MAFS Quick Review (5th BPE)

Module – A

1. Functions of Money

 Medium of Exchange: Facilitates transactions and removes the need for barter.
 Unit of Account: Provides a standard measure to compare values.
 Standard of Deferred Payment: Used in contracts for future payments.
 Store of Value: Retains value over time for saving and wealth storage.

2. Keynesian Money Demand Function

 Transaction Motive: Money held for daily purchases and payments.

 Precautionary Motive: Held for unforeseen expenses and emergencies.
 Speculative Motive: Held to take advantage of future investment opportunities.
 Income Effect: Higher income increases transaction and precautionary demand.
 Interest Rate Effect: Lower interest rates increase speculative demand for money.

3. Why Do People Demand Money

 Transactions Motive: Needed to buy goods and services.

 Precautionary Motive: Reserved for unexpected events or needs.
 Speculative Motive: Held to invest when opportunities arise.
 Income Impact: Higher income = more transaction needs.
 Interest Rate Impact: Higher rates = less cash held, more investments.

4. Money Supply and Interbank Deposits

 M1 Definition: Currency outside banks and demand deposits.

 M2 Definition: M1 plus time deposits.
 Excludes Interbank Deposits: Not included in money supply.
 Reason: Interbank money isn’t available to the public.
 Impact: Including it would misrepresent real public liquidity.

5. How is Money Supply Measured?

 M1: Most liquid – includes cash and demand deposits.

 M2: Broader – includes M1 and time deposits.
 Liquidity: M1 is highly liquid; M2 is less so.
 Composition: M1 = cash + demand deposits; M2 = M1 + time deposits.
 Economic Role: M1 reflects current spending; M2 shows future potential.

6. Fisher Equation: Interest, Inflation, Real Rate

(1+i)=(1+r)(1+π)

Where:

i = Nominal interest rate, r = Real interest rate, π = Inflation rate

 Formula: Nominal Interest = Real Interest + Inflation.

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  Inflation Effect: Higher inflation increases nominal rate.
 Real Interest: Reflects actual return after inflation adjustment.

7. Constituents of the Monetary System

 Currency: Coins and notes issued by the central authority.

 Banks & Institutions: Provide financial services and regulate money.
 Money Supply: Total currency and deposits in the economy.
 Payment Systems: Tools for transferring money, like cards and online systems.

8. How Banks Create Money

 Initial Deposit: Customer deposits money in a bank.

 Reserve Requirement: A portion is kept as reserve, rest is lent out.
 Money Creation: Loans get redeposited and multiplied.
 Money Multiplier: Shows total increase in money supply.

Impact of Bond Auction on Money Supply

 Bond Sale: Central bank sells treasury bonds.

 Reserve Decrease: Buyer payments reduce bank reserves.
 Lower Lending: Fewer reserves mean less capacity to lend.
 Money Supply Falls: Overall money in the economy contracts.

Module – B

1. Different Payment Systems in Bangladesh:

Payment Method Description Advantages Disadvantages

Cash Payment Physical currency (coins and Easy for small transactions, Less safe for large amounts, not
notes). widely accepted. suitable for large transactions.
Cheque Payment Written order to transfer money Safe for large payments, Takes time to process, risk of
between bank accounts. used in business. fake or bounced cheques.
Mobile Financial Platforms like bKash, Nagad, and Popular in urban and rural Requires mobile phone,
Services Rocket on mobile phones for areas, fast and convenient. sometimes slow transaction
payments. times.
Real-Time Gross Electronic payments for high- Instant settlement of large Mainly used for high-value
Settlement (RTGS) value transactions between banks. payments. transactions, not accessible for
everyone.
Electronic Funds Transfers money between bank Fast and secure for bank-to- Requires internet or bank access,
Transfer (EFT) accounts electronically. bank payments. not for all users.
Debit/Credit Card Payments via debit/credit cards in Fast, secure, and convenient Not accepted everywhere, may
Payment shops or online. for large payments. require specific devices.
Online Payment Platforms like SSLCommerz and Works for e-commerce, Requires internet access, not
Gateways EasyPay for e-commerce supports multiple payment universally available.
payments. options.
Internet Banking Online services for money Convenient for making Requires internet access, not all
transfers, bill payments, etc. payments from home. people use it.
Post Office Post offices offering financial Useful in remote areas with Not as widely used as mobile or
Payments services like money transfer and no bank, offers additional bank payments.
bill pay. services.

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2. Advantages and Disadvantages of Payment Methods (Table Format)

Payment Method Advantages Disadvantages

Cash Simple, widely accepted Risky for large amounts, hard to carry
Cheque Safe for big payments, less cash needed Processing delay, fake cheque risk
Card Safe, fast for big purchases Needs equipment, may charge fees
Mobile Payment Convenient, safe, works from phone Needs internet/device, may take 1–3 days
EFT Safe for large payments Can be complex for regular users
Mobile Wallet Fast, encrypted, secure Needs device or app
QR Code Contactless, works on all phones Needs internet, not usable without a smartphone

3. Why Electronic Payments Are Popular:

1. Fast – Instant payments anytime, anywhere.

2. Safe – Lower chance of fraud or theft.
3. Transparent – All transactions are recorded.
4. Cost-saving – Less cost than handling cash.
5. Global – Easy international payments.
6. Inclusive – Helps people without bank access.

4. MPS vs. Traditional Methods for Remittance:

Feature Mobile Payment System (MPS) Traditional Methods

Speed Instant transfers Takes days or weeks
Access Works without bank account Requires bank visits
Cost Low transaction fees High fees and hidden costs
Security Encrypted and confirmed immediately Risk of fraud and delay
Support Promoted by government Less encouraged now

5. Dominant and Fastest Growing Payment Methods:

 Most Used: MFS like bKash, Nagad, Rocket.

 Fastest Growing: QR Code and EFT.
 Reason: Easy, fast, and safe digital options.
 Stat: MFS handles over 1.5 trillion BDT monthly.

6. Contactless Payment:

1. Definition – Payment by tapping card/phone near a machine.

2. Uses NFC/RFID – No physical swipe or insert needed.
3. Fast Process – Takes only a few seconds.
4. Secure – Uses encryption for safety.
5. Hygienic – No physical contact, useful in health safety.
6. Examples – Visa tap cards, bKash app, Nagad QR code.

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 Module – C

1. Functions of Financial Markets in Allocating Funds Efficiently

 Financial markets transfer funds from surplus units to deficit units for economic growth.
 Key Functions:
1. Mobilization of Savings: Encourages savings by providing secure investment options.
2. Facilitating Investment & Capital Formation: Channels savings into productive sectors like industry and
infrastructure.
3. Risk Diversification: Provides a variety of financial instruments to reduce investment risks.
4. Liquidity Provision: Ensures assets can be easily bought and sold without major losses.
5. Price Determination: Asset prices reflect supply and demand, guiding investors.

2. Financial System Components

 A financial system consists of institutions, markets, instruments, and regulations.

 Components:
1. Financial Institutions: Intermediaries like banks, insurance companies, and microfinance institutions.
2. Financial Markets: Platforms for buying and selling financial instruments (stocks, bonds).
3. Financial Instruments: Assets like stocks, bonds, and derivatives traded in markets.
4. Regulatory Bodies: Authorities ensuring stability and compliance, e.g., Bangladesh Bank and SEC.
5. Payment Systems: Technologies enabling electronic fund transfers, e.g., bKash.
6. Financial Intermediaries: Institutions like banks that channel funds between savers and borrowers.

3. Functions of Financial Systems

 Financial systems provide liquidity, efficient capital allocation, and risk management.
 Key Functions:
1. Mobilization of Savings: Encourages savings into productive investments.
2. Efficient Resource Allocation: Ensures funds go to the most productive sectors.
3. Risk Management: Offers tools for managing financial risks.
4. Facilitating Payments: Supports smooth financial transactions.
5. Providing Liquidity: Ensures availability of funds when needed.
6. Economic Stability: Maintains balance and prevents financial crises.

4. "All Forms of Money Are Financial Instruments, But All Financial Instruments Are Not Money."

 Financial instruments include various contracts, while money serves as a medium of exchange.
 Key Differences:
1. Purpose: Money enables transactions; other financial instruments help raise capital or investments.
2. Liquidity: Money is highly liquid, while other instruments need conversion.
3. Examples: Money is currency; financial instruments include stocks and bonds.

5. Characteristics of an Efficient Financial Market

 Efficient markets ensure liquidity, transparency, and price discovery.

 Characteristics:
1. Liquidity: Assets are bought/sold quickly without large price changes.
2. Transparency: Clear pricing and public access to market information.
3. Price Discovery: Asset prices reflect all available information.
4. Low Transaction Costs: Reduces barriers and promotes investment.
5. Regulatory Oversight: Ensures fairness and prevents market manipulation.

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6. Financial Development

 Financial development includes the expansion of markets, institutions, and instruments to foster economic growth.
 Measurement Methods:
1. Financial Depth: Ratio of credit or money supply to GDP, reflecting financial sector size.
2. Access to Financial Services: Measures how accessible banking services are to the population.
3. Efficiency: Assessed by the cost of financial transactions or lending-deposit rate spread.

7. Financial Development Indicators

 Key indicators assess financial system integration and mobilization.

 Indicators:
1. Financial Interrelations Ratio (FIR): Measures the connection between financial sectors.
2. Financial Intermediation Ratio (FIMR): Shows the efficiency of fund mobilization by institutions.
3. New Issue Ratio (NIR): Reflects capital market activity through new securities issuance.
4. Financialisation Ratio: Measures the dominance of financial markets in the economy.
5. Monetization Ratio: Indicates the share of the economy using formal money.

8. Impact of Transaction Costs on the Financial System

 Transaction costs affect market efficiency, liquidity, and capital allocation.

 Impacts:
1. Market Efficiency: High costs reduce trading and investment activities.
2. Liquidity: Lower costs improve market liquidity.
3. Capital Allocation: High costs limit access to finance, affecting growth.
4. Financial Inclusion: Reduced costs make financial services affordable for more people.
5. Investment Returns: Higher costs lower net returns, influencing investor behavior.

9. Differences between Microcredit and Microfinance:

Aspect Microcredit Microfinance

Definition Small loans to low-income individuals for Broader, including loans, savings, insurance,
business. remittances.
Services Focuses on credit (small loans). Provides credit, savings, insurance, and more.
Provided
Target Group Individuals with no access to traditional banking. Low-income individuals, with a wider service range.
Purpose Primarily for starting or expanding small Aims for financial inclusion and poverty alleviation.
businesses.
Scope Narrow (focused on credit). Broader (includes multiple financial services).

10. Why Are NBFIs Known as Financial Intermediaries

Feature BFIs (Banks) NBFIs (Non-Bank Financial Institutions)

Deposit Collection Accept deposits from the public. Cannot accept demand deposits (except term
deposits).
Loan Structure Offer both short and long-term loans. Focus mainly on long-term financing.
Regulation Regulated under Bank Company Act, Regulated under Financial Institutions Act, 1993.
1991.
Role in Money Active in monetary policy transmission. Not directly involved in monetary policy.
Market

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 Types of Services General banking, trade finance, Leasing, investment banking, asset management.
remittances.
Supervisory Bangladesh Bank Bangladesh Bank (with different regulations).
Authority

11. Role of the Financial System in Economic Development

 The financial system supports investment, trade, and economic growth.

 Key Contributions:
1. Mobilization of Savings: Channels savings into investments for business expansion.
2. Efficient Allocation: Allocates funds to productive sectors like agriculture and industry.
3. Facilitating Trade: Supports domestic and international trade with credit and transaction services.
4. Promoting Entrepreneurship: Provides funding for startups and small businesses.
5. Employment Generation: Creates jobs by funding industries and businesses.
6. Economic Stability: Ensures price stability and prevents financial crises.

Module – D

1. BFIs and NBFIs as Financial Intermediaries

BFIs:

 Deposits Collection: Collect funds from individuals and businesses.

 Loans and Credit: Lend funds to individuals, firms, and governments.
 Payment Services: Enable transactions through various payment methods.
 Risk Management: Offer tools to manage financial risks.
 Liquidity Provision: Provide liquidity by converting assets to cash.

NBFIs:

 Investment Services: Pool and invest funds in securities.

 Credit and Financing: Offer credit to non-traditional borrowers.
 Asset Management: Manage investment portfolios for clients.
 Market Development: Provide niche financial products like leasing.
 Financial Inclusion: Serve underserved and rural populations.

2. Functions and Growth of BFIs in Bangladesh

Functions:

 Savings Mobilization: Gather public savings through deposits.

 Credit Provision: Provide loans across economic sectors.
 Payment Services: Facilitate smooth financial transactions.
 Risk Management: Offer tools to protect against financial risks.
 Investment Services: Invest in bonds and securities for returns.

Growth:

 Network Expansion: Increased number of banks and branches.

 Tech Adoption: Embraced digital and mobile banking solutions.
 Product Diversification: Launched Islamic and microfinance services.
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  Capital Strengthening: Improved financial health via regulations.
 Foreign Investment: Attracted foreign capital and expertise.

3. Functions and Growth of NBFIs in Bangladesh

Functions:

 Credit Provision: Offer loans especially to SMEs.

 Investment Services: Provide options like bonds and stocks.
 Insurance Services: Offer life and general insurance products.
 Microfinance: Support low-income groups with small loans.
 Asset Management: Handle mutual and pension funds.

Growth:

 Market Expansion: Increased share in financial services.

 Tech Integration: Adopted digital platforms for outreach.
 Regulatory Support: Benefited from central bank policies.
 Product Innovation: Expanded mutual and bond market products.
 Public Awareness: More people using NBFI services.

4. Roles Banks Play in an Economy

 Payment Facilitation: Enable safe and quick transactions.

 Savings Mobilization: Encourage savings and investments.
 Credit Provision: Provide funding for personal and business needs.
 Risk Management: Help manage risks with financial tools.
 Policy Implementation: Support monetary policy through lending and rates.

5. Multiple Deposit Creation by Banks

 Concept: Banks create money by lending out a portion of deposits repeatedly.

 Fractional Reserve System: Banks keep a fraction of deposits as reserves and lend the rest.
 Reserve Requirement: Central bank sets a minimum reserve ratio (e.g., 10%).
 Money Multiplier Effect: Each round of lending increases total money supply.
 Economic Impact: Expands credit availability and supports economic growth.

6. Key Trends in Commercial Banking

 Digital Transformation: Banks adopt mobile, online, and AI technologies.

 Fintech Integration: Partnering with fintechs to offer innovative solutions.
 Customer-Centric Services: Personalizing services using data analytics.
 Regulatory Compliance: Focusing on transparency and legal requirements.
 Sustainable Banking: Integrating ESG goals into banking operations.

7. Trends Reshaping Commercial Banking Worldwide

 Digital Banking: Fintech, mobile apps, and blockchain reshape operations.

 Cashless Economy: Rise in card payments and mobile wallets reduces cash use.
 Regulatory Changes: New rules enhance stability but increase complexity.
 Cybersecurity Focus: Banks invest in data protection and fraud prevention.
 Customer Personalization: AI helps deliver tailored financial services.
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  Green Finance: Banks fund eco-friendly and renewable energy projects.

8. Banks’ Intermediation as “Risk Arbitrage”

 Concept: Banks earn profit by managing risk differences between deposits and loans.
 Low-Risk Deposits: Offer safe, low-interest returns to depositors.
 High-Risk Loans: Lend to borrowers at higher interest rates with credit risk.
 Profit Spread: Interest rate gap between deposits and loans forms profit.
 Risk Management: Use tools like diversification and credit assessment to balance risks.

Module – E

1. Participants in the Money Markets and Their Roles

Definition: The money market is a segment of the financial market where short-term borrowing, lending, and trading of
financial instruments occur.

 Central Banks: Regulate money supply and maintain liquidity through interest rate control.
 Commercial Banks: Borrow and lend short-term funds to manage liquidity needs.
 Corporations: Use short-term instruments like commercial papers for funding needs.
 Money Market Mutual Funds: Invest pooled funds in short-term debt for liquidity and safety.
 Governments: Issue Treasury bills to fund short-term needs and offer low-risk options.

2. Capital Market and Its Functions

Definition: Capital market is a financial market where long-term debt and equity securities are issued and traded.

 Mobilization of Savings: Converts public savings into productive investments.

 Facilitating Investment: Helps businesses raise long-term capital via securities.
 Price Discovery: Determines security prices through market demand and supply.
 Liquidity: Enables easy buying and selling of long-term securities.
 Economic Growth: Supports growth by channeling funds to productive sectors.

3. Bond Market and Its Operations

Definition: Bond market is where investors trade debt securities issued by governments, corporations, or other entities.

 Issuance: Bonds are issued by entities to raise capital for projects.

 Trading: Bonds are traded in primary (from issuer) and secondary markets.
 Pricing: Influenced by interest rates, credit ratings, and economy.
 Yield: Reflects return on investment from bond price and coupon rate.
 Maturity: Bonds repay principal at a fixed time after issuance.

4. FDI and Its Impact on Bangladesh

Foreign Direct Investment (FDI) is an investment by a foreign entity in business assets of another country with significant
ownership or control.

 Job Creation: New businesses create employment opportunities.

 Technology Transfer: Brings modern tech and expertise to local industries.
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  Infrastructure Development: Improves physical and service infrastructure.
 Export Growth: Increases export capacity and foreign exchange earnings.
 Economic Growth: Stimulates overall growth via capital and investment flow.

5. Components of Balance of Payment (BoP)

Balance of Payment (BoP) is a record of all economic transactions between residents of a country and the rest of the world in a
given time.

 Goods (Current A/C): Tracks trade in tangible exports and imports.

 Services (Current A/C): Covers international trade in services.
 Income (Current A/C): Includes earnings from investments and remittances.
 Current Transfers (Current A/C): Records unilateral inflows like aid and donations.
 Capital Account: Records non-financial asset transfers and debt forgiveness.
 Financial Account: Includes FDI, portfolio investment, and foreign loans.
 BoP Balance: In theory always balances; in practice, may show surplus or deficit.

6. Bond Sales and Interest Rate Effects

Central bank bond sales are a monetary policy tool used to reduce the money supply in the economy.

 Selling Bonds: Central bank increases bond supply in the market.

 Reduced Money Supply: Investors use money to buy bonds, shrinking liquidity.
 Bond Price Drop: Increased supply lowers bond prices.
 Interest Rate Rise: Falling bond prices push yields (interest rates) up.
 Graph View: Rightward bond supply shift raises interest by lowering prices.

Module – F

1. Shari'ah Governance in an Islamic Financial Institution

Definition: Shari'ah governance refers to a system that ensures all operations and financial products of Islamic Financial
Institutions (IFIs) comply with Islamic law (Shari'ah).

 Shari'ah Board: Group of Islamic scholars issuing fatwas and guiding Shari'ah compliance.
 Board of Directors: Ensures strategic direction aligns with Shari'ah principles.
 Management: Executes daily operations under Shari'ah guidelines.
 Shari'ah Compliance Dept.: Monitors and reports financial activities for Shari'ah adherence.
 Shari'ah Audit Function: Independently verifies compliance with Shari'ah rulings.
 Regulatory Authorities: Provide legal framework for Islamic finance oversight.

2. Relationship between Finance and Religion (Islam)

Definition: Islamic finance is a financial system based on Islamic law (Shari'ah), which prohibits interest (riba) and emphasizes
ethical and fair transactions.

 Three Core Elements: Based on Aqidah (faith), Shari’ah (law), Akhlaq (ethics).
 Muamalat: Covers all financial and social dealings in line with Islamic teachings.
 No Riba or Gharar: Prohibits interest and excessive uncertainty.
 Zakat and Welfare: Encourages redistribution of wealth for social justice.
 Ethical Investments: Forbids haram activities (e.g., gambling, alcohol).

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  Profit & Risk Sharing: Uses Mudarabah and Musharakah instead of interest.

3. Basic Fundamentals of Shari'ah Law

Definition: Shari'ah is the divine law of Islam derived from the Qur’an, Hadith, Ijma (consensus), and Qiyas (analogy).

 Tawhid: Oneness of Allah must guide all aspects of life.

 Qur'an and Hadith: Primary and direct sources of Shari’ah.
 Ijma: Consensus of scholars for unaddressed issues.
 Qiyas: Analogical reasoning for deriving laws.
 Ethics & Morality: Justice and social welfare are essential values.

Principles for Shari’ah-Compliant Products:

 No Riba: Avoids interest-based structures.

 Halal Practices: No involvement in unethical or prohibited industries.
 Risk Sharing: Encourages equity-based and joint-risk mechanisms.
 Transparency: Contracts must be clear to avoid uncertainty (Gharar).
 Maslahat (Public Good): Should benefit society at large.

4. How Ijma & Qiyas Differ from Qur'an and Hadith

 Ijma (Definition): Scholarly consensus on new issues not directly covered in Qur’an/Hadith.
 Qiyas (Definition): Analogical reasoning to apply known rulings to new issues.
 Qur’an: Primary, divine, and eternal source of Islamic law.
 Hadith: Sayings/actions of Prophet Muhammad (PBUH); clarifies the Qur’an.
 Difference: Qur’an/Hadith are direct revelations, while Ijma/Qiyas are interpretative tools.

5. Objectives of Islamic Banking

Definition: Islamic banking refers to a banking system that operates in accordance with the principles of Islamic Shari'ah,
prohibiting interest (riba) and promoting ethical finance.

 Shari'ah-Compliant Services: Offers financial products that follow Islamic law and avoid riba.
 Economic Development: Promotes entrepreneurship and growth through profit-sharing.
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  Resource Allocation: Invests in productive and socially beneficial projects.
 Fair Income Distribution: Ensures equitable sharing among banks, depositors, and entrepreneurs.

Definition of Riba:
Riba is the unjust gain in trade or business under Islamic law, typically referring to interest on loans. It is strictly prohibited as it
leads to exploitation and unearned profits.

6. Role of Money in Islamic Economics and Finance

Definition: In Islamic economics, money is a medium of exchange and a measure of value—not a commodity to be traded for
profit.

 Means of Exchange: Facilitates trade and economic activity.

 Measure of Value: Standard unit to compare product values.
 No Hoarding: Money should circulate and support economic growth.
 No Riba: Profit must come from real trade or assets, not from lending.
 Equity-Based Finance: Encourages risk-sharing and fairness.
 Tangible Asset-Backed: Investments must link to real, productive assets.

7. Key Principles of Islamic Banking

 No Riba: Interest is banned; earning from lending money is prohibited.

 Profit & Loss Sharing: Encourages equity models like Mudarabah & Musharakah.
 Asset-Backed Financing: Real assets must support all transactions.
 Ethical Investment: Avoids businesses involving haram activities.
 Risk Sharing: Fair distribution of risks and rewards.

Conceptual Difference:

 Interest: A fixed return on loans; risk-free for lender—exploitative.

 Riba: Broader term covering any guaranteed, risk-free profit—unjust in Islam.

8. Investment Products of Islamic Banks in Bangladesh

Definitions of Products:

 Mudarabah: Profit-sharing model—bank provides funds, entrepreneur manages.

 Musharakah: Joint venture—both share capital and profit/loss.
 Murabaha: Cost-plus sale—bank sells at a profit with full price disclosure.
 Ijara: Leasing model—bank leases assets for a fee.
 Ijara wa-Iktina: Lease-to-own—customer may buy asset at lease end.
 Sukuk: Islamic bonds—returns come from real asset profits, not interest.

Key Features:

 Shari'ah Compliance: No riba or gharar.

 Profit Sharing: Mutual benefit and fairness.
 Asset-Backed: Transactions tied to real assets.

Fundamental Sources of Shari’ah Law:

 Qur’an: Primary divine law source.

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  Hadith: Teachings of the Prophet Muhammad (PBUH).
 Ijma: Scholarly consensus.
 Qiyas: Analogical deduction based on known rulings.

9. Three Key Shari’ah Principles Adopted by Islamic Banks

 Mudarabah (Definition): Trust-based contract—capital from one, management by another, shared profit.
 Musharakah (Definition): Joint venture—both provide capital and share results.
 Murabaha (Definition): Trade-based sale—bank buys item and resells it at a disclosed profit.

Module – G
1. Why is Financial System Regulation necessary:

1. Ensures Stability: Regulation helps maintain stability within the financial system by preventing risks that can lead to
financial crises.
2. Protects Consumers: It ensures that financial products and services are safe for consumers, preventing fraud and
exploitation.
3. Promotes Fairness: Regulation ensures that all financial institutions operate on a level playing field, preventing
unethical practices.
4. Encourages Confidence: A well-regulated system builds trust in the financial sector, encouraging investment and
economic growth.

2. Difference between Macroprudential and Microprudential Regulations:

Aspect Macroprudential Regulations Microprudential Regulations

Focus Stability of the entire financial system. Stability of individual financial institutions.
Objective Prevent systemic risks that could harm the broader Ensure the soundness and stability of individual
economy. institutions.
Scope Addresses broader economic issues (e.g., asset Focuses on issues related to specific institutions
bubbles, interconnections). (e.g., capital adequacy, liquidity).
Risk Mitigates risks that could lead to financial crises. Manages risks within a specific institution.
Management
Examples of Capital surcharges, liquidity requirements, stress Capital requirements, prudential ratios, supervisory
Tools testing of the financial system. interventions.

3. Main Functions of the Central Bank

The central bank is a national financial institution responsible for managing monetary policy, issuing currency, regulating
financial systems, and ensuring economic stability.

1. Monetary Management
o Control Inflation & Money Supply: Implements policies to control inflation and regulate the money supply.
o Interest Rate Regulation: Adjusts interest rates to stabilize the economy.
2. Issuance of Currency
o Sole Authority: The central bank has the exclusive right to issue national currency.
o Money Supply: Ensures there is an adequate money supply to meet the economic needs.
3. Banking Supervision
o Regulates Banks: Ensures that banks adhere to prudential regulations and maintain financial stability.
o Risk Management: Monitors the financial health of banks and enforces sound risk management practices.

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 4. Lender of Last Resort
o Emergency Funding: Provides financial assistance to banks facing liquidity crises to prevent systemic collapse.
o Prevents Collapse: Ensures the stability of the financial system during economic shocks.
5. Foreign Exchange & Reserves Management
o Manages Reserves: Controls the country’s foreign exchange reserves to stabilize the exchange rate.
o Trade Facilitation: Implements policies that support international trade and investments.
6. Developmental Role
o Financial Inclusion: Promotes inclusive financial services for all sectors of society.
o Encourages Innovation: Supports innovation in digital banking and financial technology.

4. Regulators of the Financial System in Bangladesh:

1. Bangladesh Bank (BB): Regulates and supervises banks, monetary policy, and foreign exchange.

2. Bangladesh Securities and Exchange Commission (BSEC): Oversees the capital market, stock exchanges, and
securities regulations.

3. Insurance Development and Regulatory Authority (IDRA): Regulates the insurance sector, ensuring policyholder
protection.

4. Microcredit Regulatory Authority (MRA): Supervises and regulates microfinance institutions (MFIs).

5. Financial Reporting Council (FRC): Ensures transparency and accountability in financial reporting and auditing.

5. Core Policies of the Central Bank:

1. Monetary Policy:
It involves managing the money supply, interest rates, and inflation to maintain price stability and control inflation.
2. Exchange Rate Policy:
The central bank manages the currency exchange rate to ensure stability in foreign trade and protect the currency's value.
3. Financial Stability Policy:
This aims to ensure the stability of the financial system by monitoring risks, regulating financial institutions, and
maintaining liquidity.
4. Banking Supervision:
The central bank supervises and regulates commercial banks and other financial institutions to ensure they operate
within legal and regulatory frameworks.

Short Notes:

1. NPSB (National Payment Switch Bangladesh)

NPSB is a central payment platform in Bangladesh designed to facilitate secure, fast, and efficient electronic transactions. It
connects different banks, mobile financial services, and payment service providers. NPSB helps streamline domestic payments
and allows for interbank payments, bill payments, and fund transfers. The system enhances interoperability, providing customers
with better access to various financial products. By ensuring uniform payment standards, NPSB promotes financial inclusion. It
also reduces the risk of fraud and operational errors by using robust security protocols. The platform plays a vital role in
Bangladesh's goal of a cashless economy. NPSB supports e-commerce and mobile banking, promoting digital financial
transactions.

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2. POS (Point of Sale)

POS refers to the system where retail transactions are completed. It is a critical part of retail businesses, facilitating payments via
debit cards, credit cards, or mobile payment systems. The system includes hardware (card readers) and software to handle
transactions, print receipts, and record sales data. POS systems help merchants track inventory and sales in real time, improving
business operations. They also reduce human errors and speed up the transaction process. In Bangladesh, POS systems are
increasingly being adopted by businesses of all sizes, enabling digital payments. POS technology helps financial institutions
integrate new forms of payment like mobile wallets. The system contributes to increasing the cashless economy and fostering
financial inclusion.

3. EFT (Electronic Funds Transfer)

EFT is a system that transfers funds electronically from one bank account to another, eliminating the need for physical cash or
checks. It includes various types of transactions like wire transfers, direct deposits, and online payments. EFT offers speed,
convenience, and security, making it ideal for personal and business payments. In Bangladesh, EFT systems are crucial for
facilitating wage payments, utility bill settlements, and interbank transfers. The system helps reduce costs associated with paper-
based payments and improves financial efficiency. EFT also promotes transparency in transactions by providing a digital trail of
payments. It minimizes the risk of theft or fraud compared to traditional payment methods. The adoption of EFT is key to enhancing
the financial infrastructure of Bangladesh.

4. QR Code

A QR code (Quick Response Code) is a type of matrix barcode that stores information which can be easily scanned using a
smartphone camera. In the context of finance, QR codes are used for quick payments, enabling customers to pay by simply
scanning a code displayed at a merchant location or sent via digital platforms. The use of QR codes in Bangladesh has been
growing, especially in mobile payment systems like bKash and Rocket. They are cost-effective, simple to implement, and increase
the speed of transactions. QR codes reduce the need for physical cards and cash, making transactions faster and more secure. It
also helps small businesses accept digital payments without needing a POS machine. As the government promotes digital payment
systems, QR codes play a critical role in financial inclusion.

5. Sustainable Finance

Sustainable finance refers to investments and financial products that consider environmental, social, and governance (ESG) factors.
It aims to promote long-term economic growth while addressing global challenges like climate change and social inequality. In
Bangladesh, sustainable finance is gaining traction as the country faces the effects of climate change. Green bonds, socially
responsible investing (SRI), and ESG reporting are examples of sustainable financial practices. The Bangladesh Bank has
encouraged banks to adopt environmentally friendly policies through guidelines for green financing. Sustainable finance ensures
that capital flows toward businesses that positively impact society and the environment. It also offers an opportunity for banks to
diversify portfolios and engage with responsible investing. As awareness grows, sustainable finance is expected to play a
significant role in Bangladesh’s financial sector.

6. Green Banking

Green banking involves practices and policies adopted by financial institutions to support sustainable development and
environmental conservation. It includes financing eco-friendly projects like renewable energy, waste management, and energy-
efficient infrastructure. Green banking aims to reduce the environmental footprint of banking operations, such as reducing paper
use and energy consumption. In Bangladesh, the banking sector has started offering green loans and financial products designed
to address climate change and environmental issues. The Bangladesh Bank has set guidelines for banks to promote green financing
and encourage eco-friendly investments. Green banking helps reduce risks associated with climate change while fostering
sustainable economic growth. It also allows banks to attract environmentally conscious investors. With increasing environmental
awareness, green banking is expected to grow in Bangladesh.

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7. Inclusive Finance

Inclusive finance refers to providing financial services to all individuals, particularly those who are underserved by traditional
banking systems. This includes low-income households, small businesses, and rural populations. In Bangladesh, inclusive finance
plays a significant role in financial inclusion, helping people access basic banking services, microloans, and insurance. The
government and financial institutions are working to promote access to digital financial services through mobile banking and
agents. Products like microcredit and mobile wallets have made it easier for marginalized communities to access credit and savings
accounts. Financial inclusion reduces poverty by allowing individuals to invest in education, health, and entrepreneurship.
Inclusive finance also contributes to the country’s overall economic development by fostering entrepreneurship and economic
participation. The Bangladesh Bank supports inclusive finance by providing regulatory guidelines and encouraging the
development of inclusive financial products.

8. Financial Market

A financial market is a platform where buyers and sellers engage in the trading of financial assets such as stocks, bonds, and
commodities. These markets can be classified into primary and secondary markets, with the primary market dealing with the
issuance of new securities and the secondary market dealing with the trading of existing securities. In Bangladesh, the Dhaka Stock
Exchange (DSE) and the Chittagong Stock Exchange (CSE) are key players in the financial market. The financial market provides
liquidity, allows companies to raise capital, and offers investment opportunities for individuals. The market's stability is crucial
for the country's economic health, as it impacts investment and savings behavior. Financial markets also help set the prices of
assets based on supply and demand dynamics. Regulatory authorities like the Bangladesh Securities and Exchange Commission
(BSEC) ensure the smooth functioning of financial markets. The development of financial markets in Bangladesh is essential for
improving economic growth and attracting foreign investment.

9. Microcredit and Microfinance

Microcredit refers to the provision of small loans to individuals, particularly in developing countries, who do not have access to
traditional banking services. Microfinance includes a broader range of financial services, such as savings, insurance, and training,
targeted at low-income people or small entrepreneurs. In Bangladesh, microcredit has played a significant role in poverty
alleviation by empowering people, especially women, to start small businesses. Institutions like Grameen Bank have pioneered
microfinance in Bangladesh, helping millions of people gain access to credit for income-generating activities. Microfinance offers
financial inclusion and economic empowerment to marginalized communities. It enables individuals to break the cycle of poverty
and contribute to the country’s economic growth. By offering small loans with low interest rates, microcredit helps increase access
to capital and improve living standards. Microfinance is a vital tool for fostering entrepreneurship and promoting social change.

10. Development Banking

Development banking refers to financial institutions established to provide long-term credit and financial services to promote
industrialization, infrastructure development, and poverty alleviation. Development banks play a key role in funding projects that
contribute to a nation’s economic development, especially in sectors that may not attract traditional commercial banks due to high
risk. In Bangladesh, institutions like the Bangladesh Industrial Finance Corporation (BIFC) and the Bangladesh Development
Bank Limited (BDBL) provide loans for infrastructure, small businesses, and industrial projects. Development banks focus on
sectors such as agriculture, energy, and transportation, which are vital for economic growth. They offer favorable lending terms,
including low interest rates and longer repayment periods. Development banking also promotes economic diversification and helps
create jobs. These institutions play a crucial role in financing projects that enhance national development and reduce socio-
economic inequalities. Development banks are vital in the financial ecosystem, providing essential capital to boost the economy.

11. Federal Fund

The Federal Funds are overnight borrowings between banks and credit institutions to meet reserve requirements set by the Federal
Reserve. The Federal Reserve Bank does not directly lend the funds but facilitates this borrowing by determining the Federal
Funds rate, which influences the cost of borrowing. The Federal Funds rate is a key benchmark in the U.S. financial system,
affecting the interest rates for loans, savings, and investments. In essence, it impacts monetary policy and liquidity in the banking
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system. Banks lend to one another to ensure that they meet reserve requirements, which help stabilize the financial system. Changes
in the Federal Funds rate can indicate economic conditions and guide monetary policy decisions. For Bangladesh, while it doesn’t
have an identical system, understanding the Federal Funds helps comprehend global banking practices.

12. Repurchase Agreement (Repo)

A Repurchase Agreement (Repo) is a short-term borrowing agreement where one party sells securities to another with the promise
to repurchase them at a later date for a slightly higher price. Repos are commonly used by financial institutions and central banks
to manage short-term liquidity. In a Repo transaction, the initial sale of securities serves as collateral, making it a relatively low-
risk transaction. Repos can be a tool for banks to manage their cash flow needs without selling off their assets permanently. In
Bangladesh, repo operations are conducted by the Bangladesh Bank to regulate money supply and stabilize the banking system.
The difference in price between the initial sale and the repurchase amount represents the interest on the loan. Repos help maintain
liquidity and promote stability in the financial markets.

13. Commercial Paper

Commercial paper is a short-term, unsecured debt instrument issued by corporations to finance their immediate operational needs,
like payroll and inventory. These instruments typically have maturities of 1 to 270 days and are issued in denominations of
$100,000 or more. Investors in commercial paper are usually institutional investors or money market funds, as the instruments are
typically issued at a discount. Commercial paper is a low-cost source of funding for companies with high credit ratings, offering
a better rate compared to bank loans. In Bangladesh, commercial paper issuance is still in its nascent stages but has the potential
to be a significant tool for corporate financing. The risk of investment in commercial paper is considered low, as companies with
strong credit ratings are less likely to default. Commercial paper contributes to a well-functioning money market and is an
alternative to bank financing for large corporations.

14. Bankers Acceptance

A Bankers Acceptance (BA) is a short-term debt instrument issued by a firm and guaranteed by a bank. Typically, it is used in
international trade to finance the import or export of goods. The bank guarantees payment to the seller on behalf of the buyer,
making it a secure transaction. A BA is usually issued for 30 to 180 days, and the buyer's bank pays the face value upon maturity.
This instrument can be traded on the secondary market, offering liquidity to the holder. Bankers Acceptances provide a way for
businesses to engage in international trade with less risk, as the guarantee by a reputable bank ensures payment. In Bangladesh,
BAs are often used in trade finance and are backed by the country's central bank. BAs facilitate smoother cross-border trade and
offer financial institutions a low-risk investment option. They are essential in fostering trust in international transactions and
enhancing global trade relationships.

15. Municipal Bond

Municipal bonds (munis) are debt securities issued by local governments or their agencies to finance public projects such as
schools, highways, and hospitals. These bonds offer tax-free interest income to investors, making them attractive for those in high
tax brackets. They come in two main types: general obligation bonds (backed by the issuing government's taxing power) and
revenue bonds (backed by specific revenue sources, like tolls). In Bangladesh, municipal bonds are not yet widely used, but they
hold the potential to support urban infrastructure development. Municipal bonds can help local governments raise necessary funds
without raising taxes. However, the risk of default varies depending on the issuer's financial health. The bond’s interest rate reflects
the creditworthiness of the issuer.

16. Stock Valuation

Stock valuation is the process of determining the fair value of a company's shares. It is essential for investors to assess whether a
stock is underpriced or overpriced based on factors such as earnings, growth potential, and market conditions. Common methods
for stock valuation include the Price-to-Earnings (P/E) ratio, discounted cash flow (DCF) analysis, and market comparables. In
Bangladesh, stock valuation plays a critical role for investors in the Dhaka Stock Exchange (DSE). Accurate stock valuation helps

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investors make informed decisions, preventing overvaluation or undervaluation of stocks. A higher P/E ratio indicates that
investors expect higher growth, while a lower P/E suggests undervaluation. Understanding stock valuation is crucial for
maximizing investment returns.

17. Pegged Exchange Rate System

The pegged exchange rate system is a type of exchange rate regime where a country’s currency is tied or “pegged” to the value of
another major currency, such as the US dollar or euro. Under this system, the central bank of the country will buy and sell its
currency in the foreign exchange market to maintain the peg. The advantage of a pegged system is stability, which helps in
international trade and investment. For Bangladesh, the Taka is linked to the US dollar, which helps maintain relative stability in
trade. However, maintaining a peg requires the central bank to hold large reserves of foreign currencies. If there are significant
changes in global economic conditions, a pegged exchange rate system can be difficult to maintain without depleting the country's
foreign reserves.

18. Price Stability

Price stability refers to the condition where the general level of prices for goods and services remains relatively constant over time,
without significant inflation or deflation. It is an important goal for central banks as it fosters a predictable economic environment,
encouraging investment and long-term planning. In Bangladesh, the central bank, Bangladesh Bank, strives for price stability by
using monetary policies like adjusting interest rates and controlling the money supply. When inflation is high, purchasing power
is eroded, and when deflation occurs, it can lead to reduced economic activity. Price stability supports sustainable economic
growth, reduces uncertainty, and improves the standard of living. Central banks achieve this through a balanced and cautious
approach to managing inflation rates.

19. Lender of the Last Resort

The Lender of the Last Resort (LLR) is a role played by central banks to provide emergency liquidity to financial institutions
facing temporary difficulties in meeting their obligations. This function prevents systemic risks and financial crises. The central
bank typically lends at high interest rates to discourage banks from relying too heavily on this emergency support. In Bangladesh,
Bangladesh Bank acts as the LLR, offering liquidity assistance during crises, such as during a banking liquidity shortfall. By being
the LLR, the central bank ensures that banks can continue to operate smoothly without causing a loss of confidence in the banking
system. It helps to preserve stability in the financial system, thereby avoiding panic-driven bank runs.

20. CAMELS Rating System

The CAMELS rating system is used by regulatory agencies to evaluate the soundness of financial institutions. It stands for Capital
Adequacy, Asset Quality, Management Quality, Earnings, Liquidity, and Sensitivity to Market Risk. Each of these factors is rated
on a scale, typically from 1 to 5, with 1 being the best rating. In Bangladesh, the Bangladesh Bank uses the CAMELS framework
to monitor the health of banks. A high CAMELS rating indicates a strong and stable institution, while a low rating points to
potential risks. The system helps regulators identify troubled institutions early and implement corrective actions to safeguard the
financial system. CAMELS helps ensure banks are operating within safe risk parameters and are resilient to financial stress.

21. Bai Muazzal

Bai Muazzal is an Islamic financing contract where a bank or financial institution sells goods to a customer at an agreed-upon
price, which includes a profit margin. The customer agrees to pay the price in installments, often with a fixed repayment schedule.
This type of transaction is used to avoid interest, as it is compliant with Islamic principles of not charging riba (interest). In
Bangladesh, Bai Muazzal is offered by Islamic banks and financial institutions, providing an alternative to conventional financing.
The risk is shared between the bank and the customer, as the price of goods is fixed. This contract fosters financial inclusion and
supports the development of the Islamic finance sector in Bangladesh.

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22. Bankers Bank

A Bankers Bank is a financial institution that serves other banks, providing a variety of services such as facilitating the settlement
of inter-bank transactions, offering emergency liquidity, and assisting with the management of reserves. It helps maintain the
stability and efficiency of the financial system. Bangladesh Bank acts as the bankers' bank in Bangladesh, ensuring that commercial
banks meet their reserve requirements and providing necessary support during times of financial instability. A Bankers Bank also
acts as a central point for clearing and settlement of payments between banks. This function promotes trust and collaboration
among banks, ensuring the smooth functioning of the financial system.

23. Financial Intermediaries

Financial intermediaries are institutions that act as a middleman between savers and borrowers. These include banks, investment
funds, insurance companies, and pension funds. They facilitate the flow of funds from those who have excess money (savers) to
those who need funds for investment (borrowers). In Bangladesh, commercial banks, microfinance institutions, and insurance
companies serve as financial intermediaries, promoting economic development by channeling savings into productive investments.
Financial intermediaries help mitigate risks and provide liquidity. They also improve financial inclusion by offering diverse
products that cater to different segments of the population. By pooling resources, these intermediaries make large-scale financing
feasible.

24. Commercial Bond

Commercial bonds are debt securities issued by companies to raise capital for various business purposes, such as funding
expansion, acquisition, or refinancing. These bonds are typically sold to institutional investors and are secured by the company's
assets. They offer a fixed interest rate and have a maturity period, after which the principal is repaid. In Bangladesh, commercial
bonds are not yet a dominant source of funding but are increasingly being used by large corporations for long-term financing.
They are an alternative to bank loans, providing flexibility for businesses. The credit rating of the issuer determines the risk and
return for investors. These bonds contribute to the development of capital markets by diversifying sources of financing.

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