Monetary & Financial System

(অর্থ ও আর্র্িক ব্যব্স্থা)

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 What are the functions of money?

It serves to perform these 3 primary functions in the economy:

(a) Medium of Exchange: Money is the medium via which goods and services are paid for in
almost all types of market transactions in the economy. It acts as the medium of exchange
through which goods and services are exchanged for one another. Money is what is used to buy
goods and services from the market and it is also what we are paid in as salary and wages for
our services rendered.
(b) Unit of Account: It provides a unit of account i.e. it provides a measurement of value in the
economy. The prices of goods and services in any modern economy is measured and denoted in
terms of money. For example, the way we measure weight in kilograms and distance in
kilometer, the same way the value of a good or service is measured (and quoted) in terms of
money. Thus it is money which enables us to measure the value of the good or service that we
buy or sell in the market.
(c) Store of Value: The third role that money plays in the economy is that it functions as a store
of value i.e. it acts as a store of the purchasing power that is embedded in it. A store of value can
save the purchasing power of money from the time the money is received (as salary, earnings or
compensation of any other form) until the time it is spent to buy goods and services.
(d) Other Functions:
Distribution of social income: Income can easily be distributed with the help of money. Ex:
Distribution of total money earned by a school in the form of salaries, wages, utility bills, etc.
Basis of Credit Creation: The “store of value” function of the money helps in credit creation by
the banks. Ex: Using the money of demand deposits as a tool for credit creation.
Liquidity: Money is the most liquid asset of the economy. Ex: Credit cards, debit cards, cash.
Standard of deferred payments: Money is considered the standard for future payments. Ex- The
payment of the electricity bill on the upcoming due date.

Is Credit Card money?

to be money, it has to be able to store value. When you make a purchase using a debit card: the
payment the bank makes on your behalf is money and so is the repayment that you make to the
bank. But the credit that the bank provides you is just an obligation of repayment and it cannot
be used like money to say make purchases or settle debts. Thus credit cards are not money.

Define Demand for Money. Why do people hold money?

The demand for money refers to the desire of individuals and businesses to hold money in the
form of cash, bank deposits, or other forms of liquid assets to make purchases or payments for
goods and services. The demand for money is affected by various factors such as interest rates,
inflation, income levels, and economic conditions.
The primary reason why people demand money is to use it for transactions. The more
transactions people make, the greater their demand for money. For example, if an individual
plans to purchase a car, they will need to have enough money to pay for it.
Broadly stating, there are three main motives, for which money is wanted by the people:
a. Transaction Motive;

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b. Precautionary Motive;
c. Speculative Motive.
(a)Transaction Motive: It refers to demand for money for conducting day-to-day transactions.
This motive can be looked at from the perspective of consumers, who want income to meet their
household expenditure (income motive) and from the perspective of businessmen, who require
money to carry on their business activities (business motive).
The transaction motive relates to demand for money to meet the current transactions of
individuals and business units. The income, which a person gets, is not continuous whereas,
expenditure is continuous.
So, to bridge the gap between receipt of income and its expenditure, people hold cash.
(b) Precautionary Motive: It refers to the desire of people to hold cash balances for unforeseen
contingencies. People wish to hold some money to provide for the risk of unforeseen events like
sickness, accident, etc. The amount of money held under this motive, depends on the nature of
individual and on the conditions in which he lives. The demand of money for precautionary
balances is also closely related to the level of income. Higher the level of income, more will be
the cash balances for contingencies.
(c) Speculative Motive: It refers to desire of the holder to keep cash balance as an alternative to
financial assets like bonds. Under speculative motive, it is presumed that people can hold their
wealth either in the form of bonds or in the form of cash balances. The decisions regarding
holding of bonds or cash balances depend upon the expectations about changes in the rate of
interest or capital value of assets (bonds) in future.

How Creation of Money works by Commercial Bank? Or, How money is created?

Commercial banks play a crucial role in the creation of money supply in the economy through
the process of credit creation. When a bank receives a deposit from a customer, it keeps a
portion of that deposit as reserves and lends out the rest to borrowers. The loaned amount
becomes a new deposit in another account, which the bank can then lend out a portion of, and
so on. This process of lending and re-depositing continues, leading to the creation of new money
in the economy.
The creation of money by commercial banks is a complex process, but it can be explained in a
few simple steps:
1. A customer deposits money into a commercial bank. The bank keeps a certain percentage of
the deposit as reserves and lends out the rest to borrowers.
2. The borrower uses the loan to make purchases, pay bills, or invest, and the money is
deposited into another account at another bank. This deposit becomes new money that can
be lent out by the bank
3. This process of lending and depositing continues, creating a cycle of credit creation that
multiplies the original deposit many times over.
4. The new money created by the bank can then be used by borrowers to make purchases, pay
bills, or invest, creating a multiplier effect on the money supply.
5. The central bank regulates the amount of money in circulation by adjusting the reserve
requirement, the interest rates, and other monetary policy tools.

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 What do you mean by money multiplier?
The money multiplier is a concept that explains how an initial injection of money into the
banking system can lead to a larger increase in the overall money supply. The money multiplier
is based on the idea that banks can create money through the process of lending.
When a central bank, such as the Federal Reserve or the Bangladesh Bank, injects new money
into the banking system by buying government securities or making loans to commercial banks,
this initial injection can lead to an increase in the overall money supply through a chain reaction
of lending and deposit creation.
The formula for calculating the money multiplier is:
Money Multiplier = 1/Reserve Ratio
or
Money Multiplier =Total Deposits/Required Reserves
where:
▪ Reserve Ratio is the fraction of deposits that a bank must hold in reserve as mandated by the
central bank's reserve requirement policy.
▪ Total Deposits refer to the total amount of deposits held by the banking system.
▪ Required Reserves refer to the amount of reserves required to be held by banks based on the
reserve requirement policy of the central bank.

What is Balance of payments?

The balance of payments of a country is the difference between all money flowing into the
country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the
rest of the world. These financial transactions are made by individuals, firms and government
bodies to compare receipts and payment arising out of trade of goods and services.
Balance of Payment (BOP) is a statement which records all the monetary transactions made
between residents of a country and the rest of the world during any given period. This statement
includes all the transactions made by/to individuals, corporates and the government and helps
in monitoring the flow IMF Proposed Balance of Payment Formula (Adopted by Bangladesh
Bank)- Current account + financial account + capital account + Balancing item (Errors and
omissions) = 0
BOP statement of a country indicates whether the country has a surplus or a deficit of funds i.e
when country's export is more than its import, its BOP is said to be in surplus. On the other
hand, BC deficit indicates that a country's imports are more than its exports. Tracking the
transactions under BC is something similar to the double entry system of accounting. This
means, all the transaction will have a debit entry and a corresponding credit entry.

What are the Elements of balance of payment?

There are three components of balance of payment viz current account, capital account, and
financial account. The total of the current account must balance with the total of capital and
financial accounts ideal situations.
Current Account: The current account is used to monitor the inflow and outflow of goods and
service between countries.

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This account covers all the receipts and payments made with respect to materials and
manufactured goods. It also includes receipts from engineering, tourism, transportatic business
services, stocks, and royalties from patents and copyrights. When all the goods and services are
combined, together they make up to a country's Balance of Trade (BOT).
Capital Account: All capital transactions between the countries are monitored through the
capital account. Capital transactions include the purchase and sale of assets (non-financial) like
land and properties. The capital account also includes the flow of taxes, purchase and sale of
fixed assets etc. by migrants moving out/in to a different country. The deficit or surplus in the
current account is managed through the finance from capital account and vice versa.
There are 3 major elements of capital account:
Loans & borrowings, Investments, and Foreign exchange reserves.
Financial Account: The flow of funds from and to foreign countries through various investments
in real estates, business ventures, foreign direct investments etc. is monitored through the
financial account. This account measures the changes in the foreign ownership of domestic
assets and domestic ownership of foreign assets. On analyzing these changes, it can be
understood if the country is selling or acquiring more assets (like gold, stocks, equity etc.).

Distinguish between fixed and floating (flexible) exchange rate.

Fixed (Pegged) Exchange Flexible (Floating)

Basis
Rate Exchange Rate
Fixed exchange rate refers to a Flexible exchange rate is a
Meaning rate which the government sets rate that variate according to
and maintains at the same level. the market forces.
Determined by Government or central bank Demand and Supply forces
Changes in Depreciation and
Devaluation and Revaluation
currency price Appreciation
Takes place when there is rumor
Speculation about change in government Very common
policy.
Operates through variation in Operates to remove external
Self-adjusting
supply of money, domestic instability by change in forex
mechanism
interest rate and price. rate.
Need for
Foreign reserves need to be No need for maintaining
maintaining
maintained foreign reserve
foreign reserve
Impact on BOP (Balance Can cause deficit in BOP that Deficit or surplus in BOP is
of Payment) cannot be adjusted automatically corrected

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Distinguish between floating/flexible exchange rate and managed floating exchange
rate.

Managed floating
Basis Flexible Exchange Rate
Exchange Rate
Exchange rate determined
Exchange rate determined by
by forces of demand and
Meaning Determination the demand and supply forces
supply with occasional
only.
government intervention.
It is also called free exchange It is also called dirty floating
Name
rate system system.
Comparatively less
As it is determined by demand
fluctuations as government
Fluctuations and supply forces it is prone to
intervenes to ensure that the
more fluctuations.
rate does not very much
Government intervenes by
selling or purchasing foreign
Government intervention No intervention
currency in the international
market
Comparatively more
predictable as the variations
Unpredictable as the exchange
Predictability of Trade in exchange rates are
rate is flexible in nature
governed by the monetary
authorities

Define Payment System. Describes Different payment options in Bangladesh.

Payment systems are the means by which funds are transferred among financial institutions,
businesses, and persons. Payment systems are considered as the most important factor for the
well-functioning of a country's financial system and for successful application of monetary
policies by the central banks.
The payments system is the set of institutional arrangements through which purchasing power
is transferred from one transactor in exchange to another. For efficient exchange, a common
medium of exchange or means of payment is necessary.
There are several payment options available in Bangladesh, including:
1. Cash: Cash is the most common payment method in Bangladesh, especially for small
transactions. It is widely accepted by most retailers, restaurants, and street vendors.
2. Credit/debit card: Credit and debit cards are becoming increasingly popular in Bangladesh.
Visa, Mastercard, and American Express are the most widely accepted cards. Many banks in
Bangladesh issue credit and debit cards, and they can be used at most retail outlets and
online merchants.
3. Mobile banking: Mobile banking is a popular payment method in Bangladesh. It allows
customers to transfer money, pay bills, and make purchases using their mobile phones. The
most popular mobile banking services in Bangladesh are bKash, Rocket, and Nagad.
4. Online payment: Online payment options are becoming more popular in Bangladesh,
especially for e-commerce transactions. Some of the most popular online payment options in

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Bangladesh are PayPal, Stripe, and Payoneer.
5. Bank transfer: Bank transfers are another common payment method in Bangladesh.
Customers can transfer money from one bank account to another using their bank's online
banking portal or mobile banking app.

Define Debit Card and Credit card

Debit card:
A debit card is a payment card that is linked to a checking or savings account at a bank or credit
union. When you use a debit card to make a purchase, the funds are automatically deducted
from your account, rather than adding to a balance that you'll have to pay off later like a credit
card. Debit cards are often used as an alternative to carrying cash or writing a check, and they
offer several benefits to cardholders.
Debit cards offer several advantages over cash and checks. They are more secure than carrying
cash, as they can be easily canceled if lost or stolen. They also offer a record of your transactions,
making it easier to track your spending and budgeting. Additionally, many banks and credit
unions offer fraud protection and zero-liability policies on debit card transactions.
Credit card:
A credit card is a type of payment card that allows the cardholder to borrow money from a bank
or other financial institution in order to make purchases. The cardholder can use the credit card
to pay for goods and services, with the promise to repay the borrowed funds at a later time,
usually with interest.
Credit cards come with a credit limit, which is the maximum amount that the cardholder can
borrow at any given time. The credit limit is determined by the bank or financial institution
based on the cardholder's creditworthiness, income, and other financial factors.
Credit cards can be used to make purchases both in-person and online. When the cardholder
uses the credit card to make a purchase, the card issuer pays the merchant on the cardholder's
behalf, and the cardholder becomes responsible for paying back the amount borrowed, usually
with interest.

Describes evaluation and Growth of Bangladesh Payment System.

The payment system in Bangladesh has undergone a significant transformation over the past
few decades. In the early years of the country's independence, the payment system was largely
cash- based, with limited electronic payment options. However, with the development of modern
technologies and the increasing demand for faster and more efficient payment options, the
payment system has evolved significantly.
In the 1980s, the Bangladesh Bank, the central bank of Bangladesh, started introducing a series
of measures aimed at modernizing the payment system. The first Automated Teller Machine
(ATM) was installed in 1999, which provided customers with access to cash around the clock.
This was followed by the introduction of debit and credit cards in the early 2000s, which further
expanded the electronic payment options available.
In 2010, the Bangladesh Bank launched the Real Time Gross Settlement (RTGS) system, which
allows for real-time transfers of large amounts of funds between banks. This system has greatly
improved the efficiency and speed of interbank transactions in Bangladesh.

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The Bangladesh Bank has also introduced a number of other measures to promote the growth
of electronic payments in the country. For example, the National Payment Switch Bangladesh
(NPSB) was launched in 2011, which enables electronic funds transfers and bill payments
between banks and financial institutions.

What do you mean by Non-Bank Financial Institutions (FIs)? Explain its features.

Non-Bank Financial Institutions (FIs) are those types of financial institutions which are regulated
under Financial Institution Act, 1993 and controlled by Bangladesh Bank.
Now, 34 FIs are operating in Bangladesh while the maiden one was established in 1981. Out of
the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 16 were initiated by private
domestic initiative and 15 were initiated by joint venture initiative.
The major features of FIs are as follows:
▪ FIs cannot issue cheques, pay-orders or demand drafts.
▪ FIs cannot receive demand deposits,
▪ FIs cannot be involved in foreign exchange financing,
▪ FIs can conduct their business operations with diversified financing modes like syndicated
financing, bridge financing, lease financing, securitization instruments, private placement of
equity etc.

Describe major difference between banks and NBFIS.

Banks and non-bank financial institutions (NBFIs) are both important players in the financial
system, but there are some key differences between the two.
1. Regulatory framework: Banks are highly regulated and supervised by the central bank of the
country. In Bangladesh, banks are regulated by the Bangladesh Bank. On the other hand
NBFIs are regulated by the Bangladesh Securities and Exchange Commission (BSEC) or other
relevant regulatory bodies.
2. Legal status: Banks are licensed by the central bank and are authorized to create money
through the process of lending and accepting deposits. NBFIS, on the other hand, are not
authorized to create money and cannot accept demand deposits.
3. Scope of activities: Banks offer a wide range of financial services, including accepting
deposits, providing loans, issuing credit cards, and facilitating international transactions.
NBFIs, on the other hand, are specialized financial institutions that provide a specific set of
financial services, such as leasing, factoring, and investment management.
4. Risk profile: Banks are exposed to a wide range of risks, including credit risk, liquidity risk,
and interest rate risk. NBFIs, on the other hand, are typically exposed to more specialized
risks related to the specific financial services they offer.
5. Ownership: Banks are typically owned by private individuals or corporations, while NBFIS
may be owned by the government, private individuals, or corporations.

Define central Bank of the Country and its main functions.

Bangladesh Bank acts as the Central Bank of Bangladesh which was established on December
16, 1971 through the enactment of Bangladesh Bank Order 1972- President's Order No. 127 of
1972).
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Bangladesh Bank is responsible for regulating and supervising the country's monetary and
financial system.
The general superintendence and direction of the affairs and business of BB have been
entrusted to a 9 members' Board of Directors which is headed by the Governor who is the Chief
Executive Officer of this institution as well. BB has 45 departments and 10 branch offices.
The main functions of BB are (Section 7A of BB Order, 1972)-
1. to formulate and implement monetary policy;
2. to formulate and implement intervention policies in the foreign exchange market;
3. to give advice to the Government on the interaction of monetary policy with fiscal and
exchange rate policy, on the impact of various policy measures on the economy and to
propose legislative measures it considers necessary or appropriate to attain its objectives
and perform its functions;
4. to hold and manage the official foreign reserves of Bangladesh;
5. to promote, regulate and ensure a secure and efficient payment system, including the issue
of bank notes;
6. to regulate and supervise banking companies and financial institutions.

Who are the capital market intermediaries describes in brief.

Capital market intermediaries are of following types:

1. Stock Exchanges: Apart from Dhaka Stock Exchange, there is another stock exchange in
Bangladesh that is Chittagong Stock Exchange established in 1995.
2. Central Depository: The only depository system for the transaction and settlement of
financial securities, Central Depository Bangladesh Ltd (CDBL) was formed in 2000 which
conducts its operations under Depositories Act 1999, Depositories Regulations 2000,
Depository (User) Regulations 2003, and the CDBL by-laws.
3. Stock Dealer/Sock Broker: Under SEC (Stock Dealer, Stock Broker & Authorized
Representative) Rules 2000, these entities are licensed and they are bound to be a member
of any of the two stock exchanges. At present, DSE and CSE have 238 and 136 members
respectively.
4. Merchant Banker & Portfolio Manager: These institutions are licensed to operate under SEC
(Merchant Banker & Portfolio Manager Rules) 1996 and 45 institutions have been licensed by
SEC under this rules so far.
5. Asset Management Companies (AMCs): AMCs are authorized to act as issue and portfolio
manager of the mutual funds which are issued under SEC (Mutual Fund) Rules 2001. There
are 15 AMCs in Bangladesh at present.
6. Credit Rating Companies (CRCs): CRCs in Bangladesh are licensed under Credit Rating
Companies Rules, 1996 and now, 5 CRCs have been accredited by SEC.
7. Trustees/Custodians: According to rules, all asset backed securitizations and mutual funds
must have an accredited trusty and security custodian. For that purpose, SEC has licensed 9
institutions as Trustees and 9 institutions as custodians.
8. Investment Corporation of Bangladesh (ICB): ICB is a specialized capital market
intermediary which was established in 1976 through the ordainment of The Investment
Corporation of Bangladesh Ordinance 1976. This ordinance has empowered ICB to perform
all types of capital market intermediation that fall under jurisdiction of SEC.

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 What is agent banking? State the main services provided by Agent Banking.

Agent Banking means providing limited scale banking and financial services to the underserved
population through engaged agents under a valid agency agreement, rather than a
teller/cashier. It is the owner of an outlet who conducts banking transactions on behalf of a
bank.
Agents will be able to offer financial services to the largely unbanked people who reside in rural
areas thus meeting their need to open bank accounts, save money and earn interest on savings,
whilst agents earn commissions from the services they provide.
The following services will be covered under Agent Banking:
I. Collection of small value cash deposits and cash withdrawals;
II. Inward foreign remittance disbursement;
III. Facilitating small value loan disbursement and recovery of loans, installments;
IV. Facilitating utility bill payment;
V. Cash payment under social safety net program me of the Government;
VI. Facilitating fund transfer (ceiling should be determined by BB from time to time);
VII. Balance inquiry;
VIII. Collection and processing of forms/documents in relation to account opening, loan
application, credit and debit card application from public;
IX. Post sanction monitoring of loans and advances and follow up of loan recovery.
X. Receiving of clearing cheque.
XI. Other functions like collection of insurance premium including micro- insurance etc.
An Agent must provide, as a minimum, cash deposit and cash withdrawal services. The agent's
activities would be within normal course of banking business of the scheduled banks but
conducted at places other than bank premises/ ATM booths. Agent must provide services in the
designated business premises.

What is bank rate? How Bangladesh Bank controls the credit by changing bank rate?
Give example.

The bank rate is the rate of interest which is charged by a central bank while lending loans to a
commercial bank. It is also called the discount rate; this rate is charged on all loans issued to
commercial banks.
One major way the central bank influences the economy is through the bank rate. This interest
rate is often low and in turn gives room for the expansion of the economy. In the event of a fund
deficiency, a bank can borrow money from the central bank of a country. Now Bank Rate in our
country is 4.00%.
Bank rate is the rate at which central bank offers loans to the Commercial Banks as a lender of
last resort. During inflation, when supply of credit is to be reduced, bank rate is increased. This
reduces borrowing by the Commercial Banks implying a reduction in their cash reserve and
therefore, a reduction in their capacity to create credit. Following increase in bank rate, market
rate of interest is also raised, implying a check on borrowings from the Commercial Banks.
Thus, overall supply of credit is reduced in the economy. Exactly opposite is done to combat
deflation: bank rate is lowered to increase the supply of credit.
So, it can be concluded that during inflation, when supply of credit is to be reduced, bank rate is
increased. This reduces borrowing by the Commercial Banks implying a reduction in their cash
reserve and therefore, a reduction in their capacity to create credit.

Difference between Money Market and Capital Market.

Comparison Money Market Capital Market

Definition It is the part of financial Capital market is part of the
market where lending and financial market where
borrowing takes place for lending and borrowing takes
short-term up to one year place for the medium-term
and long-term

Types of instruments Money markets generally Capital market deals in

involved deal in promissory notes, equity shares, debentures,
bills of exchange, bonds, preference shares,
commercial paper, T bills, etc.
call money, etc.

Institutions involved/types of The money market contains It involves stockbrokers,

investors financial banks, the central mutual funds, underwriters,
bank, commercial banks, individual investors,
financial companies, chit commercial banks, stock
funds, etc. exchanges, Insurance
Companies

Nature of Market Money markets are informal Capital markets are more
formal

Liquidity of the market Money markets are liquid Capital Markets are
comparatively less liquid

Maturity period The maturity of financial The maturity of capital

instruments is generally up markets instruments is
to 1 year longer and they do not have
stipulated time frame

Risk factor Since the market is liquid Due to less liquid nature and
and the maturity is less than long maturity, the risk is
one year, Risk involved is low comparatively high

Purpose The market fulfills the short- The capital market fulfills the
term credit needs of the long-term credit needs of the
business business

Functional merit The money markets increase The capital market stabilizes
the liquidity of funds in the the economy due to long-
economy term savings

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 Comparison Money Market Capital Market
Return on investment The return in money markets The returns in capital
are usually low markets are high because of
higher duration

Positives and Negatives aspects of an IPO

An IPO's principal purpose is to raise funds for a company. It may also have additional
advantages and downsides
The corporation has access to investments from the entire investing public, which is one of the
primary benefits. This improves the company's exposure, prestige, and public image, which can
boost sales and profitability.
Increased openness resulting from quarterly reporting requirements can typically help a firm
obtain more favorable loan conditions than a private company
Pros:
• Can generate additional capital through secondary offerings in the future.
• Participation in liquid stock equity attracts and keeps superior management and qualified
staff.
• IPOS can provide a company with a cheaper cost of equity and debt funding.
Cons:
• Significant legal, accounting, and marketing costs arise, many of which are ongoing
• Increased time, effort, and attention required of management for reporting
• There is a loss of control and stronger agency problems.

Define Micro-finance. Describes functions of micro finance.

Microfinance refers to a type of financial service that is specifically designed to provide access to
credit, savings, insurance, and other financial services to low-income individuals, typically in
developing countries. Microfinance institutions (MFIs) offer small loans to individuals who are
often excluded from the traditional banking sector due to their low-income status, lack of
collateral, or limited credit history.
Microfinance services are typically provided to entrepreneurs, small business owners, and self-
employed individuals, who use the loans to start or expand their businesses. Microfinance is
often seen as a tool for poverty reduction and economic development, as it provides access to
financial services to those who would otherwise be unable to obtain them.
The functions of microfinance institutions (MFIs) are primarily aimed at providing financial
services to low-income individuals and micro-enterprises.
Here are some of the key functions of microfinance:
1. Providing Access to Finance: The primary function of microfinance institutions is to provide
access to finance for low-income individuals and micro-enterprises who are typically
excluded from the formal banking sector.
2. Credit Provision: MFIs provide small loans, typically with short repayment periods and
without collateral, to help entrepreneurs start or expand their businesses.

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3. Savings Mobilization: MFIs encourage individuals to save money, even small amounts, which
be used as a safety net during difficult times or as a source of capital to start a business.
4. Insurance Provision: MFIs also provide micro-insurance products to help individuals protect
can themselves and their businesses against unexpected events, such as natural disasters,
illness, or death.
5. Capacity Building: MFIs often provide training and technical assistance to entrepreneurs to
help them develop the necessary skills and knowledge to manage their businesses
effectively.
6. Social Development: MFIs often have a social mission to promote financial inclusion, reduce
poverty, and empower women and marginalized communities.
Overall, the functions of microfinance institutions are aimed at providing access to finance and
other financial services to those who are typically excluded from the formal banking sector, in
order to promote economic development, poverty reduction, and financial inclusion.

Distinguish between micro-finance and micro-credit market.

Micro-credit, on the other hand, refers specifically to small loans provided to low-income
individuals or micro-enterprises to help them start or expand their businesses. These loans are
usually provided without collateral and have shorter repayment periods compared to traditional
bank loans. Micro-credit is usually extended to entrepreneurs who are considered high-risk
borrowers by traditional banks, but who have the potential to become self-sufficient with the
help of small loans.

The microfinance and micro-credit market in Bangladesh is one of the largest and most
developed in the world, with over 30 million borrowers served by more than 600 microfinance
institutions. The microfinance sector in Bangladesh has played a significant role in reducing
poverty and promoting financial inclusion in the country, particularly for women and rural
communities.

Despite the success of the microfinance sector in Bangladesh, there have been some concerns
about high-interest rates and over-indebtedness among borrowers. There have also been issues
around the governance and transparency of some microfinance institutions. However, overall,
the microfinance and micro-credit market in Bangladesh has had a positive impact on poverty
reduction and economic development in the country.

Who are Key Players in FX Markets?

The foreign exchange (FX) market is a highly decentralized market, which means that there are
many participants involved in the buying and selling of currencies. Some of the key players in
the FX market include:
1. Commercial banks: Commercial banks are the largest participants in the FX market,
accounting for the majority of daily trading volume. They trade currencies on behalf of their
clients, such as multinational corporations, governments, and institutional investors.
2. Investment banks: Investment banks also play a significant role in the FX market, providing
services such as currency trading, risk management, and advisory services to institutional
clients.
3. Central banks: Central banks are responsible for setting monetary policy and managing
foreign exchange reserves. They also intervene in the FX market from time to time to
stabilize their domestic currency or to influence the exchange rate.
4. Hedge funds: Hedge funds are large institutional investors that trade currencies as part of
their investment strategies. They may use a variety of trading techniques, including
algorithmic trading and high-frequency trading.
5. Corporations: Multinational corporations that engage in international trade and investment
may also participate in the FX market to hedge their currency risks or to execute currency
transactions.
6. Retail traders: Retail traders are individuals who trade currencies for their own account,
typically through an online trading platform. They account for a small portion of the overall
FX market volume.
7. Currency traders and FX brokers: Currency traders are individuals or institutions that buy
and sell currencies on the FX market to make a profit. They can be individuals trading from
home, professional traders working for banks or hedge funds, or small businesses engaged
in international trade. They use a variety of trading strategies and tools, including technical
analysis, fundamental analysis, and automated trading algorithms, to identify profitable
opportunities in the market.
8. Speculators: Speculators are a type of trader in the financial markets, including the foreign
exchange (FX) market, who engage in trades with the primary goal of profiting from price
movements. Speculators are distinct from other market participants, such as investors, who
invest in an asset for the long term, seeking to generate income or capital appreciation.
9. Central Banks of countries: Central banks are the main regulatory bodies in charge of
managing a country's monetary policy and ensuring the stability of its financial system.
Central banks play a crucial role in the global economy, and their actions can have a
significant impact on the foreign exchange (FX) market.

What do you mean by Islamic Banking? Describe the prospective of Islamic Banking.

Islamic banking refers to a system of banking that complies with Islamic law also known as
Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit
sharing between parties, the assurance of fairness for all and that transactions are based on an
underlying business activity or asset.
The main principles of Islamic finance are that: Wealth must be generated from legitimate trade
and asset-based investment.
Distinguishing features of Islamic banking: Five essential differences as below:
1. Abolition of Interest (Riba): The first distinguishing feature of an Islamic bank must be that it
is interest-free, while the abolition of Riba would be the first and essential difference
between the conventional interest-based commercial banks and Islamic banks, if would not
the constitute the only difference between them.
2. Adherence to public interest: Activity of commercial banks being primarily based on the use
of public funds, public interest rather than individual or group interest will be served by
Islamic Commercial banks. The Islamic banks should use all deposits, which come from the
public for serving public interest and realizing the relevant socio-economic goals of Islam.
3. multi-purpose bank: Another substantial distinguishing feature is that Islamic banks will be
universal or multi-purpose banks and not purely commercial banks. These banks are
conceived to be a crossbreed of commercial and investments banks, investment trusts and
investment management institutions would offer a variety of services to their customers.
4. More careful evaluation of investment demand: Since the Islamic bank has in built
mechanism of risk-sharing, it would need to be careful more careful. It adds a healthy
dimension in the whole lending business and eliminates a whole range of undesirable
lending practices.
5. Work as Catalyst of development: Profit-loss sharing being a distinctive characteristic of an
Islamic bank, if fosters closer relations between banks and entrepreneurs. It helps develop
financial expertise in non-financial firm also enables the banks to assume the role technical
consultants and financial advisors and act as catalysts in the process of industrialization and
development.

What are the sources of Shariah law and how are they used in Islamic jurisprudence?

The primary sources of Shariah law in Islam are the Quran, the Sunnah (the practices and
teachings of the Prophet Muhammad), the Ijma (consensus of Muslim scholars), and the Qiyas
(analogical reasoning).
The sources of Shariah law are the primary sources of Islamic jurisprudence that guide Muslims
in their religious, social, and legal practices.
1. The Quran: The Quran is the foundational source of Islamic law, providing the principles and
values that guide Muslims in all aspects of their lives. The Quran is the primary source of
Shariah law, containing the divine revelation from Allah to the Prophet Muhammad. It
provides the foundational principles and guidance for all aspects of Islamic life, including
moral and ethical behavior, social practices, and legal rulings.
2. The Sunnah: The Sunnah refers to the practices and traditions of the Prophet Muhammad,
which are recorded in the Hadith (narrations of the Prophet's sayings and actions) and the
Seerah (biography of the Prophet). The Sunnah provides guidance on how to implement the
principles and teachings of the Quran in everyday life.
3. Ijma: Ijma refers to the consensus of Muslim scholars on a particular issue or question. This
consensus is based on the collective understanding and interpretation of the Quran and
Sunnah by Islamic scholars throughout history. Ijma provides a source of authority for legal
rulings and helps to establish a unified understanding of Islamic law.
4. Qiyas: Qiyas refers to analogical reasoning, which involves deriving legal rulings for new
situations by analogy with existing rulings. Qiyas is used when there is no explicit guidance
in the Quran, Sunnah, or Ijma on a particular issue. Qiyas is a complex and nuanced method
of legal reasoning that requires a deep understanding of Islamic principles and values.
 Define Narrow and Broad money.

In the macro economy of Bangladesh, narrow money refers to the M1 money supply, which
includes physical currency, coins, demand deposits (checking accounts), and other checkable
deposits held by households and businesses.
Narrow money can be calculated using the following formula:
M1 = Currency in Circulation + Demand Deposits + Other Checkable Deposits
To calculate M1, add up the total amount of currency in circulation, demand deposits, and other
checkable deposits in an economy. This will give you a measure of the most liquid forms of
money that are readily available for transactions.
Narrow money is an important indicator of the liquidity in the economy, as it represents the
most liquid forms of money that can be used for transactions. In Bangladesh, narrow money
plays a significant role in the conduct of monetary policy, as the central bank (Bangladesh Bank)
uses various tools to manage the supply of money in the economy and maintain price stability.
Broad money:
In the macro economy of Bangladesh, broad money refers to the M2 money supply, which
includes all of the components of M1 (physical currency, coins, demand deposits, and other
checkable deposits), as well as savings deposits, time deposits (such as certificates of deposit),
and money market funds.
Broad money can be calculated using the following formula:
𝑀2 = 𝑀1 + 𝑆𝑎𝑣𝑖𝑛𝑔𝑠 𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠 + 𝑇𝑖𝑚𝑒 𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠 + 𝑀𝑜𝑛𝑒𝑦 𝑀𝑎𝑟𝑘𝑒𝑡 𝐹𝑢𝑛𝑑𝑠
It's important to note that different countries may use slightly different definitions of 𝑀2 and
may use different criteria for what is included in this measure. However, the basic formula for
calculating broad money remains the same.

What is Money Multiplier?

The money multiplier is a concept that explains how an initial injection of money into the
banking system can lead to a larger increase in the overall money supply. The money multiplier
is based on the idea that banks can create money through the process of lending.
The formula for calculating the money multiplier is:
Money Multiplier = 1/Reserve Ratio
Or, Money Multiplier = Total Deposits / Required Reserves
where:
▪ Reserve Ratio is the fraction of deposits that a bank must hold in reserve as mandated by the
central bank's reserve requirement policy.
▪ Total Deposits refer to the total amount of deposits held by the banking system.
▪ Required Reserves refer to the amount of reserves required to be held by banks based on the
reserve requirement policy of the central bank.
For example, if the reserve ratio is 10%, the money multiplier would be 1/0.1 = 10. This means
that for every $1 of new reserves injected into the banking system, the total amount of money
created in the economy would be $10, assuming all banks fully utilize their lending capacity. The
money multiplier can be affected by changes in the reserve ratio, which can impact the amount
of money that banks can lend out and the overall money supply in the economy.

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The money multiplier can also be impacted by changes in the demand for loans and the
willingness of banks to lend

What is Repo & Reverse Repo?

Repo is the mechanism through which the central bank lends money to commercial banks
keeping the treasury bills as security. It is an instrument of monetary policy. Whenever banks
have any shortage of funds they can borrow from the BB. A reduction in the repo rate helps
banks get money at a cheaper rate and vice versa. On the other hand, Reverse Repo is the
mechanism through which the central bank borrows money from commercial banks. An increase
in the reverse repo rate can prompt banks to park more funds with the central bank to earn
higher returns on idle cash. It is also a tool that can be used by the BB to drain excess money out
of the banking system.

What is the Difference between Islamic banking & Traditional banking?

Commercial banking is based on manmade rules and focus on interest financing. Islamic banks
perform functions as commercial banks but they follow the rules of Islamic Sariah board. Islamic
banking is the interest free banking.

Banks Islamic Banks

1. The functions and operating modes 1. The functions and operating modes
of conventional banks are based on of Islamic banks are based on the
manmade principles principles of Islamic Shariah.
2. The investor is assured of a 2. In contrast, it promotes risk sharing
predetermined rate of interest between provider of capital (investor)
and the user of funds (entrepreneur).
3. The investor is assured of a 3. It also aims at maximizing profit but
predetermined rate of interest subject to Shariah restrictions
4. It does not deal with Zakat 4. In the modern Islamic banking
system, it has become one of the
service-oriented functions of the

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