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ASSIGNMENT 03

A Brief Report on Money Market of Bangladesh


Focusing on T-Bills

Prepared for

Syeda Mahrufa Bashar


Course Instructor Financial Markets & Institutions

Prepared by

Mahbubur Rahman Roll # 38 MBA 45D

Institute of Business Administration University of Dhaka


April 23, 2012

Introduction

The money market in Bangladesh is rather underdeveloped. There are only limited activities in call money market, repo, reverse repo, and inter-bank repo markets.
Call Money Market

Participants in this market enter into lending and borrowing agreements for overnight. The transaction takes place due to immediate liquidity need. This may arise from various sources like temporary inability to meet the mandatory five percent cash reserve requirement (CRR) required by the BB, a sudden shortage of funds to meet the liabilities like any prescheduled payment etc. The participants determine the call money rate on a negotiated manner. The call money rate is volatile in Bangladesh. It is quite affected by certain seasonality. During the Eid especially when there is a surge of deposit withdrawals, the banks find themselves in immediate liquidity pressure. There is a direct and positive relationship between T-bill rates and call money rates. When there is a seasonal cash shortage, banks rush to the call money market. In this situation, the call money market rate peaks. Naturally investors of T-bills are not available at that time unless otherwise they are offered higher yield rates.

Repo

Before 2003 in Bangladesh, there was a premature encashment facility offered by the BB for the investors of T-bills. Premature encashment facility is a procedure of buying back the security when cash is needed giving amount and accrued interest. This is also called discounting the Tbills. Currently, instead of Discount Window, Repo facility is opened for the investors. Investors can borrow either full or partial amount against the T-bills. There is also a Repo auction that is held side by side of the T-bill auction. The yield rate of Repo is determined through bid offer and bid acceptance, and this yield is usually higher than the yield of T-bills. For example, let us assume that, T-bill yield = 8%, Repo yield = 9%, then, Net yield = 1%. To whom Repo facility will be provided is dependent upon the liquidity in the market. Repo auctions are available for 28-day T-bills. The term of repo is usually overnight or one week. Repo auctions are held every working day, with the BB having discretion to accept or reject bids in part or in full.

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Reverse Repo

When a bank or financial institution has excess liquidity, it can deposit it with the BB. This transaction is called Reverse Repo.
Inter-Bank Repo Market

It was introduced since July 27, 2003. However, there have been few activities.
Overview of T-Bills

Treasury bill or T-bill is a short-term debt issued by a national government with a maximum maturity of one year. Treasury bills are sold at discount, such that the difference between purchase price and the value at maturity is the amount of interest. Although the maturity of T-bill shouldn't be more than one year, in Bangladesh, 2-year and 5-year securities are also regarded as T-bills. Treasury bills are fully guaranteed by the government and hence are free from default risk. The biggest reason that T-Bills are so popular is because they are one of the few money market instruments that are affordable to the individual investors.
Key Players of T-Bills

The market for Bangladesh Treasury bills has a complex structure and involves numerous participants--Ministry of Finance, Bangladesh Bank, government securities dealers and brokers, and other holders of Treasury securities. The Bangladesh government finances its expenditures in excess of tax receipts through the sale of debt obligations. In addition to banks, the potential investor base for debt markets includes insurance companies, pension and provident funds, and mutual funds. Currently, the total par value of outstanding Treasury bills stood at about Taka 22000 crore approximately.
Primary Functions of T-Bills

T-bills are indirect tools for monetary management of the central bank of a country. Six types of government treasury bills are duly issued by the Bangladesh Bank through weekly auctions at rates determined by the market. The only downside related to T-bill is that the investor won't get a great return because Treasuries are exceptionally safe.

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Selling Mechanism of T-Bills

Treasury bills are sold on a discount basis, which in simple terms means that we have to pay for the bills less the interest receivable during the term of the bill and receive the face value of the bill at the end of the period. Treasury bills are not listed at the Stock Exchange. If one wanted to exit before maturity, rediscounting isn't possible at the Central Bank, rather he or she may take part in the Repo auction. There are six types of Treasury securities issued by Bangladesh Bank in Bangladesh: 1) 28 days T-bill 2) 91 days T-bill 3) 182 days T-bill, 4) 364 days T-bill 5) 2 years T-bill 6) 5 years T-bill

The 28 and 91 T-bills auctioned weekly while 182 and 364 auctioned bi-weekly in alternate. Before September 2006, the Ministry of Finance used to also issue two-year and five-year Tbills. (ii) T-bonds (5 year and 10 year). T-bonds are auctioned every four weeks and in alternate. Currently, government securities are traded in the two places- the over the counter (OTC) segment and the organized segment at the stock exchanges, the central depositary Bangladesh limited (CDBL) acts the depository function for all securities including government securities and corporate bonds.
Dealers

A primary dealer is a firm which buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities. There are fifteen primary dealers for T-bill trading in the country. Among them, twelve are banks and the rest are NBFIs. The twelve banks are Sonali Bank Ltd. Janata Bank Ltd. Agrani Bank Ltd. Prime Bank Ltd. Uttara Bank Ltd. South-East Bank Ltd. Jamuna Bank Ltd. IFIC Bank Ltd.

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Mercantile Bank Ltd. Mutual Trust Bank Ltd. Standard Chartered Bank The three NBFI primary dealers include:

National Credit and Commerce Bank Ltd

International Leasing and Financial Services Ltd. IPDC Lanka Bangla Finance Limited

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