Introduction:

Financial markets play an important role in the mobilization of financial resources for long term
investment through financial intermediation. The existence of money markets facilitates trading
in short term debt instruments to meet short term needs of large users of funds such as
governments, banks and similar institutions. A wide range of financial institutions including
merchant banks, commercial banks, the central bank and other dealers operate in the money
market. Public sector as well as private sector makes use of various financial instruments to raise
and invest short term funds. Unlike the money market, the capital market mobilizes long term
debt and equity finance for investments in long run assets. Capital markets also help to
strengthen corporate financial structure and improve the general solvency of the financial
system.

Objective of the report:

The objective of this report is to understand:

 To know the role of financial institutions in financial markets.

 To know the forms of financial markets.
 To know the classification of financial markets.
 The role of depository institutions and non-depository institutions.

Scope of the report:

The study topic allows us to know about the role of financial institutions in the financial markets
in Bangladesh.

Limitation of the report:

The limitations we found to prepare this report are-

 Lack of enough time.

 Lack of enough information
Role of Financial Institutions in Financial
Markets:
A financial market is a broad term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives.
Financial Institutions are the core factor and the core media of Financial Markets. There are two
forms of market –

I. Perfect Market
II. Imperfect Market

Perfect Market:
Where all information about any securities for sale in primary and secondary markets would be
continuously and freely available to investors.

Imperfect Market:
Where buyers and sellers of securities do not have full access to information and cannot always
break down securities to the precise size they desire.

Financial Institutions are the media or intermediary section between financial markets and
investors. Investors invest in financial markets or borrowers raise capital or fund from financial
markets through financial institutions. So without financial institutions, the information and
transaction costs of financial market transactions would be excessive.

Financial Institutions are classified into two groups –

1. Depository Institutions
2. Non-depository Institutions
Depository Institutions:
Depository Institution is a major type of financial intermediary that accepts or collect deposits
from surplus units and provides loan to deficit units. When a depository institution offers a loan,
it is acting as a creditor, just if it had purchased a debt security. Depository institutions are most
popular financial institutions among all financial institutions.

Depository institutions can be classified into several forms. Such as –

 Commercial Banks
 Investment Banks
 Savings Institutions
 Credit Unions

Commercial Banks:

Commercial banks are the most dominant depository institution. It serve surplus units by offering
a wide variety of deposit accounts and it transfer deposited funds to deficit units by providing
direct loans or purchasing debt securities. By keeping physical cash at home or in a wallet, there
are risks of loss due to theft and accidents, not to mention the loss of possible income from
interest. Banks also serve often under-appreciated roles as payment agents within a country and
between nations. Not only do banks issues debit cards that allow account holders to pay for
goods with the swipe of a card, they can also arrange wire transfers with other institutions.
Commercial banks serve both public and private sectors. Some commercial banks of Bangladesh
are –

 AB Bank Ltd.
 Eastern Bank Ltd.
 Jamuna Bank Ltd.

Investment Banks:

While investment banks may be called "banks," their operations are far different than deposit-
gathering commercial banks. An investment bank is a financial intermediary that performs a
variety of services for businesses and some governments. These services
include underwriting debt and equity offerings, acting as an intermediary between an issuer of
securities and the investing public, making markets, facilitating mergers and other corporate
reorganizations, and acting as a broker for institutional clients. They may also provide research
and financial advisory services to companies. As a general rule, investment banks focus on initial
public offerings (IPOs) and large public and private share offerings. Some investment banks of
Bangladesh are –
  Brac EPL Investment Ltd.
 Investment Corporation of Bangladesh (ICB)
 BASIC Bank Ltd.

Savings Institutions:

Savings institutions, which are sometimes referred to as thrift institutions, are another type of
depository institutions. Savings institutions include savings and loan associations and savings
banks like commercial banks; S&Ls offer deposit accounts to surplus units and then channel
these deposits to deficit units. The difference in the allocations of funds has caused the
performance of commercial banks and S&Ls to differ significantly over time. Savings Banks are
similar to S&Ls except that it has more diversified uses of funds. Therefore, this difference has
narrowed over time. Like S&Ls, most savings banks are mutual.

Credit Unions:

Credit unions are another alternative to regular commercial banks. Credit unions are almost
always organized as not-for-profit cooperatives. Like banks and S&Ls, credit unions can be
chartered at the federal or state level. Like S&Ls, credit unions typically offer higher rates on
deposits and charge lower rates on loans in comparison to commercial banks. Credit unions tend
to be much smaller than other depository institutions. It uses most of its funds to provide loans to
its members. Some credit unions of Bangladesh are –

 Christian Cooperative Credit Unions Ltd.

 Bangladesh Credit Unions Ltd.

Here included some reasons that show why depository institutions are popular.

 They offer deposit accounts that can accommodate the amount and liquidity
characteristics desired by most surplus units.
 They repackage funds received from deposits to provide loans of the size and maturity
desired by deficit units.
 They accept the risk on loans provided.
 They have more expertise than individuals in evaluating credit-worthiness of deficit unit.
 They diversify their loans among numerous units and can collect defaulted loans better
than individuals can do.

Non-depository Institutions:
Non-depository institutions generate funds from sources other than deposits but also play a major
role in financial intermediation. Non-depository financial intermediaries cannot accept deposits
but do pool the payments in the form of premiums or contributions of many people and either
invest it or provide credit to others. Hence, non-depository institutions form an important part of
the economy. These institutions are described below.

 Finance Companies
 Mutual Funds
 Securities Firms
 Insurance Companies
 Pension Funds

Finance Companies:

Most Finance Companies obtain funds by issuing securities, and then lend the funds to
individuals and small businesses. The functions of finance companies overlap the functions of
depository institutions. Some finance companies of Bangladesh are –

 IDLC
 Lanka Bangla Finance Ltd
 Union Capital Ltd.

Mutual Funds:

Mutual Funds sell shares to surplus units and use the funds received to purchase a portfolio of
securities. They are the dominant non-depository financial institution measured in total assets.
Some mutual funds concentrate their investment in capital market securities, such as stock or
bonds. Others known as money market mutual funds concentrate in money market securities.
Some mutual funds of Bangladesh are –

 ICB Mutual Fund

 AB Bank Mutual Fund
 EBL Mutual Fund

Securities Firms:

Securities firms provide a wide variety of functions in financial markets. Some securities firms
use their information resources to act as a broker, executing securities transactions between two
parties. In addition to brokerage service, securities firms also provide investment banking
services. Some securities firms place newly issued securities for corporations and govt. agencies.

Again, securities firms often act as dealers, making a market in specific securities by adjusting
their inventory of securities. Another investment banking activity offered by securities firms is
advisory services on mergers and other forms of corporate restructuring. Securities firms may not
only help a firm plan it’s restructuring but also execute the change in the firm’s capital structure
by placing the securities issued by the firm. Some securities firms of Bangladesh are –

 Nexus Securities Ltd.

 Midway Securities Ltd.
 PFI Securities Ltd.

Insurance Companies:

Insurance companies provide insurance policies to individuals and firms that reduce the financial
burden associated with death, illness and damage to property or assets. They charge premiums in
exchange for the insurance that they provide. They invest the funds that they receive in the form
of premiums until the funds are needed to cover insurance claims. Insurance companies
commonly invest the funds in stocks or bonds issued by corporations or in bonds issued by the
govt. In this way, they finance the needs of deficit units and thus serve as important financial
intermediaries. Some insurance companies of Bangladesh are –

 Delta Life Insurance Ltd.

 Asia Insurance Ltd.
 Golden Life Insurance Ltd.

Pension Fund:

Many corporations and govt. agencies offer pension plans to their employees. The employees,
their employers or both periodically contribute funds to the plan. Pension funds provide an
efficient way for individuals to save for their retirement. The pension funds manage the money
until the individuals withdraw the funds from their retirement accounts. The money that is
contributed to individual’s retirement accounts is commonly invested by the pension funds in
stock or bonds issued by corporation or in bonds issued by the govt. In this way, pension funds
finance the needs of deficit units and thus serve as important financial intermediaries.
Advantages and Disadvantages of
Financial Institutions:
Advantages:
1. The financial market is composed of a number of financial institutions for that reason
they perform a variety of functions.
2. Financial institutions can be considered synonymous with financial intermediaries in the
financial markets.
3. Financial institutions pool resources and channel funds from savers/lenders to
spenders/borrowers.
4. Depository institutions assist in managing finances and reaching financial goals.
5. Depository institutions protect from loss (insurance).
6. Depository institutions create opportunity to earn interest.

Disadvantages:
1. May have to pay fees if account isn’t managed well.
2. May have required minimum balances.
3. Sharing financial information.
 Comparison of Roles among Financial
Institutions:
The role of financial institutions in facilitating the flow of funds from individual surplus units to
deficit units. Surplus units are shown on the left side of the exhibit and deficit units are shown on
the right side of the exhibit. There are three different flows of funds from surplus units to deficit
units. One set of flows represents deposits from surplus units that are transformed by depository
institutions into loans for deficit units. The second set of flows represents purchases of securities
issued by companies that are transformed into finance company loans to deficit units. The third
set of flows reflects the purchases of shares issued by mutual funds.

The deficit units also receive funding from insurance companies and pension funds. Because
insurance companies and pension funds purchase massive amounts of stocks and bonds, they
finance much of the expenditures made by large deficit units, such as corporations and
government agencies.

Deposits Depository
Institutions

Purchase
Surplus units Finance
Securities Companies

Purchase
Mutual Funds Deficit Units
Shares

Premiums
Policyholders Insurance
Companies

Employee
Employers & Pension Funds
Employees
Sources and Use of Funds of Financial
Institutions:
Financial Institutions collect and use their funds in a specific way. Source and fund distribution is
often seems different for each financial institutions. The table given below summarizes the
sources and use of funds of financial institutions.
Financial Institutions Main Source of Funds
Commercial Banks Deposits from households,
businesses & govt. agencies
Saving Institutions Deposits from households,
businesses & govt. agencies
Credit Unions Deposits from credit union
members
Finance Companies Securities sold to household &
businesses
Mutual Funds Shares sold to households,
businesses & govt. agencies
Money Market Funds Shares sold to households,
businesses & govt. agencies
Insurance Companies Insurance premiums & earnings
from investments
Pension Funds Employer/ employee contribution
Main Use of Funds
Purchases of govt. &
corporate securities; loans to
businesses & households
Purchases of govt. &
corporate securities;
mortgages & other loans to
households & businesses
Loans to credit Union
members
Loans to household &
businesses
Purchases of long-term govt.
& corporate securities
Purchases of short-term govt.
& corporate securities
Purchases of long-term govt.
& corporate securities
Purchases of long-term govt.
& corporate securities
Role of Financial Institutions in
Bangladesh:
Investment Corporation of Bangladesh (ICB):

The Investment Corporation of Bangladesh (ICB) was established on 1 st October 1976, under
“The Investment Corporation of Bangladesh Ordinance, 1976” (No. XL of 1976). The
establishment of ICB was a major step in a series of measures undertaken by the Government
to accelerate the pace of industrialization and to develop a well-organized and vibrant Capital
Market particularly securities market in Bangladesh. ICB caters to the need of institutional
support to meet the equity gap of the industrial enterprises.

Role of ICB:

Private Placement:

ICB is authorized to act as an agent of issuers and investors for private placement of
securities. Under this arrangement, ICB places securities to individuals or institutions on
behalf of the issuer for which it charges fees. ICB also acquires shares or securities for its
own portfolios.

Underwriting:

In order to raise long term debt equity from the primary market, the Government bodies,
enterprises, corporation or companies may seek intermediary assistance from ICB in the
form of underwriting. Because of its long and proven experience, reputation, asset back up
and established network of regional offices, ICB is in an excellent position to attract the
potential investors to the proposed issue of shares, debenture and other securities for
successful floatation of IPO & placement.
 Merger and Acquisitions:

Companies willing to expand their business through mergers or acquisitions or to divest

projects that no longer fit into present scale of operation contact the corporation. ICB
provides professional services & advice in respect of shaping up the cost and financial
structures to ensure best possible operation results.

Lease Financing:

ICB provides lease finance mainly for machinery, equipment and transport. ICB is in a
position to provide professional advice and financial to the intending clients. The period of
lease, rental, and changes and other terms and conditions are determined on the basis of
assets and the extent of assistance required by the applicants.

Corporate Financial Advice:

Companies and Government enterprises intending to go public often seek professional &
financial advice on corporate restructuring & reengineering. ICB through its expertise
provide such services.

Bangladesh Development Bank Ltd:

Bangladesh Development Bank Limited (BDBL) is fully state owned Bank of Bangladesh
which came to effective at 3rd January 2010. Bangladesh Shilpo Bank (BSB) and Bangladesh
Shilpo Rin Songstha(BSRS) were merge into Bangladesh Development Bank Ltd (BDBL) at
16th November 2009 and come to effective at 3rd January 2010. In addition commercial
banking, BDBL provides financial and technical assistance to broaden the private as well as
public sector industrial base of the country. It prioritizes, especially, Export Oriented/Export
Linkage industrial units, Efficient Import Substitution, Joint Ventures, Commercialization of
local technology and promotion of agro-based industry.

Functions:

 Extends term loans by giving special priority to the Small and Medium Enterprises
( SMEs ) for achieving self-reliance as well as enhancing production and employment
including empowerment of women
  Provides working capital loans to industrial projects;
 Provides equity support in the form of underwriting and bridge loan to public limited
companies.
 Issues guarantees on behalf of borrowers for repayment of loan;
 Extends commercials banking services along with deposit mobilization;
 Purchases and sales shares/securities of enlisted companies for BDBL and on behalf
of its customers as member of Dhaka Stock Exchange (DSE) Ltd. and Chittagong Stock
Exchange (CSE) Ltd. for capital market development;
 Conducts projects promotional activities along with preparation of various sub-sect
oral study reports.

Credit Unions:
The Co-operative Credit Union League of Bangladesh Ltd. in short CCULB is one of the credit
union of Bangladesh. It was founded in 1979 with participation of eleven (11) primary Credit
Unions from the then greater Dhaka district.

OBJECTIVES OF CCULB
 To create awareness on the necessity of thrift and savings;

 To organize various types of educational training, workshop, seminar and forum to

educate the leaders, members and professionals of co-operative credit unions;

 To develop skill and performance of Credit Union staff members as well as CCULB staff
too
 To implement statutory as well as internal audit to its members co-operative credit
unions;
 Improve and standardize Credit Unions;
 To provide Mutual Aid Services to its members;
 Introduce & finance for income generating program for group members;
Commercial bank:

Besides performing the usual commercial banking functions, banks in developing countries play
an effective role in their economic development. The majority of people in such countries are
poor, unemployed and engaged in traditional agriculture.

There is acute shortage of capital. People lack initiative and enterprise. Means of transport are
undeveloped. Industry is depressed. The commercial banks help in overcoming these obstacles
and promoting economic development.

The role of a commercial bank in a developing country is discussed as under.

1. Mobilizing Saving for Capital Formation:

The commercial banks help in mobilizing savings through network of branch banking. People in
developing countries have low incomes but the banks induce them to save by introducing variety
of deposit schemes to suit the needs of individual depositors. They also mobilize idle savings of
the few rich. By mobilizing savings, the banks channelize them into productive investments.
Thus they help in the capital formation of a developing country.

2. Financing Industry:

The commercial banks finance the industrial sector in a number of ways. They provide short-
term, medium-term and long-term loans to industry. In India they provide short-term loans.
Income of the Latin American countries like Guatemala, they advance medium-term loans for
one to three years. But in Korea, the commercial banks also advance long-term loans to industry.

3. Financing Trade:

The commercial banks help in financing both internal and external trade. The banks provide
loans to retailers and wholesalers to stock goods in which they deal. They also help in the
movement of goods from one place to another by providing all types of facilities such as
discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc.
Moreover, they finance both exports and imports of developing countries by providing foreign
exchange facilities to importers and exporters of goods.

4. Financing Agriculture:

The commercial banks help the large agricultural sector in developing countries in a number of
ways. They provide loans to traders in agricultural commodities. They open a network of
branches in rural areas to provide agricultural credit. They provide finance directly to
agriculturists for the marketing of their produce, for the modernization and mechanization of
their farms, for providing irrigation facilities, for developing land, etc.

Non-depository institutions:
Mutual fund:

It is a recognized principle that diversification of investment reduces risk. An individual may not
have the time, expertise and resources to undertake such diversification. Here arises the
advantage of a Mutual Fund. Mutual Funds pool the savings of a great number of investors and
make investments in a wide array of securities.

Role of mutual fund:

Mutual fund (MF) is a very useful investment mechanism in a capital market. A developed
capital market consists of varieties of investment instruments and MF is one of them. But
the share of mutual funds in Bangladesh's capital market is very low. The market is fully
equity based and there is little scope to introduce any new financial instrument. That's
why a rapid development has not happened in the MF sector all. But MF can be a good
investment alternative in this undiversified market.

Mutual funds in Bangladesh: Bangladesh has a very small market for mutual funds. As
of 2012, there were 41 MFs in the country's capital market. For them, MF rules were
framed by the Securities and Exchange Commission (SEC). Under the rules, a fund
consists of one sponsor/entrepreneur, one trustee and obviously a fund manager. It is required
for every such company to get permission of the SEC before proceeding with its fund
allocation process.

Insurance:
There should be vigorous campaign throughout the country to make the people aware of the
utility and prospects of buying insurance. Bangladesh is a densely populated country and most of
the people in our country are poor. They would definitively go for insurance for the security and
the risks covered by the insurance. Therefore, the prospects of Insurance are very high in
Bangladesh if the following measures can be adopted.

First of all, there is no alternative of quality service. Insurance being a service rendering entity
must provide quick services. Policyholders are highly dissatisfied with service of JBC and SBC.
Due to poor quality services, public corporations are loosing market. In order to ensure their
continuity, such corporation must pay adequate attention on their quality of service. Private
companies also need put their all out efforts to improve quality of service so as to strengthen
their position.

Secondly, the government should eliminate the difficulty in licensing procedure and should not
delay in the approval of new companies if all the requirements are fulfilled. It will help not only
to increase volume of business but also solve the problems of unemployment.

Finally, the policy holders are very much worried about the settlement of claims. Ordinary
people also consider it main constraint. Therefore, instance companies should settle the claims as
quickly as possible to create a healthy public image. For this purpose the claim settlement
procedure can be simplified and the insurers can provide proper written guidelines of claim
settlement to the policyholders.

If the above steps can be taken, more and more people in Bangladesh will be interested in buying
insurance.

Pension:

Bangladesh, as an Asian country, has a long cultural and religious tradition of looking after the
elderly and families and communities are expected to take care of their own elderly members.
But rapid socio economic and demographic transformation, mass poverty, declining social and
religious values, influence of western culture and other factors have broken down the traditional
extended family and community care system. Most of the older people in the country are
suffering from many basic human problems such as lack of sufficient income and employment
opportunities, absolute poverty, senile diseases and absence of proper health and medicare
facilities, exclusion, negligence, deprivation, socio-economic insecurity, etc. 80% of the older
persons live in rural Bangladesh and suffer from cumulative effects of a lifetime of deprivation.

Because of increased life expectancy the elderly people will live for longer years resulting in
increased dependency ratio and declining potential support ratio. Current and future health needs
of the older people should be urgently addressed through promotion of health education and
information targeting elderly population. Elderly people are increasing and will continue to
increase. Government has only very limited programs to provide care to the elderly. As stated
earlier, one such programs is Old Age Allowance which has been highlighted. There are other
government programs targeting the poor and woman. For example Vulnerable Group
Development (VGD) and Vulnerable Group Feeding (VGF). These programs aim to provide
development or food assistance to the poor. These programs do not directly target older people.
Conclusion:
The financial market plays an important role in promoting economic growth. By mobilizing
savings for productive investment and facilitating capital inflows, it stimulates investment both
in both physical and human capital. The financial market also channels savings to more
productive uses by collecting and analyzing information about investment opportunities. Thus,
by creating an efficient mechanism for transactions in long term financial instruments, it
provides a wide range of wealth creating opportunities for the government, corporations, private
individuals and other financial institutions.
Bibliography:
Financial Markets and Institutions

- Jeff Madura

http://www.globalbankingandfinance.com/list-of-investment-banks-in-bangladesh/

http://www.en.wikipedia.org/wiki/List_of_banks_in_Bangladesh

http://www.idra.org.bd/idra-org/Ins-Com.htm

http://dsebd.org/companylistbyindustry.php?industryno=12

http://www.nslbd.com