The Money Market and the Capital Market are complementary to each other and are not

competitive. The difference between two is only of degree rather than of kind. Certain
institutions operate in money markets as well as capital markets. For example, commercial banks
operate in money market as well as in Capital Market. Money Market and Capital Market are
interdependent. The activities and policies of one market have their impact on those of the other.

Capital Market of Bangladesh is still highly speculative and lacks transparency due to poor
regulatory framework.

RESEARCH QUESTIONS AND HYPOTHESES

This research was guided by the following research questions:

i. What is the relation between Money market & Capital market in Bangladesh?

ii. What is the impact of this relationship on the economic growth of Bangladesh.

iv. How could this relationship through its crucial role stimulate economic growth in
Bangladesh?
The hypothesis that would be tested in the course of this research is stated below as:
H0: That there is interrelation between Money market and Capital market.

Money Markets:
The organization for the lending of short-term fund, through the use of such instruments as
commercial bills of exchange, short-term government securities and bankers acceptance.

Functions of Money Market:

Transfer of large sums of money
Transfer from parties with surplus funds to parties with a deficit
Allow governments to raise funds
Help to implement monetary policy
Determined short-term interest rates
Medium to control creation of Credit

Composition of Money Market:

Call Money Market
Collateral Loan Market
Acceptance Market
Bill or Discount Market

Financial institutes of Money Market:

 The Central Bank
Commercial Bank
Institutional Investors
Private Individuals, partnership and Companies

Characteristics of a Developed Money Market:

Highly organized commercial Banking System
Presence of a Central Bank
Availability of proper Credit Instrument
Existence of a number of sub-markets

Usefulness of a Developed Money Market :

Financing in Industry and Commerce
Investment of short-term Funds
Help to the Central Bank
Help to the Government
Characteristics of Money Market:
Lacking of short term assets
No intermediaries between the Gov. and banking system
Doesnt contain any sub-markets
Deficit of proper between different sectors of Money Market
BB has lack of enough power to control Money Market

Defects of Money Market :

Loose and Disjoined Structure
Wasteful Competition
Shortage of Capital Inadequate Banking Facilities Seasonal Shortage of Funds
Disparity in Interest rates in Different Centers
Undeveloped Bill Market
Inelasticity and Instability
Absence of Sub-Markets
Insensitive to International Influence

Measure for Improvement of the Money Market:

Steps has been taken to establish relations between indigenous bankers and commercial
banker
Reducing monetary shortages through open market operations
Diversifying the Market
Access to bill rediscounting market increasingly

Suggestion to remove defects:

 The activities of the money lender and chit fund should brought under control
Banking facilities should be extended, especially in the unbanked and neglected areas
The number of clearing house should be increased
Adequate and easy remittance facilities should be provided to the businessman

Harmony between sub-markets and co-ordination of their activities must be achieved

The Repo Market:

Repo is a money market instrument which helps in collateralized short term borrowing and
lending through sale/purchase operations in debt instrument. Under a repo transaction, securities
are sold by their holder to an investor with an agreement to purchase them at a predetermined
rate and date.

The Commercial Bill Market:

The Commercial bill market is the sub-market in which the trade bills or the commercial bills are
handled. The Commercial bill is a bill drawn by one merchant firm on the other. Generally,
Commercial bills arise out of the domestic transactions. The legitimate purpose of a commercial
bill is to reimburse the seller while the buyer delays payment.

The Certificate of Deposit Market:

A Certificate of Deposit (CD) is a time deposit with a bank. CDs are generally issued by
commercial banks but they can be bought through brokerages. They bear a specific maturity date
(from three months to five years), a specified interest rate, and can be issued in any
denomination, much like bonds. Like all time deposits, the funds may not be withdrawn on
demand like those in a checking account.

The Commercial Paper Market:

In the global money market, commercial paper is an unsecured promissory note with a fixed
maturity of no more than 270 days. Commercial paper is a money-market security issued (sold)
by large corporation to get money to meet short term debt obligations (for example, payroll), and
is only backed by an issuing bank or corporation's promise to pay the face amount on the
maturity date specified on the note.

Money Market Mutual Fund:

A Certificate of Deposit (CD) is a time deposit with a bank. CDs are generally issued by
commercial banks but they can be bought through brokerages. They bear a specific maturity date
(from three months to five years), a specified interest rate, and can be issued in any
denomination, much like bonds. Like all time deposits, the funds may not be withdrawn on
demand like those in a checking account.

Capital Market:
A market in which individuals and institutions trade financial securities
Organizations/institutions in the public and private sectors also often sell securities on the capital
markets in order to raise funds. Thus, this type of market is composed of both the primary and
secondary markets.

Classification of Capital Market:

The Capital Market of Bangladesh consists of two parts. They are
1. Primary Market: The Primary Market is a place where new shares and bonds are offered.
2. Secondary Market: Secondary market is a place where existing shares and debentures are
traded.

Importance of Capital Market:

Mobilizing Savings: The capital market plays a vital role in mobilizing savings to put it in
productive investment, so that the development of trade, commerce and industry could be
facilitated.
Stability in Value: In case of a developed capital market, the experts in banking and non-
banking intermediaries put in every effort in stabilizing the values of stocks and
securities.
Encouragement to Economic Growth: The various institutions of the capital market give
quantitative and qualitative direction to the flow of funds that cause economic growth.
Inducement to Savings: Savings are the backbone of any nations economic development.
If capital markets are developed in less developed areas, people will get induced to save
more because savings are facilitated by banking and non-banking financial
intermediaries.

Functions of Capital Market:

Mobilization of financial resources on a nationwide scale.
Securing the foreign capital and know how to fill up the deficit in the required resources
for economic growth at a faster rate.
Effective allocation of the mobilized financial resources by directing the same to projects
yielding highest yield to the projects needed to promote balanced economic development.

Structure of Capital Market Structure of Money Market Organized Sector Individual Investors
Investment Intermediaries Financial Institutions Commercial Bank Government Unorganized
Sector Agricultures Private Individual

COMPONENTS OF BANGLADESI CAPITAL MARKET:

New Issue Market: The new issue market is called primary market where new shares
or bonds are offered. Both the new companies and existing ones raise capital on the
new issue market.
Stock Market: Secondary or stock market represents the secondary market where
existing shares and debentures are traded. Stock exchange provides an organized
mechanism of purchase and sale of existing securities.
Financial Institutions: Special financial institutions are the most active constituents of
Money Market. Such organizations provide medium and long-term loans repayable
on easy installments to big business houses.

RECENT TRENDS IN THE CAPITAL MARKET:

 Growth of Capital Market
New Financial Instruments
New Specialized Financial Institution
Financial Services
Regulation of Capital Market

SIMILALARITES OF MONEY MARKET and CAPITAL MARKET:

Complementary: The Money Market and the Capital Market are complementary to each
other and are not competitive. The difference between two is only of degree rather than of
kind.
Same Institutions: Certain institutions operate in money as well as capital markets. For
example, commercial banks operate in money market as well as in Capital Market.
Interdependence: Money Market and Capital Market are interdependent. The activities
and policies of one market have their impact on those of the other.

DIFFERECES BETWEEN MONEY MARKET and CAPITAL MARKET:

Maturity Period
Credit Instruments
Institutions
Risk
Market Regulation

Relation with Central Bank

The various institutions in the money market generally include the following:

1. Central Bank:

It is naturally to be the leader of all banks. It is the bank, which is entrusted with the task of
controlling the issue of money and funds to the market and regulates credit facilities provided by
various other institutions.

2. Commercial Banks:

They play a vital role in the money market. They make advances, discount bills and lend against
the promissory notes and the like. They also take help of the market in solving their liquidity
problems.

3. Discount Houses:

Discount houses are special institutions for rediscounting the bills of exchange. They usually
deal in three kinds of bills.

(a) The domestic bills

(b) The foreign bills and

(c) The government treasury bills.

The discount houses borrow huge funds for short periods from the commercial banks and RBI
and Sinvest them in discounting bills. But before discounting a trade bill of exchange, the
Discount House insists that it should be accepted by an Acceptance House.

4. Acceptance Houses:

Acceptance Houses are institutions which specialize in accepting bills of exchange. Generally
they are merchant bankers. They act as second signatories on the bills of exchange. That is they
guarantee the bills of a trader whose financial standing is not known, for making the bill
negotiable.

They maintain correspondents in important towns of various places within and outside the
country to collect information about the creditworthiness and financial position of the customers,
who seek the assistance of the Acceptance Houses. For their service, they charge a small amount
of commission but ensure great security for the bills discounted by the Discount Houses.

5. Bill Brokers:

The "Bill Brokers" intimately know their customers and act as intermediaries between the sellers
and buyers of bill for a small commission. Sometimes, these bill brokers discount bills on their
own account.

The money market includes the following important sub-markets in the traditional sense:

Money Market

i. The market for extremely short period loans.

ii. Money at call and short notice

iii. The rate in this market is the "call money rate."

iv. The rate is determined by the demand and supply of funds.

v. Money is lent mainly to the bill brokers and stock exchange dealers.

Merits

i. The money can be taken back when needed.

ii. Earn interest by quick lending of idle cash.

iii. Promote stock exchange transactions.

iv. The market for the acceptance of trade bills.

v. The main operators in this market are the 'Acceptance houses' and the commercial banks.

Demerits

i. Promotes the operations of discount houses.

ii. Making the bills negotiable.

Bill Market

i. Market for short- term bills.

ii. Buying and selling of short dated papers, bills, etc.

iii. It includes commercial bill market and Treasury bill market

Merits

i. Helps the government by marketing of treasury bills.

ii. Helps the other sectors as well.

Collateral Loan Market

i. Important section of the money market.

ii. It takes the form of loans over drafts, cash credits.

iii. The loans and advances are covered by collaborates like government securities, gold silver,
stocks of corporations, merchandise, etc.

1.1.1 Financial Markets: Capital vs. Money Markets

A financial market is a market that brings buyers and sellers together to trade in financial assets
such as stocks, bonds, commodities, derivatives and currencies. The purpose of a financial
market is to set prices for global trade, raise capital and transfer liquidity and risk. Although there
are many components to a financial market, two of the most commonly used are money markets
and capital markets.

Money markets are used for a short-term basis, usually for assets up to one year. Conversely,
capital markets are used for long-term assets, which are any asset with maturity greater than one
year. Capital markets include the equity (stock) market and debt (bond) market. Together the
money and capital markets comprise a large portion of the financial market and are often used
together to manage liquidity and risks for companies, governments and individuals.
1.1.2 Inter relation between money market and capital market

Relationship between Money Market and Capital Market:

a) Capital market is a market for financial assets which have a long or indefinite maturity and
money market is the mechanism whereby funds are obtained for short periods of time (from
one day to one year).
b) Two markets are inter-related. They will buy treasury bills at relative.
c) In Money Market, short-term funds are used whereas the Capital Market deals in long term
fund required.
d) Capital Market is not as sensitive to change in demand and supply as are the money market
components.
e) Change of interest rate in both market affect each other.
f) Money markets facilitate the sale of short-term securities, while capital markets facilitate the
sale/buy of long term securities.

The relationship between the money market and capital market helps explain the basic
framework of the financial system. Under this framework, businesses and government agencies
access sources of short-term and long-term funds to generate immediate cash flow or finance
long-term projects. Both markets have a particular role in how money flows from savers to
businesses and government to finance operations and investment. As a result, both markets
provide investors with opportunities to generate earnings and premiums from risky ventures.

1.3 Objective of the Research / Purpose of the Study

1.3.1 Overall objective

To examine the relationship between demographic factors and aspects closely related with
capital market. Another area that the study will try to identify the rule of regulators behind
the recent capital market crash and focus on developing a road map for promoting
Sustainable capital market regulatory framework in Bangladesh.

1.3.2 Specific objectives

The specific objectives of the study will be:

i. To analyze the nature and characteristics of the share market prevailing in

Bangladesh;

ii. To analyze and identify the reasons (Esp., regulatory rules.) for recent stock market
crash in Bangladesh.
 iii. To find out the problems and hindrances associated with capital market;

iv. To show the impact of the capital market on the economy and

v. To give suggestions for the development of the capital market and recommend some
guidelines for better regulations to strengthen the capital market in Bangladesh

2.2.1 Variables to be covered

Basically, two types of variables are used one for measuring money supply and the other for
measuring the performance of Dhaka Stock Exchange Limited. The variables of the first set are Broad
Money Supply (M2_BB), Cash Reserve Requirement Balance with Bangladesh Bank (CRR_BB), and
Total Reserve Requirement Balance with Bangladesh Bank (TRR_BB) and the variables of the
second set are End Period Annual General Index of Dhaka Stock Exchange Limited (GI_DSE), End
Period Market Capitalization of Dhaka Stock Exchange Limited (MC_DSE), and End Period Annual
Turnover of Dhaka Stock Exchange Limited (TO_DSE).

2.2.3 Sources of Data

This study is basically descriptive in nature. Data is collected from both Primary (Stock Exchange, SEC)
and secondary sources like different publications of DSE, Bangladesh Bank, annual reports of the
respective Stock Exchanges, and from respective websites of the Stock Exchanges and or Central Banks.
Some other research papers in this line will also be used.

In my study, I will also use quantitative techniques to analyze data. Softwares like SPSS, STATA, and
Excel might be helpful for me.

2.2.2 Operational definitions of the key variables

Brief conceptual descriptions and operational definition of the key variables used are as follows:

Broad money is a measure of the money supply that includes more than just physical
money such as currency and coins (also termed narrow money). It generally includes
demand deposits at commercial banks, and any monies held in easily accessible
accounts. Components of broad money are still very liquid, and non-cash components can
usually be converted into cash very easily. The most commonly used measure of broad
 money is M2, which includes currency and coins, and deposits in checking accounts, savings
accounts and small time deposits, overnight repos at commercial banks, and non-
institutional money market accounts. This is the main measure of the money supply,
and is the economic indicator usually used to assess the amount of liquidity in the economy,
as it is relatively easy to track (Wikipedia, 2011).

The reserve requirements is a central bank regulation that sets the minimum reserves each
commercial bank must hold to customer deposits and notes i.e. the amount that the bank
surrenders with the central bank. It would normally be in the form of flat currency stored
in a bank vault (vault cash), or with a central bank. The reserve ratio is sometimes used as
a tool in the monetary policy, influencing the country's economy, borrowing, and
interest rates. Statutory Liquidity Ratio (SLR) restricts the banks leverage in pumping more
money into the economy. On the other hand, Cash Reserve Ratio (CRR) is the portion of
deposits that the banks have to maintain with the Central Bank. To meet SLR, banks can
use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is
maintained in cash form with central bank, whereas SLR is maintained in liquid form with
banks themselves (Wikipedia, 2011).

Stock Market Index or Share Index refers to the statistical indicator used in measurement
and reporting of changes in the market value of a group of stocks/shares. Different stock
indices track the market differentlydepending on (1) which averaging method is used to
establish the index, (2) whether the index is broad based or narrow based, and (3) whether
the averaging method assigns weights on the basis of market price or market capitalization
(Business Dictionary, 2011).

Market Capitalization is a measurement of size of a business enterprise (corporation) equal

to the share price times the number of shares outstanding (shares that have been
authorized, issued, and purchased by investors) of a publicly traded company. As owning
stock represents ownership of the company, including all its equity, capitalization could
represent the public opinion of a company's net worth and is a determining factor in
stock valuation (Wikipedia, 2011).

Turnover refers to the volume or value of shares traded on a stock exchange during a day, month,
or year (Business Dictionary, 2011). A stock markets turnover ratio measures how often shares change
hands and is simply a relative measure of the supply and demand relationship which tells us how
volatile a stock will trade given an imbalance in supply or demand either to the upward or downward.