Introduction

Financial system is a system which tones up the savings-investment process of a country.

Financial system plays a significant role in the economic development of a country. The
importance of an efficient financial sector lies in the fact that, it ensures domestic resources
mobilization, generation of savings, and investments in productive sectors. In fact, it is the
system by which a country’s most profitable and efficient projects are systematically and
continuously directed to the most productive sources of future growth. The financial system not
only transfers funds from savers to investors, it also selects projects which will yield the highest
returns, accumulates sufficient quantities of capital to fund the range of investment projects
across economic activities, accounts for price risks across assets, monitor performance, and
enforce contracts.

Financial Institution
A financial institution is an institution that provides financial service for its clients or members.
One of the most important financial services provided by a financial institution is acting as
financial intermediary. Most financial institutions are regulated by the government.
 There are two types of financial institutions. It can be Banking and Non Banking Financial
Institution.

Roles and Responsibilities of Financial Institutions-

Banking Financial Institution:

Commercial Banks:

A commercial bank is a financial institution that is authorized by law to receive money from
businesses and individuals and lend money to them. Commercial banks are open to the public
and serve individuals, institutions, and businesses. A commercial bank is almost certainly the
type of bank you think of when you think about a bank because it is the type of bank that most
people regularly use.
Banks are regulated by federal and state laws depending on how they are organized and the
services they provide. Commercial banks are also monitored through the Federal Reserve
System.

A commercial bank is authorized to serve the following functions:

 Receive deposits - take money in from individuals and businesses (called depositors)
 Disburse payments - make payments upon the direction of its depositors, such as
honoring a check
 Collections - a bank will act as your agent to collect funds from another bank payable to
you, such as when someone pays you by check drawn on an account from a different
bank
 Invest funds in securities for a return
 Safeguard money - banks are considered a safe place to store your wealth
 Maintain and service savings and checking accounts of its depositors
 Maintain custodial accounts - accounts controlled by one person but for the benefit of
another person, such as a trust account

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. Traditionally, investment
banks do not deal with the general public. However, some of the big names in investment
banking, such as JP Morgan Chase, Bank of America and Citigroup, also operate commercial
banks. Investment banks are subject to less regulation than commercial banks. While investment
banks operate under the supervision of regulatory bodies, like the Securities and Exchange
Commission, FINRA, and the U.S. Treasury, there are typically fewer restrictions when it comes
to maintaining capital ratios or introducing new products..

Capital Markets

The primary role of the capital market is to raise long-term funds for governments, banks, and
corporations while providing a platform for the trading of securities. This fundraising is
regulated by the performance of the stock and bond markets within the capital market.
The member organizations of the capital market may issue stocks and bonds in order to raise
funds. Investors can then invest in the capital market by purchasing those stocks and bonds. The
capital market, however, is not without risk.

It is important for investors to understand market trends before fully investing in the capital
market. To that end, there are various market indices available to investors that reflect the
present performance of the market.

Insurance Companies:

A company that provides risk-mitigation services for its parent company. A captive insurance
company may be formed if the parent company is unable to find an outside firm to insure against
a particular business risk; if the parent company determines that the premiums it pays to the
captive insurance company are sufficiently deductible; or that the insurance the captive insurance
company provides is more affordable or offers better coverage.

Investment Companies:
An investment company is a company whose main business is holding securities of other
companies purely for investment purposes. The investment company invests money on behalf of
its shareholders who in turn share in the profits and losses.
There are three fundamental types of investment companies: unit investment trusts (UITs), face
amount certificate companies and managed investment companies. All three types have the
following things in common:
 An undivided interest in the fund proportional to the number of shares held
 Diversification in a large number of securities
 Professional management
 Specific investment objectives

Brokerages:
A stock broker is an agent who represents clients to buy or sell stocks and other securities. The
term is applied to both companies that deal in securities and their employees, who technically are
registered representatives working for the brokerage. To most investors, however, the broker is
the person they call when they want to invest in or trade stocks. Most individual brokers work in
offices far removed from the stock trading floors.
Nonbank Financial Institutions:

The following institutions are not technically banks but provide some of the same services as
banks. 
Table 2: Performance Ratios of NBFIs

Year Currect Ratio Debt -Equity Productivity Return on

Ratio Ratio Equity
2002 1.98 1.61 1.34 6.57
2003 1.91 2.20 1.36 10.57
2004 1.81 2.42 1.36 16.37
2005 2.83 2.56 1.30 14.15
2006(Jan-Jun) 2.66 2.94 - 6.34
Source: Authors’ calculation from data provided by the Financial Institution Department, BB

Shadow Banks:
The housing bubble and subsequent credit crisis brought attention to what is commonly called
"the shadow banking system." This is a collection of investment banks, hedge funds, insurers and
other non-bank financial institutions that replicate some of the activities of regulated banks, but
do not operate in the same regulatory environment.

The shadow banking system funneled a great deal of money into the Bangladesh residential
mortgage market during the bubble. Insurance companies would buy mortgage bonds from
investment banks, which would then use the proceeds to buy more mortgages, so that they could
issue more mortgage bonds.

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.

In exchange for a little added freedom, there is one particular restriction on credit unions;
membership is not open to the public, but rather restricted to a particular membership group. In
the past, this has meant that employees of certain companies, members of certain churches, and
so on, were the only ones allowed to join a credit union. In recent years, though, these
restrictions have been eased considerably, very much over the objections of banks.

Savings and Loans

Savings and loan associations, also known as S&Ls or thrifts, resemble banks in many respects.
Most consumers don't know the differences between commercial banks and S&Ls. By law,
savings and loan companies must have 65% or more of their lending in residential mortgages,
though other types of lending is allowed.

Importance of financial institutions in the overall economic progress of the country:

1. Mobilizing Saving for Capital Formation:

The Financial institutions help in mobilizing savings through network of branch banking. People
in our countries have low incomes but the banks induce them to save by introducing variety of
deposit schemes to suit the needs of individual depositors.

2. Financing Industry:
The Financial institutions finance the industrial sector in a number of ways. They provide short-
term, medium-term and long-term loans to industry. they underwrite the shares and debentures of
large scale industries.

3. Financing Trade:
The financial institutions 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.

4. Financing Agriculture:
The Financial institutions help the large agricultural sector in our 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.

5. Financing Consumer Activities:

People in our countries being poor and having low incomes do not possess sufficient financial
resources to buy durable consumer goods. The commercial banks advance loans to consumers
for the purchase of such items as houses, scooters, fans, refrigerators, etc. In this way, they also
help in raising the standard of living of the people in developing countries by providing loans for
consumptive activities.

6. Financing Employment Generating Activities:

The Financial institutions finance employment generating activities in our countries. They
advance loans to young entrepreneurs, medical and engineering graduates, and other technically
trained persons in establishing their own business. Such loan facilities are being provided by a
number of commercial bank. Thus the banks not only help inhuman capital formation but also in
increasing entrepreneurial activities in developing countries.

7. Help in Monetary Policy:

The Financial institutions help the economic development of a country by faithfully following
the monetary policy of the central bank. In fact, the central bank depends upon the commercial
banks for the success of its policy of monetary management in keeping with Thus the
commercial banks contribute much to the growth of a developing economy by granting loans to
agriculture, trade and industry, by helping in physical and human capital formation and by
following the monetary policy of the country.
 Figure 3: Banks and NBFIs Activities as GDP Share

Source: Annual Report, Economic Trends and FID, Bangladesh Bank

8. Development of Foreign Trade: 

Commercial banks help traders from two different countries do business together. Letters of
credit are issued by the importer’s bank to the exporters to ensure the payment. The banks also
arrange foreign exchange.
Financial Market:
A financial market is a market in which people trade financial securities, commodities, and other
fungible items of value at low transaction costs and at prices that reflect supply and demand.
Securities include stocks and bonds, and commodities include precious metals or agricultural
good. In Bangladesh there are two financial markets.

Roles and Responsibilities of Financial Market:

Money Market:
The money market is the trade in short-term loans between banks and other financial institutions.
Money market securities consist of negotiable certificates of deposit (CDs), banker's
acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and
repurchase agreements (repos). Money market investments are also called cash investments
because of their short maturities. The money market is used by a wide array of participants, from
a company raising money by selling commercial paper into the market to an investor purchasing
CDs as a safe place to park money in the short term. The money market is typically seen as a
safe place to put money due the highly liquid nature of the securities and short
maturities. Because they are extremely conservative, money market securities offer significantly
lower returns than most other securities. However, there are risks in the money market that any
investor needs to be aware of, including the risk of default on securities such as commercial
paper.

Capital Markets:
Capital market is a market where buyers and sellers engage in trade of financial securities like
bonds, stocks, etc. The public and private sector Organizations are often sell securities on the
capital markets in order to raise funds. For this reason, this type of market is composed of both
the primary and secondary markets. If any government or private corporation requires capital
(funds) to finance, its operations and to engage in its own long-term investments. To do this, a
company raises money through the sale of securities in the company's name.
Stock Markets:

Stock markets allow investors to buy and sell shares in publicly traded companies. They are one
of the most vital areas of a free market economy as they provide companies with access to
capital and investors with a slice of ownership in the company and the potential of gains based
on the Company’s future performance. This market can be divided into two main sections: the
primary market and the secondary market. The primary market is where new issues are first
offered, with any subsequent trading going on in the secondary market.

Bond Markets:
A bond is a debt investment in which an investor loans money to an entity (corporate or
governmental), which borrows the funds for a defined period of time at a fixed interest rate.
Bond Market is composed of Treasury bond, Municipal Bond and Corporate Bond. This is of
two kinds- Organized and OTC markets. There are various types of bond products depending on
provisions, maturities, coupon rate, options, convertibility, etc. Bond Market in Bangladesh is
dominated by treasury debt securities. It has now only one corporate bond; but does not have any
municipal bond/debenture. In recent years, around 70 percent of the domestic savings are held in
the form of bank deposits, while only 30 percent are investments in the debt market which is
entirely dominated by government instruments. There hardly exists a corporate bond market in
the country, it has a debenture market with only a small number of well-known issuers. As of
today, only one corporate bond has been floated.

There are two organized market in Capital Market-

Dhaka Stock Exchange (DSE):
Dhaka stock exchange, is one of the two stock exchanges of. In 2010, the combined market
capitalization of listed companies on the Dhaka bourse stood at over $50 billion. .The Dhaka Stock
Exchange (DSE) is registered as a Public Limited Company and its activities are regulated by its
Articles of Association rules & regulations and bye-laws along with the Securities and Exchange
Ordinance, 1969, Companies Act 1994 & Securities & Exchange Commission Act, 1993.
Roles of DSE:
 Listing of Companies.
 Providing the screen based automated trading of listed Securities
 Settlement of trading.
 Market Administration & control
 Publication of Monthly Review
 Market Surveillance
 Investors Protection Fund
 Monitoring the activities of listed companies
 Investors grievance Cell (Disposal of complaint bye laws 1997)
 Announcement of Price sensitive or other information about listed companies through
online

Responsibilities of DSE:
 DSE should promote the movement of capital across the Region.
 It should increase investment opportunities.
 Attract more foreign investments to attain a steady level of the total market
capitalization.
 Increase the attractiveness of the Region as an area for investment, both by regional
and non-regional investors.
 Encourage optimum financing for firms irrespective of where the entity resides.
 DSE should provide a fair, transparent and efficient securities market to investors
using electronic trading system.

Chittagong Stock Exchange (CSE):

It is one of the twin financial hubs of the country, alongside the Dhaka Stock Exchange. Established
in 1991. It has a combined market capitalization of US$ 30 billion as of 2013. Seventy reputed
business personalities established the CSE in the commercial capital of Chittagong.
Roles of CSE:
  Listing function of organizations and institute.
 Trading shares
 Post-IPO function
 Clearing & Settlement
 Research & Development

Responsibilities of CSE:
Chittagong Stock Exchange plays a great role in our economy. So it has many responsibilities to
make our stock market stronger and efficient. Explicitly the responsibilities of CSE are following
 Increase business turnover
 Electronic trading system
 Achieve high level of confidence & professionalism
 Contribute to capital market policy development
 Ensure effective relationship management
 Engage in product and market diversification

Importance of Financial market in the overall economic progress of the country-

1. Allocation of Capital:
One of the major economic benefits generated by development of the financial markets is
improving the allocation of capital. The prices of equity and debt respond immediately to change
in market conditions and quickly embodied in current asset prices. The signal created by the
price change encourages or discourages capital inflow to an industry or company.

2. Allocation of Risk:
The other major economic benefit generated by development of the financial Markets is
improved allocation of Risk. Capital markets give an opportunity to investors to earn returns
based on their risk taking ability. It’s a common theory that high risk is represents high return.
Investors invest in high-risk instruments either because they are less riskaverse or because the
new risk is unaffected or negatively correlated with other investments.

3. Flow of Savings:
We know that there are three participants in financial market. Business, household and
government. Businesses are the net borrower who borrow money for gaining profit, households
are the net saver who save money for earning interest on their idle savings. So a financial market
manage the whole process so that all the flows can easily transferred. Financial Markets is a
good channel to move idle savings to most productive units in the Economy. In the first case the
transaction occurs through the exchange of securities. In case of common stock the transfer
results in ownership and in case of debt there is a contractual obligation to pay interest rate and
debt. The advantage of investing in Capital Markets is the price of the securities fluctuates in
response to change in supply and demand and can be bought and sold to third parties. As result,
the investor usually has a good idea of what the securities are worth and can obtain liquid funds
by selling the securities. On the other hand, in the second case the investor doesn’t have claim
over the ultimate beneficiary of the funds and the price of the claim doesn’t fluctuate in response
to shift in supply and demand.

4. Making Policy:
Financial Markets play an important role in improving or developing new policy framework of a
country. This is because when policy makers set a bad policies the equity and bond prices tend to
fall. Capital markets reduce politician’s incentives to do things that provide short-term gains by
anticipating the future prospects of a country but that brings long-term costs that will hamper the
economy.

5. Micro, Small and Medium Enterprises (MSME):

Traditionally MSME are the ones that faced difficulty in obtaining capital at low interest rate, but
MSME sector contributes 8% of the country's GDP, 45% of the manufactured output and 40% of our
exports. Apart from the facts mentioned above, about the significance of Capital Markets, there is a vast
amount of empirical data that supports the importance of Capital Markets facilitating economic growth.
The view that Capital Markets is associated with superior economic performance can be verified by
looking the correlation between Real GDP VS performance of Capital.

Concluding remarks:

Today, almost everyone agrees that the financial system is essential for development of country.
Improving the financial system can lead to higher growth and reduce the likelihood and severity
of crises. While Bangladesh has achieved relatively high economic growth over the past years
with a distorted financial system and in spite of its governance problems, cross-country
experience has shown the importance of financial and institutional development to sustain long-
term economic growth. Faster GDP growth consistent with the poverty reduction goals cannot be
met unless the extent and quality of financial intermediation in Bangladesh advances
significantly. In particular, this would require more competitive banking and non-banking
financial sectors capable of reaching out to all sections of the community, rural &urban, catering
to all types of marketable financial service. The pro-active measures taken in the financial sector
in recent years have put salutary impact on the financial system. Hopefully, the on-going reform
process in the financial system of Bangladesh will bring more stability and transparency. In this
regard, proper care should be taken in the reform process so that reforms in the financial sector
embrace the socio- economic realities in Bangladesh.