4.19% of the GDP in 1990-91. Bangladesh's drawings from the IMF continued to increase. These drawings during the period from 1976 to 1982 amounted to SDR 689.39 million under various facilities viz., Compensatory Financing Facilities, Oil Facilities, Trust Fund Facilities, Stand-by Arrangements and Extended Fund Facilities. The adjustment policies that Bangladesh pursued under various facilities of the IMF brought about some positive changes in the economy. The aggregate demand management policies initiated by IMF through streamlining fiscal and monetary systems proved largely successful. The exchange rate and interest rate policies of Bangladesh brought about positive results. The Fund's arrangements for high conditional loans also worked as a 'seal of approval' for enhanced foreign assistance to Bangladesh. Bangladesh entered into Structural Adjustment Facility with IMF in February 1987 and into Enhanced Structural Adjustment Facility in August 1990 to improve her balance of payments position. Bangladesh also received emergency assistance from IMF in November 1998. The current account deficit during the 1990s did not pose a serious problem for Bangladesh. The deficit in the current account declined from $981 million, or 4.19% of the GDP in 1990-91, to $664 million, or 2.28% of the GDP in 1994-95, but rose to $1,291 million, or 4.05% of the GDP in 1995-96. Thereafter, this deficit continued to decline till 19992000. Notable developments that have taken place in Bangladesh during the 1990s include a continued trade liberalisation policy and implementation of the Financial Sector Reforms Programme. A liberal Import Policy Order for 1995-97 was put into effect to remove quantitative restrictions on imports. A fairly liberal five-yearly trade policy became effective from July 1998. Average nominal tariff rate declined from 57% in 1991-92 to 20% in 1997-98 and further, to 16% in 1999-2000. The highest decline in tariff rate was from 90% in 1991-92 to 37.5% in 2000-2001.

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Despite liberalisation of import trade of the country, improvements in current account deficit continued during the late 1990s due mainly to increase in export receipts, decline in deficits in services account, and increase in wage earner's remittances. The net position under services' account became positive in 1996-97 and continued to be so till 1999-2000. The wage earners remittances recorded increase from $555 million in 1985-86 to $764 million in 1990-91, to $1,217 million in 1995-96, and further to $1,947 million in 1999-2000.

*** Foreign exchange market:

The foreign exchange (currency or forex or FX) market existswhereverone currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3 trillion.

01.Market size and liquidity:

The foreign exchange market is unique because of

its trading volumes, the extreme liquidity of the market, the large number of, and variety of, traders in the market, its geographical dispersion, its long trading hours: 24 hours a day (except on weekends), the variety of factors that affect exchange rates.

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the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)

Foreign exchange market turnover, 1998 - 2007, measured in millions of USD. As such, it has been referred to as the market closest to the ideal perfect competition. According to the BIS,[1] average daily turnover in traditional foreign exchange markets is estimated at $3.21 trillion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below: This $3.21 trillion in global foreign exchange "traditional" turnover was broken down as follows:

market

$1,005 billion in spot transactions $362 billion in outright forwards $1,714 billion in forex swaps $129 billion estimated gaps in reporting

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In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20). Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the worlds equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market. Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. RPP The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask

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(sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 03 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of currency, which is a standard "lot". These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.

02.Market participants:
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the line (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53%
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of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s. (2004) In addition, he notes, Hedge funds have grown markedly over the 20012004 period in terms of both number and overall size Central banks also participate in the forex market to align currencies to their economic needs.

Source: Euromoney FX survey[3] Top 10 Currency Traders % of overall volume, May 2007 Rank 1 2 3 4 5 6 7 8 9 10 UBS AG Citi Royal Bank of Scotland Barclays Capital Bank of America HSBC Goldman Sachs JPMorgan Morgan Stanley

Name

Volume

Deutsche Bank

19.30% 14.85% 9.00% 8.90% 8.80% 5.29% 4.36% 4.14% 3.33% 2.86%

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There are various Market Participants of Bangladesh Bank this are under bellow:

2.1.Banks:
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

2.2.Commercial companies:
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

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2.3.Central banks:
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[4] Several scenarios of this nature were seen in the 199293 ERM collapse, and in more recent times in Southeast Asia.

2.4.Investment management firms:

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities.
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Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization. Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.

2.5.Hedge funds:
Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

2.6.Retail forex brokers:

There are two types of retail broker: brokers offering speculative trading and brokers offering physical delivery i.e. the bought currency is delivered to a bank account. Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $2550 billion daily, which is about 2% of the whole market. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks, and might be subject to forex scams[5] [6].

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03.Trading characteristics:
There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is not a single dollar rate but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism. The main trading centers are in London, New York, Tokyo, Hong Kong and Singapore, but banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends. There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow. Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217

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international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.3045 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair. The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ. On the spot market, according to the BIS study, the most heavily traded products were:

EUR/USD: 28 % USD/JPY: 18 % GBP/USD (also called sterling or cable): 14 %

and the US currency was involved in 88.7% of transactions, followed by the euro (37.2%), the yen (20.3%), and the sterling (16.9%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers. Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus far still largely dollarcentered. For instance, trading the euro versus a nonEuropean currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.

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Most traded currencies[1] Currency distribution of reported FX market turnover % daily share (April 2004)

Rank

Currency

ISO 4217 code (Symbol)

1 2 3 4 5 6 7 8 9 10

United States dollar Euro Japanese yen British pound sterling Swiss franc Australian dollar Canadian dollar Swedish krona Hong Kong dollar Norwegian krone

USD ($) EUR () JPY () GBP () CHF (Fr) AUD ($) CAD ($) SEK (kr) HKD ($) NOK (kr) Other Total

88.7% 37.2% 20.3% 16.9% 6.1% 5.5% 4.2% 2.3% 1.9% 1.4% 15.5% 200%

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04.Factors affecting currency trading:

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange. Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology. There are various facyors affecting currency trading these are under bellow:

4.1.Economic factors:
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators. Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).

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Economic conditions include:

Government budget deficits or surpluses:
The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends:

The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends:

Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise shortterm interest rates to combat rising inflation.

Economic growth and health:

Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

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4.2.Political conditions:
Internal, regional, and international political conditions and events can have a profound effect on currency markets. For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

4.3.Market psychology:
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality:
Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.

Long-term trends:
Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [7] "Buy the rumor, sell the fact: " This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the

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opposite direction. This may also be referred to as a market being "oversold" or "overbought".[8] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.

Economic numbers:
While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations:

As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns. [9]

05.Algorithmic trading in forex: Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.

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06.Financial instruments:
Ther are difference financial instruments of Bangladesh Bank. These are under bellows:

6.1.Spot:
A spot transaction is a two-day delivery transaction, as opposed to the futures contracts, which are usually three months. This trade represents a direct exchange between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreedupon transaction. The data for this study come from the spot market. Spot has the largest share by volume in FX transactions among all instruments.

6.2. Forward:
One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years.

6.3. Future:
Main article: Currency future. Foreign currency futures are forward transactions with standard contract sizes and maturity dates for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

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6.4.Swap:
Main article: Forex swap. The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.

6.5.Option:
Main article: Foreign exchange option A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

6.7.Exchange Traded Fund:

Main article: Exchange-traded fund Exchange-traded funds (or ETFs) are Open Ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (e.g. SPY), but recently they are now replicating investments in the currency markets with the ETF increasing in value when the US Dollar weakness versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus the US Dollar, and increase in value

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directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar denominated investors and speculators.

07.Speculation:
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) have argued that speculators perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph Stiglitz) however, may consider this argument to be based more on politics and a free market philosophy than on economics. Large hedge funds and other well capitalized "position traders" are the main professional speculators. Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.[10] Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit. In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their
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national economies, and forex speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. Given that Malaysia recovered quickly after imposing currency controls directly against IMF advice, this view is open to doubt.

*** Currency :

A currency is a unit of exchange, facilitating the transfer of goods and/or services. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value. A currency is the dominant medium of exchange. To facilitate trade between currency zones, there are exchange rates, which are the prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. Currencies can be classified as either floating currencies or fixed currencies based on their exchange rate regime. In common usage, currency sometimes refers to only paper money, as in coins and currency, but this is misleading. Coins and paper money are both forms of currency.

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In most cases, each country has monopoly control over the supply and production of its own currency. Member countries of the European Union's Economic and Monetary Union are a notable exception to this rule, as they have ceded control of monetary policy to the European Central Bank. In cases where a country does have control of its own currency, that control is exercised either by a central bank or by a Ministry of Finance. In either case, the institution that has control of monetary policy is referred to as the monetary authority. Monetary authorities have varying degrees of autonomy from the governments that create them. In the United States, the Federal Reserve System operates without direct interference from the legislative or executive branches. It is important to note that a monetary authority is created and supported by its sponsoring government, so independence can be reduced or revoked by the legislative or executive authority that creates it. However, in practical terms, the revocation of authority is not likely. In almost all Western countries, the monetary authority is largely independent from the government. Several countries can use the same name, each for their own currency (e.g. Canadian dollars and United States dollars), several countries can use the same currency (e.g. the euro), or a country can declare the currency of another country to be legal tender. For example, Panama and El Salvador have declared U.S. currency to be legal tender, and from 1791-1857, Spanish silver coins were legal tender in the United States. At various times countries have either restamped foreign coins, or used currency board issuing one note of currency for each note of a foreign government held, as Ecuador currently does. Each currency typically has one fractional currency, often valued at 1100 of the main currency: 100 cents = 1 dollar, 100 centimes = 1 franc, 100 pence = 1 pound. Units of 110 or 11000 are also common, but some currencies do not have any smaller units. Mauritania and Madagascar are the

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only remaining countries that do not use the instead, the Mauritanian ouguiya is divided while the Malagasy ariary is divided into However, due to inflation, both fractional practice fallen into disuse. .

decimal system; into 5 khoums, 5 iraimbilanja. units have in

01.History:
1.1.Early currency:
The origin of currency is the creation of a circulating medium of exchange based on a unit of account which quickly becomes a store of value. Currency evolved from two basic innovations: the use of counters to assure that shipments arrived with the same goods that were shipped, and later with the use of silver ingots to represent stored value in the form of grain. Both of these developments had occurred by 2000 BC. Originally money was a form of receipting grain stored in temple granaries in ancient Egypt and Mesopotamia. This first stage of currency, where metals were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the Fertile Crescent for over 1500 years. However, the collapse of the Near Eastern trading system pointed to a flaw: in an era where there was no place that was safe to store value, the value of a circulating medium could only be as sound as the forces that defended that store. Trade could only reach as far as the credibility of that military. By the late Bronze Age, however, a series of international treaties had established safe passage for merchants around the Eastern Mediterranean, spreading from Minoan Crete and Mycenae in the North West to Elam and Bahrein in the South East. Although it is not known what functioned as a currency to facilitate these exchanges, it is thought that ox-hide shaped ingots of copper, produced in Cyprus may have functioned as a currency.

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It is thought that the increase in piracy and raiding associated with the Bronze Age collapse, possibly produced by the Peoples of the Sea, brought this trading system to an end. It was only with the recovery of Phoenician trade in the ninth and tenth centuries, that saw a return to prosperity, and the appearance of real coinage, possibly first in Anatolia with Croesus of Lydia and subsequently with the Greeks and Persians. In Africa many forms of value store have been used including beads, ingots, ivory, various forms of weapons, livestock, the manilla currency, ochre and other earth oxides, and so on. The manilla rings of West Africa were one of the currencies used from the 15th century onwards to buy and sell slaves. African currency is still notable for its variety, and in many places various forms of barter still apply.

1.2.Coinage:
These factors led to the shift of the store of value being the metal itself: at first silver, then both silver and gold. Metals were mined, weighed, and stamped into coins. This was to assure the individual taking the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but they also created a new unit of account, which helped lead to banking. Archimedes' principle was that the next link in currency occurred: coins could now be easily tested for their fine weight of metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with (see Numismatics). In most major economies using coinage, copper, silver and gold formed three tiers of coins. Gold coins were used for large purchases, payment of the military and backing of state activities. Silver coins were used for large, but common, transactions, and as a unit of account for taxes, dues, contracts and fealty, while copper coins represented the coinage of common transaction. This system had been used in ancient India since the time of the Mahajanapadas. In Europe,

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this system worked through the medieval period because there was virtually no new gold, silver or copper introduced through mining or conquest. Thus the overall ratios of the three coinages remained roughly equivalent.

1.3.Era of hard and credit money:

In premodern China, the need for credit and for circulating a medium that was less of a burden than exchanging thousands of copper coins led to the introduction of paper money, commonly known today as banknotes. This economic phenomenon was a slow and gradual process that took place from the late Tang Dynasty (618-907) into the Song Dynasty (960-1279). It began as a means for merchants to exchange heavy coinage for receipts of deposit issued as promissory notes from shops of wholesalers, notes that were valid for temporary use in a small regional territory. In the 10th century, the Song Dynasty government began circulating these notes amongst the traders in their monopolized salt industry. The Song government granted several shops the sole right to issue banknotes, and in the early 12th century the government finally took over these shops to produce stateissued currency. Yet the banknotes issued were still regionally-valid and temporary; it was not until the mid 13th century that a standard and uniform government issue of paper money was made into an acceptable nationwide currency. The already widespread methods of woodblock printing and then Bi Sheng's movable type printing by the 11th century was the impetus for the massive production of paper money in premodern China. At around the same time in the medieval Islamic world, a vigorous monetary economy was created during the 7th-12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (the dinar). Innovations introduced by Muslim economists, traders and merchants include the earliest uses of credit,[1] cheques, promissory notes,[2] savings accounts, transactional accounts,
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loaning, trusts, exchange rates, the transfer of credit and debt,[3] and banking institutions for loans and deposits.[4] In Europe paper money was first introduced in Sweden in 1661. Sweden was rich in copper, thus, because of copper's low value, extraordinarily big coins (often weighing several kilograms) had to be made. Because the coin was so big, it was probably more convenient to carry a note stating your possession of such a coin than to carry the coin itself. The advantages of paper currency were numerous: it reduced transport of gold and silver, and thus lowered the risks; it made loaning gold or silver at interest easier, since the specie (gold or silver) never left the possession of the lender until someone else redeemed the note; and it allowed for a division of currency into credit and specie backed forms. It enabled the sale of stock in joint stock companies, and the redemption of those shares in paper. However, these advantages held within them disadvantages. First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more of it than they had specie to back it with. Second, because it created money that did not exist, it increased inflationary pressures, a fact observed by David Hume in the 18th century. The result is that paper money would often lead to an inflationary bubble, which could collapse if people began demanding hard money, causing the demand for paper notes to fall to zero. The printing of paper money was also associated with wars, and financing of wars, and therefore regarded as part of maintaining a standing army. For these reasons, paper currency was held in suspicion and hostility in Europe and America. It was also addictive, since the speculative profits of trade and capital creation were quite large. Major nations established mints to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.

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1.4.Legal tender era:

With the creation of central banks, currency underwent several significant changes. During both the coinage and credit money eras the number of entities which had the ability to coin or print money was quite large. One could, literally, have "a license to print money"; many nobles had the right of coinage. Royal colonial companies, such as the Massachusetts Bay Company or the British East India Company could issue notes of creditmoney backed by the promise to pay later, or exchangeable for payments owed to the company itself. This led to continual instability of the value of money. The exposure of coins to debasement and shaving, however, presented the same problem in another form: with each pair of hands a coin passed through, its value grew less. The solution which evolved beginning in the late 18th century and through the 19th century was the creation of a central monetary authority which had a virtual monopoly on issuing currency, and whose notes had to be accepted for "all debts public and private". The creation of a truly national currency, backed by the government's store of precious metals, and enforced by their military and governmental control over an area was, in its time, extremely controversial. Advocates of the old system of Free Banking repealed central banking laws, or slowed down the adoption of restrictions on local currency. (See Gold standard for a fuller discussion of the creation of a standard gold based currency). At this time both silver and gold were considered legal tender, and accepted by governments for taxes. However, the instability in the ratio between the two grew over the course of the 19th century, with the increase both in supply of these metals, particularly silver, and of trade. This is called bimetallism and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of inflationists. Governments at this point could use currency as an instrument of policy,

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printing paper currency such as the United States Greenback, to pay for military expenditures. They could also set the terms at which they would redeem notes for specie, by limiting the amount of purchase, or the minimum amount that could be redeemed. By 1900, most of the industrializing nations were on some form of gold standard, with paper notes and silver coins constituting the circulating medium. Governments too followed Gresham's Law: keeping gold and silver paid, but paying out in notes.

1.5.Paper money era:

Main articles: Banknote and Fiat currency A banknote (more commonly known as a bill in the United States and Canada) is a type of currency, and commonly used as legal tender in many jurisdictions. With coins, banknotes make up the cash form of all modern money.

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02.Modern currencies:

Currently, the International Organization for Standardization has introduced a three-letter system of codes (ISO 4217) to define currency (as opposed to simple names or currency signs), in order to remove the confusion that there are dozens of currencies called the dollar and many called the franc. Even the pound is used in nearly a dozen different countries, all, of course, with wildly differing values. In general, the three-letter code uses the ISO 3166-1 country code for the first two letters and the first letter of the name of the currency (D for dollar, for instance) as the third letter. The International Monetary Fund uses a variant system when referring to national currencies. For exchange rates, see exchange rate and table of historical exchange rates.

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03.Privately issued currencies:

Main article: Private currency From the earliest times token coins were issued by companies in remote parts of the world to overcome the shortage of circulating currency. Several large companies issue points to their customers, to be redeemed for products and services produced by that company. Often, a network of companies will join to share in the offering and redemption of points. While these can hardly be considered stable currency systems, they present many of the same features as "legitimate" currency: they are a store of value, issued in discrete units; they are controlled by a central issuing authority; and they have varying rates of exchange with other forms of currency. For example, frequent flyer miles can be bought using U.S. dollars.

*** Banknote:
A banknote (often known as a bill or simply a note) is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. Along with coins, banknotes make up the cash or bearer forms of all modern money. With the exception of non-circulating high-value or precious metal commemorative issues, coins are generally used for lower valued monetary units, while banknotes are used for higher values.

01. Advantages of Banknotes:

Originally, precious and semi-precious metals were formed into coins and were used to negotiate and settle trades. Banknotes offer an alternative bearer form of money, but the advantages and disadvantages between the two forms of
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bearer money are complex and so in different circumstances the overall advantage can lie with either form. The costs of using bearer money include: The different advantages and disadvantages between coins and banknotes imply that there may be an ongoing role for both forms of bearer money, each being used where its advantages outweigh its disadvantages.

02.Convertibility:
The ability to exchange a note for some other kind of value is called "convertibility". For example a US silver certificate was "payable in silver on demand" from the treasury until 1965. If a note is payable on demand for a fixed unit, it is said to be fully convertible to that unit. Limited convertibility occurs when there are restrictions in the time, place, manner or amount of exchange. A common misconception is that a bank note that is inconvertible is necessarily unbacked (so-called "fiat money"). Most of the confusion centers around the failure to distinguish between two types of convertibility: The importance of financial convertibility can be seen by imagining that people in a community one day find themselves with more paper currency than they wish to hold for example, when the main shopping season has ended. If the paper currency is physically convertible (for one ounce of silver, let us suppose), people will return the unwanted paper currency to the bank in exchange for silver, but the bank could head off this demand for silver by selling some of its own bonds to the public in exchange for its own paper currency. For example, if the community has 100 units of unwanted paper money, and if people intend to redeem the unwanted
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100 units for silver at the bank, the bank could simply sell 100 units worth of bonds or other assets in exchange for 100 units of its own paper currency. This will soak up the unwanted paper and head off people's desire to redeem the 100 units for silver. Thus, by conducting this type of open market operation selling bonds when there is excess currency and buying bonds when there is too little the bank can maintain the value of the paper currency at one ounce of silver without ever redeeming any paper currency for silver. In fact, this is essentially what all modern central banks do, and the fact that their currencies might be physically inconvertible is made irrelevant by the maintenance of financial convertibility. Note that financial convertibility cannot be maintained unless the bank has sufficient assets to back the currency it has issued. Thus, it is an illusion that any physically inconvertible currency is necessarily also unbacked.

03.History:
Paper money originated in two forms: drafts, which are receipts for value held on account, and "bills", which were issued with a promise to convert at a later date. Money is based on the coming to pre-eminence of some commodity as payment. The oldest monetary basis was for agricultural capital: cattle and grain. In Ancient Mesopotamia, drafts were issued against stored grain as a unit of account. A "drachma" was a weight of grain. Japan's feudal system was based on rice per year koku. At the same time, legal codes enforced the payment for injury in a standardized form, usually in precious metals. The development of money then comes from the role of agricultural capital and precious metals having a privileged place in the economy.

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Such drafts were used for giro systems of banking as early as Ptolemaic Egypt in the first century BC. The perception of banknotes as money has evolved over time. Originally, money was based on precious metals. Banknotes were seen as essentially an I.O.U. or promissory note: a promise to pay someone in precious metal on presentation (see representative money). With the gradual removal of precious metals from the monetary system, banknotes evolved to represent credit money, or (if backed by the credit of a government) also fiat money. Generally, a central bank or treasury is solely responsible within a state or currency union for the issue of banknotes. However, this is not always the case, and historically the paper currency of countries was often handled entirely by private banks. Thus, many different banks or institutions may have issued banknotes in a given country. For example, by virtue of the complex constitutional setup in the United Kingdom, two of the union's four constituent countries (Scotland and Northern Ireland) continue to print their own banknotes for domestic circulation (even though they are not fiat money or declared in law as legal tender anywhere), with the UK's central bank (the Bank of England) printing notes which are legal tender in England and Wales, and are also usable as money in the rest of the UK.

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Song Dynasty Jiaozi, the world's earliest paper money

3.1.First banknotes in the world:

The use of paper money as a circulating medium is intimately related to shortages of metal for coins. In ancient China coins were circular with a rectangular hole in the middle. Several coins could be strung together on a rope. Merchants in China, if they became rich enough, found that their strings of coins were too heavy to carry around easily. To solve this problem, coins were often left with a trustworthy person, and the merchant was given a slip of paper recording how much money he had with that person. If he showed the paper to that person he could regain his money. Eventually from this paper money "jiaozi" originated. In the 600s there were local issues of paper currency in China and by 960 the Song Dynasty, short of copper for striking coins, issued the first generally circulating notes. A note is a promise to redeem later for some other object of value, usually specie. The issue of credit notes is
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often for a limited duration, and at some discount to the promised amount later. The jiaozi nevertheless did not replace coins during the Song Dynasty; paper money was used alongside the coins. The successive Yuan Dynasty was the first dynasty in China to use paper currency completely as the circulating medium. The original notes during the Yuan Dynasty were restricted in area and duration as in the Song Dynasty, but in the later course of the dynasty, facing massive shortages of specie to fund their ruling in China, began printing paper money without restrictions on duration. By 1455, in an effort to rein in economic expansion and end hyperinflation, the new Ming Dynasty ended paper money, and closed much of Chinese trade.

3.2.Banknotes in Europe:
In Europe the first paper money consisted of paper 'coins' issued in Protestant Leyden (today, Leiden) in the Netherlands during the Spanish siege of 1574. Over 5000 of the estimated 14,000 residents of Leyden died, mostly due to starvation. Even leather (often used to create emergency currency) was boiled and used to feed the people. So to create currency, the residents took covers and paper from hymnals and church missives and created paper planchets, which were struck using the same dies that were previously used to mint coins. The first proper European banknotes were issued by Stockholms Banco, a predecessor of the Bank of Sweden, in 1660, although the bank ran out of coins to redeem its notes in 1664 and ceased operating in that year.

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3.3.Banknotes in the Americas:

Banknotes are often kept in wallets. Emergency paper money hand-written on playing cards was used in French Canada from 1685. In the early 1690s, the Massachusetts Bay Colony was the first of the colonies to issue permanently circulating banknotes. The use of fixed denominations and printed banknotes came into use in the 18th century. In the United States, public acceptance of banknotes in replacement of precious metals was hastened in part by Executive Order 6102. This order carried the threat of a maximum $10,000 fine and a maximum of ten years in prison for anyone who kept more than $100 of gold in preference to banknotes. Similar measures were taken worldwide[citation needed], with similar results.

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04.Materials used for banknotes:

There are various materials used for banknote. These are under bellows:

4.1.Paper banknotes:
Most banknotes are made of dense 80 to 90 grams per square meter cotton paper (see also paper), sometimes mixed with linen, abaca, or other textile fibres. Generally, the paper used is different from ordinary paper: it is much more resilient, resists wear and tear, and also does not contain the usual agents that make ordinary paper glow slightly under ultraviolet light. Early Chinese banknotes were printed on paper made of mulberry bark and this fibre is used in Japanese banknote paper today. Unlike most printing and writing paper, banknote paper is impregnated with polyvinyl alcohol or gelatin to give it extra strength. Most banknotes are made using the mould made process in which a watermark and thread is incorporated during the paper forming process. The thread is a simple looking security component found in most banknotes. It is however often rather complex in construction comprising fluorescent, magnetic, metallic and micro print elements. By combining it with watermarking technology the thread can be made to surface periodically on one side only. This is known as windowed thread and further increases the counterfeit resistance of the banknote paper. This process was invented by Portals, part of the De La Rue group in the UK. Recently this company has introduced many new features to the banknote world including Cornerstone, Platinum and Optiks, all registered trade marks of De La Rue.
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Cornerstone uses watermarking to reduce the number of corner folds by strengthening this part of the note. Platinum is a special coating to reduce the dirt picked up by banknotes. Optiks is a new thread based security feature that creates a plastic window in the paper which is very hard to copy.

4.2.Durable banknote papers:

Banknote paper with enhanced durability is a recent development, designed to meet the growing need for popular low-denomination banknotes to withstand extreme wear. Improved protection against dirt: Manufacturers of banknote paper were quick to recognize the problems associated with dirt and developed a special paper with a thin layer of varnish on the surface to repel soiling. This layer is applied directly to the substrate. The thickness and structure of the paper remain unchanged, thereby preserving the natural feel. The so-called Durable Banknote Papers, which are available in the global banknote market under brand names, such as LongLife, Platinum, Marathon Coated, Diamone, and Flesure, protect banknotes from soiling and environmental incluences, making it possible for them to remain in circulation for longer. Increased mechanical stability: With new products, such as Synthec and Diamone Composite, banknote manufacturers have gone a step further and responded to the growing demand for higher mechanical stability of the paper because the longer a banknote stays in circulation, the limper it becomes and the more easily it tears. Synthec substrate, for example, consists of 80 percent cotton fiber and 20 percent synthetic fiber, with the latter being longer and more flexible than the former. The synthetic fibers constitute a dense network within the cotton fiber structure, supporting the banknote like a kind of corset and increasing its mechanical stability. This practically doubles the useful life of the product.
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Synthec is much less sensitive to climate fluctuations than standard banknote paper. The synthetic fibers are incorporated in the banknote substrate at the sheet formation stage. This has the advantage that all established security featuressuch as three dimensional watermarks, fluorescent fibers, security threads, or the innovative new varifeye seethrough windowcan be integrated into the new Synthec substrate, just as they would be with the standard cotton substrate. Optically variable effect inks and foil elements, such as holograms, can be applied to this substrate in the same way as with traditional banknote paper. Public confidence in the established security features, built up over decades, remains intact. To ensure that the banknotes are also protected against dirt, they are given a standard coating of varnish. By the end of 2007, Synthec banknotes will be circulating in three countries, including an African country with different climate zones that has chosen Synthec as a substrate for its lowest-denomination note. In the south of the country conditions are tropical, with a rainy season that lasts for eight months, while the north is very arid and extremely hot, with temperatures reaching 41 degrees Celsius.

4.3. Counterfeiting and security measures on paper banknotes:

The ease with which paper money can be created, by both legitimate authorities and counterfeiters, has led both to a temptation in times of crisis such as war or revolution to produce paper money which was not supported by precious metal or other goods, thus leading to hyperinflation and a loss of faith in the value of paper money, e.g. the Continental Currency produced by the Continental Congress during the American Revolution, the Assignats produced during the French Revolution, the paper currency produced by the Confederate States of America and the Individual States of the
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Confederate States of America, the financing of the First World War by the Central Powers (by 1922 1 gold Austro-Hungarian krone of 1914 was worth 14,400 paper Kronen), the devaluation of the Yugoslav Dinar in the 1990s, etc. Banknotes may also be overprinted to reflect political changes that occur faster than new currency can be printed. In 1988, Austria produced the 5000 Schilling banknote (Mozart), which is the first foil application (Kinegram) to a paper banknote in the history of banknote printing. The application of optical features is now in common use throughout the world. Many countries' banknotes now have embedded holograms.

4.4. Polymer banknotes:

In 1983, Costa Rica and Haiti issued the first Tyvek and the Isle of Man issued the first Bradvek polymer (or plastic) banknotes; these were printed by the American Banknote Company and developed by DuPont. In 1988, after significant research and development by the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Reserve Bank of Australia, Australia produced the first polymer banknote made from biaxially-oriented polypropylene (plastic), and in 1996 became the first country to have a full set of circulating polymer banknotes of all denominations. Since then, other countries to adopt circulating polymer banknotes include Bangladesh, Brazil, Brunei, Chile, Indonesia, Malaysia, Mexico, Nepal, New Zealand, Papua and New Guinea, Romania, Singapore, the Solomon Islands, Sri Lanka, Thailand, Viet Nam, Western Samoa and Zambia, with other countries issuing commemorative polymer notes, including China, Kuwait, the Northern Bank of Northern Ireland, Taiwan. Other countries indicating plans to issue polymer banknotes include Nigeria. In 2005, Bulgaria issued the world's first hybrid paper-polymer banknote.

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Polymer banknotes were developed to improve durability and prevent counterfeiting through incorporated security features, such as optically variable devices that are extremely difficult to reproduce. The uptake of polymer banknotes has however been comparatively slow with an estimated 1.5% of the Worlds banknotes now using this material. Problems with print durability and the very bulky nature of creased polymer notes rank high amongst the problems limiting polymer uptake. Some countries such as Sri Lanka and Thailand have reverted to paper after testing polymer notes in circulation.

4.5.Other materials:
Over the years, a number of materials other than paper have been used to print banknotes. This includes various textiles, including silk, and materials such as leather. Silk and other fibers have been commonly used in the manufacture of various banknote papers, intended to provide both additional durability and security. Crane and Company patented banknote paper with embedded silk threads in 1844 and has supplied paper to the United States Treasury since 1879. Banknotes printed on pure silk "paper" include "emergency money" (Notgeld) issues from a number of German towns in 1923 during a period of fiscal crisis and hyperinflation. Most notoriously, Bielefeld produced a number of silk, leather, velvet, linen and wood issues, and although these issues were produced primarily for collectors, rather than for circulation, they are in demand by collectors. Banknotes printed on cloth include a number of Communist Revolutionary issues in China from areas such as Xinjiang, or Sinkiang, in the United Islamic Republic of East Turkestan in 1933. Emergency money was also printed in 1902 on khaki shirt fabric during the Boer War.

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Leather banknotes (or coins) were issued in a number of sieges, as well as in other times of emergency. During the Russian administration of Alaska, banknotes were printed on sealskin. A number of 19th century issues are known in Germanic and Baltic states, including the towns of Dorpat, Pernau, Reval, Werro and Woisek. In addition to the Bielefeld issues, other German leather Notgeld from 1923 is known from Borna, Osterwieck, Paderborn and Pneck. Other issues from 1923 were printed on wood, which was also used in Canada in 1763-1764 during Pontiac's War, and by the Hudson's Bay Company. In 1848, in Bohemia, wooden checkerboard pieces were used as money. Even playing cards were used for currency in France in the early 19th Century, and in French Canada from 1685 until 1757, in the Isle of Man in the beginning of the 19th Century, and again in Germany after World War I.

05.Vending machines and banknotes:

People are not the only economic actors who are required to accept banknotes. In the late twentieth century machines were designed to recognize banknotes of the smaller values long after they were designed to recognize coins distinct from slugs. This capability has become inescapable in economies where inflation has not been followed by introduction of progressively larger coin denominations (such as the United States, where several attempts to introduce dollar coins in general circulation have largely failed). The existing infrastructure of such machines presents one of the difficulties in changing the design of these banknotes to make them less counterfeitable, that is, by adding additional features so easily discernable by people that they would immediately reject banknotes of inferior quality, for every machine in the country would have to be updated.

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06. Destruction:
Banknotes have a limited lifetime, after which they are collected for destruction, usually recycling or shredding. A banknote is removed from the money supply by banks or other financial institutions due to everyday wear and tear from its handling. Banknote bundles are passed through a sorting machine that determines whether a particular note needs to be shredded, or are removed from the supply chain by a human inspector if they are deemed unfit for continued use for example, if they are mutilated or torn. Counterfeit banknotes are destroyed unless they are needed for evidentiary or forensic purposes. Contaminated banknotes are also Canadian government report indicates: decommissioned. A

Types of contaminants include: notes found on a corpse, stagnant water, contaminated by human or animal body fluids such as urine, feces, vomit, infectious blood, fine hazardous powders from detonated explosives, dye pack and/or drugs..

These are removed from circulation primarily to prevent the spread of diseases. When taken out of circulation, Australian bank notes are melted down and mixed together to form plastic garbage bins.

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Banknotes from all around the world donated by visitors to the British Museum, London.

07.Paper money collecting as a hobby:

Banknote collecting, or Notaphily, is a rapidly growing area of numismatics. Although generally not as widespread as coin and stamp collecting, the hobby is increasingly expanding. Prior to the 1990s, currency collecting was a relatively small adjunct to coin collecting, but the practice of currency auctions, combined with larger public awareness of paper money have caused a boom in interest and values of rare banknotes. In the 1950s, Robert Friedberg published the landmark book Paper Money of the United States. Friedberg devised an organizing number system of all types of U.S. banknotes; the system is widely accepted among collectors and dealers to this day, and the volume has been regularly updated.

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Another pioneer of cataloguing banknotes was Albert Pick, a well-known German notaphilist (born 15 May 1922 in Cologne) who published a number of catalogs of European paper money, and, in 1974, the first Standard Catalog of World Paper Money. His collection of over 180,000 banknotes was eventually housed at the Bavarian Mortgages and Exchange Bank (Bayerischen Hypotheken- und Wechselbank, now HypoVereinsbank). This catalog underwent several incarnations, and currently is published as a three volume group. Volume I, called Specialized Issues, includes notes issued by local authorities, which circulated in a limited area. Volume II called General Issues covers notes issued on a national scope, dated 1368 through 1960. Volume III covers Modern Issues dated 1960 to present. Each of the volumes is updated regularly, with Volume III now updated every year, Volumes I and II every 3 or so years. While Pick no longer edits the catalogs (since 1994 the honor has passed to George S. Cuhaj), the catalogs are still commonly referred to as 'Pick Catalogs' and dealers and collectors alike refer to banknotes by their 'Pick number.' Current issues of the three volumes include:
For years, the mode of collecting banknotes was through a handful of mail order dealers who issued price lists and catalogs. In the early 1990s, it became more common for rare notes to be sold at various coin and currency shows via auction. The illustrated catalogs and "event nature" of the auction practice seemed to fuel a sharp rise in overall awareness of paper money in the numismatic community. Entire advanced collections are often sold at one time, and to this day single auctions can generate well in excess of $1 million dollars in gross sales. Today, eBay has surpassed auctions in terms of highest volume of sales of banknotes. However, as of 2005, rare banknotes still sell for much less than comparable rare coins. There is wide consensus in the paper money collecting arena that this disparity is diminishing as paper money prices continue to rise at a rapid rate.

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*** Bangladeshi taka:

Bangladeshi taka (Bengali)

1 taka coin ISO 4217 Code User(s) Inflation Source Subunit 1/100 Symbol Coins Freq. used Rarely used BDT Bangladesh 7.2%

5 taka coin

The World Factbook, 2006 est. poisha , 1, 2, 5 taka

1, 5, 10, 25, 50 poisha 1, 2, 5, 10, 20, 50, 100, 500 Banknotes taka Central bank Bangladesh Bank Website www.bangladesh-bank.org

The taka (Bengali: aka) is the currency of Bangladesh. It has the ISO 4217 code BDT and is subdivided into 100 poisha (Bengali: pesha). The symbols , and (in English) Tk are used to represent taka. For example, , 50 or Tk 50 would represent 50 taka.

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01.History:
The taka became Bangladesh's currency in 1972, replacing the Pakistani rupee at par. The word "taka" is derived from the Sanskrit tanka which was an ancient denomination of silver coin. The term taka was widely used in different parts of India but with varying meanings. In north India, taka was a copper coin equal to two paise and in the south, it was equal to four paisa or one anna. It was only in Bengal and Orissa where taka was equal to the rupee. In all areas of India, taka was used informally for money in general. However, Bengal was the stronghold of the taka.

The rupee was introduced by the Turko-Afghan rulers and was strongly upheld by the Mughals and the British rulers. The Bengali people always used the word taka for the rupee, whether silver or gold. Ibn Battuta, the Arab traveller, noticed that, in Bengal, people described gold coins (Dinar) as gold tanka and silver coin as silver tanka. In other words, whatever might be the metallic content of the coin, the people called it taka. This tradition has been followed to this day in eastern regions like Bangladesh, West Bengal, Tripura, Orissa, and Assam. The Indian rupee is officially known as

02.Coins:
In 1973, coins were introduced in denominations of 5, 10, 25 and 50 poisha. 1 poisha coins followed in 1974, with 1 taka coins introduced in 1975. The 1, 5 and 10 poisha were struck in aluminium, with the 25 and 50 poisha struck in steel and the 1 taka in cupro-nickel. The 5 poisha were square with rounded corners, whilst the 10 poisha were scalloped. Steel 5 taka were introduced in 1994, whilst a steel 2 taka coin followed in 2004.

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1 and 5 poisha coins are rarely found in circulation. 10, 25, and 50 poisha coins do not circulate widely. Only the 1, 2 and 5 taka are regularly found in circulation.

1973 Series Image Value Composition Reverse Obverse Obverse Reverse Description

Date of first minting

5 poisha Aluminium 10 poisha

National emblem Rohu Steel

1973

25 poisha 50 poisha

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1974 Series (FAO) Ornamental design, floral patterns

1 poisha

5 poisha Aluminium 1974 10 poisha

National emblem

25 Steel poisha

1 taka Various

Four human figures, slogan 1975 "Planned family - Food for All"

1977 Series (FAO) Plough, National Industrial emblem wheel

5 Aluminium poisha

1977

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10 poisha

A man and a woman seated on 2 back steeds facing each other

25 poisha Steel 50 poisha

Royal Bengal Tiger

Hilsha fish, Chicken, Pineapple, Banana

Newer Issues 2 taka Steel 5 taka Education 2004

National emblem Jamuna Multipurpose 1994 Bridge

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03. Paper money:

In 1971, Pakistani notes for 1, 5 and 10 rupees were overstamped for use in Bangladesh. These were followed in 1972 by treasury notes for 1 taka and notes of the Bangladesh Bank for 5, 10 and 100 taka. In 1975, banknotes for 50 taka were introduced, followed by 500 taka in 1977 and 20 taka in 1980. 1 taka treasury notes were issued until 1984, with 2 taka treasury notes introduced in 1989. In the year 2000, the government issued polymer 10-taka notes as an experiment (similar to the Australian dollar). They proved unpopular, however, and were withdrawn later. At present, the 1-taka and 5-taka notes are gradually being replaced with coins.

Note: 500 Tk.

Note: One Tk.

Note: Two Tk.

Note: One Tk.

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Conclution:

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