Term Paper 1

On“How Financial Markets Influence

Economic Development”

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Group Name

“Friends Forever”

Submitted By: Rajkumar Victor Halder

Department Of BBA

Submitted To:K.M. Anwarul Islam

Assistant Professor & Course Coordinator

Department of Business Administration

Letter of Transmittal

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5 May, 2016

K.M. Anwarul Islam

Assistant Professor & Course Coordinator

Department of Business Administration

Subject: Submission of Term Paper report.

Dear Sir,

We beg most respectfully to state that, we are the student. Here is our Term Paper reports that fulfills partial requirements for financial markets and institutions on BBA program.

We completed our Term Paper on “How Financial Markets Influence Economic Development” In the report, I have tried to accommodate your valuable comments

& suggestions. In this concern, if you need any further clarification, please contract

via email/call.

Thank you for your kind cooperation. Without your support, this report would not

have been completed. So we are submitting our term paper report and requesting

your acceptance.

Regards,

Supervisor’s Certificates

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This is to certify that the entitled “Financial Markets Influence Economic

Development” submitted in partial completion of the requirement for the award of the

degree in Bachelor of Business Administration from carried out by “Friends forever”

group Department of Business Administration, Under my supervision and guidance

that no part of this report has been submitted for the awarded of any other degree.

He is permitted to submit the term paper

…………………………………………………

Signature & Date

K.M. Anwarul Islam

Assistant Professor & Course Coordinator

Department of Business Administration

DECLARATIONI hereby declare that, this Term paper has been done under the supervision of Mr. K.M. Anwarul Islam,

Course Coordinator and Lecturer, Department of Business Administration,. I also declare that neither this

Term Paper report nor any part of this report has been submitted elsewhere for award of any degree.

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Supervised By:

K.M. Anwarul Islam

Assistant Professor & Course Coordinator

(BBA Programme)

Department of Business Administration

Submitted By:

“Friends Forever” Group

Member’s Signature

Rajkumar Victor Halder ……..…………………………………….. Signature & Date

Department of Business Administration (BBA Program)

ACKNOWLEDGEMENT

At first I would like to express our -felt thanks to almighty ALLAH for his kind blessing for complete of

this report successfully.

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We would like to heartiest thanks our honorable course teacher & supervisor, K.M. Anwarul Islam,

Course Coordinator and Lecturer Department of Business Administration, for his guidance, help and

encouragement throughout the progress of the Term Paper report. I am very grateful for his kind advice

and instructions.

Their guidelines, suggestions & inspiration helped us a lot.

EXECUTIVE SUMMARY

Financial markets are important in enabling economic growth in any economy. They are closely connected to all markets and almost all individuals in an economy (Winkler, 1998).This amplifies the importance of financial markets which lies with the fact that they are linked to all spending decisions in an economy. A flow of funds analysis is certainly the best way of highlighting the close interlink age between real activity and financial markets. The funds circulating in a financial market on the other hand are either from locals or from foreign direct investment. On the case of local investments, the gain of an economic agent for example a household or firm results from the loss in another financial agent,

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i.e. for an agent to incur a financial surplus then an agent in the economy has to incur a financial deficit; the sum of all financial balances in an economy, works out to zero (Winkler, 1998).Contrary foreign direct investment does not affect two agents in the economy the investment is from external sources, thus it propagates a gaining situation for the local economy. The sum of all financial balances includes the investment from external sources thus does no add up to zero (Winkler, 1998).Financial markets perform the primary function of intertemporal and interpersonal resource transfer, and are monetary markets. Although foreign direct investment can be in different forms, it still embodies the fact that it adds financial value total local economy. FDI induces a number of positive effects to the local economy in the form of technological transfers, managerial skills, introduction of new process and productivity gains.FDI generally relies on capital from abroad, and thus the spillovers for the host country significantly rely on the domestic financial markets development. Consequently, spillovers will not be restricted to the improvements in a local business by taking advantage of the new knowledge, purchases of new machines and equipment and the hiring of skilled labor and management. Local investment is capable of availing the required financial resources but might be constrained in providing the new technological advancements and potential entrepreneurial needs. Foreign direct investment has the potential to create backward linkages but in the absence of developed financial markets, this is rigorously hampered. FDI through linkages that multinationals create allows existing firms in a host economy to achieve economies of scale and even help in creation of new firms (Hirschman, 1958).

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Table of content

EXECUTIVE

SUMMARY…………………………………………………………………..08

INTRODUCTION…………………………………………………….…………….

………….10

Financial markets and institutions…………………….…………….….11

Financial markets and their important………………….……….….12

Financial markets and their impact on economy….…….…12-15

Conclusion and Recommendations…………………….……….……...

….16

Research Mythology:…………………………………………………..

INTRODUCTION

The

financial sector is a vital part of an economy because of the role it plays in intermediating savings of

the private and public sector to productive activities including investment. Bangladesh financial

system is dominated by the banking sector, which fundamentally depends on short- and medium-

term deposits for financing their lending portfolios. This limits availability of funds that would be

required for long-term investments like infrastructure and housing. Bangladesh has a capital

market, with its known difficulties, and there is no vibrant secondary market for bonds, which limits

the availability of resources for infrastructure financing. This paper starts with a general overview of

the current structure of the financial system in Bangladesh in terms of the 4 key markets—money

market comprising banks, microfinance institutions and nonbank financial institutions, stock market,

bond market and insurance market--and their sizes, relationships between the various markets and

the associated regulatory bodies assigned to govern the different market segments. It then

analyzes recent performance of these markets by looking at their important constituents and

identifies the key challenges these markets are facing which could undermine their intermediation

role in allocating resources to the key sectors and activities to support achievement of the Seventh

Plan objectives. In particular, intermediation of private financial resources through the banking

system, and mobilization of resources for private investment through the capital and bond markets

will be important for achieving the investment targets under the Plan. The paper then recommends

for each of the markets the corrective reforms which will strengthen their operations and

enhance/accelerate market development. As we are passing through the final year of the Sixth Five

Year Plan (SFYP) period, the discussions will be cast in relevant cases against the

objectives/targets established under the SFYP. The remainder of the paper covers the following

issues. Section II discusses the overall structure of the financial system, which is comprised of four

main markets, their developments over time and relative size, and regulatory management. Monet

market related issues are analyzed in Section III. This section provides an overview of past and

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recent developments in the banking sector of Bangladesh covering important issues such as

structural reforms of 1980s and 1990s, indicators of banking sector performance, progress with

Basel II and preparations for Basel III, monetary policy management of Bangladesh Bank, Interest

rate related issues, developments in foreign exchange market, and impact of liberalization of

foreign currency denominated borrowing on the banking system. This section also highlights the

setbacks to the banking system due to banking scams and default loans, developments and

outlook for microfinance institutions in Bangladesh, gains made in terms of financial inclusion, and

developments and issues related to nonbank financial institutions. Section III also discusses the

challenges and concerns relating 2 to the banking sector and a comprehensive agenda for money

market reform and operational improvements. Section IV discusses capital or stock market related

issues. It provides discussions on historical background of the capital market including the turbulent

episode of 2009-14; and current state of the capital market in terms of key market indicators. This

section also provide a discussions on the progress made with structural reforms in the post

correction period and makes a number of recommendations based on capital market studies made

in recent months. Bond market related issues are covered in Section V. Following discussions on

the current status of the bond market in Bangladesh, this section also focuses on constraints to

development of the bond market and policy recommendations. This section also covers related

issues like current status of pension funds in Bangladesh and prospects related to issuance of

municipal bonds in Bangladesh. Specific policy recommendations relating to development of the

overall bond market, pension funds, and municipal bonds are also noted in this section. Section VI

covers issues related to the insurance market—its current state and the agenda for reform. Some

concluding observations are presented in the final section (Section VII) of the study.

Financial markets and institutions

A financial market is a market in which financial assets (securities) can be purchased or sold

Financial markets facilitate transfers of funds from person or business without investment

opportunities (i.e., “Lender- Savers”, or “Surplus Unit”) to those who have them (i.e., “Borrower-

Spenders”, or “Deficit Unit”) Funds transferred directly from Ultimate Savers to Ultimate Borrowers

is called Direct Financing. A financial "intermediary" transforms financial claims with one set of

characteristics into financial claims with other characteristics e.g. deposits are used to make loans.

Example: A bank giving loans to the borrower is indirect financing

Financial markets and their important

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Financial markets play a critical role in the accumulation of capital and the production of goods and

services. The price of credit and returns on investment provide signals to producers and consumers—

financial market participants. Those signals help direct funds (from savers, mainly households and

businesses) to the consumers, businesses, governments, and investors that would like to borrow

money by connecting those who value the funds most highly (i.e., are willing to pay a higher price, or

interest rate), to willing lenders. In a similar way, the existence of robust financial markets and

institutions also facilitates the international flow of funds between countries.

In addition, efficient financial markets and institutions tend to lower search and transactions costs in the

economy. By providing a large array of financial products, with varying risk and pricing structures as

well as maturity, a well-developed financial system offers products to participants that provide

borrowers and lenders with a close match for their needs. Individuals, businesses, and governments in

need of funds can easily discover which financial institutions or which financial markets may provide

funding and what the cost will be for the borrower. This allows investors to compare the cost of

financing to their expected return on investment, thus making the investment choice that best suits their

needs. In this way, financial markets direct the allocation of credit throughout the economy—and

facilitate the production of goods and services.

 Financial markets and their impact on economy

Individual’s wealth

Activities in Financial Markets have a direct impact on individual’s wealth, the behavior of

businesses and the efficiency of our economy. Hence 3 markets deserve particular attention as any

movement in these markets have a direct impact on individuals, businesses, markets and the

economy Bond / Debt Markets Where interest rates are determined Stock Markets A major impact

on people’s wealth and on firm’s investment decisions Foreign Exchange Market Fluctuations in the

exchange markets have a direct bearing on the economy Market

Monetary Policy

Monetary policies affects interest rates, inflation and business cycles, all of which have an

important impact on financial markets and institutions, it’s important how monetary policy is

conducted by Central Banks and other financial institutions channel funds from people who might

not put them to productive use to people who can do so and thus playing a central role in improving

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the efficiency of the economy Monetary Policy Interest Rates, Inflation, Business Cycles Financial

Markets & Institutions. The interaction between financial markets, economic growth and monetary

policy is by no means a new issue for central bankers. However, financial market developments

have brought the question to the forefront of the policy debate. The continued integration and

deepening of financial markets is a significant issue for policy-makers, and particularly for central

bankers, since smoothly functioning and efficient financial markets are crucial in ensuring a smooth

transmission of monetary impulses.

Foreign Direct Investment

Foreign direct investment influences economic growth by increasing the total factor productivity of

the host economy and generally by raising the efficiency of resources in use in the host country. As

mentioned earlier, local investment has little effect on the growth of the economy due to the zero

sum game which occurs since any gains by an agent result in a loss by another agent. The points

below display a brief comparison between the effects of foreign direct investment as opposed to

domestic investment in an economy with a well-established financial market.

Capital Markets

A capital market is one in which individuals and institutions trade financial securities. Organizations and 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.

Any government or corporation requires capital (funds) to finance its operations and to engage in its own long-term investments. To do this, a company raises money through the sale of securities - stocks and bonds in the company's name. These are bought and sold in the capital markets.

Stock Markets

Stock markets allow investors to buy and sell shares in publicly traded companies. They are one of the most vital areas of a market economy as they provide companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance.

This market can be split into two main sections: the primary market and the secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the

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Secondary market.

Bond Markets

A bond is a debt investment in which an investor loans money to an entity (corporate or governmental), which borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds can be bought and sold by investors on credit markets around the world. This market is alternatively referred to as the debt, credit or fixed-income market.

Money Market

The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), banker's acceptances, U.S. Treasury bills, commercial paper, municipal notes, and repurchase agreements (repos). Money market investments are also called cash investments because of their short maturities.The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities.

Cash or Spot Market

Investing in the cash or "spot" market is highly sophisticated, with opportunities for both big losses and big gains. In the cash market, goods are sold for cash and are delivered immediately. By the same token, contracts bought and sold on the spot market are immediately effective. Prices are settled in cash "on the spot" at current market prices.

The cash market is complex and delicate, and generally not suitable for inexperienced traders. The cash markets end to be dominated by so-called institutional market players such as hedge funds, limited partnerships and corporate investors. The very nature of the products traded requires access to far-reaching, detailed information and a high level of macroeconomic analysis and trading skills.

Derivatives MarketsThe derivative is named so for a reason: its value is derived from its underlying asset or assets. A

derivative is a contract, but in this case the contract price is determined by the market price of the core

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asset. If that sounds complicated, it's because it is. The derivatives market adds yet another layer of

complexity and is therefore not ideal for inexperienced traders looking to speculate. However, it can be

used quite effectively as part of a risk management program.

Examples of common derivatives are forwards, futures, options, swaps and contracts-for-

difference (CFDs). Not only are these instruments complex but so too are the strategies deployed by

this market's participants. There are also many derivatives, structured products and collateralized

obligations available, mainly in the over-the-counter (non-exchange) market that professional investors,

institutions and hedge fund managers use to varying degrees but that play an insignificant role in

Private investing.

Forex and the Interbank Market

The interbank market is the financial system and trading of currencies among banks

and financial institutions, excluding retail investors and smaller trading parties. While some interbank

trading is performed by banks on behalf of large customers, most interbank trading takes place from the

banks own accounts.

The forex market is where currencies are traded. The forex market is the largest, most liquid market in

the world with an average traded value that exceeds $1.9 trillion per day and includes all of the

currencies in the world. The forex is the largest market in the world in terms of the total cash value

traded, and any person, firm or country may participate in this market.

There is no central marketplace for currency exchange; trade is conducted over the counter. The forex

market is open 24 hours a day, five days a week and currencies are traded worldwide among the

major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris

and Sydney.

Until recently, forex trading in the currency market had largely been the domain of

large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals.

The emergence of the internet has changed all of this, and now it is possible for average investors to

buy and sell currencies easily with the click of a mouse through online brokerage accounts.

Conclusion and Recommendations

As depicted in the paper, studies have shown that foreign direct investment in a country with a well-

developed financial market contributes to economic growth at a higher rate as compared to local

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investment. It is however difficult to evaluate the magnitude of foreign direct investment on a host

country, since the high growth rate might be as an influence of other unrelated factors. Also the

crowding out effect associated with foreign direct investment is yet to be clearly studied .Foreign direct

investment also boosts domestic investment in that it creates an entrepreneurial effect in the local

investors who imitate the new technologies advanced by foreign investment .In less developed

economies with low educational, technological and infrastructure development, foreign direct

investment has a relatively smaller effect on growth, commonly

Characterized threshold externalities which include less developed financial markets. Governments

especially in less developed countries need to enhance and develop robust financial markets in order to

realize the full potential of foreign direct investment. Financial markets act as linkages between the

foreign financial markets and the economy. With better managed financial markets, the spillovers from

direct foreign investment are capable of influencing great economic development in host countries. For

a country to attract foreign direct investment it requires policies and mechanism that make it conducive

for the investment. This includes human capital development, streamlining government bureaucracies,

development of the financial markets to mirror the international financial markets which are competitive

and devoid of corruption. Most developing and third world countries fail to provide these incentives to

multinationals and foreign investors.

Research Mythology:Works on secondary data. The term paper based on secondary data.

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