CHAPTER# 1
INTRODUCTION
GLOBAL AND BANGLADESH ECONOMY
Chapter Contents
hat the objective of the report is and how it has been prepared & what are the challenges faced during the re
Introduction
Objective of the report
Scope of the report
Chapter Hints Methodology
Limitations
The role of money market to economic growth in Bangladesh
1.0 Introduction
There are various financial markets, which are institutional arrangements that facilitate the
intermediation of funds in an economy. The financial market is segmented into two: one is
the money market, which deals in short term funds and the other, the capital market that is for
longterm dealings in loanable. The basis of distinction between the money market and the
capital market lies in the degree of liquidity of instruments bought and sold in each of the
market, which can be further sub-divided into the primary and secondary. While primary
market is concerned with the raising of new funds, the secondary market exists for the sale
and purchasing of existing securities that are already in peoples hands, thus, enabling savers
who purchased securities when they had surplus funds to recover their money when they are
in need of cash.
Money market provides short term financing for assets that are taking part in short term
lending, borrowing, selling and buying whose maturity does not exceed one year.
Money markets play a key role in banks liquidity management and the transmission of
monetary policy by providing the appropriate instruments for liquidity trading, control of
money supply and demand-pull inflation, determination of short-run interest rate. In normal
times, money markets are among the most liquid in the financial sector note that money
market instruments are used by intermediary agents especially banks to bridge financial gaps
in the economy. By providing the appropriate instruments and partners for liquidity trading,
the money market allows the refinancing of short and medium-term positions and facilitates
the mitigation of your business liquidity risk. The banking system and the money market
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The role of money market to economic growth in Bangladesh
represent the exclusive setting monetary policy operates in. A developed, active and efficient
interbank market enhances the efficiency of central banks monetary policy, transmitting its
impulses into the economy best. Thus, the development of the money market smooth the
progress of financial intermediation and boosts lending to economy, improving the countrys
economic and social welfare. It is salient that the extent to which the money market performs
its roles depends largely on its level of development. Therefore, the development of the
money market is in all stakeholders interests: the banking system itself, the Central Bank and
the economy on the whole.
The main objective of this study is to examine the operations and activities of Bangladeshi
Money Market. The specific objectives of the study are stated below:
1. To evaluate role of the money market to the economic growth of the country.
1.3 Methodology
This report is an exploratory and descriptive one in nature. All the information incorporated
in this report has been collected from the secondary sources. .The data are collected from
various issues of Bank and Financial Institutions & NBFIs Activities, a yearly publication
of the Bangladesh Bank Annual Report. This paper adopts collective procedures of economic
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The role of money market to economic growth in Bangladesh
records for addressing the growth and development of financial situation of NBFIs
using time succession. Other secondary sources has been used as follows
Newspaper
Journal or Articles
Class Lectures
Internet
Books
Bangladesh Bank Annual Report
DSE publications
1.4 Limitations
The present study was not out of limitations. But as business student it has
been a great opportunity for us to gather knowledge regarding money market
contribution to the growth of Bangladeshi economy but preparing this report
some constraints arises such as
We did not have access to all types of recent data. Again, some site were restricted
Due to time limitation, many of the aspects could not be discussed in the report.
Despite all the limitations we have given the best of our efforts and tried to make the report as
informative and as comprehensive as possible.
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The role of money market to economic growth in Bangladesh
CHAPTER# 2
Chapter Contents
Chapter Hints
Non-banking Financial institutions play aStructure ofmoney
role in the Money market
Market for
in Bangladesh
the growth of the economy. This sectio
How it contributes to the development of Economy
Presentation of Various Analytical Data
Summary of Money Market Roles in Economy
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The role of money market to economic growth in Bangladesh
The money market in Bangladesh is its transitional state. The various constituent parts of it
are in the process of formations; continuous efforts are being made to develop appropriate
and adequate instruments to be traded in the market. At present, government treasury bills of
varying maturity--- Bangladesh Bank Bills and certificates of Deposits et. In limited supply,
are available for trading in the market. The role of the financial market and institutions in the
economic development of Bangladesh the banking sector has triggered a tremendous growth
since liberation.
In 1999, a total of about 6000 branches of the scheduled banks provided short-term credit
throughout the country in the form of a cash credit, overdraft and demand loan. The rate of
interest is determined by the individual banks and as such the market is quite competitive.
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The role of money market to economic growth in Bangladesh
Each bank maintains its liquidity, and supply of funds is arranged throughout the country
with the help of a network of branches. BB as central bank of the country exercises its role in
the market through the use of instruments such as Bank rate, open market operations and
changes in the statutory liquidity requirements. The money market was the major constituent
part of the financial market of the country
Apart from the major characteristics like liquidity, safety instrument of money market, the d
money market has the following characteristics:
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The role of money market to economic growth in Bangladesh
It is usually well known that in money market there are two main participants: supplier and
demander of money market securities. It is quite natural that participants in the money market
acts both supplier and demander of loans and securities. Generally, the participants in money
market are: i) individual ii) Business and iii) Government;
Investment Companies/Bank
Finance Companies
Insurance Companies
Pension Fund etc
Individuals ;
a. Only lender
c. Only borrower
All NCBs, most of SBs and some FCBs are the lender of the inter bank money market. Some
PCBs who are well recognized and financially sound, borrow a lot of money from NCBs,
SBs and FCBs and lend it to other PCBs and NBFIs. Therefore, they played as the unofficial
intermediaries in inter bank money market. These types of PCBs at first take the opportunity
of borrowing money at a low interest rate from the NCBs, SBs and FCBs and lend it to other
PCBs and NBFIs at a higher interest rate and earn a lot of profits. Therefore, these banks are
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The role of money market to economic growth in Bangladesh
responsible in raising the interest rate during the period of a shortfall of fund. The third type
of participant in the interbank call money market is financially weak banks and NBFIs. They
are only borrowers in the interbank money market and have to take loans at a very high rate
of interest.
2.3 Money Market instruments & its role to the Growth of Economy
The common types of money market securities traded in Bangladesh are given below:
Treasury Bills, one of the safest money market instruments, are short term borrowing
instruments of the Central Government of the country issued through the Central Bank. They
are zero risk instruments. It is available both in the primary market as well as secondary
market. T-bills are short-term securities that mature in one year or less from their issue date.
They are issued with three-month, six-month and one-year maturity periods. The Central
Government issues T-Bills at a price less than their face value (par value). They are issued
with a promise to pay full face value on maturity. So, when the T-Bills mature, the
government pays the holder its face value. The difference between the purchase price and the
maturity value is the interest income earned by the purchaser of the instrument.
Treasury bills are designated by the number of days to their maturity. There are six types of T-
bills that prevail in Bangladesh. These are
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The role of money market to economic growth in Bangladesh
a) 28 days T-bill
b) 91 days T-bill
c) 182 days T-bill,
d) 364 days T-bill
e) 2 years T-bill
f) 5 years T-bill
Participants
The market for Bangladesh Treasury bills has a complex structure and involves numerous
participants--Ministry of Finance, Bangladesh Bank, government securities dealers and
brokers, and other holders of Treasury securities. Until 2003, there was no secondary market
for treasury securities. Any investor (institution or individual), who maintains a current
account with Bangladesh Bank, can invest in T-bills through primary market auctions.
Auction is held on every Sunday at 11 a.m. at the Motijheel Branch of BB. If Sunday is a
holiday, then the last working day before Sunday is used. All the investors submit their bid
unless otherwise pension or provident fund. After receiving the bid, the auction committee
decides how much T-bills will be offloaded. There is a high-powered committee to oversee
the treasury functions; which includes seven members.
Selling System
Treasury bills are sold on a discount basis, which in simple terms means that we have to pay
for the bills less the interest receivable during the term of the bill and receive the face value
of the bill at the end of the period. Treasury bills are not listed at the Stock Exchange. If one
wanted to exit before maturity, rediscounting isn't possible at the Central Bank, rather he or
she may take part in the Repo auction.
Until 2003, there was no secondary market for T-bills transaction in Bangladesh. Government
had decided to introduce the secondary T-bill market with a vision of broadening the
government securities market. World's leading financial institution Citigroup's subsidiary
Citibank, N.A. and local Prime Bank Limited had taken part in the first secondary transaction
of T-bills in Bangladesh that year. Citibank, N.A. had sold a T-bill of 2 years maturity bearing
Taka 3 crore of face value to Prime bank. BANGLADESH BANK had taken necessary steps
to assist this transaction. This was regarded the first secondary T-bill transaction in the
country. a. Primary Dealers: Bangladesh Bank has selected eight banks and one non-bank
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The role of money market to economic growth in Bangladesh
financial institution as primary dealers (PDs) to handle secondary transactions of T-bills and
other government bonds. The eight banks are Sonali Bank, Janata Bank, Agrani Bank, Prime
Bank Ltd, Uttara Bank Ltd, South-East Bank Ltd, Jamuna Bank Ltd, and NCCBL, and the
only NBFI is International Leasing and Financial Services Ltd.
To foster liquidity in the market, the Treasury issues securities consistently and predictably
through a regular schedule of auctions. In Bangladesh, Multiple-units Auction Model is
followed. Two types of bids may be submitted at the auction:
a) Competitive bids
b) Non-competitive bids
Competitive bids specify both the quantity of the security sought and a yield. If the specified
yield is within the range accepted at the auction, the bidder is awarded the entire quantity
sought (unless the specified yield is the highest rate accepted, in which case the bidder is
awarded a prorated portion of the bid. Noncompetitive bids specify only the quantity of the
security sought. Let us discuss the procedure that BANGLADESH BANK follows to allot T-
bills to competitive and non-competitive bidders through T-bill auctions. In Bangladesh, T-
bills are quoted on a 364-day discount basis.
T-BILL Yield
Operations of 7-day and 14-day Bangladesh Bank Bill were introduced in April, 2016 and 30-
day Bangladesh Bank Bill which revived in FY 09 was also continued in FY16 as a tool of
Open Market Operations (OMOs) in order to effective management and sterilize liquidity of
the banking system. With a view to maintaining stable interest rate and exchange rate,
Bangladesh Bank vigorously used these instruments in FY16. The results of Bangladesh
Bank Bill auctions in FY16 are shown at
Outstanding bills
Tenor of bills Number (billion Taka) Number (billion Taka) FY15 FY16
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The role of money market to economic growth in Bangladesh
Commercial Paper (CP) is basically a short-term debt security issued by highly rated
companies to raise funds for funding operating expenses as well as current assets such as
account receivables and inventories
Maturities on CP rarely range any longer than 270 days though it can be up to 365 days. CP
is being issued in the form of promissory note in Bangladesh. It is typically issued at discount
like Treasury Bills, reflecting prevailing market interest rates. That means, investors purchase
promissory notes at less than face value and receive the face value at maturity. The difference
between the purchase price and face value, called the discount, is the interest received on
such investment.
CP is sporadically issued as an interest-bearing note, i.e., investors pay the face value and, at
maturity, receive the face value and accrued interest. All the commercial papers issued so far
in Bangladesh are interest-bearing only. Generally, companies and financial institutions can
issue commercial paper. Even though banks and non-bank financial institutions (NBFIs) can
act as arrangers for the issuers, only a scheduled bank can act as an issuing and paying agent
(IPA) for the issuance of CP. Banks, NBFIs and corporate bodies are the major investors in
CP.
2.3.2.1 Commercial paper prospects & how its play a role to growth of economy in
Bangladesh
Commercial paper market is experiencing rapid growth in Bangladesh for the last
couple of years owing to its low cost and easy access.
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The role of money market to economic growth in Bangladesh
CP is a highly promising product for a developing country like Bangladesh for at least
two reasons:
First, it fosters the goal of reducing cost of borrowing which can
stimulate growth. Through CP, companies can now get funds at lower
cost compared to bank loans. Weighted average interest rate on CPs
issued in the last three years stands at 10.34 per cent against the
weighted average bank lending rate 13.06 per cent during the same
period.
Secondly, there are limited investment opportunities in the financial
market of Bangladesh. Often banks remain overburdened with surplus
liquidity and heavily dependent on government securities amid low
credit growth in the economy.
Volatility of interest rate would have been lower
For many corporations, borrowing short-term money from banks is often a laborious
and annoying task. The desire to avoid banks as much as possible has led to the
widespread popularity of CP
CP can broaden investment opportunities as it provides additional instrument to the
investors. Thus, it can play an important role for development and growth of
sustainable financial market.
It enable foreign owned companies to collect working capital from local companies,
banks and NBFIs
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The role of money market to economic growth in Bangladesh
2.3.3 Repo & Reverse Repo Scenario in Bangladesh and how it helps to the economy
Bangladesh Bank has introduced Repurchase Agreements (Repo) for banks and financial
institutions, as an indirect monetary tool for day to-day liquidity management to smoothen
temporary and unexpected disturbances in the supply and demand for money. This facility
will provide short-term liquidity in the money market against an eligible security without
necessitating liquidation of the security without necessitating liquidation of the security.
Repo is the sale of a security with a commitment by the seller to buy the security back from
the purchaser at a specified price and date. The transaction is called Repo from the point of
the seller of the security. When a bank or financial institution has excess liquidity, it can
deposit it to Bangladesh bank. This procedure is frequently known as Reverse Repo
The repo rate is the rate at which the central bank lends to commercial banks. A cut in the
repo rate helps the commercial banks get money at a cheaper rate in the event of a fund
shortfall. Conversely, the reverse repo rate is the rate at which Bangladesh Bank borrows
funds from commercial banks to control money supply.
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The role of money market to economic growth in Bangladesh
Bangladesh Bank usually conducts various types of repo auctions to provide overnight
liquidity facility to banks at a predetermined policy rate as against the collateral face value of
government treasury bills and bonds to maintain their instant liquidity requirements. Repo
and reserve repo rates were reduced by 50 basis points and re fixed at 6.75 percent and 4.75
percent respectively from 7.25 percent and 5.25 percent on 14 January 2016 while special
repo rate remained unchanged at 9.75 percent for discouraging banks to borrow from BB and
encouraging them to borrow from the market for achieving broad objective of monetary
policy
A total of three repo auctions (including special repo and LSF auctions) were held during
FY16. In all 10 bids for Taka 13.30 billion were received, of which Taka 13.05 billion was
accepted. During FY15 total 2983 bids for Taka 4597.20 billion were received, of which Taka
4593.40 billion was accepted. The volume of accepted amounts decreased by 99.72 percent
during FY16
The range of interest rate against the accepted bids was 7.25-10.25 percent per annum, which
was same as previous fiscal year
In line with the broad objective of monetary policy, Bangladesh Bank continues to mop up
liquidity from the banks through the reverse repo auctions in order to keep up reserve money
and money multiplier on track. In case of reverse repo, BB does not provide any collateral to
the banks. A total of 215 daily reverse repo auctions were held in FY16. In total 1797 bids of
1-2 day and 472 bids of 3-7 day tenors for a total of Taka 14538.49 billion were received and
Taka 11747.96 billion was accepted. During FY15 bids for Taka 5477.62 billion were
received and all bids were accepted. The interest rate against the accepted bids was 5.25
percent which changed at 4.75 percent per annum since 14 January, 2016
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The role of money market to economic growth in Bangladesh
Now let us address the significance of these rates. These rates have the significance of
influencing the market interest rates for the whole economy
Over the time, the banking systems borrowing through the repo route has increased
and now large volume of borrowing is made by the banks to meet their liquidity
requirements
The lower Rate allows banks to borrow more and pay lesser interest to BB
With lower repo and reverse repo rates, industry gets to borrow more and even gets to
pay lower interest rates on its borrowing. Therefore, those businesses that are in a
position to secure additional lending from the banking system will benefit from lower
repo and reverse repo rates.
In case of inflation, BB will try to reduce the amount of money in circulation by
increasing the repo Rate. When repo rates are increased, banks will borrow less and
hence the amount of money they will be lending to the public also decrease. In case of
a deflation, BB will want to inject more money into circulation and hence they will
reduce the repo rate
The money market in Bangladesh comprising banks and financial institutions passed through
a steady growth path in FY16. BB provided repo, special repo and liquidity support facility
(LSF) to the primary dealers (PDs) and non-PD banks against their holdings of eligible
treasury bills and bonds. BBs prudential policy measures resulted in a stable weighted
average interest rate in the call money market ranging from 3.67 percent to 5.71 percent with
minor fluctuations during FY16 during FY16 the monthly average volume of transaction in
the call money market increased by Taka 43.58 billion which was 3.74 percent higher than
that of FY15. Although the volume of transaction in the call money market was relatively low
in the initial months but it steadily increased and weighted average interest rate showed a
declining trend amid little fluctuations in FY16 and its trend remained closely aligned to the
policy repo rate
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The role of money market to economic growth in Bangladesh
In fact, the call money market is fully dominated by commercial banks and the rate is not
determined by the market forces as dealing method is bilateral through over telephone.
Money market experts say a sound and transparent money market is necessary for banks and
non-bank financial institutions and ardent tasks to develop the financial system in an
economy like Bangladesh. A common e-trading platform, therefore, remains a long cherish
demand of money dealers of banks and NBFIs in Bangladesh.
The call money rate is the interest rate that banks charge other banks or financial
institutions on overnight loans. The banks borrow funds from other banks to finance
the shortfall created during festival-time demand.
It enables the banks & institutions to even out their day to day deficit-surpluses of
money
It helps ease the liquidity shortage in the banks.
NCDs are certificates that are issued by large commercial banks as a short term source of
fund. The nonfinancial corporations often purchase NCDs. The minimum denomination is not
fixed in Bangladesh. Maturities on NCDs normally range from 15 to 1 years. It provides
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The role of money market to economic growth in Bangladesh
return in the form of interest along with the difference between the price at which NCDs is
redeemed and the purchase price.
It indicates that a bank accepts responsibility for a future payment which is commonly used
for international trade. Maturity of it is ranged from 30 to 270 days. The return from it is
above T-bill yield.
Money market has important role to play in the process of industrialization and economic
development of a country. Following are the areas in which money market play a role to the
growth of economy
Money market funds provide valuable liquidity by investing in commercial paper, and
repurchase agreements: Money market funds are significant participants in the commercial
paper, repurchase agreement (or repo) markets. The repo market is an important means by
which Bangladesh Bank can conduct monetary policy and provides daily liquidity to global
financial institutions. Quantum of liquidity in the banking system is of paramount
17
The role of money market to economic growth in Bangladesh
Money market helps the industries in securing short-term loans to meet their working
capital requirements through the commercial papers.
18
The role of money market to economic growth in Bangladesh
Money market enables the commercial banks to use their excess reserves in profitable
investment. The main objective of the commercial banks is to earn income from its reserves
as well as maintain liquidity to meet the uncertain cash demand of the depositors. In the
money market, the excess reserves of the commercial banks are invested in near-money
assets (e.g. short-term bills of exchange) which are highly liquid and can be easily converted
into cash. Thus, the commercial banks earn profits without losing liquidity.
Developed money market helps the commercial banks to become self-sufficient. In the
situation of emergency, when the commercial banks have scarcity of funds, they need not
approach the Bangladesh Bank and borrow at a higher interest rate. On the other hand, they
can meet their requirements by recalling their old short-run loans from the money market.
Though the Bangladesh bank can function and influence the banking system in the absence of
a money market, the existence of a developed money market smoothens the functioning and
increases the efficiency of the central bank.
The short-run interest rates of the money market serves as an indicator of the
monetary and banking conditions in the country and, in this way, guide the central
bank to adopt an appropriate banking policy,
The sensitive and integrated money market helps the central bank to secure quick and
widespread influence on the sub-markets, and thus achieve effective implementation
of its policy.
.
2.4.8 Financing Trade:
Money Market plays crucial role in financing both internal as well as international trade.
Commercial finance is made available to the traders through bills of exchange, which are
discounted by the bill market. The acceptance houses and discount markets help in financing
foreign trade.
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The role of money market to economic growth in Bangladesh
20
CHAPTER# The
3 role of money market to economic growth in Bangladesh
FINDINGS
GLOBAL AND BANGLADESH ECONOMY
Chapter Contents
Chapter
ection is designed to introduce Hintsfindings of the report
the overall
Money Market Findings
Market Roles in Bangladeshi Economy: Findings
3.0 FINDINGS
Money markets play a key role in banks liquidity management and the transmission of
monetary policy. The development of the money market improves the progress of financial
21
The role of money market to economic growth in Bangladesh
intermediation and boosts lending to economy, hence improving the countrys economic and
social welfare. Therefore, the development of the money market is in all stakeholders
interests: the banking system, Bangladesh Bank and the economy on the whole.
22
The role of money market to economic growth in Bangladesh
The short-term interest rates of the money market influence the long-term interest
rates of the capital market. Thus, money market indirectly helps the industries through
its link with and influence on long-term capital market.
Higher rates in the money markets decrease the liquidity in the economy and have the
effect of reducing the economic activity in the system & Vice Versa
Money market enables the commercial banks to use their excess reserves in profitable
investment
The sensitive and integrated money market helps the central bank to secure quick and
widespread influence on the sub-markets, and thus achieve effective implementation
of its policy.
23
The role of money market to economic growth in Bangladesh
CHAPTER# 4
Chapter Contents
e of money market & what are the areas need to be improved respective authority might focus on that areas.
Recommendations & Conclusion
Chapter Hints Bibliography
Appendix
24
The role of money market to economic growth in Bangladesh
To sum up, the money market is a key component of the financial system as it is the essential
of monetary operations conducted by the central bank in its pursuit of monetary policy
objectives. It is a market for short-term funds with maturity ranging from overnight to one
year and includes financial instruments that are deemed to be close substitutes of money. The
money market performs three broad functions. Firstly, it provides an equilibrating mechanism
for demand and supply of short-term funds. Secondly, it enables borrowers and lenders of
short-term funds to fulfill their borrowing and investment requirements at an efficient market
clearing price. Three, it provides an avenue for central bank intervention in influencing both
quantum and cost of liquidity in the financial system, thereby transmitting monetary policy
impulses to the real economy. Here are some suggestions for money market that contributes
to the growth of Bangladeshi Economy
As excessive money market volatility could deliver confusing signals about the
stance of monetary policy, it is critical to ensure orderly market behavior, from the
point of view of both monetary and financial stability.
As the quantity of the treasury bills to be issued is decided by the government
depending upon the volume of its requirement for short-term funds so yield on
treasury bill might not vary so much
In addition to the existing approved investors, firms, companies, corporate bodies,
and non-resident Bangladeshis should be allowed to participate in auctions of
treasury bills which leads to help in our economy
The secondary market for government securities is still not active. To activate the
market it is necessary to push institutions to encourage a culture of trading, develop
safe, and efficient trading & settlement system , sensitize market participants to
internalize effective risk management practices and stabilize market standard.
The objective of monetary management by the central bank might align money
market rates with the key policy rate
25
The role of money market to economic growth in Bangladesh
Thus, efficient functioning of the money market is important for the effectiveness of
monetary policy
4.2 Bibliography
http://www.google.com
http://en.banglapedia.org/index.php?title=Money_Market
https://www.bb.org.bd/fnansys/finmarket.php
http://www.thedailystar.net/business
http://print.thefinancialexpress-bd.com/2014/11/01/63882
http://lankabd.com/market/money-market
http://www.bizbangladesh.com/business-news-2220.php
http://www.thedailystar.net/business/bb-issues-guideline-commercial-paper-
1289731
http://waset.org/publications/9996702/the-link-between-money-market-and-
economic-growth
https://www.bb.org.bd/aboutus/regulationguideline/brpd/sep252016_guideline_c
p_banks
https://www.bb.org.bd/pub/annual/anreport/ar1314/full_2015_2016.pdf
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The role of money market to economic growth in Bangladesh
Appendix
\
Bids
Total no. of received Bids accepted
1-Day/2
Day 1797 11482.89 1479 9263.59 5.25
3-Day/7
215 Day 472 3055.60 401 2484.37 5.25
27
The role of money market to economic growth in Bangladesh
28