Financial System of Bangladesh
The Financial System is a set of institutional arrangement through which surplus units transfer their fund to deficit units. At present the financial system in Bangladesh is mainly composed of two types of institutions like banks and non-bank financial institution (NBFIs). The formal financial sector in Bangladesh includes: (a) Bangladesh Bank as the central bank, (b) 48 commercial banks, including 4 Government owned commercial banks, 30 domestic private banks (PCBs) (of which 6 banks are operating under Islamic Shariah), 9 foreign banks (FCBs) (of which 1 bank is operating as Islamic bank); and 5 government-owned specialized banks (DFIs); (c) 28 non-bank financial institutions (NBFIs) – licensed by the Bangladesh Bank); (d) 2 large government- owned insurance companies (life and general) and 60 private owned (17 life and 43 general) insurance companies; (e) 2 stock exchanges and, (f) some co-operative banks. Besides, a good number of semi-formal micro finance institutions (MFIs) also are operating in Bangladesh.
Structure of Financial System:
The main constituents of financial system are :
i) Financial Institutions
ii) Financial Instruments, and
iii) Financial Markets.
The modern name of Financial Institution is Financial Intermediary (FI), because it mediates or stand between ultimate borrowers and ultimate lenders and helps transfer funds from one to another. The Financial system helps production, capital-accumulation and growth by i) encouraging savings and
ii) allocating them among the alternative uses and users.
Financial Instruments are of two types:
i) Primary (or Direct)
ii) Secondary (or Indirect)
Financial markets facilitate the flow of funds in order to finance investments by governments, corporations, and individuals. It transfers funds from those who have excess funds (surplus units) to those who need funds(deficit units). Financial markets facilitate:
The raising of capital (in the capital markets)
The transfer of risk (in the derivatives markets)
Global transactions with integration of financial markets
The transfer of liquidity (in the money markets)
International trade (in the currency markets)
And are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. This return on investment is a necessary part of markets to ensure that funds are supplied to them. Financial markets attract funds from investors and channel them to corporations—they thus allow corporations to finance their operations and achieve growth. Money markets allow firms to borrow funds on a short term basis, while capital markets allow corporations to gain long-term funding to support expansion. Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks, Investment Banks, and Boutique Investment Banks can help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold.
The following table illustrates where financial markets fit in the relationship between lenders and borrowers: Relationship between lenders and borrowers...
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