Monetary and Financial System Module-A Money

and Monetary System

Q-1). What is money? What are the Characteristics of Money? ***

Answer:
Money is a medium of exchange that is widely accepted in transactions for goods, services, and debts. It is a
unit of account and a store of value. In essence, money is a tool used to facilitate trade and economic
transactions.

Historically, various forms of money have been used, including physical objects such as shells, beads, and
precious metals like gold and silver. However, modern economies primarily rely on fiat money, which has no
intrinsic value and is not backed by a physical commodity like gold.

Fiat money derives its value from the trust and confidence people have in the issuing authority, usually a
government. It is typically in the form of banknotes (paper money) and coins. In addition to physical currency,
money exists in electronic or digital form, including bank deposits and digital payment systems.

Money serves several important functions in an economy:

1. Medium of exchange: Money is widely accepted as a means of payment in transactions. It eliminates the need
for barter, where goods and services are exchanged directly, and allows for more efficient trade.
2. Unit of account: Money provides a common measure of value that allows people to express prices, wages, and
other economic values in a standardized manner. It facilitates economic calculations and comparisons.
3. Store of value: Money can be saved and used to store wealth over time. It retains its value and can be used for
future purchases.
4. Standard of deferred payment: Money allows for the settlement of debts and obligations over time. It enables
borrowing and lending, making it possible to finance investments, purchases, and other economic activities.

Overall, money plays a vital role in modern economies, enabling the exchange of goods and services and
facilitating economic growth and development.

The characteristics of money are generally recognized as being durability, portability, divisibility, uniformity,
limited supply, acceptability, and fungibility. Let's explore each of these characteristics in more detail:
1. Durability: Money should be able to withstand physical wear and tear over time. It should not easily
deteriorate or become damaged. Examples of durable money include coins made of metals such as copper,
nickel, or steel, as well as polymer banknotes.
2. Portability: Money should be easy to carry and transport. It should have a high value relative to its weight and
size, allowing individuals to conveniently carry it for transactions. Physical coins and banknotes are designed to
be portable.

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3. Divisibility: Money should be easily divisible into smaller units without losing its value. This allows for flexibility
in pricing goods and services. For example, a dollar can be divided into cents, enabling transactions at various
price points.
4. Uniformity: Money should be standardized, with each unit being identical to others of the same denomination.
This ensures that all units are easily recognizable and accepted. Uniformity helps prevent counterfeiting and
allows for widespread acceptance.
5. Limited supply: Money should have a controlled and limited supply to maintain its value. If money is too
abundant, it can lead to inflation and a decrease in purchasing power. Central banks typically manage the
money supply to maintain stability.
6. Acceptability: Money should be universally accepted as a medium of exchange. It should be recognized and
trusted by individuals, businesses, and institutions within a particular economy. Acceptability ensures that
money can be used to settle debts and make transactions.
7. Fungibility: Money should be interchangeable and mutually substitutable. Each unit of money of the same
denomination should be equal in value to any other unit of the same denomination. For example, all $1 bills
are fungible and can be used interchangeably.

These characteristics collectively make money a reliable and efficient tool for facilitating economic
transactions, promoting economic stability, and serving as a store of value.

Q-2). What are the functions of money?

Answer:

Money serves several important functions in an economy. Here are the primary functions of money:

1. Medium of exchange: One of the fundamental functions of money is to serve as a widely accepted medium of
exchange. It facilitates the buying and selling of goods and services by eliminating the need for barter. With
money, individuals can exchange their goods or services for money and then use that money to acquire other
goods or services. Money greatly enhances the efficiency of transactions and promotes economic activity.
2. Unit of account: Money provides a common unit of measurement for expressing the value of goods, services,
assets, and liabilities. It serves as a standard of comparison, allowing individuals and businesses to easily
determine and compare prices, wages, profits, and

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 debts. By providing a consistent unit of account, money simplifies economic calculations and
facilitates economic decision-making.
3. Store of value: Money can be saved and used to store wealth over time. Its function as a store of
value allows individuals to postpone consumption and accumulate wealth. Money retains its value
and can be easily exchanged for goods and services in the future. However, it is important to note
that the value of money can be eroded by inflation over time, so some individuals choose to invest
their money in assets that can provide a higher return or act as a hedge against inflation.
4. Standard of deferred payment: Money allows for the settlement of debts and obligations over time.
It enables borrowing and lending activities by providing a means for the transfer of purchasing
power from the present to the future. Contracts, loans, and credit transactions are denominated in
a particular currency, and the money serves as a standard for the repayment of debts and the
fulfillment of financial obligations.
5. Measure of value and wealth: Money serves as a measure of value, enabling individuals to assess
the worth or economic value of goods, services, assets, and resources. By assigning prices to various
goods and services, money helps determine their relative value and facilitates economic decision-
making. Money is also used to measure and compare personal wealth, income, and financial
transactions.

These functions of money are crucial for the functioning of modern economies, as they provide a common
medium of exchange, facilitate economic transactions, enable economic calculations, promote saving and
investment, and facilitate the transfer of purchasing power over time.

Easy to Read
Certainly! Here are ten functions of money:

1. Medium of exchange: Money serves as a universally accepted medium for buying and selling goods and
services.
2. Unit of account: Money provides a common unit of measurement for expressing the value of goods, services,
and assets.
3. Store of value: Money can be saved and retained over time as a form of wealth, preserving its purchasing
power.
4. Standard of deferred payment: Money enables the settlement of debts and financial obligations in the present
or future.
5. Means of transferring value: Money facilitates the transfer of purchasing power from one person or entity to
another.
6. Measure of economic performance: Money is used to measure and compare economic indicators, such as GDP,
wages, and prices.
7. Indicator of price levels: Money helps determine the relative value of goods and services through pricing
mechanisms.
8. Facilitator of specialization and division of labor: Money allows individuals to specialize in specific occupations
and exchange their skills and products for money.
9. Tool for economic decision-making: Money provides a basis for evaluating costs, benefits, profits, and
investments.
10. Source of liquidity: Money allows for quick and easy access to funds, enabling transactions and meeting
immediate financial needs.

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 These functions collectively contribute to the efficient functioning of economies, promoting trade, facilitating
economic growth, and enabling individuals and businesses to engage in economic activities.

Q-3). Define Demand for Money. Why do people hold money?

Answer:

The demand for money refers to the desired amount of money that individuals and businesses wish to hold for
various purposes in an economy. It represents the demand for the medium of exchange, rather than the
physical currency itself.

The demand for money arises from the need to conduct transactions, hold wealth, and meet liquidity
preferences. People hold money as a store of value and as a means to facilitate the exchange of goods and
services. The level of demand for money is influenced by several factors:

1. Transaction demand: The demand for money to facilitate day-to-day transactions, such as buying goods,
paying bills, and conducting business activities. This demand is influenced by factors such as income levels, the
frequency of transactions, and the efficiency of payment systems.
2. Precautionary demand: The demand for money to cover unforeseen expenses or emergencies. People hold
money as a precautionary measure to have readily available funds for unexpected needs or contingencies.
3. Speculative demand: The demand for money as an alternative to other assets, such as stocks, bonds, or real
estate. Some individuals may hold money in anticipation of future investment opportunities or to take
advantage of favorable market conditions.

The demand for money is also influenced by various economic and non-economic factors, including:
 Interest rates: Higher interest rates may reduce the demand for money as individuals are more
incentivized to hold interest-bearing assets. Conversely, lower interest rates may increase the
demand for money as the opportunity cost of holding money decreases.
 Income levels: As income rises, the demand for money typically increases due to increased
spending on goods and services.
 Price levels: Inflation and changes in the general price level can affect the demand for money.
When prices rise, people may hold more money to accommodate higher transaction costs.

 Financial innovation and technology: Advancements in financial technology and electronic payment
systems can influence the demand for money by providing more efficient alternatives for
transactions.
Understanding the demand for money is crucial for policymakers and central banks in formulating monetary
policies, managing interest rates, and ensuring the stability of the financial system.

People hold money for various reasons, which can be summarized in the following ten points:

1. Medium of exchange: Money is held to facilitate transactions by serving as a universally accepted medium of
exchange for the purchase of goods and services.

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2. Liquidity preference: Holding money provides individuals with immediate access to funds, allowing them to
meet unexpected expenses or take advantage of sudden opportunities.
3. Store of value: Money serves as a means of preserving wealth. By holding money, individuals can retain the
value of their assets and protect against potential depreciation or losses.
4. Transaction costs: Holding money reduces transaction costs compared to other forms of payment, such as
credit cards or checks, which may involve fees or processing delays.
5. Uncertainty and precaution: People hold money as a precautionary measure to have readily available funds to
cover unforeseen expenses, emergencies, or future uncertainties.
6. Convenience: Money is a convenient form of payment, widely accepted and easily recognizable, making it a
practical choice for day-to-day transactions.
7. Flexibility and anonymity: Cash provides anonymity and flexibility in transactions, allowing individuals to
maintain privacy and control over their financial activities.
8. Confidence and trust: Holding money can provide a sense of security and peace of mind, as it is backed by the
trust and confidence people have in the currency and the stability of the monetary system.
9. Speculative motives: Some individuals hold money in anticipation of future investment opportunities or market
fluctuations, aiming to take advantage of favorable conditions or asset price changes.
10. Cultural and psychological factors: Cultural norms and personal preferences can also influence the desire
to hold money. Some individuals may have a preference for cash or find comfort in physically possessing
money.

It's important to note that the optimal level of money holding varies from person to person and is influenced
by factors such as income, financial goals, risk appetite, and the availability of alternative financial instruments.

Q-4). What are the differences between Transaction Motive and Precautionary Motive

Answer:
Certainly! Here are ten key differences between the transaction motive and precautionary motive for holding
money:

Transaction Motive:

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1. Purpose: The transaction motive arises from the need to facilitate day-to-day transactions and fulfill
regular, expected expenses.
2. Frequency: It is driven by recurring transactions, such as purchasing goods, paying bills, and
conducting routine financial activities.
3. Timing: The timing of money demand for transactions is typically known in advance or can be
reasonably estimated, allowing individuals to plan their money holdings accordingly.
4. Stability: The demand for money due to the transaction motive tends to be relatively stable over
time, as it is linked to the volume and frequency of transactions, which often exhibit consistent
patterns.
5. Predictability: Transaction motives are based on expected expenses and regular financial
obligations, making them more predictable and manageable.
6. Short-term focus: The transaction motive primarily addresses short-term financial needs and aims to
ensure that individuals have sufficient funds readily available for immediate transactions.
7. Cash flow management: Holding money for transactions helps individuals effectively manage their
cash flow, ensuring that they can cover their ongoing expenses and financial obligations.
8. Volatility: The demand for money for transactions is less susceptible to sudden changes or
fluctuations compared to other motives, as it is driven by routine financial activities.
9. Planning and budgeting: Individuals can plan and budget their money holdings based on their
anticipated transaction needs, allowing for better financial management.
10. Direct link to economic activity: The transaction motive for holding money is directly connected
to economic activity, as it supports the smooth functioning of day-to-day transactions and
commerce.

Precautionary Motive:

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1. Purpose: The precautionary motive arises from the need to have readily available funds to cover
unforeseen expenses, emergencies, or provide a financial safety net.
2. Infrequency: It is driven by the need for financial security and preparedness for unexpected events,
which are typically less frequent than routine transactions.
3. Timing: The timing of money demand for precautionary purposes is uncertain and contingent upon
the occurrence of unforeseen events or emergencies.
4. Fluctuation: The demand for money due to the precautionary motive can vary depending on the
perceived level of risk, uncertainty, and the individual's assessment of the likelihood of unforeseen
events.
5. Uncertainty: Precautionary motives address the need for financial protection in the face of
uncertain events and unexpected circumstances, which are difficult to predict.
6. Long-term focus: Holding money for precautionary purposes emphasizes long-term financial
preparedness and acts as a buffer against unforeseen future challenges.
7. Emergency fund: The precautionary motive often involves setting aside a specific amount of money
as an emergency fund to handle unexpected expenses or income disruptions.
8. Risk management: The demand for money for precautionary purposes is closely tied to risk
management, as individuals aim to mitigate the potential negative impacts of unexpected events on
their financial well-being.
9. Flexibility: The amount of money held for precautionary motives may vary depending on individual
risk tolerance, personal circumstances, and the level of financial stability sought.
10. Peace of mind: Holding money for precautionary purposes provides individuals with a sense of
financial security and peace of mind, knowing they have a cushion to handle unexpected financial
challenges.

These differences highlight the distinct motivations and characteristics of the transaction motive and
precautionary motive for holding money, reflecting their respective roles in facilitating regular transactions and
providing financial stability in the face of uncertainty.

Q-5). Describes role of Bangladesh Bank for maintaining Monetary system

Answer:

The Bangladesh Bank, as the central bank of Bangladesh, plays a crucial role in maintaining the monetary
system of the country. Here are ten key points that describe the role of the Bangladesh Bank in this regard:

1. Formulating and implementing monetary policy: The Bangladesh Bank formulates and implements monetary
policy to control money supply, manage inflation, stabilize interest rates, and promote economic growth and
stability.

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2. Conducting open market operations: The central bank conducts open market operations, such as
buying or selling government securities, to manage liquidity in the banking system and influence
interest rates.
3. Controlling reserve requirements: The Bangladesh Bank sets reserve requirements for banks,
specifying the minimum amount of funds that banks must hold as reserves. This helps regulate the
lending capacity of banks and influences money supply.
4. Managing the discount window: The central bank acts as a lender of last resort, providing short-
term loans to commercial banks through its discount window to ensure the stability of the banking
system and address liquidity shortages.
5. Supervising and regulating banks: The Bangladesh Bank supervises and regulates banks to ensure
their soundness and stability. It sets prudential regulations, conducts inspections, and monitors
compliance to maintain a safe and robust banking sector.
6. Issuing and managing currency: The central bank is responsible for issuing and managing the
currency in circulation, including banknotes and coins. It ensures an adequate supply of currency
and maintains its integrity.
7. Managing foreign exchange reserves: The Bangladesh Bank manages the country's foreign exchange
reserves, aiming to maintain stability in the foreign exchange market and support international
trade and payment obligations.
8. Conducting research and analysis: The central bank engages in research and analysis to monitor
economic indicators, assess financial risks, and provide insights for policy formulation and decision-
making.
9. Promoting financial stability: The Bangladesh Bank works to maintain overall financial stability by
implementing measures to prevent and mitigate financial crises, ensuring the soundness of the
banking sector, and managing systemic risks.
10. Enhancing financial inclusion: The central bank promotes financial inclusion by implementing
policies and initiatives to expand access to financial services, particularly for underserved segments
of the population, fostering inclusive economic growth.

These roles collectively enable the Bangladesh Bank to maintain monetary stability, ensure the smooth
functioning of the financial system, and support sustainable economic development in Bangladesh.

Q-6). Role of Banking System for Secondary Money Creation in BD Economy

Answer:

The banking system in Bangladesh plays a crucial role in the secondary money creation process within the
economy. Here are ten key points that describe the role of the banking system in secondary money creation:

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1. Depository institutions: Banks act as depository institutions, accepting deposits from individuals,
businesses, and other entities. These deposits form the basis for the creation of secondary money.
2. Fractional reserve banking: Banks operate under a fractional reserve system, where they are
required to hold only a fraction of their deposits as reserves, allowing them to lend out the
remaining funds.
3. Credit creation: Through the process of lending, banks create new money in the form of credit.
When banks make loans, they effectively increase the money supply in the economy beyond the
initial deposits.
4. Money multiplier effect: The banking system's ability to create credit has a multiplier effect on the
money supply. When new loans are made, the money created through these loans can be re-
deposited in other banks, leading to further lending and money creation.
5. Broad money supply: The secondary money created by the banking system contributes to the
broader money supply in the economy, which includes both physical currency and deposit-based
money.
6. Financing investment and economic activities: Banks provide loans and credit to businesses,
individuals, and government entities, enabling investment in various sectors of the economy and
supporting economic activities.
7. Money circulation: The loans disbursed by banks stimulate economic transactions by providing
individuals and businesses with the necessary funds to engage in spending, investment, and
consumption.
8. Facilitating economic growth: The banking system's ability to create secondary money supports
economic growth by providing the necessary capital for businesses to expand, innovate, and create
employment opportunities.
9. Financial intermediation: Banks act as intermediaries between savers and borrowers, channeling
funds from savers to borrowers and allocating capital efficiently within the economy.
10. Maintaining stability: While banks play a crucial role in secondary money creation, they are also
responsible for managing risks and maintaining financial stability. Prudent lending practices, risk
management, and regulatory oversight help ensure the stability and soundness of the banking
system.

These roles highlight how the banking system's ability to create credit and expand the money supply through
lending activities contributes to the overall functioning and growth of the economy in Bangladesh.

Q-7). Define money supply. How can a central bank control the money supply?

Answer:

Money supply refers to the total stock or quantity of money that is available in an economy at a particular point
in time. It represents the aggregate value of all the physical currency in circulation, such as banknotes and
coins, as well as various types of deposit-based money held in banks and other financial institutions. The money
supply includes both the narrow definition (M1) and the broader definition (M2 or M3) depending on the
specific components considered, such as currency in circulation, demand deposits, time deposits, and other
liquid assets. The money supply is a key indicator of the overall liquidity and monetary conditions in an
economy, and it plays a crucial role in influencing economic activity, price levels, and financial stability.

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 Here are ten key points on how a central bank can control the money supply:
1. Open market operations: The central bank can control the money supply by conducting open
market operations, which involve buying or selling government securities. Purchasing securities
injects money into the economy, increasing the money supply, while selling securities reduces the
money supply.
2. Reserve requirements: The central bank can influence the money supply by adjusting reserve
requirements for commercial banks. Lowering reserve requirements allows banks to lend out a
larger portion of their deposits, increasing the money supply, while raising reserve requirements
limits banks' lending capacity, reducing the money supply.
3. Discount rate: The central bank can control the money supply by setting the discount rate, which is
the interest rate at which commercial banks can borrow from the central bank. Lowering the
discount rate encourages borrowing, increases lending capacity, and expands the money supply,
while raising the discount rate has the opposite effect.
4. Interest rate policy: By setting the benchmark interest rate or influencing short-term interest rates,
the central bank can impact borrowing costs for banks and influence lending and borrowing
activities, thereby influencing the money supply.
5. Open market operations with foreign currencies: The central bank can intervene in the foreign
exchange market by buying or selling foreign currencies, affecting the domestic money supply
through the impact on reserves.
6. Moral suasion and guidance: The central bank can use moral suasion, which involves persuasion and
guidance, to influence commercial banks' lending practices and liquidity management, indirectly
influencing the money supply.
7. Credit controls: The central bank can impose credit controls by setting limits on banks' lending
activities, such as restricting loans for specific sectors or purposes, which directly affects the
availability of credit and, consequently, the money supply.
8. Setting monetary policy targets: The central bank sets monetary policy targets, such as inflation
targets or money supply growth targets, which guide its actions in controlling the money supply.
9. Regulating and supervising banks: The central bank regulates and supervises commercial banks,
ensuring they adhere to prudential regulations. This helps control excessive lending and prevents
the creation of excessive money supply.

10. Communication and forward guidance: The central bank can use communication and forward guidance to
signal its intentions regarding monetary policy and the future direction of the money supply. This helps shape
market expectations and influence the behavior of market participants.

It is important to note that the effectiveness of these tools can vary depending on the economic conditions,
the level of financial development, and the overall institutional framework in a specific country. Central banks
employ these measures in combination to maintain price stability, manage inflation, support economic growth,
and ensure the stability of the financial system.

Q-8). Distinguish between “High powered Money” & “Broad Money”?

Anwer:

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 Distinguishing between "High powered money" and "Broad money" involves understanding the different
components and definitions of these monetary aggregates. Here are ten key points that highlight the
differences between high powered money and broad money:

High Powered Money:

1. Definition: High powered money, also known as base money or monetary base, refers to the total amount of
central bank money in the economy. It includes physical currency (banknotes and coins) held by the non-bank
public and the reserves held by commercial banks at the central bank.
2. Components: The components of high powered money include currency in circulation (held by the public) and
reserves held by commercial banks. Reserves comprise both required reserves (mandated by the central bank)
and excess reserves (voluntary reserves held by banks).
3. Creation: High powered money is created solely by the central bank through activities such as issuing currency,
conducting open market operations, and providing loans to commercial banks.
4. Control: The central bank has direct control over high powered money through its monetary policy tools and
operations. It can adjust the quantity of high powered money to influence the overall money supply and
economic conditions.
5. Significance: High powered money serves as the foundation or base upon which the banking system creates
additional money through lending and deposit creation.

Broad Money:

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1. Definition: Broad money refers to the total amount of money in the economy, including both high
powered money and various forms of deposit-based money created by commercial banks.
2. Components: The components of broad money include physical currency, demand deposits
(checking accounts), savings deposits, time deposits, and other liquid assets held by individuals,
businesses, and non-bank financial institutions.
3. Creation: Broad money is created through the process of fractional reserve banking. Commercial
banks create money by making loans to borrowers, which in turn leads to the creation of new
deposits in the banking system.
4. Control: While the central bank has control over high powered money, it has limited control over
broad money. The creation of broad money is primarily influenced by the lending activities of
commercial banks and the demand for credit in the economy.
5. Importance: Broad money represents the money supply available for transactions, savings, and
investments in the economy. It reflects the total amount of money that individuals and businesses
can use for various purposes.
6. Indicators: Broad money is an important indicator for monitoring the overall liquidity, financial
health, and economic activity within an economy.
7. Monetary aggregates: Various measures of broad money, such as M1 (narrow money) and M2 or
M3 (broad money), are used to track and analyze the money supply and its relationship with
economic variables.
8. Velocity of money: Broad money is associated with the concept of money velocity, which
represents the rate at which money circulates in the economy and influences economic
transactions and economic growth.
9. Stability: Changes in the level of broad money can impact inflation, economic stability, and the
overall health of the financial system.
10. Policy implications: Broad money is considered when formulating monetary policy, as it
provides insights into the availability of credit, financial intermediation, and the overall state of the
economy.

In summary, high powered money represents the central bank's money supply, while broad money includes
both central bank money and deposit-based money created by commercial banks. The creation and control of
high powered money are the responsibility of the central bank, while the creation of broad money is primarily
driven by lending activities in the banking system.

Q-9. Distinguish between monetary and fiscal policy.

Answer:

Distinguishing between monetary policy and fiscal policy involves understanding their respective objectives,
tools, and the institutions responsible for their implementation. Here are ten key points that highlight the
differences between monetary policy and fiscal policy:

Monetary Policy:

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1. Objective: Monetary policy aims to manage the money supply, interest rates, and credit conditions
to achieve price stability, control inflation, and promote sustainable economic growth.
2. Responsibility: Monetary policy is formulated and implemented by the central bank, such as the
Federal Reserve in the United States or the European Central Bank in the Eurozone.
3. Tools: The central bank uses various tools to conduct monetary policy, including open market
operations, reserve requirements, discount rates, and communication channels like forward
guidance.
4. Focus: Monetary policy focuses on influencing aggregate demand, managing inflationary pressures,
stabilizing financial markets, and maintaining the stability of the banking system.
5. Time Horizon: Monetary policy actions often have a relatively shorter-term impact, as they primarily
aim to manage short-term economic conditions and fluctuations.
6. Flexibility: Monetary policy can be adjusted relatively quickly, allowing central banks to respond
promptly to changing economic conditions and financial market developments.
7. Indirect Impact: Monetary policy primarily affects the economy indirectly by influencing interest
rates, credit availability, and investor and consumer behavior.
8. Autonomy: Central banks are typically granted a degree of independence to set monetary policy
without direct interference from the government, ensuring policy decisions are based on economic
considerations rather than political pressures.
9. Broad Scope: Monetary policy decisions impact the entire economy and are not limited to specific
sectors or industries.
10. Macroeconomic Stabilization: Monetary policy is a key tool for macroeconomic stabilization,
particularly in managing inflation, supporting economic growth, and addressing financial crises.

Fiscal Policy:

1. Objective: Fiscal policy aims to manage government revenue, expenditure, and taxation to influence aggregate
demand, promote economic stability, and achieve desirable social and economic outcomes.
2. Responsibility: Fiscal policy is formulated and implemented by the government and its fiscal authorities, such
as the Ministry of Finance or Treasury Department.
3. Tools: Fiscal policy employs tools such as taxation, government spending, borrowing, and public investment to
influence economic conditions and achieve policy objectives.
4. Focus: Fiscal policy focuses on addressing structural issues, income distribution, public goods provision, social
welfare, and long-term economic development.

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5. Time Horizon: Fiscal policy decisions can have both short-term and long-term impacts, as they often
involve changes in government spending and taxation that extend over several years.
6. Implementation Process: Fiscal policy requires approval from legislative bodies, as it involves
decisions regarding government budgets, tax laws, public expenditure, and borrowing.
7. Direct Impact: Fiscal policy can have a direct impact on specific sectors, industries, and targeted
groups through government spending programs, tax incentives, and subsidies.
8. Political Considerations: Fiscal policy decisions may be influenced by political considerations and
priorities, as governments balance various interests and public preferences.
9. Budgetary Constraints: Fiscal policy decisions are constrained by the government's budgetary
limitations and debt sustainability considerations.
10. Public Investments: Fiscal policy can focus on public investments in infrastructure, education,
healthcare, and other areas to support long-term economic growth and development.

In summary, monetary policy is primarily concerned with managing the money supply, interest rates, and
financial conditions to influence the overall economy, while fiscal policy focuses on government revenue,
expenditure, and taxation to achieve social and economic objectives. Monetary policy is implemented by the
central bank, while fiscal policy is formulated and implemented by the government.

Q-10). "Monetary policy is more effective than fiscal policy."---Do you agree? Explain.

Answer:

As an AI language model, I don't hold personal opinions or biases. However, I can provide you with an analysis
of the statement.

The effectiveness of monetary policy versus fiscal policy depends on various factors, including the economic
context, the nature of the issue at hand, and the specific objectives of policymakers. It is important to note
that both monetary and fiscal policies can play complementary roles in influencing economic conditions. Here
are some points to consider in the comparison:

Advantages of Monetary Policy:

1. Flexibility: Monetary policy can be implemented relatively quickly, allowing central banks to adjust interest
rates, liquidity, and credit conditions to address immediate economic concerns and respond to changing
market conditions.
2. Precision: Monetary policy can be fine-tuned to target specific sectors or economic indicators, such as inflation
or exchange rates, by adjusting interest rates or conducting open market operations.
3. Market Signals: Monetary policy actions, such as changes in interest rates, can send important signals to
financial markets, influencing investor and consumer behavior and contributing to market stability.
4. Independence: Central banks often operate with a degree of independence, which allows them to make policy
decisions based on economic considerations rather than political pressures, enhancing their credibility and
effectiveness.

Advantages of Fiscal Policy:

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1. Broader Scope: Fiscal policy can directly target specific sectors or groups through government spending
programs, tax policies, and targeted subsidies, allowing for more direct intervention in the economy.
2. Counter-cyclical Measures: Fiscal policy can be used to provide countercyclical support during economic
downturns, as governments can increase public spending and implement stimulus measures to boost demand
and stabilize the economy.
3. Long-term Planning: Fiscal policy decisions can address structural issues, support long-term investments in
infrastructure, education, and healthcare, and promote sustainable economic growth and development.
4. Income Redistribution: Fiscal policy can be used to address income inequality and promote social welfare
through progressive tax systems, targeted transfers, and social programs.

Effectiveness Comparison:

The effectiveness of monetary policy versus fiscal policy depends on the specific circumstances and challenges
faced by an economy. In general, monetary policy may be more effective in addressing short-term fluctuations,
managing inflation, and maintaining financial stability. It can act quickly to influence interest rates and credit
conditions, impacting investment and consumption decisions.

On the other hand, fiscal policy may be more effective in addressing broader structural issues, providing
targeted support during recessions, and promoting long-term economic growth. It can directly stimulate
demand through government spending or tax cuts, particularly when monetary policy is constrained by near-
zero interest rates.

In practice, the effectiveness of both policies can be enhanced when they are coordinated and implemented in
a complementary manner. Monetary and fiscal policy coordination can provide a more comprehensive
approach to addressing economic challenges and promoting stability and growth.

Ultimately, the effectiveness of monetary policy versus fiscal policy can vary based on the specific context,
policy objectives, and the ability of policymakers to implement and coordinate these policies effectively. Both
monetary and fiscal policies have their strengths and limitations, and their effectiveness depends on the
specific circumstances and challenges faced by an economy.

Q-11). Monetary policy of a developing country like Bangladesh can’t be fully independent of fiscal policy. – Do
you agree? Justify your answer.**

Answer:

Yes, I agree that the monetary policy of a developing country like Bangladesh cannot be fully independent of
fiscal policy. Several factors contribute to this interdependence. Here is a justification for this statement:

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1. Fiscal Dominance: In developing countries, fiscal policy often plays a dominant role due to the
government's significant presence in the economy. Government expenditure, taxation, and
borrowing can have a substantial impact on the overall fiscal position, which in turn affects
monetary policy decisions.
2. Government Debt and Financing: Developing countries often rely on domestic borrowing to finance
budget deficits. The level of government debt and the associated interest payments can put
pressure on the monetary policy stance as the central bank might need to accommodate the fiscal
needs of the government, affecting interest rates and liquidity conditions.
3. Public Sector Borrowing: The government's borrowing activities in the financial markets can
compete with private sector borrowing, leading to crowding-out effects. This can limit the
effectiveness of monetary policy in influencing private investment and overall economic activity.
4. Inflationary Pressures: Government spending and fiscal policies can have a direct impact on
inflation. If fiscal policy stimulates aggregate demand beyond the economy's capacity, it can put
upward pressure on prices, necessitating a monetary policy response to maintain price stability.
5. External Factors: Developing countries often face external shocks and vulnerabilities, such as
fluctuations in commodity prices, exchange rate movements, or changes in international capital
flows. These external factors can influence both fiscal and monetary policy decisions, requiring
coordination to manage their impact on the economy.
6. Development Priorities: In developing countries, policymakers often need to focus on achieving
socio-economic objectives, such as poverty reduction, infrastructure development, and social
welfare. Fiscal policy plays a crucial role in directing resources toward these priorities, and monetary
policy needs to align with these objectives.
7. Limited Monetary Instruments: Developing countries may have limited monetary policy instruments
due to underdeveloped financial markets, shallow money markets, or structural constraints. In such
cases, fiscal policy becomes more critical in influencing economic conditions and addressing
development challenges.

8. Coordination for Macroeconomic Stability: Coordinated monetary and fiscal policies can contribute to
macroeconomic stability and long-term growth. Close collaboration between the central bank and fiscal
authorities allows for a more comprehensive approach in addressing economic challenges and maintaining
stability.
9. Policy Credibility: The independence of monetary policy can be enhanced when fiscal policy supports
macroeconomic stability and fiscal discipline. A credible fiscal policy can provide a solid foundation for the
effectiveness of monetary policy.
10. Communication and Transparency: Effective communication and coordination between monetary and
fiscal authorities are crucial for managing expectations, maintaining market confidence, and ensuring policy
coherence.

In summary, the interdependence of monetary and fiscal policy in a developing country like Bangladesh stems
from various factors, including fiscal dominance, government debt and financing needs, inflationary pressures,
external factors, and development priorities. Coordinated efforts and communication between monetary and
fiscal authorities are essential to achieve macroeconomic stability, manage inflation, and promote sustainable
economic growth.

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 Q-12). Define inflation. What are its pervasive effects? How inflation can be checked effectively?***

Answer:

Inflation refers to the sustained increase in the general price level of goods and services in an economy over a
period of time. It is often measured by the rate of change in a price index, such as the Consumer Price Index
(CPI) or the Wholesale Price Index (WPI). Inflation indicates a decrease in the purchasing power of money, as
more units of currency are required to purchase the same goods and services.

Inflation occurs when the demand for goods and services exceeds their supply, leading to an increase in prices.
It can also be caused by factors such as increases in production costs, changes in government policies,
fluctuations in exchange rates, or excessive growth in the money supply.

Inflation can have both positive and negative impacts on an economy. Moderate inflation can be a sign of a
healthy and growing economy, as it encourages consumer spending and investment. It also allows for the
adjustment of wages and prices over time. However, high or unpredictable inflation can be detrimental to an
economy. It erodes the purchasing power of individuals, reduces real incomes, distorts economic decision-
making, and creates uncertainties for businesses and investors.

Central banks and governments often employ monetary and fiscal policies to manage inflation. Monetary
policy tools, such as adjusting interest rates and managing the money supply, can influence inflationary
pressures. Fiscal policy, through measures such as taxation and government spending, can also impact inflation
by affecting aggregate demand and supply conditions.

In summary, inflation refers to the sustained increase in the general price level of goods and services over time.
It is an important economic indicator that influences consumer behavior, investment decisions, and overall
economic stability. Controlling and managing inflation is a key objective of monetary and fiscal policies in most
economies.

Inflation has pervasive effects on various aspects of an economy, affecting individuals, businesses, and the
overall economic environment. Here are some of the pervasive effects of inflation:

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1. Reduced Purchasing Power: Inflation erodes the purchasing power of money, meaning that
individuals can buy fewer goods and services with the same amount of currency. This leads to a
decrease in the standard of living and can affect people on fixed incomes, retirees, and those with
low wages the most.
2. Uncertainty and Planning Challenges: High or unpredictable inflation creates uncertainty about
future prices. Businesses and individuals find it difficult to plan and make informed decisions
regarding investments, savings, and long-term financial commitments. This can hinder economic
growth and stability.
3. Redistribution of Wealth: Inflation can redistribute wealth within society. Debtors benefit from
inflation as the value of their debts decreases over time, while creditors experience a decrease in
the real value of the money owed to them. This redistribution can have social and economic
implications, affecting income inequality and wealth distribution.
4. Interest Rates and Investment Decisions: Inflation impacts interest rates, as lenders and investors
demand higher returns to compensate for the eroding value of money. High inflation rates can lead
to higher borrowing costs, making it more expensive for businesses and individuals to access credit
and invest in productive activities. This can hinder economic growth and investment.
5. Distorted Price Signals: Inflation distorts price signals, making it difficult for businesses to determine
the relative value of goods and services. This can affect resource allocation, production decisions,
and market efficiency, potentially leading to inefficient allocation of resources.
6. Wage-Price Spiral: Inflation can trigger a wage-price spiral. As prices rise, workers demand higher
wages to maintain their purchasing power, and businesses pass on these increased costs to
consumers through higher prices. This cycle can perpetuate inflationary pressures, creating a
challenge for policymakers to break the cycle.

7. International Competitiveness: High inflation can impact a country's international competitiveness. If domestic
prices rise faster than those in trading partners' countries, it can make exports more expensive and imports
cheaper, affecting trade balances and overall competitiveness in global markets.
8. Social and Political Implications: High inflation rates can have social and political implications. It can lead to
public discontent, social unrest, and political instability. Governments may face pressure to address inflation
through policy measures, which can impact public finances and policymaking.
9. Asset Price Inflation: Inflation can also affect asset prices, such as real estate, stocks, and commodities. Rapid
asset price inflation can create speculative bubbles, leading to financial instability and potential economic
crises.
10. Central Bank Credibility: Persistent high inflation can undermine the credibility and effectiveness of the
central bank's monetary policy. It can erode public trust in the currency and the central bank's ability to
maintain price stability, requiring decisive actions to restore confidence.

Overall, the pervasive effects of inflation highlight its impact on various economic agents, resource allocation,
investment decisions, and social dynamics. Maintaining price stability and managing inflation are key
challenges for policymakers to ensure economic stability and the well-being of individuals and businesses.

Controlling and managing inflation is a key objective for policymakers. While there is no one-size-fits-all
approach, here are some commonly used strategies to effectively check inflation:

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1. Monetary Policy: Central banks can use monetary policy tools to manage inflation. They can raise interest rates
to reduce borrowing and spending, which can help curb inflationary pressures. Additionally, central banks can
control the money supply by implementing open market operations, reserve requirements, and adjusting
lending facilities to influence liquidity in the economy.
2. Fiscal Policy: Governments can use fiscal policy measures to control inflation. This includes adjusting taxation
policies, reducing government spending, and managing budget deficits. These actions can help reduce
aggregate demand and ease inflationary pressures.
3. Supply-Side Policies: Governments can implement supply-side policies to address inflation by improving
productivity, reducing production costs, and removing supply-side bottlenecks. This can involve investing in
infrastructure, promoting research and development, enhancing labor market flexibility, and encouraging
competition.
4. Wage and Price Controls: In certain situations, governments may resort to implementing wage and price
controls to directly regulate the prices of goods and services or limit wage increases. However, this approach
can have unintended consequences and distort market mechanisms, so it is generally considered a temporary
and less preferred measure.
5. Exchange Rate Management: In countries with flexible exchange rates, policymakers can use
exchange rate management to influence import prices and manage inflation. Appreciating the
domestic currency can make imports cheaper and help control inflation, while depreciating the
currency can boost export competitiveness.
6. Inflation Targeting: Many central banks adopt inflation targeting as a monetary policy framework.
Inflation targets are set, and monetary policy decisions are geared towards achieving those targets.
Clear communication of these targets to the public and maintaining policy credibility are important
aspects of inflation targeting.
7. Public Confidence and Communication: Building public confidence in the stability of the currency
and the effectiveness of policies is crucial. Clear communication from central banks and
governments regarding inflation goals, policy actions, and expectations can help manage
inflationary expectations and guide economic behavior.
8. Structural Reforms: Implementing structural reforms to improve the efficiency and competitiveness
of markets can have long-term effects on inflation. This can include measures such as deregulation,
reducing trade barriers, enhancing competition, and improving the business environment.
9. International Coordination: In an increasingly interconnected world, coordination with international
partners is important to manage inflation effectively. Collaboration on monetary policies, exchange
rate stability, and addressing global economic imbalances can contribute to controlling inflationary
pressures.
10. Long-Term Fiscal Discipline: Establishing and maintaining long-term fiscal discipline is crucial.
This involves prudent fiscal management, avoiding excessive public debt, and ensuring sustainable
government finances. Sound fiscal policies provide a solid foundation for controlling inflation and
maintaining economic stability.

It's important to note that the effectiveness of these measures can vary depending on the specific economic
circumstances and the persistence of inflationary pressures. A comprehensive and coordinated approach,
considering both monetary and fiscal policies along with structural reforms, is often necessary to effectively
check inflation and maintain price stability.

Q-13). How can you explain country’s positive Balance of Trade (BOT) position in a given period and its impact to
the economy? **

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 Answer:

A positive Balance of Trade (BOT) position occurs when a country's exports of goods and services exceed its
imports during a given period. Here are 10 points explaining the implications and impact of a positive BOT
position on the economy:
1. Increased Export Revenue: A positive BOT implies that the country is earning more from exports
than it is spending on imports. This leads to an increase in export revenue, which can contribute to
higher national income and economic growth.
2. Trade Surplus: A positive BOT results in a trade surplus, which indicates that the country has a
competitive advantage in producing and exporting goods and services. It reflects the country's
ability to generate foreign exchange and accumulate foreign reserves.
3. Current Account Surplus: The BOT is a component of the current account in the balance of
payments. A positive BOT contributes to a current account surplus, which reflects the overall
position of the country's international transactions. It indicates that the country is a net lender to
the rest of the world.
4. Employment Generation: A positive BOT can lead to increased demand for domestically produced
goods and services, which can stimulate economic activity and create job opportunities. Export-
oriented industries, in particular, may experience growth and expansion, contributing to
employment generation.
5. Improved Trade Balance: A positive BOT helps improve the country's trade balance by reducing
trade deficits. It indicates that the country is importing fewer goods and services relative to its
exports, which can enhance the stability and sustainability of the economy.
6. Accumulation of Foreign Reserves: A positive BOT allows for the accumulation of foreign reserves.
These reserves can be used to stabilize the country's currency, support import payments, and act as
a buffer against external shocks or economic uncertainties.
7. Enhanced Financial Position: A positive BOT strengthens the country's financial position in the global
market. It can enhance investor confidence, attract foreign direct investment (FDI), and facilitate
access to international capital markets.
8. Increased Tax Revenues: Higher export earnings from a positive BOT can lead to increased tax
revenues for the government. This provides additional resources for public expenditure,
infrastructure development, social welfare programs, and investment in key sectors of the
economy.
9. Technological and Knowledge Transfer: Export-oriented industries often require advanced
technology and expertise to remain competitive. A positive BOT can promote technological and
knowledge transfer through interactions with international markets and collaborations with foreign
partners, contributing to the overall development of the economy.
10. Improved Terms of Trade: A positive BOT can lead to an improvement in the country's terms of
trade, which refers to the ratio of export prices to import prices. This can result in a favorable
exchange rate, reduced import costs, and increased purchasing power, benefiting consumers and
businesses.

It's important to note that while a positive BOT generally indicates economic strength, sustained large
surpluses may have some challenges, such as over-reliance on exports, potential trade imbalances with trading
partners, and currency appreciation. Therefore, maintaining a balanced trade position is crucial for long-term
economic stability and sustainable growth.

Q-14). Differentiate between Balance of Trade and Balance of Payments. **

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 Answer:

Balance of Trade (BOT) and Balance of Payments (BOP) are two related concepts that measure the economic
transactions between a country and the rest of the world. Here are 10 points differentiating between Balance
of Trade and Balance of Payments:

Balance of Trade (BOT):

1. BOT focuses specifically on the trade of goods (visible items) between a country and its trading partners.
2. It compares the value of a country's exports and imports of goods during a specific period.
3. BOT includes only tangible goods, such as machinery, automobiles, electronics, and agricultural products.
4. A positive BOT indicates a trade surplus, which means that the value of exports exceeds the value of imports.

A negative BOT indi

cates a trade deficit, implying that the value of imports exceeds the

Balance of Payments (BOP):

BOP is a broader measure that covers all economic transactions between a country and the
value of exports.

rest of the world, including goods, services, income, and financial flows.
2. It encompasses the BOT as one of its components, along with the balance of services, income, and transfer
payments.
3. BOP includes both visible (goods) and invisible (services) items, such as tourism, transportation, banking,
insurance, and remittances.
4. BOP accounts for the inflows and outflows of money, as well as changes in the country's foreign reserves and
liabilities.
5. BOP provides a comprehensive view of a country's economic interactions with the world and assesses its
overall international financial position.
6. BOP includes the current account, capital account, and financial account.
7. The current account captures the trade balance (BOT), as well as net income from abroad (such as dividends
and interest) and net transfer payments (such as foreign aid).
8. The capital account records the flow of capital between countries, including investments in fixed assets and
transfers of ownership rights.
9. The financial account measures changes in ownership of financial assets and liabilities, including foreign direct
investment (FDI), portfolio investments, and changes in reserve assets.
10. BOP is a more comprehensive measure of a country's international transactions and helps assess its overall
economic health, financial stability, and external balance.

In summary, while the Balance of Trade focuses solely on the trade of goods, the Balance of Payments is a
broader measure that includes all economic transactions, including goods, services, income, and financial

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 flows. The BOP provides a more comprehensive view of a country's international economic interactions and its
overall international financial position.

Q-15). What are the preconditions which are to be met if convertibility to be successfully implemented? *

Answer:

Implementing convertibility, particularly in the context of currency convertibility, requires certain

preconditions to ensure its successful implementation and smooth functioning. Here are 10 preconditions that
are typically considered important:

1. Macroeconomic Stability: A country should have a stable macroeconomic environment with low inflation,
controlled fiscal deficit, stable exchange rates, and manageable levels of public debt. Macroeconomic stability
is crucial to instill confidence in the convertibility of the currency.
2. Sound Monetary Policy: The central bank should have a credible and effective monetary policy framework in
place to control inflation, maintain price stability, and manage liquidity in the financial system. Sound monetary
policy helps support the stability and convertibility of the currency.
3. Strong Financial System: A well-regulated and supervised financial system is essential for convertibility. The
banking sector should be robust, with adequate capitalization, risk management practices, and regulatory
oversight. A strong financial system ensures the stability of the currency and facilitates seamless convertibility.
4. Exchange Rate Flexibility: A flexible exchange rate regime allows the market forces to determine the value of
the currency. A freely floating or managed floating exchange rate system helps absorb external shocks and
maintains competitiveness. It is important to have a flexible exchange rate regime in place for successful
convertibility.
5. Current Account Convertibility: The country should have a reasonably balanced current account position,
meaning that it does not heavily rely on external borrowing to finance its imports. A stable current account
ensures a steady flow of foreign exchange and facilitates currency convertibility.
6. Capital Account Convertibility: Gradual liberalization of the capital account, allowing the free flow of capital in
and out of the country, is a precondition for successful convertibility.

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 However, it should be managed cautiously to prevent excessive volatility and potential risks to the
domestic financial system.
7. Strong Legal Framework: A robust legal framework is necessary to enforce contracts, protect
property rights, and ensure a transparent and fair business environment. This promotes investor
confidence and supports convertibility by providing a secure legal framework for economic
transactions.
8. Transparency and Accountability: Transparency and accountability in economic and financial
matters are crucial for successful convertibility. Governments should have transparent policies,
accurate and timely data, and accountability mechanisms in place to maintain public trust and
confidence in the convertibility process.
9. Adequate Foreign Exchange Reserves: Sufficient foreign exchange reserves are essential to support
convertibility and manage potential imbalances. A country should have an adequate level of
reserves to intervene in the foreign exchange market, stabilize the currency, and meet any
unexpected external obligations.
10. Strong Institutions and Governance: A country needs strong institutions, including a credible
central bank, effective regulatory bodies, and good governance practices, to ensure the smooth
functioning of convertibility. Strong institutions promote confidence, transparency, and
accountability in economic management.

It is important to note that the preconditions for successful convertibility may vary depending on the specific
country's economic circumstances, institutional capacity, and stage of development. Implementing
convertibility should be done cautiously, taking into account the readiness and capacity of the country's
economy to manage the potential risks and challenges associated with convertibility.

Q-16). What do you mean by foreign rate of exchange? How is foreign rate of exchange determined?
**

Answer:

The foreign rate of exchange, also known as the foreign exchange rate or simply the exchange rate, refers to
the price at which one currency can be exchanged for another currency. It represents the value of one
currency in terms of another currency.

Exchange rates are determined in the foreign exchange market, where currencies are bought and sold. These
rates fluctuate continuously due to various factors such as supply and demand dynamics, interest rate
differentials, economic indicators, geopolitical events, and market expectations.

Exchange rates are typically expressed as the amount of one currency required to purchase a unit of another
currency. For example, if the exchange rate between the US dollar (USD) and the Euro (EUR) is 1.20, it means
that one US dollar is equivalent to 1.20 Euros.
Exchange rates play a crucial role in international trade and finance as they affect the competitiveness of a
country's exports and imports, influence capital flows, and impact the relative value of assets denominated in
different currencies. Changes in exchange rates can have significant implications for businesses, investors,
travelers, and governments.

Exchange rates can be quoted in different ways, including spot rates (current exchange rates for immediate
delivery) and forward rates (exchange rates for future delivery). They can also be categorized into fixed

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 exchange rates (where the value of a currency is fixed to a specific benchmark or another currency) or floating
exchange rates (where the value of a currency fluctuates freely in response to market forces).

Monitoring and understanding exchange rates are essential for businesses and individuals engaged in
international transactions, as well as policymakers responsible for managing the economy's external sector
and maintaining currency stability.

The foreign exchange rate, or the rate at which one currency can be exchanged for another, is determined
through a complex interplay of various factors in the global foreign exchange market. The primary factors
influencing the determination of exchange rates include:

1. Supply and Demand: The fundamental factor influencing exchange rates is the supply and demand dynamics of
currencies. If the demand for a particular currency exceeds its supply, its value appreciates relative to other
currencies. Conversely, if the supply of a currency exceeds demand, its value depreciates. The supply and
demand for currencies are influenced by various economic factors, such as trade flows, capital flows, interest
rate differentials, inflation rates, and market sentiment.
2. Interest Rates: Differences in interest rates between countries can affect exchange rates. Higher interest rates
tend to attract foreign investors, leading to increased demand for the currency of the country with higher
rates. This increased demand can cause the currency to appreciate. Conversely, lower interest rates may
reduce demand for a currency and lead to depreciation.
3. Inflation Rates: Inflation differentials between countries can impact exchange rates. Countries with lower
inflation rates tend to have stronger currencies as their purchasing power remains relatively stable.
Conversely, countries with higher inflation rates may experience currency depreciation as their purchasing
power erodes.
4. Economic Performance: The overall economic performance of a country, including factors such as GDP growth,
employment levels, productivity, and trade balances, can influence exchange rates. Strong economic
performance can attract foreign investment and lead to currency appreciation, while weak economic
performance can result in currency depreciation.
5. Political and Geopolitical Factors: Political stability, government policies, geopolitical events, and international
relations can impact exchange rates. Uncertainty or instability in a country may lead to capital outflows,
currency depreciation, and higher exchange rate volatility.
6. Market Sentiment and Speculation: Market participants, including traders, investors, and speculators, play a
role in determining exchange rates based on their expectations and perceptions of future currency
movements. Market sentiment, news, and speculation can drive short-term fluctuations in exchange rates.
7. Central Bank Interventions: Central banks can intervene in the foreign exchange market to influence exchange
rates. They may buy or sell currencies to stabilize or manage their currency's value. Central banks can also
adjust interest rates and implement monetary policies that indirectly impact exchange rates.

It is important to note that exchange rates in the foreign exchange market are determined through a
decentralized and continuous process of buying and selling currencies by market participants worldwide. The
interaction of these factors and the constant flow of information and transactions in the foreign exchange
market contribute to the determination of exchange rates.

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 Q-17). Distinguish between fixed and floating (flexible) exchange rate. ***

Answer:

Fixed Exchange Rate System:

1. Definition: Under a fixed exchange rate system, the value of a country's currency is pegged or fixed to the value
of another currency, a basket of currencies, or a commodity like gold. The exchange rate remains constant and
is maintained by the country's central bank or monetary authority.
2. Exchange Rate Stability: Fixed exchange rates provide stability and predictability in international trade and
financial transactions. The exchange rate between the pegged currency and the reference currency remains
constant, reducing uncertainty for businesses and investors.
3. Central Bank Intervention: To maintain the fixed exchange rate, the central bank intervenes in the foreign
exchange market by buying or selling its currency. If the value of the domestic currency weakens, the central
bank sells its reserves of foreign currency to increase demand and support the exchange rate. Conversely, if the
domestic currency strengthens, the central bank buys its own currency to reduce its value.
4. Monetary Policy Constraints: A fixed exchange rate system limits the ability of a country to pursue an
independent monetary policy. The central bank needs to align its monetary policy, including interest rates and
money supply, with the policy of the currency to which it
is pegged. This constraint can impact a country's ability to respond to domestic economic
conditions.
5. Stability in Trade and Investments: Fixed exchange rates promote stability in international trade and
investments by eliminating currency fluctuations. Businesses can plan and budget effectively
without the risk of sudden currency value changes impacting their transactions.
Floating (Flexible) Exchange Rate System:

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1. Definition: In a floating exchange rate system, the value of a country's currency is determined by
market forces of supply and demand in the foreign exchange market. The exchange rate fluctuates
freely and is not directly controlled by the central bank or monetary authority.
2. Market Determination: Floating exchange rates are determined by the interaction of market
participants, including traders, investors, and speculators. Factors such as supply and demand,
interest rate differentials, inflation rates, economic indicators, and market sentiment influence the
exchange rate.
3. Flexibility: Floating exchange rates provide flexibility and adjustability to respond to changing
economic conditions. The exchange rate can move freely, allowing it to reflect market fundamentals
and adjust to changes in the economy.
4. Independent Monetary Policy: With a floating exchange rate, the central bank has greater flexibility
in implementing its monetary policy. It can adjust interest rates, money supply, and other policy
tools to address domestic economic conditions, such as inflation, employment, and economic
growth.
5. Exchange Rate Volatility: Floating exchange rates are subject to market forces and can experience
volatility. Currency values can fluctuate widely based on economic events, investor sentiment, and
market speculation. Exchange rate volatility can impact international trade, investment decisions,
and the competitiveness of export-oriented industries.
6. Automatic Adjustment Mechanism: Floating exchange rates act as an automatic adjustment
mechanism to restore equilibrium in the balance of payments. If a country has a trade deficit, its
currency depreciates, making its exports more competitive and imports relatively more expensive.
This adjustment helps correct trade imbalances.
7. Market-Based Price Discovery: Floating exchange rates provide a transparent and marketbased
mechanism for price discovery. Market participants continuously assess economic and political
factors, adjusting exchange rates accordingly. This allows currencies to reflect fundamental
economic conditions.

It's important to note that some countries adopt managed floating exchange rate systems, which lie between
fixed and floating exchange rate regimes. In a managed float, the central bank may intervene in the foreign
exchange market to influence the exchange rate within certain limits or based on specific policy objectives.

Q-18). Distinguish between floating/flexible exchange rate and managed floating exchange rate. **

Answer:

Floating/Flexible Exchange Rate:

1. Market Determination: Under a floating or flexible exchange rate system, the value of a country's currency is
determined by market forces of supply and demand in the foreign exchange market. The exchange rate
fluctuates freely based on economic factors and investor sentiment.
2. Limited Intervention: In a floating exchange rate system, the central bank or monetary authority generally has
minimal intervention in the foreign exchange market. The exchange rate is primarily determined by market
dynamics, and the central bank may only intervene in exceptional circumstances or to address extreme
volatility.

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3. Exchange Rate Volatility: Floating exchange rates can experience higher levels of volatility due to market
speculation, economic events, and shifts in investor sentiment. Exchange rates can fluctuate widely in response
to changing economic conditions, impacting trade and investment decisions.
4. Automatic Adjustment Mechanism: Floating exchange rates act as an automatic adjustment mechanism to
restore equilibrium in the balance of payments. If a country has a trade deficit, its currency depreciates,
making its exports more competitive and imports relatively more expensive. This adjustment helps correct
trade imbalances.

Managed Floating Exchange Rate:

1. Defined Exchange Rate Band: Under a managed floating exchange rate system, the central bank or monetary
authority allows the exchange rate to fluctuate within a specified range or band. The central bank sets certain
upper and lower limits to prevent excessive volatility.
2. Central Bank Intervention: In a managed float, the central bank actively intervenes in the foreign exchange
market to influence the exchange rate within the specified range. It buys or sells its currency to stabilize the
exchange rate or prevent it from moving beyond the established limits.
3. Policy Objectives: The central bank's interventions in a managed floating exchange rate system are driven by
specific policy objectives. These objectives may include maintaining price stability, supporting export
competitiveness, managing inflation, or addressing excessive exchange rate volatility.
4. Flexibility with Intervention: Unlike fixed exchange rate systems, a managed floating exchange rate allows the
central bank to intervene when necessary. The extent and frequency of intervention can vary based on the
central bank's policy goals and prevailing economic conditions.
5. Balancing Market Forces and Policy Objectives: A managed float strikes a balance between market
determination and policy intervention. While market forces influence the exchange
rate, the central bank's interventions aim to align the exchange rate with desired policy objectives
and maintain stability within the established range.
6. Exchange Rate Management: In a managed floating system, the central bank actively manages the
exchange rate through its intervention actions. It monitors economic indicators, market
developments, and adjusts its interventions accordingly to achieve desired outcomes.
7. Enhanced Stability: The use of managed floating exchange rates can provide a greater degree of
stability compared to pure floating exchange rates. The established range or band helps limit
excessive exchange rate fluctuations and provides a level of certainty for businesses and investors.

It's important to note that the specific features and practices of a managed floating exchange rate system can
vary between countries, depending on their unique economic circumstances and policy objectives.

Module-B: Payment System

Q-1). Define Payment System. Describes Different payment options in Bangladesh.

Answer:

A payment system refers to a set of arrangements, rules, and procedures that facilitate the transfer of funds
between individuals, businesses, and other entities. It encompasses the entire process of initiating,
authorizing, transmitting, and settling payment transactions.

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 Payment systems play a crucial role in enabling the exchange of goods, services, and financial assets in an
economy. They provide a safe, efficient, and reliable means of transferring funds, thereby facilitating economic
activities and financial transactions.

Key components of a payment system include:

1. Payment Instruments: These are the means by which funds are transferred between parties. Examples of
payment instruments include cash, checks, debit cards, credit cards, electronic funds transfers (EFTs), mobile
payments, and digital wallets.
2. Payment Channels: These are the various channels or mediums through which payment transactions can be
initiated and processed. They include physical channels such as branches, ATMs, and point-of-sale (POS)
terminals, as well as electronic channels such as online banking, mobile banking applications, and payment
gateways.
3. Clearing and Settlement: Clearing involves the validation, sorting, and matching of payment instructions
between the payer and the payee, while settlement refers to the final transfer of funds between the parties
involved. Clearing houses, central banks, and other settlement systems facilitate the secure and timely
settlement of payment transactions.
4. Payment Infrastructure: This refers to the physical and technological infrastructure that supports
the payment system. It includes networks, data centers, servers,
telecommunications systems, security protocols, and regulatory frameworks that ensure the
smooth functioning, security, and integrity of payment transactions.
5. Payment Service Providers: These are the entities that offer payment services to customers,
including banks, non-bank financial institutions, payment processors, mobile network operators,
and fintech companies. They act as intermediaries in the payment process, providing access to
payment instruments, channels, and infrastructure.
6. Regulatory Framework: Payment systems are subject to regulations and oversight by regulatory
authorities, central banks, and other financial authorities. These regulations aim to ensure the
safety, efficiency, transparency, and integrity of payment transactions and protect the interests of
consumers and participants in the payment system.

The primary objectives of a payment system are to facilitate the timely and secure transfer of funds, minimize
transaction costs, reduce risks, enhance financial inclusion, promote financial stability, and support economic
growth and development.

Overall, payment systems form the backbone of modern economies, enabling individuals and businesses to
conduct transactions, settle obligations, and participate in economic activities efficiently and effectively.

In Bangladesh, various payment options are available to individuals and businesses, providing convenience,
speed, and security in financial transactions. Here are different payment options commonly used in
Bangladesh:

1. Cash: Cash remains a widely used payment option in Bangladesh. It involves the use of physical currency notes
and coins for in-person transactions.
2. Checks: Checks are commonly used for business-to-business transactions in Bangladesh. They provide a secure
and convenient way to transfer funds, especially for large-value transactions.

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3. Bank Transfers: Electronic funds transfer between bank accounts is a popular payment option in Bangladesh. It
allows individuals and businesses to transfer funds electronically, either through online banking platforms or by
visiting bank branches.
4. Mobile Banking: Bangladesh has seen significant growth in mobile banking services, allowing individuals to
perform financial transactions through their mobile phones. Services like bKash, Rocket, and Nagad are widely
used for mobile payments, bill payments, fund transfers, and mobile top-ups.
5. Debit and Credit Cards: The use of debit and credit cards is gaining popularity in Bangladesh. Cardholders can
make payments at point-of-sale (POS) terminals, withdraw cash from ATMs, and make online purchases.
6. Online Banking: Internet banking services offered by banks allow customers to manage their accounts, transfer
funds, pay bills, and make online purchases using their computers or mobile devices.
7. Prepaid Cards: Prepaid cards, such as travel cards and gift cards, are available in Bangladesh. These cards are
loaded with a specific amount and can be used for various purposes, including online shopping and travel-
related expenses.
8. Digital Wallets: Digital wallets, such as bKash, Rocket, and Nagad, are widely used in Bangladesh. They enable
users to store funds digitally and make payments for goods and services through mobile apps.
9. Electronic Fund Transfer (EFT): EFT systems facilitate the transfer of funds between different banks
electronically. The Bangladesh Electronic Funds Transfer Network (BEFTN) is an example of an EFT system in
Bangladesh.

10. Payment Gateways: Payment gateways provide secure online payment processing for ecommerce
merchants. Popular payment gateways in Bangladesh include SSLCOMMERZ, Payza, and PayFast.

Answer:
It's worth noting that the availability and usage of these payment options may
vary
depending on factors such as technological infrastructure, accessibility, and A
individual
preference
s.

Q-2). Define Cheque and classification of cheque

er NI as
actp1881. **
cheque is a negotiable instrument that serves as a written order from an account holder
(drawer) to their bank (drawee) to pay a specific sum of money to the designated recipient (payee). It provides
a secure and convenient method of transferring funds between individuals or entities.

As per the Negotiable Instruments Act, 1881 of Bangladesh, cheques can be classified into the following types:
1. Open Cheque: An open cheque is payable to the bearer on demand. The payee can receive the
payment in cash from the bank counter without any restrictions.
2. Crossed Cheque: A crossed cheque has two parallel lines drawn across its face, indicating that the
payment should be made through a bank and not directly in cash. It provides an additional layer of
security and prevents the cheque from being encashed at the counter.
The payee needs to deposit the cheque in their bank account.

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3. Account Payee Cheque: An account payee cheque contains the words "Account Payee" or "A/C
Payee" written between the parallel lines. It ensures that the payment is credited only to the
account of the payee and cannot be endorsed or transferred to another party.
4. Bearer Cheque: A bearer cheque is payable to the bearer, meaning anyone who presents the
cheque can receive the payment. It does not specify a specific payee's name and can be encashed at
the counter of the bank.
5. Order Cheque: An order cheque is payable to a specific person or entity named on the cheque as
the payee. The payment can only be made to the person named on the cheque or their authorized
representative.
6. Stale Cheque: A stale cheque is a cheque that is presented for payment after a specified period,
typically three to six months, from the date mentioned on the cheque. Banks generally do not honor
stale cheques, and the payee needs to obtain a new cheque from the drawer.
7. Post-Dated Cheque: A post-dated cheque carries a future date, which is later than the date of
issuance. The payment can only be made on or after the specified date mentioned on the cheque.
8. Ante-Dated Cheque: An ante-dated cheque carries a date earlier than the date of issuance.
The payment can be made on or after the date mentioned on the cheque.

These classifications help determine the rights and obligations associated with different types of cheques and
provide guidance on how they should be handled and processed by banks and financial institutions.

Q-3). What is plastic money? Where we can use plastic money? What types of plastic money are used in
Bangladesh?

**

Answer:

Plastic money refers to payment cards that are made of plastic, typically in the form of debit cards, credit
cards, or prepaid cards. These cards serve as an alternative to cash and allow individuals to make electronic
transactions conveniently and securely.

Here are the key characteristics and features of plastic money:

1. Payment Cards: Plastic money includes various types of payment cards issued by banks and financial
institutions, such as debit cards, credit cards, and prepaid cards.
2. Convenience: Plastic money provides a convenient way to make payments without the need for carrying large
amounts of cash. Cardholders can simply swipe, insert, or tap their cards at point-of-sale (POS) terminals or use
them for online purchases.

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3. Electronic Transactions: Plastic money enables electronic transactions, allowing cardholders to
transfer funds digitally, make purchases, and pay bills. The transactions are processed through
electronic payment networks, ensuring faster and secure processing.
4. Universal Acceptance: Payment cards are widely accepted by merchants, both domestically and
internationally. They can be used at various retail stores, restaurants, hotels, online platforms, and
ATMs.
5. Line of Credit: Credit cards provide a line of credit to cardholders, allowing them to make purchases
on credit. The cardholder can repay the amount in full or choose to pay in installments, subject to
interest charges and terms set by the issuing institution.
6. Access to Funds: Debit cards provide direct access to the cardholder's bank account. They allow
cardholders to withdraw cash from ATMs, make purchases using the available balance in their
account, and transfer funds between accounts.
7. Security Features: Plastic money incorporates various security features to protect against
fraudulent activities. These may include magnetic stripes, EMV chips, PIN (Personal Identification
Number) verification, CVV (Card Verification Value) codes, and additional security measures like
two-factor authentication or biometric authentication.
8. Transaction Records: Plastic money transactions leave a digital trail, providing cardholders with
detailed transaction records. This enables them to track their spending, manage their finances, and
reconcile their accounts.
9. Rewards and Benefits: Many payment cards offer rewards programs, cashback schemes, discounts,
or other benefits to cardholders based on their usage. These rewards can include airline miles,
loyalty points, cashback on purchases, or exclusive offers at partner merchants.
10. Contactless Payments: Modern payment cards may support contactless payment technology,
allowing cardholders to make transactions by simply tapping their cards on contactless-enabled
terminals, enhancing speed and convenience.

Plastic money has revolutionized the way people conduct financial transactions, offering convenience, security,
and flexibility in making payments. However, it is essential to use plastic money responsibly, manage credit
card debts, and protect personal and financial information to ensure a positive and secure payment
experience.

Plastic money, in the form of payment cards, can be used in various locations and contexts. Here are common
places where plastic money is accepted:

1. Retail Stores: Payment cards are widely accepted at retail stores, including supermarkets, department stores,
clothing boutiques, electronics shops, and other brick-and-mortar establishments.
2. Restaurants and Cafes: Plastic money can be used to settle bills at restaurants, cafes, fastfood chains, and other
dining establishments.
3. Hotels and Accommodation: Many hotels, resorts, and accommodation facilities accept payment cards for
room bookings, meals, and other services.
4. Online Shopping: Plastic money is extensively used for online shopping on e-commerce platforms. Cardholders
can make purchases on websites and mobile apps, paying for goods and services electronically.
5. Fuel Stations: Payment cards are commonly used to pay for fuel at gas stations. Cardholders can swipe or
insert their cards at the fuel pump or pay at the station's counter.
6. Transportation: Plastic money can be used for various modes of transportation, such as paying for public
transportation fares, taxi rides, and ride-hailing services.

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7. Entertainment Venues: Payment cards are accepted at cinemas, theaters, amusement parks, concert venues,
and other entertainment establishments for ticket purchases, refreshments, and merchandise.
8. Online Services and Subscriptions: Plastic money is used to pay for online services like streaming platforms,
digital subscriptions, software downloads, and online memberships.

In Bangladesh, the following types of plastic money are commonly used:

1. Debit Cards: Debit cards are linked to individuals' bank accounts, allowing them to access funds directly for
purchases, cash withdrawals, and online transactions.
2. Credit Cards: Credit cards provide a line of credit to cardholders, allowing them to make purchases on credit.
They can repay the amount in full or choose to pay in installments, subject to interest charges.
3. Prepaid Cards: Prepaid cards are loaded with a specific amount and can be used for transactions up to the
available balance. They are particularly useful for individuals who do not have a bank account or prefer to limit
their spending.
4. Mobile Payment Apps: In Bangladesh, mobile payment apps like bKash, Rocket, and Nagad serve as digital
wallets, allowing users to store funds digitally and make payments using their mobile phones.

These types of plastic money offer individuals in Bangladesh the convenience and flexibility to make electronic
transactions, access funds, and engage in various financial activities both online and offline.

Q-4). What are the concept/features of mobile financial services (MFS)? Or What do you mean by interoperability
of Mobile Financial Services? What might be its benefits? **

Answer:

Mobile Financial Services (MFS) refer to the use of mobile phones and mobile networks to provide financial
services to individuals and businesses. It enables users to perform various financial transactions, such as
money transfers, bill payments, merchant payments, and accessing financial products, using their mobile
devices. Here are the key concepts and features of MFS:
1. Mobile Phone Accessibility: MFS leverages the widespread use of mobile phones, allowing individuals to access
financial services anytime, anywhere, as long as they have a mobile phone with network coverage.
2. Mobile Wallets: MFS typically involves the use of mobile wallets, which are digital accounts linked to a user's
mobile phone number. Users can store funds in their mobile wallets and perform financial transactions using
the balance available in the wallet.
3. USSD and SMS Technology: MFS often utilizes USSD (Unstructured Supplementary Service Data) and SMS
(Short Message Service) technology to provide access to financial services. Users can dial specific USSD codes
or send SMS commands to initiate transactions and interact with the mobile financial service provider.
4. Agent Networks: MFS relies on agent networks, where authorized individuals or businesses act as
intermediaries between users and the mobile financial service provider. Agents help users with cash-in and
cash-out transactions, account registration, and other services.
5. Financial Inclusion: MFS plays a crucial role in promoting financial inclusion by providing access to financial
services to individuals who are unbanked or underbanked. It allows people to participate in the formal financial
system and manage their finances more efficiently.
6. Interoperability: Interoperability in MFS refers to the ability of different mobile financial service providers to
seamlessly exchange transactions and share information. It allows users of one MFS platform to transact with
users of another platform, regardless of their service provider.

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 Benefits of Interoperability in Mobile Financial Services:

1. Increased Convenience: Interoperability enables users to transact with a broader network of individuals and
businesses, expanding the options for financial transactions and making it more convenient for users.
2. Expanded Reach: Interoperability helps overcome the limitations of closed-loop systems, allowing users of
different MFS platforms to interact and transact. It expands the reach of financial services to a larger
population.
3. Enhanced Competition: Interoperability fosters competition among mobile financial service providers, leading
to improved service offerings, lower transaction costs, and better customer experiences.
4. Promotes Innovation: Interoperability stimulates innovation within the mobile financial services sector. It
encourages service providers to develop new features, products, and solutions to meet the evolving needs of
users.
5. Financial System Stability: Interoperability promotes the stability and resilience of the financial system by
reducing concentration risks associated with a single MFS provider. It diversifies the ecosystem and minimizes
the impact of disruptions in individual service providers.
6. Facilitates Financial Sector Development: Interoperability in MFS contributes to the development of the
broader financial sector. It encourages collaboration between mobile financial service providers, banks, and
other financial institutions, promoting integration and synergy.

Interoperability in Mobile Financial Services is a crucial element in achieving the full potential of MFS by
creating an open and interconnected ecosystem. It fosters financial inclusion, expands access to services, and
drives innovation, ultimately benefiting individuals, businesses, and the overall economy.

Q-5). Discuss the problems and prospects of MFS in Bangladesh. How can we overcome those problems? Or,
Put forward the problems and prospects of Mobile Financial Service (MFS) in Bangladesh. How can those
problems be overcome? ***

Answer:

Problems and Prospects of Mobile Financial Services (MFS) in Bangladesh:

Problems:

1. Limited Digital Literacy: One of the major challenges is the limited digital literacy among a significant portion of
the population. Many people, especially in rural areas, are not familiar with using mobile phones or mobile
financial services, which hinders the adoption and usage of MFS.
2. Network Coverage and Connectivity: Uneven network coverage and connectivity issues in remote areas pose
challenges for MFS usage. Limited access to reliable and high-speed internet services can hinder the smooth
operation of MFS and limit its reach.
3. Trust and Security Concerns: Some individuals may have concerns regarding the security and trustworthiness
of MFS platforms. Instances of fraud and unauthorized transactions can erode confidence in using mobile
financial services, especially among individuals who are new to digital transactions.
4. Cash Dependency: Bangladesh has a predominantly cash-dependent economy. Many individuals and
businesses still prefer cash transactions over digital payments. This cashcentric behavior creates a hurdle for
the widespread adoption of MFS.

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5. Limited Interoperability: Interoperability among different MFS providers is essential for seamless transactions
and user convenience. However, the lack of full interoperability in Bangladesh restricts the ability of users to
transact across different platforms, limiting the potential of MFS.

Prospects:
1. Financial Inclusion: MFS has the potential to significantly contribute to financial inclusion by
providing access to financial services to the unbanked and underbanked population. It can help
bridge the gap and bring individuals into the formal financial system.
2. Increased Convenience and Efficiency: MFS offers convenience and efficiency in conducting
financial transactions. It eliminates the need for physical visits to banks or cash-based transactions,
allowing users to perform various transactions conveniently using their mobile phones.
3. Cost-Effectiveness: Mobile financial services can be more cost-effective compared to traditional
banking services. They can reduce the costs associated with physical
infrastructure, paperwork, and manual processes, making financial services more accessible and
affordable.
4. Enhanced Security Measures: Mobile financial services continue to improve security measures,
including two-factor authentication, biometric verification, and encryption technologies. These
advancements enhance the security and trustworthiness of MFS platforms.
5. Innovation and Product Development: The dynamic nature of MFS encourages continuous
innovation and product development. Service providers can introduce new features, tailor products
to specific user segments, and explore partnerships to enhance the overall user experience.

Overcoming Problems:

1. Digital Literacy Campaigns: Extensive awareness and digital literacy campaigns can be conducted to educate
individuals about the benefits and usage of MFS. These campaigns should target both urban and rural areas,
focusing on building confidence and knowledge among potential users.
2. Infrastructure Development: Efforts should be made to improve network coverage and connectivity in remote
areas. Investments in expanding telecommunication infrastructure and strengthening internet connectivity will
enhance the reach and effectiveness of MFS.
3. Security Measures and Consumer Protection: Continuous improvements in security measures and robust
consumer protection frameworks are essential to address trust and security concerns. Strong regulatory
oversight can ensure compliance and safeguard users' interests.
4. Promoting Interoperability: Encouraging full interoperability among different MFS providers is crucial for
creating a more inclusive and convenient ecosystem. Regulatory measures can be taken to facilitate
interoperability and encourage collaboration among service providers.
5. Behavioral Change and Cashless Initiatives: Public awareness campaigns promoting the benefits of cashless
transactions and incentives for digital payments can help shift consumer behavior towards adopting MFS.
Encouraging merchants to accept digital payments and creating a cashless ecosystem can further drive MFS
usage.
Overall, addressing the challenges and leveraging the prospects of MFS in Bangladesh requires collaboration
among regulators, service providers, financial institutions, and the government. A comprehensive approach
focusing on education, infrastructure development,

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 Q-6). How MFS and Agent Banking contribute to deepen financial inclusion? **

Answer:

Mobile Financial Services (MFS) and Agent Banking play crucial roles in deepening financial inclusion by
providing access to financial services to underserved populations. Here's how they contribute:
1. Increased Accessibility: MFS and Agent Banking bring financial services closer to individuals who
have limited access to traditional banking infrastructure. Through mobile phones and agent
networks, people in remote areas can conveniently access a range of financial services.
2. Overcoming Physical Barriers: MFS and Agent Banking overcome physical barriers that hinder
financial inclusion. Individuals no longer need to travel long distances to reach a bank branch.
Instead, they can access financial services through their mobile phones or local agents.
3. Lower Costs and Affordability: MFS and Agent Banking offer cost-effective solutions compared to
traditional banking. The digital nature of MFS reduces the need for physical infrastructure,
paperwork, and manual processes, making financial services more affordable and accessible to low-
income individuals.
4. Cash Management: MFS and Agent Banking provide individuals with better options for managing
their finances. They can securely store and transfer funds digitally, reducing the risks and challenges
associated with cash handling, such as theft or loss.
5. Mobile Wallets and Digital Payments: MFS enables individuals to have a mobile wallet linked to their
mobile phone number, allowing them to perform various financial transactions. They can send and
receive money, pay bills, make merchant payments, and conduct other financial activities using their
mobile phones.
6. Agent Networks: Agent Banking utilizes a network of authorized agents who act as intermediaries
between customers and financial service providers. These agents offer a range of services, such as
cash-in and cash-out transactions, account opening, customer support, and other financial
transactions. Agent networks expand the reach of financial services to underserved areas, where
traditional bank branches are limited.
7. Financial Literacy and Inclusion Programs: MFS and Agent Banking initiatives often include financial
literacy programs that educate individuals on financial management, digital transactions, and the
benefits of accessing formal financial services. These programs empower individuals with
knowledge and skills necessary for making informed financial decisions.

8. Integration with Other Services: MFS and Agent Banking can integrate with other essential services, such as
utility bill payments, government transfers, remittances, and microfinance, further enhancing financial
inclusion. This integration provides individuals with a comprehensive suite of financial services that cater to
their diverse needs.
9. Micro and Small Business Enablement: MFS and Agent Banking also support micro and small businesses by
providing them with secure and convenient payment solutions. Small entrepreneurs can accept digital
payments from customers, access working capital loans, and engage in electronic commerce, enabling business
growth and sustainability.

To deepen financial inclusion effectively, it is crucial to address infrastructure challenges, regulatory

frameworks, consumer protection, and privacy concerns. Collaboration among regulators, financial service

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providers, telecom operators, and government entities is vital to create an enabling environment for MFS and
Agent Banking to thrive and reach underserved populations.

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 Module-C: Financial System
Q-1). Define finance. What are the modes of finance? ***

Answer

Finance refers to the management of money, assets, and liabilities. It encompasses activities related to the
acquisition, allocation, and utilization of funds to achieve financial goals and maximize the value of an individual,
organization, or economy.

Modes of Finance:

1. Equity Financing: Equity financing involves raising funds by issuing shares of ownership in a company. Investors
who purchase these shares become partial owners and have a claim on the company's profits and assets. Examples
of equity financing include issuing common stock or preferred stock.

2. Debt Financing: Debt financing involves borrowing funds from lenders or creditors with an obligation to repay
the borrowed amount over time, typically with interest. Common forms of debt financing include bank loans,
bonds, and commercial paper. The borrower retains ownership and control of the business or assets while being
liable to repay the borrowed amount.

3. Lease Financing: Lease financing involves leasing or renting assets from a lessor in exchange for periodic lease
payments. This allows businesses or individuals to use assets without owning them outright. Lease financing is
commonly used for equipment, vehicles, or real estate.

4. Venture Capital: Venture capital refers to funds provided by venture capital firms or investors to startups and
early-stage companies with high growth potential. In exchange for the investment, the venture capitalists receive
equity ownership in the company. Venture capital financing typically targets innovative and high-risk ventures.

5. Angel Investment: Angel investment involves individual investors providing financial support to startups or
small businesses in exchange for equity ownership. Angel investors often bring not only capital but also expertise,
mentorship, and networking opportunities to the invested company.

6. Crowdfunding: Crowdfunding is a mode of finance where funds are raised from a large number of individuals
(the crowd) through online platforms. It allows individuals or businesses to present their projects or ideas and
solicit contributions from the public. Crowdfunding can be reward-based, donation-based, or equity-based,
depending on the nature of the project.

7. Factoring: Factoring is a form of financing where a company sells its accounts receivable to a third party (the
factor) at a discount. The factor then collects the payments from the customers and provides immediate cash to
the company. Factoring helps improve cash flow by converting receivables into immediate funds.

8. Trade Credit: Trade credit is a mode of financing where suppliers extend credit terms to buyers. It allows buyers
to acquire goods or services from suppliers and make payment at a later date. Trade credit can help businesses
manage cash flow and working capital needs.

9. Grants and Subsidies: Grants and subsidies are financial aids provided by governments, organizations, or
institutions to support specific projects, initiatives, or sectors. They are usually non-repayable and intended to
promote economic development, research, social welfare, or environmental sustainability.

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Internal Financing: Internal financing involves using retained earnings or profits generated by a company to fund its
operations or growth. This form of finance does not involve external borrowing or equity issuance and allows
companies to retain control over their operations and decision-making.

Q-2). What are the Classifications of Banking sector? **

Answer: The banking sector can be classified into various categories based on different criteria. Here are some
common classifications of the banking sector:

1. Commercial Banks: Commercial banks are the most common type of banks that provide a wide range of
financial services to individuals, businesses, and government entities. They accept deposits, offer loans and credit
facilities, facilitate payments, issue debit and credit cards, and provide other banking services.

2. Central Banks: Central banks are regulatory authorities responsible for controlling and managing the monetary
system of a country or a group of countries. They are typically responsible for issuing currency, formulating and
implementing monetary policy, supervising commercial banks, and maintaining financial stability.

3. Retail Banks: Retail banks primarily serve individual customers, offering services such as savings accounts,
checking accounts, personal loans, mortgages, credit cards, and other consumer-oriented financial products and
services.

4. Investment Banks: Investment banks specialize in providing financial services to corporations, governments,
and other large institutions. They assist with raising capital through underwriting securities, advising on mergers
and acquisitions, facilitating corporate restructuring, and offering investment and wealth management services.

5. Development Banks: Development banks focus on providing financial assistance and support for long-term
development projects and initiatives. They often operate at a national or regional level and aim to promote
economic growth, infrastructure development, and poverty reduction. Development banks may provide loans,
grants, and technical assistance to specific sectors or industries.

6. Cooperative Banks: Cooperative banks are owned and operated by their members, who are typically
individuals, businesses, or organizations with a common interest or purpose. These banks prioritize the needs of
their members and often serve specific communities or sectors. Cooperative banks offer a range of banking
services, including savings accounts, loans, and other financial products.

7. Islamic Banks: Islamic banks operate in accordance with Islamic principles and adhere to Shariah law. They offer
financial services that are compliant with Islamic principles, which prohibit interest (riba) and promote ethical and
socially responsible investments. Islamic banks provide Islamic financing, savings accounts, investment products,
and other Shariahcompliant services.

8. Foreign Banks: Foreign banks are banks that are incorporated in one country but have branches or subsidiaries
in other countries. These banks operate internationally and provide banking services to individuals, businesses, and
multinational corporations in different countries.

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9. Online Banks: Online banks, also known as virtual banks or internet banks, operate primarily through online
platforms and do not have physical branch networks. They provide banking services electronically, including
account opening, transactions, and customer support, leveraging digital technology and online interfaces.

Microfinance Institutions: Microfinance institutions (MFIs) specialize in providing financial services to low-income
individuals and small-scale entrepreneurs who have limited access to traditional banking services. MFIs offer
microloans, microsavings, and microinsurance products to support financial inclusion and poverty alleviation.

It's important to note that the classification of the banking sector may vary across countries and regions, and
some banks may fall into multiple categories depending on their business activities and service offerings.

Q-3). What do you mean by Non-Bank Financial Institutions (FIs)? Explain its features. ***

Answer:

Non-Bank Financial Institutions (NBFIs) are financial intermediaries that provide various financial services and
products similar to traditional banks but are not licensed as commercial banks. NBFIs play an important role in
the financial system by complementing the services offered by banks and catering to the diverse financial needs
of individuals and businesses. Here are some key features of Non-Bank Financial Institutions:

1. Diverse Range of Services: NBFIs offer a wide array of financial services and products. These may
include consumer loans, leasing and hire-purchase services, insurance, investment funds, pension funds,
factoring, housing finance, venture capital, and other specialized financial services.

2. Non-Banking License: NBFIs operate under different regulatory frameworks and licenses that are
distinct from those of traditional banks. They are subject to specific regulations and supervision by the relevant
regulatory authorities in their respective jurisdictions.

3. Financial Intermediation: NBFIs act as intermediaries between lenders and borrowers, investors and
businesses, or insurers and policyholders. They mobilize funds from various sources and channel them to
borrowers or investors in need of capital. NBFIs facilitate the flow of funds in the financial system and contribute
to the efficient allocation of resources.

4. Focus on Niche Markets: NBFIs often specialize in serving specific market segments or target particular
industries or sectors. They tailor their services to meet the unique financial needs of their target customers. For
example, housing finance companies focus on providing mortgage loans, while leasing companies specialize in
equipment leasing.

5. Innovation and Flexibility: NBFIs are known for their ability to innovate and adapt to changing market
conditions. They can introduce new financial products, develop customized solutions, and offer more flexible
terms compared to traditional banks. This flexibility allows them to address market gaps and cater to
underserved or niche markets.

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 6. Risk Assessment and Management: NBFIs employ rigorous risk assessment and management practices
to ensure the soundness of their operations. They evaluate the creditworthiness of borrowers, assess investment
risks, and maintain appropriate risk mitigation measures. This enables them to manage their risk exposure and
maintain financial stability.

7. Limited Deposit-Taking Activities: While some NBFIs may accept deposits, their deposittaking activities
are usually limited compared to traditional banks. Instead, NBFIs rely on

other sources of funding such as debt securities, equity investments, interbank borrowing, or capital
contributions from shareholders.

8. Regulatory Oversight: NBFIs are subject to regulatory oversight to ensure their compliance with
relevant laws, regulations, and prudential standards. Regulatory authorities supervise NBFIs to safeguard the
interests of customers, maintain financial stability, and prevent systemic risks.

9. Financial Inclusion: NBFIs often play a crucial role in promoting financial inclusion by providing financial
services to individuals and businesses who have limited access to traditional banking services. They reach out to
underserved populations, including low-income individuals, small businesses, and rural communities, and offer
tailored financial solutions to meet their specific needs.

10. Market Competition and Diversification: NBFIs enhance competition in the financial industry by offering
alternative financial products and services. Their presence promotes market diversification, fosters innovation,
and provides consumers with a broader choice of financial service providers.

It's important to note that the specific features and regulations governing NBFIs may vary across countries and
jurisdictions. The term "Non-Bank Financial Institution" can encompass various types of entities, such as finance
companies, leasing companies, insurance companies, investment firms, and others, depending on the regulatory
framework of each country.

Q-4). Describes Dhaka Stock Exchange and Explain its major functions. **

Answer:

The Dhaka Stock Exchange (DSE) is the principal stock exchange in Bangladesh. It is located in Dhaka, the capital
city, and serves as a crucial platform for the trading and investment of securities. The DSE plays a significant role in
the country's capital market and contributes to the development of the overall economy. Here are the major
functions of the Dhaka Stock Exchange:

1. Securities Trading: The primary function of the Dhaka Stock Exchange is to facilitate the trading of securities,
such as stocks, bonds, and mutual funds. It provides a centralized marketplace where buyers and sellers can come
together to buy and sell these securities based on prevailing market prices. The DSE operates a transparent and
regulated trading platform, enabling efficient and fair transactions.

2. Listing and Delisting of Companies: The DSE provides a platform for companies to list their shares and become
publicly traded entities. It establishes listing criteria and requirements that companies must meet to be listed on
the exchange. The process of listing enhances a company's visibility, credibility, and access to capital. Conversely,
the DSE also delists companies that fail to comply with listing regulations or meet specified criteria.

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3. Market Regulation: The DSE plays a crucial role in regulating the capital market by enforcing rules and
regulations that govern securities trading. It ensures transparency, fairness, and investor protection. The exchange
maintains a surveillance system to detect any potential market manipulation, insider trading, or other irregularities.
It also collaborates with regulatory bodies to establish and implement market regulations.

4. Price Discovery: The DSE serves as a platform for price discovery, which refers to the process of determining the
fair market value of securities based on supply and demand dynamics. Through continuous trading sessions and
real-time price updates, the DSE provides information that helps investors and market participants assess the value
of securities.

5. Market Information Dissemination: The DSE disseminates real-time market information to investors, market
participants, and the general public. It provides stock quotes, indices, company announcements, financial reports,
and other relevant data that enable investors to make informed decisions. Timely and accurate information is vital
for market transparency and efficient investment decision-making.

6. Market Development and Investor Education: The DSE plays an active role in developing the capital market and
promoting investor education. It conducts seminars, workshops, and training programs to enhance investor
knowledge and awareness. The exchange collaborates with regulatory bodies, market participants, and educational
institutions to foster a well-informed and educated investor base.

7. Market Index Calculation: The DSE calculates and disseminates market indices that reflect the overall
performance of the stock market. The main index of the DSE is the DSE General Index (DGEN), which tracks the
price movements of a selected group of stocks listed on the exchange. Market indices serve as benchmarks for
investors and provide insights into market trends and sentiment.

8. Market Surveillance and Investor Protection: The DSE maintains a robust surveillance system to monitor market
activities and detect any potential market abuses. It investigates suspicious trading activities, manipulative
practices, and violations of trading rules. The exchange aims to ensure a fair and transparent market environment
while protecting the interests of investors.

9. Market Connectivity: The DSE collaborates with other exchanges and international market platforms to
establish connectivity and facilitate cross-border trading. This enables foreign investors to access the Bangladeshi
capital market and provides local investors with opportunities to diversify their investment portfolios.

10. Market Research and Analysis: The DSE conducts research and analysis on market trends, economic indicators,
and policy developments that may impact the capital market. It publishes reports, market analysis, and research
findings to provide insights to market participants and policymakers.

Overall, the Dhaka Stock Exchange serves as a vital platform for capital market activities in Bangladesh. It
facilitates securities trading, promotes market

Q-5). Define central Bank of the Country and its main functions. ***

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Answer: The central bank of a country is the primary monetary authority responsible for formulating and
implementing monetary policy, controlling the money supply, and regulating the banking system within the
country. Its main functions can be summarized as follows:

1. Monetary Policy Formulation: The central bank is responsible for formulating and implementing monetary
policy to achieve price stability and promote sustainable economic growth. It determines the target interest rates
and employs various tools, such as open market operations, reserve requirements, and discount rates, to manage
the money supply and influence economic conditions.

2. Currency Issuance: The central bank has the authority to issue and regulate the country's currency. It ensures
an adequate supply of currency in circulation and maintains its integrity, security, and quality.

3. Banker to the Government: The central bank acts as a banker and fiscal agent to the government. It manages
the government's accounts, handles transactions, issues government securities, and provides short-term financing.

4. Banker to Banks: The central bank acts as a banker to commercial banks. It maintains accounts for banks,
provides liquidity support, sets reserve requirements, and supervises and regulates the banking system to ensure
its stability and soundness.

5. Lender of Last Resort: In times of financial crises or liquidity shortages, the central bank serves as a lender of
last resort. It provides emergency funds to banks or financial institutions to prevent systemic risks and maintain the
stability of the financial system.

6. Foreign Exchange Management: The central bank manages the country's foreign exchange reserves and
implements exchange rate policies. It intervenes in the foreign exchange market to stabilize the currency's value,
maintain exchange rate stability, and manage external imbalances.

7. Monetary Data and Research: The central bank collects, analyzes, and publishes monetary and financial data. It
conducts research and analysis on economic and financial trends to support policy decisions and provide
information to market participants and the public.

8. Financial Stability and Regulation: The central bank plays a crucial role in ensuring financial stability. It regulates
and supervises banks and financial institutions, sets prudential norms, and monitors systemic risks to safeguard the
stability and integrity of the financial system.

9. Payment System Oversight: The central bank oversees and regulates payment and settlement systems within
the country. It ensures the smooth functioning, safety, and efficiency of payment systems, including electronic
funds transfers, clearinghouses, and interbank settlements.

10. Economic Advising and Coordination: The central bank advises the government on economic and financial
matters, providing expertise and analysis. It collaborates with other national and international institutions to
coordinate policies and actions that contribute to macroeconomic stability and sustainable economic development.

It's important to note that the specific functions and powers of a central bank may vary from country to country,
depending on the legal framework and the mandates given by the government or legislature.

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 Q-6). Securities and Exchange Commission (SEC) acts as the regulator of Capital Market Intermediaries and
narrate its functions. **

Answer:

The Securities and Exchange Commission (SEC) is a regulatory agency that plays a crucial role in overseeing and
regulating capital market intermediaries, primarily in the United States. Here are its main functions:
1. Investor Protection: One of the primary functions of the SEC is to protect investors by ensuring fair
and transparent markets. It promotes disclosure requirements, prohibits fraudulent and
manipulative practices, and takes enforcement actions against individuals or entities that violate
securities laws.
2. Registration and Regulation: The SEC requires securities market intermediaries, such as brokers,
dealers, investment advisers, and mutual funds, to register with the commission. It sets rules and
regulations that govern their operations, conduct, and disclosure obligations to protect investors'
interests.
3. Enforcement of Securities Laws: The SEC has the authority to enforce securities laws and
regulations. It investigates potential violations, such as insider trading, accounting fraud, market
manipulation, and other securities-related misconduct. The SEC can bring civil enforcement actions,
impose penalties, and pursue criminal charges through cooperation with law enforcement agencies.
4. Financial Statement Disclosure: The SEC mandates publicly traded companies to provide accurate
and timely financial information to the investing public. It reviews and approves financial
statements, prospectuses, and other disclosures to ensure compliance with accounting standards
and promote transparency.
5. Market Surveillance and Regulation: The SEC monitors and regulates the securities markets to
maintain fair and orderly trading. It oversees stock exchanges, self-regulatory
organizations (SROs), and alternative trading systems (ATS). The SEC sets rules and conducts
inspections to detect market abuses, manipulative practices, and illegal activities.
6. Rulemaking and Standard Setting: The SEC has the authority to develop and enforce rules and
regulations governing the securities industry. It works to establish standards for corporate
governance, financial reporting, and disclosure requirements. The SEC also proposes and adopts
new rules to adapt to changing market conditions and address emerging risks.
7. Education and Outreach: The SEC engages in educational initiatives and outreach programs to
enhance investor knowledge and awareness. It provides resources, guidance, and investor

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 alerts to help individuals make informed investment decisions and protect themselves against fraud
and scams.
8. International Cooperation: The SEC collaborates with regulatory bodies and organizations
worldwide to foster international cooperation and harmonization of securities regulations. It
participates in bilateral and multilateral initiatives to share information, coordinate enforcement
actions, and promote consistent standards across global markets.
9. Market Development and Oversight: The SEC plays a role in facilitating market development and
innovation. It reviews new securities products, exchange-traded funds (ETFs), and other investment
vehicles to ensure compliance with regulations while promoting capital formation and market
efficiency.
10. Policy Recommendations: The SEC advises the government and Congress on securitiesrelated
matters and proposes legislative and regulatory reforms. It provides expert insights and
recommendations to shape policies that promote investor protection, market integrity, and the
stability of the capital markets.

It's important to note that the functions of securities market regulators may differ across countries, as they
operate within the legal framework and regulatory environment specific to each jurisdiction.

.Q- Who are the capital market intermediaries describes in Brief

Capital market intermediaries are entities that facilitate the flow of capital between investors and borrowers in the
capital markets. They provide various financial services and play a crucial role in the efficient functioning of the capital
markets. Here are brief descriptions of some common capital market intermediaries:

1. Banks: Banks act as intermediaries in the capital markets by providing a range of financial services, such as
accepting deposits, granting loans, issuing credit, facilitating trade finance, and offering investment banking services.
They play a vital role in channeling funds from savers to borrowers and providing liquidity to the market.

2. Brokers: Brokers act as intermediaries between buyers and sellers in financial markets. They execute trades on
behalf of investors and provide access to various financial instruments, such as stocks, bonds, commodities, and
derivatives. Brokers may work in different market segments, including equity brokers, commodity brokers, or forex
brokers.

3. Investment Banks: Investment banks specialize in providing financial services to corporations, governments, and
institutional clients. They assist in raising capital through underwriting securities offerings (e.g., initial public offerings),
advising on mergers and acquisitions, and providing corporate finance and advisory services.

4. Mutual Funds: Mutual funds pool money from individual investors and invest in a diversified portfolio of
securities, such as stocks, bonds, and money market instruments. They offer investors the opportunity to
access a professionally managed and diversified investment portfolio, allowing small investors to participate in
the capital markets.
5. Asset Management Companies: Asset management companies manage investment portfolios on behalf of
individuals, corporations, pension funds, and other institutional investors. They provide services such as
investment advisory, portfolio management, and wealth management. Asset managers help investors achieve
their financial goals by making investment decisions on their behalf.

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6. Insurance Companies: Insurance companies collect premiums from policyholders and invest the funds in the
capital markets to generate returns. They serve as intermediaries by channeling funds into various investment
instruments, such as stocks, bonds, and real estate, to meet their long-term obligations to policyholders.
7. Pension Funds: Pension funds manage funds contributed by employers and employees to provide retirement
benefits. They invest the accumulated funds in a diversified portfolio of assets, including stocks, bonds, and real
estate, with the aim of generating returns and meeting long-term pension obligations.
8. Stock Exchanges: Stock exchanges are marketplaces where buyers and sellers trade securities. They facilitate
the listing and trading of stocks, bonds, derivatives, and other financial instruments. Stock exchanges provide a
transparent and regulated platform for investors to buy and sell securities, ensuring liquidity and price
discovery.
9. Clearinghouses: Clearinghouses act as intermediaries in the settlement and clearing of trades executed in the
capital markets. They ensure the efficient and secure transfer of securities and funds between buyers and
sellers, mitigating counterparty risks and facilitating the smooth functioning of financial transactions.
10. Credit Rating Agencies: Credit rating agencies assess the creditworthiness of issuers of debt
securities and assign ratings that reflect the credit risk. They provide independent evaluations of the
likelihood of default on debt obligations, assisting investors in making informed investment decisions.

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 Q-08). What are the main challenges facing the global financial system today? What steps can governments and
financial institutions take to address these challenges ***

Answer: The global financial system faces several challenges that require attention from governments and financial
institutions. Here are some of the main challenges and potential steps to address them:

1. Financial Stability and Systemic Risks: Governments and financial institutions need to monitor and address
systemic risks that could lead to financial instability. This includes strengthening regulations, conducting stress
tests, and enhancing oversight of financial institutions to prevent excessive risk-taking and the buildup of
vulnerabilities in the system.
2. Cybersecurity and Data Privacy: The increasing reliance on technology exposes the financial system to cyber
threats and data breaches. Governments and financial institutions must invest in robust cybersecurity
measures, promote information sharing, and develop regulations to protect sensitive customer data.
3. Financial Inclusion: Many individuals and businesses still lack access to formal financial services. Governments
can implement policies to promote financial inclusion, such as enhancing financial literacy, expanding access to
basic banking services, and encouraging the use of digital financial technologies in underserved areas.
4. Climate Change and Sustainable Finance: Climate change poses risks to the financial system, including physical
risks, transition risks, and liability risks. Governments and financial institutions can promote sustainable finance
by adopting environmental and social governance (ESG) principles, disclosing climate-related risks, and
supporting investments in clean energy and sustainable projects.
5. Cross-Border Financial Regulation: As financial transactions become increasingly global, coordinating cross-
border financial regulation and supervision is crucial. Governments and international bodies can work together
to establish common regulatory standards, enhance information sharing, and promote cooperation among
regulatory authorities.
6. Shadow Banking and Non-Bank Financial Institutions: The growth of non-bank financial institutions, such as
hedge funds and private equity firms, has raised concerns about potential risks and regulatory gaps.
Governments and regulators can implement measures to monitor and regulate these entities to mitigate risks
to financial stability.
7. Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT):
Governments and financial institutions need to strengthen their efforts to combat money laundering and
terrorist financing. This involves implementing robust AML/CFT regulations, enhancing customer due diligence
procedures, and promoting international cooperation in sharing information and intelligence.
8. Fintech and Digital Transformation: The rapid advancement of financial technology (fintech) brings both
opportunities and challenges. Governments and financial institutions can foster innovation while ensuring
consumer protection, addressing regulatory gaps, and promoting cybersecurity in the digital financial
ecosystem.
9. Debt Sustainability and Financial Imbalances: Rising levels of public and private debt in many countries pose
risks to economic stability. Governments can implement prudent fiscal policies, strengthen debt management
frameworks, and promote sustainable borrowing practices to address debt sustainability concerns.
International Financial Cooperation: Enhanced international financial cooperation is crucial to address global
challenges. Governments and financial institutions can collaborate through international forums, such as the
G20 and international financial institutions, to strengthen coordination, promote policy dialogue, and address
common issues facing the global financial system.

Module-D: Financial Institutions

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 Q-1). Why Central Bank is termed as the banker to the government? Explain the statement in the context of
Bangladesh. ***

Answer:

Q-2). Discuss the main function of the modern Central Bank. What kind of relationship between the central bank
and the government, according to you is ideal for the growth of Bangladesh's economy?
**

Answer:

Q-3). What are the main sources of fund of financial institutions? **

Answer:

Q-4). What is commercial bank? Describe the main functions of a commercial bank. **

Answer:

Q-5). Define deposit and loan products of a commercial bank. Discuss the importance of marketing new loan
product.

Answer:

Q-6). Explain the impact of classified loans on interest rates of banks and financial institutions. *** Answer:

Q-7). Describe present state of financial crisis faced by non-bank financial institutions. **

Answer:

Q-8). Distinguish between a commercial bank and a non-bank financial institution. Or What are the difference
between bank and non-bank financial institution? **

Answer:

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 Q-9). What is SME financing? What SME products are offered by different banks? Write salient features of
SME Products. *** Answer:

Q-10). Describe the importance of cyber security in banking to protect the interest of banks as usual
as the customers. **

Answer:

Q-11). What is bank rate? How Bangladesh Bank controls the credit by changing bank rate? Give example **

Answer:

Q-12). ln your opinion, what legal and regulatory steps should be taken to rescue the non-bank financial
institutions from present crisis? ***

Answer:

Q- 13). What is online banking? Give example. What are the limitations of online banking? **

Answer:

Q-1) Why Central Bank is termed as the banker to the government? Explain the statement in the context
of Bangladesh.

Answer:

The Central Bank is often referred to as the banker to the government because it performs various banking
functions for the government. In the context of Bangladesh, the Central Bank of Bangladesh is known as the
Bangladesh Bank.

The Bangladesh Bank acts as the banker to the government by carrying out the following functions:

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1. Government's Account Management: The Central Bank manages the government's accounts and
transactions. It receives deposits from the government and makes payments on behalf of the
government.
2. Custodian of Government Funds: The Central Bank holds and safeguards the government's funds,
including foreign reserves, taxes, and other revenues.
3. Government Debt Management: The Central Bank manages the issuance, sale, and redemption of
government securities such as treasury bills and bonds.
4. Lender to the Government: The Central Bank provides short-term loans and advances to the
government to meet any temporary budgetary shortfalls.
5. Fiscal Advisor: The Central Bank advises the government on fiscal matters, including monetary
policy, budget formulation, and financial stability.
6. Monetary Policy Implementation: The Central Bank implements the government's monetary policy
to control inflation, stabilize the economy, and promote sustainable economic growth.
7. Regulatory Oversight: The Central Bank regulates and supervises commercial banks and financial
institutions, ensuring their stability and compliance with relevant laws and regulations.

Overall, the Central Bank acts as a financial intermediary between the government and the financial system,
facilitating the government's financial operations and supporting the stability of the country's economy.
Q-2) Discuss the main function of the modern Central Bank. What kind of relationship between the
central bank and the government, according to you, is ideal for the growth of Bangladesh's economy?

Answer:

The main functions of a modern Central Bank typically include:

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1. Monetary Policy: The Central Bank formulates and implements monetary policy to control inflation,
stabilize prices, and promote economic growth. It uses various tools such as interest rates, reserve
requirements, and open market operations to manage the money supply.
2. Currency Issuance: The Central Bank has the authority to issue and manage the country's currency.
It ensures an adequate supply of currency to meet the needs of the economy and maintains the
integrity of the currency.
3. Bank Regulation and Supervision: The Central Bank regulates and supervises banks and financial
institutions to ensure their safety, soundness, and compliance with regulations. It sets prudential
norms, conducts inspections, and oversees the banking system's stability.
4. Financial Stability: The Central Bank monitors and takes measures to maintain overall financial
stability in the economy. It identifies and manages risks to the financial system, acts as a lender of
last resort during crises, and promotes the resilience of financial institutions.
5. Exchange Rate Management: The Central Bank manages the country's exchange rate policy and
intervenes in foreign exchange markets to stabilize the currency's value and promote external
competitiveness.
6. Payment System Oversight: The Central Bank oversees the payment and settlement systems to
ensure their efficiency, reliability, and security. It facilitates smooth and secure transactions
between financial institutions and the public.

Regarding the relationship between the central bank and the government for the growth of Bangladesh's
economy, an ideal scenario would involve:

1. Independence: The Central Bank should have operational and decision-making independence to carry out
monetary policy and maintain financial stability without political interference. This helps establish credibility,
fosters confidence, and ensures long-term economic stability.
2. Cooperation and Coordination: The central bank and the government should maintain a cooperative
relationship, where they work together in pursuing common economic goals. Regular dialogue, information
exchange, and coordination between the two entities are essential for effective policy formulation and
implementation.
3. Policy Consistency: There should be consistency and alignment between fiscal policy (government's revenue
and expenditure policies) and monetary policy (central bank's actions). Both policies should support each other
to achieve macroeconomic stability, sustainable growth, and price stability.
4. Transparency and Accountability: The central bank should be transparent in its operations, communication,
and decision-making processes. It should be accountable to the government and the public, providing regular
reports, disclosures, and explanations of its actions and policies.
5. Regulatory Independence: The central bank should have the authority and independence to regulate and
supervise banks and financial institutions effectively. It should have the power to enforce prudential
regulations and take necessary actions to ensure a stable and wellfunctioning financial system.

A strong and balanced relationship between the central bank and the government, based on these principles,
can contribute to the growth and stability of Bangladesh's economy. Q-3) What are the main sources of funds
for financial institutions?

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 Answer:

The main sources of funds for financial institutions can include:

1. Deposits: Financial institutions, such as banks, receive funds from individuals, businesses, and other
organizations through various types of deposit accounts. These deposits can be demand deposits (checking
accounts) or time deposits (savings accounts, fixed deposits) with varying terms and interest rates.
2. Borrowings: Financial institutions may borrow funds from other financial institutions, central banks, or the
money market. They can obtain short-term loans or long-term borrowings to meet their liquidity needs or
finance specific activities.
3. Equity Capital: Financial institutions can raise funds by issuing equity shares to investors. Equity capital
represents ownership in the institution, and investors become shareholders, entitled to a share in the
institution's profits and losses.
4. Debt Securities: Financial institutions can issue debt securities, such as bonds or debentures, to raise funds
from investors. These securities have fixed interest rates and maturity dates, and they represent a contractual
obligation to repay the principal and interest to the bondholders.
5. Interbank Market: Financial institutions can borrow and lend funds among themselves in the interbank market.
This market allows institutions to manage their short-term liquidity needs by borrowing from other banks with
excess funds.

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6. Central Bank Facilities: Financial institutions may have access to borrowing facilities provided by the
central bank. The central bank acts as a lender of last resort, offering short-term loans to solvent
institutions facing temporary liquidity shortages.
7. Foreign Funding: Financial institutions can also obtain funds from foreign sources, such as foreign
banks or investors. This can include foreign currency borrowings or foreign direct investments.

The specific mix of funding sources varies depending on the type of financial institution, its size,
regulatory requirements, and market conditions. Financial institutions strive to maintain a
diversified funding base to reduce dependence on any single source and manage risks effectively.

Q-4) What is a commercial bank? Describe the main functions of a commercial bank.

Answer:

A commercial bank is a type of financial institution that provides various banking services to
individuals, businesses, and organizations. Its primary functions include:

1. Depository Function: Commercial banks accept deposits from individuals and businesses. They offer
different types of deposit accounts, such as checking accounts (current accounts) and savings
accounts. Depositors can store their money in the bank and withdraw it when needed.
2. Lending Function: Commercial banks provide loans and credit facilities to individuals and
businesses. They evaluate loan applications, determine creditworthiness, and disburse funds to
borrowers. The bank earns interest on the loans, and borrowers repay the principal and interest
over a specified period.
3. Payment and Settlements: Commercial banks facilitate the transfer of funds between accounts
through various payment methods. They issue checks, provide debit and credit cards, and offer
electronic funds transfer services to enable payments and settlements.
4. Foreign Exchange Services: Commercial banks assist individuals and businesses in conducting
foreign exchange transactions. They buy and sell foreign currencies, provide exchange rate
information, and offer services like international wire transfers and foreign currency accounts.
5. Trade Finance: Commercial banks provide trade finance services to facilitate international trade.
They issue letters of credit, provide export-import financing, and offer trade-related services like
trade guarantees and documentary collections.
6. Investment Services: Commercial banks may offer investment services, such as brokerage, asset
management, and investment advisory services. They help clients invest in stocks, bonds, mutual
funds, and other financial instruments.

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7. Treasury Operations: Commercial banks manage their own treasury operations, which involve
activities such as managing liquidity, investing in securities, and trading in financial markets to earn
profits.
8. Advisory Services: Commercial banks provide financial advice and consulting services to their
clients. They offer guidance on investment strategies, financial planning, risk management, and
other financial matters.

Overall, commercial banks play a crucial role in intermediating funds between savers and
borrowers, promoting economic activity, facilitating payments, and providing financial services to
individuals and businesses.

Q-5) Define deposit and loan products of a commercial bank. Discuss the importance of marketing
a new loan product.

Answer:

Deposit Products: Deposit products offered by commercial banks are accounts that allow
customers to deposit their money and earn interest. Some common deposit products include:

1. Savings Accounts: These accounts offer a modest interest rate and provide a safe place for
customers to store their money while earning interest.
2. Current Accounts: Current accounts are transactional accounts that allow frequent deposits and
withdrawals. They typically do not offer significant interest but provide convenience for day-to-day
banking needs.
3. Fixed Deposit Accounts: These accounts offer higher interest rates compared to savings accounts.
Customers deposit a fixed amount of money for a specific period, and they earn interest on the
principal.

Loan Products: Loan products offered by commercial banks provide funds to borrowers for various
purposes. These loans come with interest rates and specific repayment terms. Some common loan
products include:

1. Personal Loans: Personal loans are typically unsecured loans provided to individuals for personal
expenses such as education, medical emergencies, or home renovations.
2. Mortgage Loans: Mortgage loans are long-term loans used to finance the purchase of real estate
properties. The property itself serves as collateral for the loan.

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3. Business Loans: Business loans are provided to businesses for various purposes, such as starting a
new venture, expanding operations, or purchasing equipment.
4. Overdraft Facilities: Overdraft facilities allow individuals or businesses to withdraw more money
from their current accounts than their actual balance. It provides short-term liquidity when the
account balance is insufficient.
5. Working Capital Loans: Working capital loans are used to finance a business's day-to-day
operations, such as managing inventory, covering payroll, or meeting short-term financial needs.

Importance of Marketing a New Loan Product:

Marketing a new loan product is essential for several reasons:

1. Awareness: Marketing creates awareness among potential borrowers about the existence of a new
loan product. It informs them about the features, benefits, and eligibility criteria associated with the
loan, encouraging them to consider borrowing.
2. Customer Acquisition: Effective marketing campaigns can attract new customers to the bank and its
loan products. By highlighting the unique selling propositions and competitive advantages of the
new loan product, the bank can increase its customer base.
3. Revenue Generation: Loan products are a significant source of revenue for commercial banks.
Marketing a new loan product can generate interest income through loan disbursements and
repayments, contributing to the bank's profitability.
4. Customization: Marketing allows banks to tailor their loan products to specific target segments. By
understanding the needs and preferences of different customer groups, banks can develop and
market loan products that align with their requirements.
5. Competitive Edge: Marketing a new loan product helps banks differentiate themselves from
competitors. Through effective marketing strategies, banks can highlight the unique features,
competitive interest rates, flexible repayment options, or additional benefits associated with their
loan products.
6. Relationship Building: Marketing campaigns create opportunities for banks to engage with
customers, understand their financial needs, and build long-term relationships. It helps banks
establish trust and credibility, encouraging customers to rely on them for future financial needs.
7. Market Expansion: Launching a new loan product and marketing it effectively can attract new
customer segments, expanding the bank's market reach and increasing its market share.

Overall, marketing a new loan product plays a crucial role in creating awareness, attracting
customers, generating revenue, and building a strong brand image for the bank. Effective

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marketing strategies help banks remain competitive in the market and drive the growth of their
loan portfolio.

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 Q-6) Explain the impact of classified loans on interest rates of banks and financial institutions.

Answer:

Classified loans, also known as non-performing loans or bad loans, are loans that borrowers have
failed to repay according to the agreed terms. When banks and financial institutions have a
significant number of classified loans in their portfolio, it has several impacts on their interest rates:
1. Increased Interest Rates: To compensate for the risk associated with classified loans, banks and
financial institutions may increase their interest rates. Lenders need to cover potential losses from
non-performing loans by charging higher interest rates on new loans to maintain profitability.
2. Risk Premium: Banks and financial institutions may add a risk premium to their interest rates due to
the higher credit risk posed by classified loans. The risk premium reflects the increased likelihood of
default and the additional costs of managing and recovering nonperforming loans.
3. Reduced Access to Credit: As classified loans increase, banks and financial institutions become more
cautious about lending. They may tighten their lending standards, making it more difficult for
borrowers to access credit. This reduction in credit availability can negatively impact economic
growth and investment.
4. Creditworthiness Assessment: Banks may become stricter in assessing the creditworthiness of
borrowers due to the presence of classified loans. They may scrutinize loan applications more
thoroughly, requiring stronger collateral, higher credit scores, or more stringent financial
documentation.
5. Adverse Selection: The presence of classified loans can lead to adverse selection in the lending
market. Borrowers with a higher credit risk profile may be more likely to seek loans from banks with
higher interest rates, leaving lower-risk borrowers with limited options and potentially higher
borrowing costs.
6. Overall Economic Impact: The impact of classified loans on interest rates extends beyond individual
banks. If a significant number of banks and financial institutions face a high level of non-performing
loans, it can lead to a credit crunch and contraction in lending, negatively affecting economic
growth.

To mitigate the impact of classified loans on interest rates, banks and financial institutions focus on
effective risk management practices, loan recovery efforts, and strategies to prevent the
accumulation of non-performing loans. They also work closely with regulators and implement
appropriate measures to address the underlying causes of loan defaults and credit risk.
Q-7) Describe the present state of the financial crisis faced by non-bank financial institutions.

Answer:

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 The present state of the financial crisis faced by non-bank financial institutions can vary depending
on the specific country and context. As of my knowledge cutoff in September 2021, I can provide a
general overview of the factors contributing to financial crises faced by non-bank financial
institutions:
1. Liquidity Stress: Non-bank financial institutions, such as shadow banks, may face liquidity stress
during times of market volatility or economic downturns. They rely on short-term funding sources to
provide longer-term loans or investments, which can create liquidity gaps if investors lose
confidence or withdraw their funds.
2. Asset Quality Deterioration: Non-bank financial institutions may experience a deterioration in the
quality of their assets, such as loans or investments. This can be due to factors like economic
recession, credit defaults, or inadequate risk management practices. As asset quality worsens, the
institutions may face difficulties in meeting their financial obligations.
3. Funding and Refinancing Challenges: Non-bank financial institutions heavily rely on funding from
capital markets, commercial banks, or other sources. During a financial crisis, funding sources may
become scarce or more expensive, making it challenging for these institutions to refinance their
obligations or raise new funds.
4. Contagion Risks: Financial crises in non-bank financial institutions can have contagion effects,
spreading to other parts of the financial system. If there are interconnectedness and dependencies
between non-bank financial institutions and banks, disruptions in one sector can impact the stability
of the entire financial system.
5. Regulatory and Governance Issues: Weak regulatory oversight and inadequate governance practices
can contribute to financial crises in non-bank financial institutions. Ineffective risk management, lack
of transparency, or regulatory loopholes can amplify the vulnerabilities of these institutions, leading
to systemic risks.

It's important to note that the specific state of the financial crisis faced by non-bank financial
institutions can change over time and may vary across different countries or regions. Monitoring
and addressing risks in non-bank financial sectors through appropriate regulations, risk
management frameworks, and crisis resolution mechanisms are essential to mitigate systemic risks
and maintain financial stability.

Q-8) Distinguish between a commercial bank and a non-bank financial institution. Or, What
are the differences between a bank and a non-bank financial institution?
Answer:

Commercial Bank:
 A commercial bank is a financial institution that accepts deposits from individuals and businesses
and provides various banking services, including loans, payments, and savings accounts.

 Commercial banks can create credit through the deposit and lending process, and they hold a
banking license.

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 They are subject to banking regulations and oversight by central banks or banking authorities.

 Commercial banks can provide a wide range of services, such as retail banking, corporate banking,
trade finance, and treasury operations.
 They are typically part of the core banking system and play a significant role in the country's
payment and settlement systems.
Non-Bank Financial Institution (NBFI):
 A non-bank financial institution refers to a financial institution that provides financial services
similar to traditional banks but does not hold a banking license.
 NBFI includes various entities such as insurance companies, pension funds, mutual funds, leasing
companies, finance companies, microfinance institutions, and more.
 Unlike commercial banks, NBFI entities do not have the power to create credit through deposit-
taking and lending.
 Non-bank financial institutions are subject to regulatory oversight by relevant authorities specific
to their activities. For example, insurance companies are regulated by insurance regulators, and
mutual funds are regulated by securities regulators.
 Non-bank financial institutions often specialize in specific financial services, such as providing
insurance coverage, investment management, or lease financing.
The main differences between a commercial bank and a non-bank financial institution lie in their
regulatory framework, the ability to create credit, and the range of financial services they offer.
Commercial banks have broader banking licenses and can engage in deposittaking and lending,
while non-bank financial institutions operate under different regulatory frameworks and specialize
in specific financial activities.

Q-9) What is SME financing? What SME products are offered by different banks? Write the
salient features of SME products.

Answer:

SME financing refers to the provision of financial products and services specifically tailored to meet
the financing needs of small and medium-sized enterprises (SMEs). SMEs are vital for economic
growth and job creation, but they often face challenges in accessing adequate financing from
traditional sources.

Different banks offer various SME products to cater to the financing requirements of SMEs. Some
common SME products offered by banks include:

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1. SME Loans: Banks provide SME loans that offer financing to SMEs for various purposes, such as
working capital, expansion, purchasing machinery or equipment, or funding specific projects. These
loans can be secured or unsecured, depending on the borrower's creditworthiness and collateral.
2. Overdraft Facilities: Banks offer overdraft facilities to SMEs, allowing them to withdraw funds
beyond their account balance up to a predetermined limit. Overdrafts provide flexibility in managing
cash flow and short-term financing needs.
3. Trade Finance: Banks provide trade finance products to support SMEs engaged in domestic and
international trade. These products include letters of credit, bank guarantees, exportimport
financing, and trade-related advisory services.
4. Supply Chain Financing: Supply chain financing products help SMEs manage their working capital by
providing financing solutions along the supply chain. These products ensure timely payments to
suppliers and optimize cash flow for SMEs.
5. Invoice Financing: Banks offer invoice financing or factoring services where SMEs can receive
immediate funds by selling their outstanding invoices to the bank. This helps SMEs manage cash
flow and bridge the gap between invoice issuance and payment receipt.
6. Asset-Based Financing: Asset-based financing allows SMEs to obtain financing by using their assets,
such as accounts receivable, inventory, or equipment, as collateral. Banks provide loans or credit
lines based on the value of these assets.

Salient features of SME products offered by banks include:

 Streamlined Application Process: Banks often have simplified and expedited application processes
for SME financing to cater to the specific needs of SMEs and reduce the burden of extensive
documentation.
 Collateral Flexibility: Banks may offer flexibility in collateral requirements for SME loans, considering
the challenges SMEs face in providing extensive collateral. They may accept personal guarantees,
business assets, or other alternative collateral.
 Customized Repayment Options: SME products often offer customized repayment options based on
the cash flow patterns and revenue generation cycles of SMEs. This can include flexible repayment
schedules or seasonal repayment plans.
 Financial Advisory Services: Banks may provide financial advisory services to SMEs, helping them
with financial planning, budgeting, cash flow management, and overall business growth strategies.

 Dedicated Relationship Managers: Some banks assign dedicated relationship managers to SME
clients. These managers have specialized knowledge of SME financing and work closely with SMEs
to understand their specific needs and provide tailored financial solutions.
The features of SME products offered by banks may vary depending on the specific bank, country,
and regulatory environment. Banks continuously innovate and introduce new SME financing
products to support the growth and development of SMEs, as they are crucial drivers of economic
activity and employment.

Q-10) Describe the importance of cybersecurity in banking to protect the interests of banks as well
as the customers.

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 Answer:

Cybersecurity in banking is of paramount importance to protect the interests of banks and their
customers. Here are several reasons highlighting its significance:

1. Customer Data Protection: Banks handle vast amounts of sensitive customer information, including
personal details, financial records, and transaction data. Effective cybersecurity measures safeguard
this data from unauthorized access, identity theft, or financial fraud.
2. Financial System Stability: Cyberattacks targeting banks can disrupt financial systems and undermine
public trust. Breaches in cybersecurity can lead to financial losses, service interruptions, and
systemic risks, impacting the stability and functioning of the overall financial system.
3. Fraud Prevention: Cybersecurity helps banks detect and prevent various types of fraud, such as
account takeovers, phishing attacks, or unauthorized transactions. Robust security measures,
including multi-factor authentication and real-time transaction monitoring, mitigate the risk of
fraudulent activities.
4. Reputation and Trust: A bank's reputation and customer trust are vital for its long-term success.
Instances of data breaches or cyberattacks can severely damage a bank's reputation, erode
customer trust, and result in the loss of business. Strong cybersecurity measures help maintain
customer confidence in the bank's ability to protect their interests.
5. Regulatory Compliance: Banks operate in a heavily regulated environment, with specific
requirements for data protection and cybersecurity. Compliance with regulatory standards is
essential to avoid penalties, legal consequences, and reputational damage.
6. Business Continuity: Cybersecurity is crucial for ensuring uninterrupted banking services. A
successful cyberattack can disrupt critical systems, leading to service disruptions, financial
losses, and reputational damage. By implementing robust cybersecurity measures, banks can
maintain business continuity even in the face of cyber threats.
7. Partnerships and Collaborations: Banks often collaborate with various third-party vendors, fintech
firms, and other financial institutions. Cybersecurity measures protect the bank's interests in these
collaborations, ensuring that sensitive data is adequately protected throughout the ecosystem.
8. Innovations in Digital Banking: With the increasing digitization of banking services, cybersecurity
becomes even more critical. Banks need to secure online banking platforms, mobile apps, and
other digital channels to provide customers with convenient and secure banking experiences.

Overall, cybersecurity is vital for safeguarding customer data, maintaining trust, complying with
regulations, preventing fraud, ensuring business continuity, and supporting the growth of digital
banking. Banks must invest in robust cybersecurity measures, including employee training,
advanced threat detection systems, encryption technologies, and regular security audits, to
mitigate the evolving cyber risks they face.

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Q-11) What is the bank
rate? How does
Bangladesh Bank control
credit by changing the
bank rate? Give an
example.

Answer:

The bank rate, also known as the discount rate or policy rate, is the interest rate at which the
central bank lends to commercial banks and financial institutions. It serves as a benchmark for other
interest rates in the economy, influencing borrowing costs, liquidity conditions, and credit
availability.

In Bangladesh, the bank rate is set and controlled by the central bank, the Bangladesh Bank. By
changing the bank rate, the central bank can influence credit conditions and control the availability
of credit in the economy. Here's an example of how the Bangladesh Bank can control credit by
changing the bank rate:

Suppose the Bangladesh Bank observes that there is excessive credit growth in the economy,
leading to concerns of inflationary pressure. To control credit and reduce lending activities, the
central bank may decide to increase the bank rate. This increase makes borrowing from the central
bank more expensive for commercial banks.

As a result, commercial banks, which rely on borrowing from the central bank for their liquidity
needs, face higher borrowing costs. To maintain profitability and manage risks, commercial banks
raise the interest rates on their loans and advances to customers. Higher interest rates make
borrowing more expensive for businesses and individuals, discouraging borrowing and reducing
credit demand in the economy.

Conversely, if the Bangladesh Bank aims to stimulate economic growth or promote credit expansion,
it may decrease the bank rate. This reduction in the bank rate makes borrowing from the central
bank cheaper for commercial banks, allowing them to lower their lending rates. Lower interest rates
encourage businesses and individuals to borrow, stimulating investment, consumption, and
economic activity.

By adjusting the bank rate, the Bangladesh Bank influences the cost and availability of credit in the
economy, thereby controlling credit growth and impacting overall economic conditions.

It's important to note that changes in the bank rate are part of the broader monetary policy
framework implemented by the central bank. The Bangladesh Bank uses various tools, including

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 reserve requirements, open market operations, and regulatory measures, in conjunction with the

bank rate to achieve its policy objectives.

Q-12 In my opinion, there are several legal and regulatory steps that can be
) taken
rescue to help
-bank financial institutions from the present crisis. Here are a few
non suggestions:
Answer:

1. Enhanced oversight and regulation: Strengthening the regulatory framework for non-bank financial
institutions can help identify and mitigate risks more effectively. This can involve implementing
stricter capital requirements, improving risk management practices, and conducting regular audits
to ensure compliance with regulations.
2. Financial assistance programs: Introducing targeted financial assistance programs can provide
temporary relief to struggling non-bank financial institutions. These programs can include measures
such as low-interest loans, liquidity support, or capital injections to help stabilize their operations
and prevent insolvency.
3. Promote transparency and disclosure: Requiring non-bank financial institutions to provide
transparent and accurate information about their financial health and risk exposure can help restore
confidence in the sector. This can be achieved through enhanced reporting requirements,
standardized disclosure practices, and improved transparency in corporate governance.
4. Collaborative industry efforts: Encouraging collaboration among non-bank financial institutions,
industry associations, and regulatory bodies can foster knowledge sharing, best practices, and
collective problem-solving. This can be done through regular forums,
conferences, and working groups aimed at addressing common challenges and finding innovative
solutions.
5. Strengthen consumer protection measures: Enhancing consumer protection regulations can
safeguard the interests of customers who rely on non-bank financial institutions for their financial
needs. This can involve implementing robust complaint handling mechanisms, ensuring fair and
transparent pricing, and promoting responsible lending practices.
6. Flexibility in regulatory requirements: Providing temporary flexibility in certain regulatory
requirements, such as loan classification and provisioning norms, can help non-bank financial
institutions manage their balance sheets during times of crisis. This flexibility should be
accompanied by strict monitoring and regular assessment of the impact on financial stability.

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 It's important to note that the specific steps needed to rescue non-bank financial institutions may
vary depending on the nature of the crisis and the regulatory environment of a particular country. A
comprehensive assessment of the situation, involving consultation with industry experts and
stakeholders, is crucial in designing an effective response.

Q-13) Online banking refers to the process of conducting financial transactions and accessing
banking services over the internet. It allows customers to perform various banking activities
conveniently from their computer, smartphone, or other internet-enabled devices. Online banking
has become increasingly popular due to its convenience, accessibility, and time-saving features.

Answer:

An example of online banking is services provided by banks through their websites or dedicated
mobile applications. Customers can use online banking to check account balances, view transaction
history, transfer funds between accounts, pay bills, apply for loans or credit cards, and perform
other financial activities.

Despite its benefits, online banking also has some limitations. Here are a few:

1. Security concerns: Online banking requires the transmission of sensitive financial information over
the internet, which poses security risks. Cybercriminals may attempt to intercept data, hack
accounts, or carry out fraudulent activities. Banks and customers need to take precautions, such as
using strong passwords, two-factor authentication, and secure networks, to mitigate these risks.
2. Technical issues: Online banking relies on stable internet connections and reliable technology
infrastructure. Technical glitches, system outages, or compatibility issues
between different devices or browsers can disrupt the banking experience and cause
inconvenience to customers.
3. Lack of personal interaction: Unlike traditional banking methods, online banking lacks faceto-face
interaction with bank staff. Some customers may prefer the personalized assistance and advice
provided by bank tellers or customer service representatives, especially for complex financial
matters.
4. Limited cash handling: Online banking primarily focuses on digital transactions and may have
limitations when it comes to cash-related services. Depositing or withdrawing cash may require
visiting a physical bank branch or using designated ATMs.
5. Digital literacy requirements: Online banking assumes a certain level of digital literacy from
customers. Individuals who are not familiar with technology or lack access to reliable internet
services may face challenges in using online banking effectively.

Banks and financial institutions continually work to address these limitations by improving security
measures, enhancing user interfaces, providing customer support through online channels, and
offering financial education programs to promote digital literacy among customers.

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 Q-1). Define Money Market. Describes about Money market instruments. **

Q-2). What is meant by Capital Market?

Discuss the characteristics of the Capital Market in
Module-E: Financial Markets

Bangladesh? ***

Q-3). What steps do you suggest to develop securities markets in developing countries like
Bangladesh? **

Answer:

Q-4). What is meant by OTC Market? Write down its features. ***

Answer:

Q-5). What are the types of Capital market in Bangladesh? Discuss the characteristics and how it
works Primary Market. **

Answer:

Q-6). What is an Initial Public Offering and How to Make an Offering to the Public in Bangladesh? **

Answer:

Q-7). Define Micro-credit Market. What are difference between micro credit and micro finance in bd
Economy? **

Answer:

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 Q-8). Describes about International Financial Market. what are segments of international
financial market? ** Answer:

Q-9). What are the Instruments that used in International Financial Marke t ***

Answer:

Q-10). Who are Key Players in FX Markets? **

Answer:

Q- 11). What are Motives for Using the International Money & Capital Markets? **

Answer:

Q-1) The money market refers to a segment of the financial market where short-term borrowing
and lending of funds take place. It is a market for highly liquid and low-risk instruments with
maturities typically less than one year. The primary participants in the money market are financial
institutions, corporations, and governments.

Money market instruments are short-term debt securities that are traded in the money market.
These instruments serve as a means for entities to manage their short-term funding needs or invest
excess liquidity. Some common money market instruments include:

1. Treasury bills (T-bills): Short-term debt securities issued by governments to finance their short-term
obligations.
2. Certificates of Deposit (CDs): Time deposits issued by banks or financial institutions with fixed
maturities and specified interest rates.
3. Commercial Paper (CP): Unsecured promissory notes issued by corporations to raise shortterm
funds directly from the market.

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4. Repurchase Agreements (Repos): Agreements where one party sells securities to another party with
an agreement to repurchase them at a predetermined price and date.
5. Banker's Acceptances (BAs): Time drafts or bills of exchange accepted by a bank, making them a
guaranteed payment instrument.
6. Treasury Repurchase Agreements (Treasuries): Repurchase agreements involving U.S. Treasury
securities as collateral.

These instruments are typically considered low-risk due to their short maturities and high credit
quality. They provide a means for participants to invest surplus funds or obtain shortterm financing
at competitive interest rates.

Q-2) The capital market refers to a segment of the financial market where long-term debt and
equity securities are bought and sold. It plays a crucial role in mobilizing long-term funds for
businesses and governments. The capital market facilitates the transfer of capital from investors to
entities that require financing for expansion, infrastructure development, or other long-term
projects.

Characteristics of the capital market in Bangladesh include:

1. Presence of organized exchanges: The capital market in Bangladesh operates through two major
stock exchanges, namely the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE).
These exchanges provide a platform for trading equity shares, bonds, and other securities.
2. Regulatory framework: The capital market in Bangladesh is regulated by the Bangladesh Securities
and Exchange Commission (BSEC). The BSEC oversees the issuance and trading of securities, ensures
fair market practices, and protects the interests of investors.
3. Participation of various entities: The capital market in Bangladesh involves the participation of
various entities, including individual investors, institutional investors, listed companies,
underwriters, brokers, and market intermediaries.
4. Availability of different securities: The capital market offers a range of securities, including equity
shares, corporate bonds, government bonds, and mutual funds. These securities provide investors
with opportunities for capital appreciation and income generation.
5. Risk and return: The capital market entails varying degrees of risk, and investors expect to earn
returns commensurate with the risk undertaken. Prices of securities in the capital market are
influenced by factors such as economic conditions, market sentiment, and company performance.
6. Market volatility: Like other capital markets, the capital market in Bangladesh experiences
fluctuations in prices and trading volumes. Market volatility can be influenced by global economic
trends, political events, and domestic economic indicators.

Q-3) Developing securities markets in countries like Bangladesh can be facilitated through
several steps:

1. Strengthening regulatory framework: Developing a robust and transparent regulatory framework is

crucial for attracting investors and ensuring market integrity. Enhancing regulations governing
securities issuance, trading, disclosure, and investor protection can instill confidence in the market.

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2. Market infrastructure development: Establishing modern market infrastructure, including trading
platforms, clearing and settlement systems, and depository services, is essential for efficient and
secure securities trading. Developing these infrastructures can enhance market liquidity and
transparency.
3. Investor education and awareness: Educating investors about securities markets, investment
opportunities, risk management, and financial literacy is vital. Promoting investor awareness
through educational programs, seminars, and workshops can encourage participation and
responsible investment practices.
4. Enhancing corporate governance: Promoting good corporate governance practices among listed
companies fosters transparency, accountability, and investor confidence.
Implementing stringent disclosure requirements, strengthening board independence, and enforcing
shareholder rights can contribute to a healthier securities market.
5. Encouraging institutional investor participation: Facilitating the participation of institutional
investors, such as pension funds, insurance companies, and mutual funds, can provide stability and
liquidity to the market. Encouraging institutional investors to invest in securities markets through
regulatory incentives and favorable investment policies can stimulate market growth.
6. Developing local and international collaborations: Establishing collaborations with international
stock exchanges, regulatory bodies, and market intermediaries can enhance

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 market connectivity, broaden access to international investors, and attract foreign investments.
Sharing best practices and knowledge exchange can also contribute to market development.

Q-4) OTC (Over-the-Counter) market refers to a decentralized marketplace where financial

instruments, such as stocks, bonds, derivatives, and commodities, are traded directly between two
parties without the involvement of an organized exchange. It operates through a network of dealers
or brokers who facilitate the transactions.

Features of the OTC market include:

1. Decentralized trading: OTC market transactions occur directly between buyers and sellers without
the centralized structure of an exchange. Trading can take place electronically or through telephone
or other communication channels.
2. Customized transactions: OTC markets offer flexibility in terms of contract specifications, allowing
parties to negotiate and customize the terms of the transaction to meet their specific needs. This
flexibility enables the trading of unique or complex financial instruments.
3. Lack of transparency: OTC market trades are not publicly disclosed or reported in real-time, as in
exchange-traded markets. Price and volume information may be limited, reducing market
transparency for participants.
4. Counterparty risk: As OTC transactions occur between two parties, there is counterparty risk
involved. If one party fails to fulfill its obligations, the other party may face financial losses.
Counterparty risk can be mitigated through the use of collateral, credit checks, and other risk
management practices.
5. Regulation and oversight: OTC markets are subject to regulatory oversight, but regulations may
differ from those governing organized exchanges. Regulators often focus on ensuring fair trading
practices, preventing market manipulation, and addressing systemic risks associated with OTC
trading.
6. Wide range of instruments: The OTC market offers a broad range of instruments, including complex
derivatives, structured products, and debt securities. These instruments may be less standardized
compared to those traded on exchanges.
7. Accessibility: OTC markets provide access to financial instruments that may not be available on
exchanges. This accessibility allows participants to trade specialized or niche products that meet
their specific investment or risk management needs.

It's important to note that while OTC markets offer flexibility and access to a wide range of
instruments, they also carry certain risks and may lack the transparency and liquidity typically found
in exchange-traded markets.

Q-5) Types of Capital Market in Bangladesh: In Bangladesh, there are two primary types of
capital markets:

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1. Primary Market: The primary market is the initial market where securities, such as stocks and bonds,
are issued and sold for the first time by companies or the government to raise capital. Some
characteristics of the primary market in Bangladesh are:
• Issuance of Securities: Companies or the government issue new securities, such as shares or bonds,
to raise funds for expansion, investment, or other financial needs.
• Initial Public Offering (IPO): The primary market facilitates IPOs, where companies offer shares to
the public for the first time.
• Underwriting: Securities in the primary market are often underwritten by investment banks or
financial institutions who guarantee the sale of securities.
• Price Determination: The price of securities in the primary market is determined through processes
such as book building or fixed pricing.
• Subscription: Interested investors can subscribe to the securities during the subscription period.
• Allotment: After the subscription period ends, securities are allocated to investors based on the
demand and allotment criteria.

The primary market plays a crucial role in mobilizing savings and providing an avenue for companies
and the government to raise funds for various projects and activities.

Q-6) Initial Public Offering (IPO) and How to Make an Offering to the Public in Bangladesh: An Initial
Public Offering (IPO) is the process through which a private company offers its shares to the public
for the first time, allowing investors to become shareholders. The steps involved in making an
offering to the public in Bangladesh include:

1. Company Preparation: The company intending to go public prepares by meeting regulatory

requirements, ensuring proper financial reporting, and obtaining necessary approvals.
2. Appointing Advisors: The company engages investment banks, underwriters, legal advisors, and
auditors to assist with the IPO process.
3. Valuation and Pricing: The company, along with advisors, determines the valuation of the company
and the price at which shares will be offered to the public.
4. Securities and Exchange Commission (SEC) Approval: The company submits the IPO prospectus and
other required documents to the SEC for review and approval.
5. Roadshow and Marketing: The company, along with underwriters, conducts a roadshow to promote
the IPO and generate interest among potential investors.
6. Subscription and Allotment: Investors subscribe to the shares during the subscription period, and
after the process closes, shares are allotted based on demand and allotment criteria.
7. Listing and Trading: Once shares are allotted, the company gets listed on the stock exchange, and
the shares become tradable.

The IPO process allows companies to raise capital, enhance their visibility, and provide an
opportunity for investors to participate in the company's growth.

Q-7) Micro-credit Market and Difference between Microcredit and Microfinance in the Bangladesh
Economy: Micro-credit Market: The micro-credit market refers to the provision of small loans,
typically without collateral, to low-income individuals or groups who lack access to traditional

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 banking services. It aims to alleviate poverty and promote entrepreneurial activities among the
poor. Some key features of the micro-credit market in Bangladesh are:

• Target Population: The micro-credit market primarily targets low-income individuals, especially
women, who lack access to formal financial services.
• Small Loans: Micro-credit institutions provide small loans to borrowers for incomegenerating
activities, such as small businesses or agricultural ventures.
• Group-Based Lending: Many micro-credit programs adopt a group-based lending model, where
borrowers form self-help groups and collectively take responsibility for loan repayment.
• Interest Rates: Micro-credit loans often come with higher interest rates compared to traditional
loans due to the higher operational costs and risks associated with lending to vulnerable
populations.
• Social Impact: The micro-credit market aims to empower individuals, reduce poverty, and promote
economic development by providing financial services to those excluded from the formal banking
sector.

Difference between Microcredit and Microfinance in the Bangladesh Economy: While microcredit is
a component of microfinance, there are some differences between the two:
 Scope: Microfinance encompasses a broader range of financial services, including savings,
insurance, and remittances, in addition to micro-credit. Microcredit specifically refers to small
loans.
 Financial Inclusion: Microfinance focuses on providing a comprehensive set of financial services to
the underserved population, while micro-credit primarily focuses on credit provision.

 Poverty Alleviation: Microfinance aims to address poverty by offering a range of financial services
and building financial capability among the underserved. Micro-credit primarily addresses the
credit needs of low-income individuals.
 Sustainability: Microfinance institutions strive for financial sustainability by leveraging savings and
other sources of funding to support their operations. Micro-credit programs may depend more on
external funding and grants.
Q-8) International Financial Market and Segments of International Financial Market: The
international financial market refers to a global marketplace where various financial instruments
are traded between entities located in different countries. It facilitates crossborder transactions,
investment opportunities, and the exchange of currencies. The segments of the international
financial market include:

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1. Foreign Exchange Market (Forex Market): The Forex market is the largest segment of the
international financial market, where currencies are bought and sold. It enables the conversion of
one currency into another and provides a platform for international trade and investment.
2. Money Market: The money market deals with short-term borrowing and lending of funds between
financial institutions and governments. It includes instruments like Treasury bills, certificates of
deposit, and commercial papers.
3. Capital Market: The capital market encompasses the issuance and trading of long-term securities,
such as stocks and bonds. It provides a platform for companies and governments to raise long-term
capital for investment and growth.
4. Derivatives Market: The derivatives market involves the trading of financial contracts derived from
underlying assets, such as commodities, currencies, stocks, or interest rates. Examples include
futures contracts, options, and swaps.
5. International Debt Market: The international debt market deals with the issuance and trading of
bonds and other debt instruments by governments, corporations, and international organizations. It
allows entities to raise funds from global investors.
6. International Equity Market: The international equity market involves the trading of stocks and
other equity instruments issued by companies listed on global stock exchanges. It provides
opportunities for investors to diversify their portfolios globally.

These segments of the international financial market facilitate global capital flows, investment
diversification, and risk management for participants.

Q-9) Instruments Used in the International Financial Market: The international financial
market utilizes various instruments to facilitate cross-border transactions and investment. Some
common instruments used in the international financial market include:

1. Currencies: Currencies play a fundamental role in international financial markets, where foreign
exchange (Forex) facilitates currency conversions and trading.
2. Stocks: Stocks represent ownership in a company and are traded on international stock exchanges.
They provide investors with an opportunity to participate in the ownership and growth of
companies from different countries.
3. Bonds: Bonds are debt instruments issued by governments, corporations, or international
organizations to raise funds. They are traded in the international debt market and provide fixed
income to investors.
4. Derivatives: Derivative instruments, such as futures contracts, options, and swaps, derive their value
from an underlying asset. They allow market participants to hedge risks or speculate on future price
movements.
5. Commodities: Commodities, such as gold, oil, agricultural products, and metals, are traded in
international commodity markets. They serve as essential inputs in various industries and provide
opportunities for investors and traders.
6. Exchange-Traded Funds (ETFs): ETFs are investment funds that trade on stock exchanges and aim to
replicate the performance of a specific index, sector, or asset class. They provide investors with
diversified exposure to international markets.

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 These instruments facilitate capital allocation, risk management, and investment opportunities in
the international financial market.

Q-10)

Key Players in FX Markets: The foreign exchange (FX) market involves various participants who play
key roles in currency trading. Some of the key players in the FX markets include:
1. Commercial Banks: Commercial banks engage in FX transactions on behalf of their clients, including
individuals, corporations, and institutional investors. They facilitate currency exchange,
international payments, and provide liquidity in the FX market.
2. Central Banks: Central banks, such as the Federal Reserve in the United States or the European
Central Bank, participate in the FX market to manage their country's currency, implement monetary
policy, and maintain currency stability.
3. Investment Banks: Investment banks engage in currency trading on behalf of clients, including
corporations, institutional investors, and governments. They provide liquidity, market analysis, and
advisory services in the FX market.
4. Hedge Funds: Hedge funds participate in the FX market to take speculative positions on currency
movements. They aim to generate profits by capitalizing on currency fluctuations.
5. Corporations: Multinational corporations engage in currency trading to manage their foreign
exchange risk. They participate in the FX market to hedge against currency volatility and ensure
smooth international transactions.
6. Retail Forex Brokers: Retail Forex brokers provide individuals and small investors access to the FX
market. They facilitate currency trading through online platforms and offer leverage to amplify
trading positions.
7. Interbank Market: The interbank market consists of large financial institutions trading currencies
directly with each other. These transactions form the backbone of the FX market and determine
exchange rates.

These key players contribute to the liquidity, efficiency, and stability of the FX market.
Q-11) Motives for Using the International Money & Capital Markets: The international money and
capital markets serve various purposes for market participants. Some key motives for using these
markets include:

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1. Capital Raising: Companies and governments use international capital markets to raise funds for
investment, expansion, or infrastructure projects. They issue bonds or stocks to access a broader
pool of investors and diversify their funding sources.
2. Investment Diversification: Investors use international money and capital markets to diversify their
portfolios globally. By investing in assets from different countries, they aim to spread risk and
potentially benefit from varied economic cycles and growth opportunities.
3. Risk Management: Participants in international markets use various instruments, such as derivatives
and currency hedging tools, to manage risks associated with foreign exchange fluctuations, interest
rate changes, or commodity price volatility.
4. Currency Exchange and Payments: International businesses and individuals utilize the foreign
exchange market to convert one currency into another for cross-border trade, international
investments, or personal transactions.
5. Yield Enhancement: Investors seek higher returns by investing in international money and capital
markets where interest rates or dividend yields may be more attractive than in domestic markets.
6. Speculation: Speculators engage in international money and capital markets to profit from short-
term price fluctuations, currency movements, or changes in interest rates. They aim to capitalize on
market inefficiencies or anticipated market trends.
7. Arbitrage Opportunities: Market participants exploit price differentials and inefficiencies between
international markets to earn risk-free profits through arbitrage strategies.
8. Liquidity Provision: Market makers, such as banks and financial institutions, participate in
international money and capital markets to provide liquidity by buying and selling financial
instruments. They ensure smooth market functioning and facilitate transactions.

These motives reflect the diverse range of activities and opportunities available in the international
money and capital markets.

Module-F: Islamic Financial System

Q-1). What do you mean by Islamic Banking? Describe the prospective of Islamic Banking. ***

Q-2). Describes Islamic Economics. what are the basic principles of Islamic economic system. ** Q-3).
What are the main principles of Islamic finance, and how do they promote social justice, economic
equality, and responsible investment? **

Q-4). How does Islamic finance differ from conventional finance in terms of its principles and
practices? ** Q-10). How does Islamic finance promote financial inclusion and encourage
participation by all members of society?

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 **

Q-5). What are the sources of Shariah law and how are they used in Islamic jurisprudence? ***

Q-6). What are the main types of Islamic financial instruments, and how are they used in Islamic
finance? ***

Q-7). How do sukuk (Islamic bonds) work, and what are their benefits and risks? **

Q-8). What is the difference between a Mudarabah and a Musharakah in Islamic finance, and how
are they used as financing instruments? **

Q-9). Difference between Islamic banking & Traditional banking ***

-1) Islamic Banking: Islamic banking is a system of banking that operates in accordance with the
principles of Islamic law (Shariah). It is based on the concept of ethical and socially responsible
banking, aiming to provide financial services that align with Islamic principles and avoid interest-
based transactions (riba) and prohibited activities (haram).

Prospective of Islamic Banking:

1. Ethical Approach: Islamic banking promotes ethical and responsible financial practices, focusing on
social justice, fairness, and transparency. It emphasizes the importance of conducting business in a
manner that benefits society as a whole.
2. Risk-Sharing: Islamic banking promotes the sharing of risks and rewards between the bank and its
clients. This principle encourages a more balanced and equitable distribution of risk and encourages
the bank to engage in careful evaluation and due diligence.
3. Prohibited Practices: Islamic banking strictly prohibits the charging and paying of interest (riba). It
also avoids investments in businesses involved in activities deemed as haram, such as alcohol,
gambling, or industries considered harmful to society.
4. Asset-Backed Financing: Islamic banking encourages financing based on tangible assets and real
economic activities. This helps in promoting productive investments and discourages speculative
and excessive leveraging practices.
5. Community Development: Islamic banking aims to contribute to social and economic development
by providing financial services that support the growth of small and mediumsized enterprises,
microfinance, and infrastructure development. It promotes financial inclusion and access to finance
for underserved segments of society.
6. Financial Stability: Islamic banking promotes stability by discouraging excessive risk-taking and
speculation. The principles of asset-backed financing and risk-sharing contribute to a more stable
and resilient financial system.

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 Q-2) Islamic Economics and Basic Principles of Islamic Economic System: Islamic economics is
an economic system based on the principles of Shariah, which aims to promote economic well-
being, social justice, and ethical conduct. The basic principles of Islamic economics include:
1. Prohibition of Interest (Riba): Islamic economics prohibits the charging and receiving of interest as it
is considered exploitative. Instead, profit-sharing and risk-sharing arrangements are encouraged.
2. Prohibition of Uncertainty (Gharar): Islamic economics discourages transactions with excessive
uncertainty or ambiguity, aiming for transparency and fairness in economic dealings.
3. Prohibition of Prohibited Activities (Haram): Islamic economics avoids engaging in economic
activities that are considered haram, such as gambling, speculation, and activities related to alcohol,
pork, or unethical industries.
4. Wealth Redistribution: Islamic economics emphasizes the fair distribution of wealth and resources,
discouraging extreme income inequality. Zakat (obligatory charity) and other forms of wealth
redistribution are encouraged to support the less fortunate members of society.
5. Value Creation and Productive Activities: Islamic economics promotes value creation through
productive economic activities. It encourages investment in sectors that contribute to the welfare of
society, such as agriculture, manufacturing, and services.
6. Property Rights and Contracts: Islamic economics recognizes and protects property rights,
promoting secure ownership and contract enforcement. Contracts should be based on mutual
consent, transparency, and justice.

These principles aim to create an economic system that ensures social welfare, promotes economic
growth, and fosters ethical conduct in economic activities.

Q-3) Main Principles of Islamic Finance and Promotion of Social Justice, Economic Equality,
and Responsible Investment: Islamic finance is guided by several principles rooted in Islamic law
(Shariah). These principles promote social justice, economic equality, and responsible investment in
the following ways:
1. Prohibition of Interest (Riba): Islamic finance prohibits the charging or paying of interest, as it is
considered exploitative. This principle helps to avoid debt-based financing that can lead to
economic disparities and promotes equitable distribution of resources.
2. Profit and Loss Sharing (PLS): Islamic finance encourages the sharing of risks and rewards between
parties. Profit and loss sharing contracts, such as Mudarabah and Musharakah, ensure that returns
on investments are linked to the actual performance of the underlying assets or projects. This
promotes economic equality and aligns the interests of investors and entrepreneurs.
3. Ethical and Responsible Investment: Islamic finance principles prohibit investments in activities
considered haram, such as alcohol, gambling, or industries harmful to society. This promotes
responsible investment practices that contribute to the well-being of society, avoiding investments
that may have negative social or environmental impacts.
4. Wealth Redistribution: Islamic finance emphasizes the concept of Zakat, which is the obligation of
giving a portion of wealth to the needy. This wealth redistribution mechanism helps to reduce
income inequality and promote social justice.

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5. Economic Stability: Islamic finance encourages real asset-backed financing and discourages
speculative and excessive leveraging practices. This promotes economic stability by reducing the
risks associated with speculative bubbles and excessive debt.
6. Ethical Conduct and Transparency: Islamic finance promotes ethical conduct and transparency in
financial transactions. Contracts and transactions should be based on mutual consent, fairness, and
full disclosure of relevant information, fostering trust and accountability.

By adhering to these principles, Islamic finance aims to create a financial system that is more
inclusive, equitable, and responsible, contributing to social justice and sustainable economic
development.

Q-4) Difference between Islamic Finance and Conventional Finance: Islamic finance differs from
conventional finance in terms of its principles and practices. Some key differences include:

1. Prohibition of Interest (Riba): Islamic finance strictly prohibits interest-based transactions (riba),
whereas conventional finance commonly involves interest charging and borrowing.
2. Asset-Backed Financing: Islamic finance promotes financing based on real assets and productive
economic activities, whereas conventional finance often involves debt-based financing and relies on
creditworthiness.
3. Risk-Sharing: Islamic finance encourages profit and loss sharing (PLS) and risk-sharing arrangements,
whereas conventional finance typically involves fixed interest payments regardless of the outcome.
4. Prohibited Activities (Haram): Islamic finance avoids investments in activities considered haram,
such as alcohol, gambling, or industries deemed harmful to society, while conventional finance does
not have such restrictions.
5. Ethical Considerations: Islamic finance emphasizes ethical conduct and responsible investment,
promoting investments that align with social and environmental values. Conventional finance may
not have the same level of emphasis on ethical considerations.
6. Zakat and Wealth Redistribution: Islamic finance incorporates the concept of Zakat, which involves
the obligation to give a portion of wealth to the needy, promoting wealth redistribution and social
justice. Conventional finance does not have a similar mandatory mechanism.
7. Contracts and Legal Framework: Islamic finance uses specific contracts compliant with Shariah
principles, such as Murabaha (cost-plus financing) and Ijarah (leasing), while conventional finance
relies on standard loan agreements and legal frameworks.
8. Supervisory and Regulatory Bodies: Islamic finance may have specific supervisory and regulatory
bodies that ensure compliance with Shariah principles, while conventional finance operates under
conventional regulatory bodies.

These differences reflect the distinct philosophical and ethical foundations of Islamic finance, which
aim to create a financial system aligned with Islamic principles and promote social justice and
economic well-being.

Q-5) Sources of Shariah Law and Their Use in Islamic Jurisprudence: Shariah law, which serves as the
basis for Islamic finance, is derived from various sources. The primary sources of Shariah law
include:

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1. The Quran: The Quran is the holy book of Islam and is considered the primary and most
authoritative source of Shariah law. It contains principles and guidance for personal, social, and
economic matters.
2. Sunnah: Sunnah refers to the practices, actions, and sayings of the Prophet Muhammad. The
Sunnah provides additional guidance and interpretation of the Quran and is an important source of
Shariah law.
3. Ijma: Ijma refers to the consensus reached by Islamic scholars on legal matters. It is based on the
collective agreement of scholars from different generations and serves as a source of guidance.
4. Qiyas: Qiyas involves analogical reasoning, where legal rulings are derived by analogy from existing
laws and principles. It helps to apply Islamic principles to new situations and circumstances.
5. Ijtihad: Ijtihad refers to the process of independent reasoning and interpretation by qualified Islamic
scholars. It allows scholars to derive legal rulings based on the principles and sources of Shariah law.

In Islamic jurisprudence, these sources are used by scholars to interpret and derive legal rulings
related to various aspects of life, including finance and commerce. Shariah advisory boards or
councils consisting of scholars with expertise in Islamic law and finance provide guidance and
ensure compliance with Shariah principles in Islamic financial institutions.
Q-6) Main Types of Islamic Financial Instruments and Their Use in Islamic Finance: Islamic
finance offers a variety of financial instruments that comply with Shariah principles. Some main
types of Islamic financial instruments include:
1. Murabaha: Murabaha is a cost-plus financing arrangement where the bank purchases an asset
requested by the customer and sells it to the customer at an agreed-upon price, which includes a
profit margin. It is commonly used for asset financing and trade transactions.
2. Musharakah: Musharakah is a partnership arrangement where two or more parties contribute
capital to finance a project or investment. Profits and losses are shared based on predetermined
ratios. It is used for joint ventures and project financing.
3. Mudarabah: Mudarabah is a profit-sharing partnership where one party provides capital (Rab al-
Mal) and another party provides expertise and labor (Mudarib). The profits generated are shared
based on predetermined ratios, while the losses are borne by the capital provider. It is used for
investment and entrepreneurship financing.
4. Ijarah: Ijarah is a leasing arrangement where the bank or financial institution purchases an asset and
leases it to the customer for an agreed-upon rental payment. It is used for equipment financing and
asset leasing.
5. Sukuk: Sukuk are Islamic bonds that represent ownership in underlying assets. They are structured
to comply with Shariah principles and are based on contracts such as
Musharakah, Mudarabah, or Ijarah. Sukuk provide investors with a share of ownership and rights to
cash flows generated by the underlying assets.
6. Salam: Salam is a forward contract where the buyer makes full payment in advance for goods to be
delivered in the future. It is commonly used in agriculture financing, allowing farmers to receive
financing before the harvest.

These instruments are structured to comply with Shariah principles, ensuring that they are free
from interest (riba) and comply with other requirements of Islamic law. They provide alternative

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 financing and investment options for individuals and businesses seeking to adhere to Islamic
principles.

Q-7) Sukuk, also known as Islamic bonds, are financial instruments that comply with Islamic
principles and are used for raising capital in a Shariah-compliant manner. Unlike conventional bonds
that represent debt, sukuk represent ownership in a tangible asset, project, or investment. Here's
how sukuk work and their benefits and risks:

1. Structure: Sukuk are structured as certificates of equal value, representing proportionate ownership
in an underlying asset or investment. The asset generates revenue, which is shared among sukuk
holders based on their ownership percentage.
2. Asset backing: Sukuk must be backed by tangible assets or services with inherent value. The
underlying asset could be real estate, infrastructure, commodities, or other revenuegenerating
projects.
3. Profit-sharing: Sukuk holders receive returns based on the profits generated by the underlying
asset, rather than fixed interest payments. Returns are distributed as a share of the profits or rental
income generated by the asset.
4. Benefits: a. Shariah compliance: Sukuk adhere to Islamic principles, which prohibit earning or paying
interest (riba) and promote risk-sharing and asset backing. b. Diversification: Sukuk offer investment
opportunities for individuals and institutions seeking Shariah-compliant investments, thereby
expanding the investor base. c. Infrastructure financing: Sukuk can be used to fund large-scale
infrastructure projects, promoting economic development in Muslim-majority countries.
5. Risks: a. Asset valuation risk: The value and performance of the underlying assets can fluctuate,
affecting the profitability and liquidity of the sukuk. b. Market risk: Changes in market conditions,
such as interest rates and investor sentiment, can impact the secondary market trading of sukuk. c.
Legal and regulatory risk: Sukuk structures must comply with Shariah principles and relevant legal
frameworks, which can introduce legal and regulatory complexities.

Q-8) Mudarabah and Musharakah are two types of Islamic financial contracts used as financing
instruments. While they both involve partnerships, they differ in the distribution of profit and loss
and the level of involvement of the parties:

1. Mudarabah: Mudarabah is a contract between two parties: the Rab-al-Maal (capital provider) and
the Mudarib (entrepreneur or manager). The capital provider contributes funds, while the
entrepreneur manages the investment. Key features include: a. Profitsharing: The profit generated
from the investment is shared between the parties based on a predetermined ratio. b. Loss-bearing:
The capital provider bears the entire loss in the event of investment failure, while the
entrepreneur's loss is limited to the effort and time invested. c. Passive investor: The capital
provider does not actively participate in the management of the investment.

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2. Musharakah: Musharakah is a partnership contract where two or more parties contribute capital
and jointly participate in a business venture. Key features include: a. Profit and loss sharing: Profits
and losses are distributed among the partners based on their capital contribution. b. Active
participation: All partners can actively participate in the management and decision-making
processes. c. Shared risk: Partners share both profit and loss, reflecting the principle of equitable
risk-sharing.

Both Mudarabah and Musharakah can be used as financing instruments for various purposes,
including business ventures, project financing, and investment activities. They promote risk-sharing,
aligning with Islamic principles that encourage fair and ethical business practices.
Q-9) Here are 10 key differences between Islamic banking and traditional banking:
1. Interest (Riba): Islamic banking prohibits the payment and receipt of interest (riba), while traditional
banking is based on interest-based transactions.
2. Profit and loss sharing: Islamic banking promotes profit and loss sharing (PLS) between the bank
and customers, while traditional banking operates on fixed interest rates.
3. Asset-based financing: Islamic banking focuses on asset-backed financing, where the bank shares in
the risks and returns of the financed asset. Traditional banking relies on collateralbased lending.
4. Risk-sharing: Islamic banking emphasizes risk-sharing between the bank and customers, aligning the
interests of all parties. Traditional banking places the burden of risk solely on the borrower.
5. Ethical principles: Islamic banking follows ethical and Shariah-compliant principles, avoiding
investments in sectors such as gambling, alcohol, and pork products. Traditional banking does not
have specific ethical restrictions.
6. Contracts: Islamic banking utilizes various Shariah-compliant contracts, such as Mudarabah,
Musharakah, and Murabaha, to structure transactions. Traditional banking primarily uses loan
agreements and interest-based contracts.
7. Governance: Islamic banking adheres to a Shariah board, comprising scholars who ensure
compliance with Islamic principles. Traditional banking operates under regulatory bodies and
standard banking practices.
8. Social impact: Islamic banking aims to contribute to society by supporting socially responsible
projects and investments. Traditional banking focuses primarily on profitability.
9. Transparency: Islamic banking promotes transparency and disclosure of information related to
transactions and investments. Traditional banking follows regulatory reporting standards.
10. Customer relationships: Islamic banking emphasizes building long-term relationships with
customers based on trust, fairness, and shared benefits. Traditional banking may prioritize short-
term profitability and transactions.

It's important to note that these differences are generalized and may vary among different Islamic
banks and traditional banks around the world.

Module-G: Regulatory Framework for Financial, Monetary and Payment System:

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 Q-1). Describe the role of Bangladesh Bank as a regulator of the financial system of Bangladesh. Or,
How Bangladesh Bank regulates and supervises the financial system of Bangladesh? ***

Q-2). What is the role of Bangladesh Bank in maintaining financial stability in the country? **

Q-3). Describes about Bangladesh Securities and Exchange Commission (BSEC) and its functions. ***

Q-4). Discuss about Insurance Development and Regulatory Authority (IDRA) and its functions. ***

Q-5). Discuss the goals and funtions of Microcredit Regulatory Authority (MRA). **

Q-6). Describe the functions and responsibilities of BFIU. (July/2019) or Or, Discuss the main functions
of BFIU. **

Q-1) Bangladesh Bank, the central bank of Bangladesh, plays a crucial role in regulating and
supervising the financial system of the country. Its responsibilities include:

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1. Formulating monetary policy: Bangladesh Bank formulates and implements monetary policy to
maintain price stability and promote economic growth.
2. Currency issuance and management: Bangladesh Bank is responsible for issuing and managing the
country's currency, ensuring an adequate supply of currency notes and coins.
3. Banking supervision: It supervises and regulates commercial banks, financial institutions, and non-
bank financial institutions (NBFIs) to ensure their soundness and stability. This includes licensing,
monitoring, and enforcing prudential regulations.
4. Foreign exchange management: Bangladesh Bank manages foreign exchange reserves, controls
foreign exchange transactions, and formulates policies to maintain a stable exchange rate.
5. Payment systems oversight: It regulates and oversees payment systems to ensure efficient and
secure transactions within the country.
6. Consumer protection: Bangladesh Bank promotes consumer protection in the financial sector by
enforcing regulations, addressing customer complaints, and ensuring fair practices by financial
institutions.
7. Financial sector development: It plays a proactive role in developing and expanding the financial
sector, including promoting financial inclusion, fostering innovation, and supporting the growth of
financial markets.
8. Economic data and research: Bangladesh Bank collects and analyzes economic data, conducts
research, and publishes reports to support evidence-based policymaking and promote economic
development.
9. Banking regulation and policy: It formulates and enforces regulations and policies related to banking
operations, capital adequacy, lending practices, risk management, and corporate governance.
10. Financial stability: Bangladesh Bank monitors and assesses risks to financial stability, takes
necessary measures to mitigate systemic risks, and acts as a lender of last resort during times of
financial crises.

Q-2) The role of Bangladesh Bank in maintaining financial stability in the country includes:

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1. Systemic risk assessment: Bangladesh Bank assesses risks to the stability of the financial system,
including monitoring macroeconomic indicators, asset quality, liquidity, and capital adequacy of
banks and financial institutions.
2. Crisis management: It develops contingency plans and takes appropriate measures to address
financial crises, including providing liquidity support to banks and NBFIs during periods of stress.
3. Prudential regulations: Bangladesh Bank sets and enforces prudential regulations, such as capital
adequacy requirements, loan classification and provisioning norms, and risk management
guidelines, to ensure the stability and soundness of financial institutions.
4. Supervision and monitoring: It conducts regular on-site inspections and off-site surveillance of
banks and NBFIs to assess their compliance with regulations and identify potential risks to financial
stability.
5. Early warning system: Bangladesh Bank operates an early warning system to detect and mitigate
emerging risks in the financial sector, such as excessive credit growth, asset price bubbles, or
concentration of risk.
6. Coordinated efforts: It collaborates with other regulatory authorities, government agencies, and
international organizations to share information, coordinate actions, and address crosssectoral and
systemic risks.
7. Crisis communication: Bangladesh Bank communicates with stakeholders, including banks, NBFIs,
government agencies, and the public, to provide timely and accurate information during times of
financial stress and maintain confidence in the financial system.
8. Capacity building: It enhances the capacity and skills of its staff and the financial industry
professionals through training programs and knowledge sharing to strengthen financial stability-
related activities.
9. Research and analysis: Bangladesh Bank conducts research and analysis on financial stability issues,
contributing to the understanding of systemic risks and informing policy decisions.
10. International cooperation: It actively participates in regional and international forums to
exchange information, collaborate on financial stability matters, and adopt best practices in
maintaining financial stability.

Q-3) The Bangladesh Securities and Exchange Commission (BSEC) is the regulatory body
responsible for regulating and supervising the securities market in Bangladesh. Its functions include:

1. Regulatory oversight: BSEC regulates and oversees all aspects of the securities market, including
stock exchanges, listed companies, market intermediaries, and investors, to ensure fair and
transparent operations.
2. Market surveillance: It monitors and supervises the securities market to detect and prevent market
manipulation, insider trading, and other fraudulent activities that could undermine market integrity.

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3. Licensing and registration: BSEC grants licenses and registrations to stock exchanges, brokers,
merchant banks, asset management companies, and other market participants, ensuring
compliance with relevant regulations and standards.
4. Issuance and disclosure requirements: BSEC sets rules and regulations for the issuance and
disclosure of securities, ensuring that companies provide accurate and timely information to
investors.
5. Investor protection: It works to protect the interests of investors by enforcing rules on fair trading
practices, investor education, complaint resolution, and the establishment of a compensation fund.
6. Market development: BSEC takes initiatives to develop the securities market, including introducing
new financial instruments, promoting market liquidity, and attracting domestic and foreign
investments.
7. Market rule-making: It formulates and updates rules, regulations, and guidelines governing the
securities market, ensuring compliance with international standards and best practices.
8. Enforcement and sanctions: BSEC has the authority to investigate violations of securities laws and
regulations, impose penalties and sanctions on market participants, and take legal actions to
maintain market discipline.
9. International cooperation: BSEC collaborates with international regulatory bodies and exchanges to
foster cooperation, share information, and adopt global best practices in securities regulation.
10. Investor awareness and education: BSEC conducts investor education programs, disseminates
information, and promotes awareness about the securities market to empower investors and
enhance market participation.

Q-4) The Insurance Development and Regulatory Authority (IDRA) of Bangladesh is the regulatory
body responsible for overseeing the insurance sector in the country. Its functions include:

1. Licensing and registration: IDRA grants licenses and registrations to insurance companies, brokers,
agents, and other entities involved in insurance operations, ensuring compliance with legal and
regulatory requirements.
2. Regulatory oversight: It regulates and supervises the insurance industry to ensure the soundness,
stability, and integrity of insurance companies, protecting the interests of policyholders and other
stakeholders.
3. Policy formulation: IDRA formulates policies, rules, and regulations related to insurance operations,
market conduct, solvency requirements, financial reporting, and risk management.
4. Product approval: It reviews and approves insurance products, ensuring they are fair, transparent,
and in compliance with regulatory standards, providing adequate coverage to policyholders.
5. Financial supervision: IDRA monitors the financial health of insurance companies, including their
capital adequacy, solvency margins, investment practices, and compliance with accounting and
reporting standards.
6. Risk management: It establishes guidelines and frameworks for risk management in the insurance
sector, ensuring that companies have effective risk management systems and processes in place.

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7. Consumer protection: IDRA works to protect the interests of policyholders by enforcing rules on fair
treatment, claims settlement, and dispute resolution. It also promotes awareness and education
among consumers about insurance products and their rights.
8. Market conduct supervision: It monitors and regulates the market conduct of insurance companies,
agents, and brokers, ensuring fair business practices, proper disclosure of information, and
compliance with ethical standards.
9. Reinsurance oversight: IDRA oversees the reinsurance activities of insurance companies, ensuring
that they have appropriate reinsurance arrangements to manage risks and protect policyholders.
10. Industry development: It takes initiatives to promote the development of the insurance
industry, including market expansion, introduction of new insurance products, and fostering
innovation and technological advancement in the sector.

Q-5) The Microcredit Regulatory Authority (MRA) of Bangladesh is responsible for regulating and
supervising microfinance institutions (MFIs) and microcredit operations in the country. Its goals and
functions include:

1. Regulatory oversight: MRA regulates and supervises the microcredit sector to ensure compliance
with laws, regulations, and policies related to microfinance operations.
2. Licensing and registration: It grants licenses and registrations to microfinance institutions, ensuring
that they meet the necessary criteria and standards for providing microcredit services.
3. Prudential regulations: MRA establishes prudential regulations and guidelines for MFIs, including
capital adequacy requirements, lending practices, interest rate caps, and borrower protection
measures.
4. Social performance monitoring: MRA monitors the social performance of MFIs, assessing their
impact on poverty alleviation, women empowerment, and socio-economic development at the
grassroots level.
5. Market conduct supervision: It oversees the market conduct of MFIs, ensuring fair treatment of
borrowers, transparent pricing, responsible lending practices, and effective mechanisms for
grievance redressal.
6. Capacity building and training: MRA conducts capacity building programs and provides training to
MFIs, staff, and borrowers to enhance their skills, knowledge, and understanding of microfinance
principles and practices.
7. Data collection and reporting: It collects data on microcredit operations, borrower profiles, and
performance indicators to facilitate policy formulation, research, and monitoring of the
microfinance sector.
8. Collaboration and coordination: MRA collaborates with other stakeholders, including government
agencies, donor organizations, and industry associations, to promote coordination, knowledge
sharing, and collaboration in the microfinance sector.
9. Consumer protection: It establishes and enforces rules and regulations to protect the rights and
interests of microcredit borrowers, including disclosure requirements, fair treatment, and
mechanisms for dispute resolution.
10. Policy advocacy: MRA participates in policy advocacy and contributes to the formulation of
policies and regulations that support the sustainable development of the microfinance sector and
its contribution to poverty reduction and inclusive growth.

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 Q-6) The Bangladesh Financial Intelligence Unit (BFIU) is the central agency responsible for
combating money laundering, terrorist financing, and other financial crimes in Bangladesh.
Its functions and responsibilities include:
1. Intelligence gathering: BFIU collects, analyzes, and processes financial intelligence from various
sources, including banks, financial institutions, law enforcement agencies, and international
counterparts, to identify suspicious transactions and patterns indicative of money laundering or
terrorist financing.
2. Reporting suspicious transactions: It receives, investigates, and disseminates reports of suspicious
transactions submitted by banks, financial institutions, and designated nonfinancial businesses and
professions (DNFBPs) in compliance with anti-money laundering (AML) and counter-terrorism
financing (CFT) regulations.
3. Financial intelligence sharing: BFIU shares financial intelligence and information with domestic and
international law enforcement agencies, regulatory authorities, and other relevant stakeholders to
facilitate investigations, prosecutions, and the prevention of financial crimes.
4. Compliance monitoring: It monitors the compliance of banks, financial institutions, and DNFBPs with
AML and CFT regulations, conducts inspections, and assesses the effectiveness of their internal
control systems for anti-money laundering and counter-terrorism financing.
5. Policy development: BFIU contributes to the development and enhancement of policies, laws, and
regulations related to AML and CFT in coordination with other relevant authorities, taking into
account international standards and best practices.
6. Training and capacity building: It provides training programs and capacity-building initiatives to
banks, financial institutions, DNFBPs, and law enforcement agencies to enhance their understanding
of AML and CFT measures and improve their capabilities in combating financial crimes.
7. International cooperation: BFIU actively cooperates and exchanges information with international
financial intelligence units and organizations to combat transnational financial crimes, support
investigations, and promote global AML/CFT efforts.

8. Risk assessment: It conducts risk assessments of the country's financial sector to identify
vulnerabilities, emerging trends, and areas of concern related to money laundering, terrorist
financing, and other financial crimes.
9. Implementation of sanctions: BFIU implements and enforces international and domestic sanctions
related to money laundering, terrorist financing, and proliferation financing, ensuring compliance by
financial institutions and other relevant entities.
10. Public awareness: It promotes public awareness and educates stakeholders, including the
general public, businesses, and professionals, about the risks of money laundering and terrorist
financing, as well as the measures in place to prevent and combat these illicit activities.

Short Notes
Q-1). Define Money and its functions. **

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Q-2). Explain three motives for need
money.
Q-3). Define Narrow and Broad money. ***

Q-4). Difference between Narrow and Broad money. **

Q-5). Velocity of money *

Q-6). How Creation of Money works by Commercial Bank?? ***

Q-7). Treasury Bill Market in Bangladesh *

Q-8). Describes Different payment options in Bngladesh. ***

Q-9). Deposit Insurance Scheme

Q-10). Different mode of Finance

Q-11). Describe major difference between banks and NBFIs. ***

Q-12). Bridge Financing **

Q-13). Central Bank Autonomy *

Q-14). Venture Capital *

Q-16). Deficit Financing **

Q-18). Primary Dealer **

Q-19). Capital Adequacy ***

Q-20). Repo & Reverse Repo **

Q-21). Money Market & Capital Market ***

Q-22). On-line Banking *

Q-23). Nature of Trade of Balance in Bangladesh **

Q-24). SWAP in Foreign Exchange Market **

Q-25). Monetary Policy by discretion *

Q-26). Prudential Regulation **

Q-27). Liquidity Trap*

Q-28). The ratio between M1 and M2. **

Q-29). Reverse repo and its impact on money supply. *

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 Q-30). Bank for International Settlements (BIS). **

Q-31). Money as a store of value: **

Q-32). Difference between Islamic banking & Traditional banking **

Q- 33). Define Sukuk Bond and Its Advantages **

Q-1) Define Money and its functions.

Money is a medium of exchange that is widely accepted in transactions for goods, services, and
debts. It serves as a unit of account, a medium of exchange, a store of value, and a standard of
deferred payment. Money can take various forms, including currency (coins and banknotes) and
digital forms like bank deposits or electronic money.

The functions of money are:

1. Medium of Exchange: Money facilitates the exchange of goods and services by acting as a
commonly accepted medium of exchange. It eliminates the need for barter, where goods are
directly exchanged for other goods, making transactions more efficient.
2. Unit of Account: Money provides a standardized unit for measuring and comparing the value of
goods and services. It allows for easy price comparisons and helps in determining the relative worth
of different items.
3. Store of Value: Money serves as a means to store wealth over time. It can be saved and used for
future purchases or investments. The value of money should ideally remain relatively stable over
time to preserve its purchasing power.
4. Standard of Deferred Payment: Money allows for the settling of debts and obligations over time. It
enables transactions where payment can be made at a later date, providing a

mechanism for borrowing, lending, and credit.

Q-2) Explain three motives for needing money.

The three motives for needing money are:

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1. Transaction Motive: This motive arises from the need for money to facilitate day-to-day
transactions for goods and services. Individuals and businesses require money for their regular
expenses and to carry out routine transactions in the economy. Having money readily available
helps meet immediate payment obligations.
2. Precautionary Motive: The precautionary motive for money arises from the desire to hold cash or
liquid assets as a precautionary measure against unforeseen events or emergencies. People need
money to have a financial buffer to cope with unexpected expenses, such as medical emergencies,
job loss, or other unforeseen circumstances.
3. Speculative Motive: The speculative motive for money arises from the desire to hold money as an
investment asset with the expectation of earning a return. Money held for speculative purposes is
typically diverted from other investment avenues, such as stocks, bonds, or real estate. It allows
individuals and businesses to take advantage of investment opportunities that may arise in the
future.

These motives for needing money reflect the various ways in which money is used to meet both
immediate and future financial needs, including transactions, precautionary savings, and
investment opportunities.

Q-3)Define Narrow and Broad money.

Narrow money refers to the most liquid forms of money that can be readily used in transactions. It
includes physical currency (coins and banknotes) held by the public and demand deposits in
commercial banks, which are withdrawable on demand by the depositors.

Broad money, on the other hand, is a broader measure of the money supply that includes not only
narrow money but also additional components that are less liquid but still part of the overall money
stock. Broad money includes narrow money (currency and demand deposits) and other relatively
less liquid forms of money, such as time deposits (fixed-term deposits), savings deposits, and
money market funds.

Q-4)Difference between Narrow and Broad money.

The key differences between narrow and broad money are as follows:
1. Components: Narrow money consists of physical currency (coins and banknotes) held by the public
and demand deposits in commercial banks. It represents the most liquid forms of money that can
be easily used in transactions. In contrast, broad money includes narrow money along with
additional components such as time deposits, savings deposits, and money market funds. These
components are less liquid but still considered part of the overall money supply.
2. Liquidity: Narrow money is highly liquid, meaning it can be readily used for transactions without any
significant delays or restrictions. On the other hand, the components of broad money, such as time
deposits and money market funds, may have certain restrictions or requirements before they can
be converted into narrow money and used for transactions. They may involve fixed terms or
withdrawal penalties, making them less immediately accessible.

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3. Measurement of Money Supply: Narrow money is a narrower measure of the money supply and
provides an indication of the immediate purchasing power available in the economy. It focuses on
the most liquid forms of money. In contrast, broad money is a broader measure that takes into
account additional components, reflecting a more comprehensive view of the overall money stock
in the economy.

The distinction between narrow and broad money is important for understanding the different
levels of liquidity and accessibility of various components within the money supply.

Q-5) Velocity of money refers to the rate at which money circulates in an economy. It
measures how quickly money is spent or exchanged for goods and services within a given time
period. It is calculated by dividing the nominal GDP (Gross Domestic Product) by the money supply.

The velocity of money is an important concept in macroeconomics as it helps understand the

relationship between the money supply and economic activity. A higher velocity of money indicates
that money is changing hands frequently, suggesting a higher level of economic activity and
spending. Conversely, a lower velocity of money suggests that money is being held onto and not
being spent as frequently, indicating lower economic activity.

Q-6) The creation of money by commercial banks is based on the fractional reserve banking
system. When a commercial bank receives a deposit from a customer, it is required to keep only a
fraction of that deposit as reserves and can use the remaining portion to extend loans or make
investments.

Here's a simplified overview of how the money creation process works:

1. Customer A deposits $1,000 into their checking account at Bank X.

2. Bank X is required to keep a fraction of this deposit as reserves, let's say 10%, which amounts to
$100. This is known as the reserve requirement.
3. Bank X can now use the remaining $900 to extend loans or make investments.
4. Customer B approaches Bank X and requests a loan of $900 to start a business.
5. Bank X approves the loan and credits $900 to Customer B's account.
6. Customer B now has $900 in their account, which they can spend or transfer to others.
7. The $900 loan amount effectively increases the money supply, as it is considered as new money
created by the bank. This is because both Customer A's original deposit and Customer B's loan are
considered as money in circulation.

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 By extending loans and creating new deposits, commercial banks effectively increase the money
supply within an economy. However, it's important to note that the process is regulated by central
banks, and there are limits on the amount of loans banks can create based on reserve requirements
and other regulations.

Q-7) The Treasury Bill (T-bill) market in Bangladesh refers to the market where the government
issues short-term debt securities, known as treasury bills, to raise funds for its financing needs. The
Bangladesh Bank (the central bank of Bangladesh) acts as the issuer and regulator of treasury bills.

T-bills are typically issued with maturities of 91 days, 182 days, and 364 days. They are considered
low-risk investments and are primarily used by investors as a means of parking surplus funds and
earning a return. The government uses the funds raised through T-bills to manage its cash flow,
finance budget deficits, and control the money supply in the economy.

Investors in the T-bill market in Bangladesh include commercial banks, non-bank financial
institutions, insurance companies, and individual investors. The T-bills are issued through auctions
conducted by the Bangladesh Bank at regular intervals. Interested investors submit competitive bids
specifying the desired amount and interest rate they are willing to accept.

The T-bills are then allotted to the highest bidders at the lowest accepted yield. The yield on T-bills
represents the return earned by the investors and is determined by the market demand and supply
dynamics. The interest earned on T-bills is exempt from income tax in Bangladesh.

Q-8) Different payment options in Bangladesh include:

1. Cash: Cash transactions are widely used in Bangladesh, especially for smaller transactions. The
Bangladeshi currency is the Bangladeshi Taka (BDT), and cash is accepted at most businesses.
2. Cheques: Cheques are commonly used for larger transactions and payments between businesses.
To make a payment by cheque, the payer writes a cheque for the specified amount, which can be
deposited into the payee's bank account.
3. Online Banking: Many banks in Bangladesh offer online banking services, allowing customers to
transfer funds, pay bills, and make other financial transactions through internet banking platforms
or mobile banking apps.
4. Mobile Financial Services: Mobile financial services, such as bKash, Rocket, and Nagad, have gained
significant popularity in Bangladesh. These services enable users to send and receive money, pay
bills, and make purchases using their mobile phones.
5. Debit and Credit Cards: Debit and credit cards issued by banks are widely accepted in urban areas
and major retail establishments. They allow users to make payments electronically, either by
swiping the card or using contactless payment methods like NFC (Near Field Communication).

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6. Electronic Fund Transfer (EFT): Electronic Fund Transfer systems like BEFTN (Bangladesh Electronic
Fund Transfer Network) and RTGS (Real-Time Gross Settlement) facilitate electronic transfers of
funds between banks in Bangladesh.
7. Mobile Banking: Some banks offer mobile banking services that allow customers to perform various
financial transactions through their mobile phones, including fund transfers, bill payments, and
balance inquiries.

It's important to note that the availability and acceptance of different payment options may vary
across different regions and establishments in Bangladesh.

Q-9) The Deposit Insurance Scheme (DIS) is a system that provides protection to depositors in
case a bank fails or becomes insolvent. It is designed to instill confidence in the banking system and
safeguard depositors' funds. In the event of a bank failure, the deposit insurance scheme ensures
that depositors receive a certain level of compensation for their deposits.

The specific details of the Deposit Insurance Scheme in Bangladesh are as follows:
 The Deposit Insurance Trust (DIT) is responsible for administering the deposit insurance scheme in
Bangladesh. It is governed by the Bangladesh Bank.
 The coverage limit for deposit insurance in Bangladesh is BDT 1,00,000 (Bangladeshi Taka One Lac)
per depositor per bank. This means that if a depositor has multiple accounts in a bank, the
maximum coverage provided by the scheme is BDT 1,00,000 across all accounts.
 The deposit insurance coverage includes savings accounts, current accounts, fixed deposits, and
other types of deposits held by individuals, partnerships, companies, and other entities.
 The deposit insurance scheme covers scheduled banks, including both conventional banks and
Islamic banks operating in Bangladesh.
 The scheme does not cover deposits held in non-scheduled banks, offshore banking units, branches
of foreign banks, or branches of Bangladeshi banks located outside Bangladesh.
 The deposit insurance premium is paid by the member banks based on their total deposits and risk
profile. The premium rates are determined by the Deposit Insurance Trust.
 In case of a bank failure, the Deposit Insurance Trust steps in to compensate the depositors up to
the coverage limit. The compensation process is initiated by the Bangladesh Bank.
It's important for depositors to be aware of the coverage limit and the specific terms and conditions
of the deposit insurance scheme to understand the extent of protection provided to their deposits.

Q-10) Different modes of finance refer to various methods or sources through which
individuals, businesses, or governments can obtain funding for their financial needs. Some common
modes of finance include:

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1. Equity Financing: Equity financing involves raising capital by issuing shares or ownership stakes in a
company. Investors who purchase these shares become shareholders and have a claim on the
company's assets and future profits.
2. Debt Financing: Debt financing involves borrowing funds from lenders or financial institutions with
the obligation to repay the borrowed amount plus interest over a specified period. This can be in
the form of bank loans, bonds, or other debt instruments.
3. Leasing: Leasing involves acquiring the use of an asset by making regular lease payments to the
lessor. The lessee does not own the asset but has the right to use it for a specific period.
4. Trade Credit: Trade credit refers to the credit extended by suppliers to businesses for the purchase
of goods or services. It allows businesses to delay payment and manage their cash flow.
5. Venture Capital: Venture capital is a form of financing typically provided to early-stage or high-
growth potential companies. Venture capitalists invest in these companies in exchange for equity
ownership.
6. Crowdfunding: Crowdfunding involves raising funds from a large number of individuals, usually
through online platforms. Contributors make small investments or donations to support a specific
project or business.
7. Grants and Subsidies: Grants and subsidies are non-repayable funds provided by governments,
organizations, or foundations to support specific activities, projects, or sectors.
8. Microfinance: Microfinance provides financial services, including small loans, to low-income
individuals or entrepreneurs who may not have access to traditional banking services.

These are just a few examples of the different modes of finance available. The choice of finance
depends on factors such as the purpose of funding, the financial needs of the borrower, risk
tolerance, and the availability of suitable sources of financing.

Q-11) The major differences between banks and Non-Bank Financial Institutions (NBFIs) are as
follows:

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1. Regulatory Framework: Banks are typically regulated by central banks or banking regulatory
authorities, whereas NBFIs are regulated by separate regulatory bodies specific to their respective
jurisdictions, such as financial services authorities or securities commissions.
2. Banking License: Banks require a banking license to operate, which involves meeting specific
regulatory requirements, capital adequacy ratios, and compliance with banking regulations. NBFIs,
on the other hand, may not require a banking license but are subject to regulations applicable to
their specific activities, such as providing credit, investment services, or insurance.
3. Scope of Activities: Banks offer a wide range of financial services, including accepting deposits,
granting loans, issuing credit cards, providing trade finance, and offering various investment
products. NBFIs, however, specialize in specific financial activities, such as providing loans, leasing,
factoring, investment management, or insurance.
4. Deposit-Taking Capability: Banks have the authority to accept deposits from the public and offer
checking and savings accounts. NBFIs, in general, do not accept deposits from the public but may
raise funds through other means, such as issuing bonds or raising capital from investors.
5. Lending Practices: Banks are the primary lending institutions, offering loans to individuals,
businesses, and governments. NBFIs also provide loans, but they may focus on specific segments,
such as consumer loans, mortgage finance, or small and medium-sized enterprise (SME) lending.
6. Systemic Importance: Banks are considered systemically important institutions due to their central
role in the financial system and the potential impact of their failure on the overall economy. NBFIs,
although significant in their respective sectors, may not have the same level of systemic importance.
7. Deposit Insurance: Banks typically provide deposit insurance to protect depositors' funds in case of
bank failure. NBFIs may not offer deposit insurance, and the protection of investors' or customers'
funds may vary depending on the specific regulations and schemes applicable to each NBFI.

It's important to note that the specific differences between banks and NBFIs can vary across
countries and jurisdictions, as regulatory frameworks and definitions may differ.

Q-12) Bridge Financing: Bridge financing refers to short-term financing provided to a company
or individual to bridge a financial gap between two larger financing transactions. It is typically used
when there is a temporary shortage of funds or a delay in receiving longterm financing. Bridge
financing can be in the form of loans, lines of credit, or other financial instruments. It helps
businesses or individuals meet their immediate financial needs until they secure long-term financing
or a permanent solution.

Q-13) Central Bank Autonomy: Central bank autonomy refers to the independence of a
country's central bank from external influences, particularly from the government or political

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interference. An autonomous central bank has the authority to formulate and implement monetary
policy decisions without undue pressure or influence from the government. This
independence is important for maintaining price stability, controlling inflation, and promoting
economic stability. Central bank autonomy is often seen as a key requirement for effective
monetary policy and the credibility of a country's financial system.

Q-14) Venture Capital: Venture capital is a type of private equity financing provided to early-stage,
high-potential companies with growth prospects. Venture capitalists invest in these companies in
exchange for an ownership stake and typically provide both capital and expertise to help the
businesses grow. Venture capital funding is commonly sought by startups or small businesses that
have limited access to traditional forms of financing, such as bank loans. Venture capitalists take on
higher risks in exchange for the potential of high returns on their investments.

Q-16) Deficit Financing: Deficit financing refers to the practice of a government borrowing money to
cover its budget deficit, which occurs when its expenditures exceed its revenue. Governments often
resort to deficit financing to fund various projects, social programs, or stimulate economic growth.
They issue government bonds or borrow from domestic or international sources to bridge the
budget gap. While deficit financing can be a useful tool, excessive reliance on it can lead to inflation,
increased public debt, and potential economic instability.

Q-18) Primary Dealer: A primary dealer is a financial institution or a bank that has a direct
relationship with a country's central bank and is authorized to participate in government securities
auctions. Primary dealers serve as intermediaries between the central bank and the secondary
market for government securities. They have the responsibility of underwriting government bond
issues, making markets for government securities, and facilitating the trading and liquidity of these
securities. Primary dealers play a crucial role in the functioning of the government bond market.

Q-19) Capital Adequacy: Capital adequacy refers to the level of capital that financial institutions,
such as banks, must maintain to ensure their financial stability and ability to absorb losses. It is a
regulatory requirement imposed by banking authorities to protect depositors and maintain the
stability of the banking system. Capital adequacy is typically measured through capital adequacy
ratios, such as the Basel III framework's Common Equity Tier 1 (CET1) ratio. Higher capital adequacy
ratios indicate a stronger financial position and ability to withstand adverse events or losses.

Q-20) Repo & Reverse Repo: Repo (repurchase agreement) and reverse repo are financial
transactions commonly used in money markets. In a repo, one party (typically a borrower) sells a
security (such as government bonds) to another party (the lender) with an agreement

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to repurchase the same security at a specified future date and price. The difference between the
sale price and repurchase price represents the interest or repo rate.

Reverse repo is the opposite of a repo. In a reverse repo, one party (the lender) purchases securities
from another party (the borrower) with an agreement to sell them back at a specified future date
and price. The difference between the purchase price and resale price represents the interest or
reverse repo rate.

Repo and reverse repo transactions are commonly used by central banks and financial institutions
to manage short-term liquidity and implement monetary policy.

Q-21) Money Market & Capital Market: Money market and capital market are two segments of the
financial market that serve different purposes.

The money market is a market for short-term borrowing and lending, usually for a period of one
year or less. It deals with highly liquid and low-risk financial instruments, such as Treasury bills,
commercial paper, certificates of deposit, and short-term government securities. The money market
provides a platform for institutions and individuals to meet their short-term funding and investment
needs.

On the other hand, the capital market is a market for long-term borrowing and lending, usually for a
period of more than one year. It deals with financial instruments such as stocks, bonds, debentures,
and long-term government securities. The capital market facilitates the raising of long-term capital
for businesses, governments, and individuals. It provides opportunities for investors to buy and sell
securities with the expectation of long-term returns.

Q-23) Online Banking: Online banking refers to the provision of banking services and transactions
conducted over the internet or through electronic means. It allows customers to access their bank
accounts, make financial transactions, and manage their finances through secure online platforms
or mobile applications. Online banking provides convenience, flexibility, and round-the-clock access
to banking services, such as checking account balances, transferring funds, paying bills, applying for
loans, and more. It has become increasingly popular due to advancements in technology and the
growing digitalization of financial services.

Q-26) Nature of Trade Balance in Bangladesh: The trade balance of a country refers to the
difference between the value of its exports and imports of goods and services over a specific period.
In the case of Bangladesh, the nature of its trade balance can vary depending on its economic
conditions, trade policies, and global market dynamics.

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Bangladesh is known for its textile and garment industry, which contributes significantly to its
export earnings. The country exports a large quantity of ready-made garments and textile products
to various countries, including the United States and European Union. These exports contribute to
the country's positive trade balance and help generate foreign exchange reserves.

On the import side, Bangladesh relies on various goods and commodities, such as petroleum,
machinery, raw materials, and consumer products. The import value often exceeds the export
value, resulting in a trade deficit. The trade deficit can put pressure on the country's current account
and may require measures to manage and finance the deficit, such as attracting foreign investment
or increasing export diversification.

Q-27) SWAP in Foreign Exchange Market: In the foreign exchange market, a swap refers to an
agreement between two parties to exchange one currency for another and then reverse the
exchange at a future predetermined date and exchange rate. Swaps are commonly used to hedge
against currency exchange rate risks or to obtain a favorable interest rate for a specific period.

There are different types of swaps in the foreign exchange market, including interest rate swaps and
currency swaps. Interest rate swaps involve exchanging interest payments on a specified principal
amount denominated in different currencies. Currency swaps involve exchanging principal amounts
in different currencies and making periodic interest payments.

Swaps provide flexibility for businesses and investors to manage their currency and interest rate
exposures and can be customized to meet specific needs. They are widely used by multinational
corporations, financial institutions, and institutional investors in global financial markets.

Q-28) Monetary Policy by discretion: Monetary policy by discretion refers to a monetary policy
approach where the central bank has the discretionary power to make policy decisions based on its
assessment of the economic conditions and objectives. Under this approach, the central bank has
the authority to set interest rates, control money supply, and implement various tools to achieve
specific policy goals, such as price stability, economic growth, or employment.

Monetary policy by discretion allows the central bank to respond to changing economic conditions
and adjust policy measures accordingly. It provides flexibility in decision-making and allows the
central bank to use its judgment and expertise in managing the economy. However, it also requires
a high level of transparency, accountability, and communication from the central bank to maintain
credibility and public trust in its policy actions.

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Q-29) Prudential Regulation: Prudential regulation refers to the regulatory framework and rules
implemented by financial authorities to ensure the safety, soundness, and stability of financial
institutions and protect the interests of depositors and investors.

Prudential regulation sets standards and requirements for financial institutions in areas such as
capital adequacy, risk management, liquidity management, corporate governance, and disclosure. It
aims to prevent excessive risk-taking, mitigate systemic risks, and maintain the overall stability of
the financial system.

Regulatory bodies, such as central banks, banking regulators, and securities commissions, enforce
prudential regulations and conduct regular assessments and inspections to ensure compliance.
Prudential regulation is essential to safeguard the integrity of the financial system, promote
confidence in financial institutions, and reduce the likelihood of financial crises.

Q-30) Liquidity Trap: A liquidity trap is an economic situation in which interest rates are extremely
low, and monetary policy becomes ineffective in stimulating economic growth and increasing
consumer spending. In a liquidity trap, people and businesses prefer to hold cash rather than invest
or spend it, despite the low interest rates. This preference for liquidity arises due to pessimistic
expectations about future economic conditions or uncertainty. As a result, the central bank's efforts
to lower interest rates and increase the money supply fail to stimulate borrowing and investment,
as individuals and businesses choose to hoard cash instead.

Q-31) The ratio between M1 and M2: M1 and M2 are measures of the money supply in an
economy, and their ratio provides insights into the composition of the money supply.

M1 includes currency in circulation (notes and coins) and demand deposits (checking accounts). It
represents the most liquid components of the money supply.

M2, on the other hand, includes M1 plus savings deposits, time deposits (e.g., certificates of
deposit), and money market funds. It represents a broader definition of the money supply,
including less liquid forms of money.

The ratio between M1 and M2 gives an indication of the relative importance of liquid and less liquid
forms of money in the economy. A higher ratio suggests that a larger portion of the money supply is
in more liquid forms, while a lower ratio indicates a higher proportion of less liquid forms of money.

Q-32) Reverse repo and its impact on money supply: A reverse repurchase agreement, or reverse
repo, is a financial transaction in which the central bank or other financial institution

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sells securities (such as government bonds) to a commercial bank or other financial entity with an
agreement to repurchase them at a later date. It is essentially the opposite of a repurchase
agreement (repo).

When a reverse repo occurs, the central bank drains liquidity from the banking system, reducing the
amount of money in circulation. This operation decreases the money supply by temporarily
removing funds from the banking system and placing them with the central bank. Reverse repos are
commonly used by central banks as a tool for monetary policy to control inflation and manage
liquidity in the economy.

Q-33) Bank for International Settlements (BIS): The Bank for International Settlements (BIS) is an
international financial institution that serves as a bank for central banks. Established in 1930, the BIS
is headquartered in Basel, Switzerland, and acts as a forum for central banks to exchange
information, collaborate, and cooperate on matters related to monetary and financial stability.

The primary objectives of the BIS include promoting monetary and financial stability globally,
fostering international cooperation in the financial sector, and acting as a bank for central banks by
providing financial services and serving as a platform for central bank transactions. The BIS also
conducts research on various economic and financial topics and publishes reports and analyses to
contribute to the understanding of global economic and monetary issues.

Q-34) Money as a store of value: Money serves as a store of value when it can be saved and
retained for future use or purchases. A store of value is an essential function of money alongside its
roles as a medium of exchange and a unit of account.

For money to effectively act as a store of value, it should maintain its purchasing power over time.
Inflation can erode the value of money, reducing its ability to store wealth. Therefore, stable
currencies or assets that retain value over time are generally preferred for long-term storage of
wealth.

Individuals and businesses often use various means to store value, such as holding money in bank
accounts, investing in stocks, bonds, real estate, or other assets. The choice of a store of value
depends on factors like risk tolerance, inflation expectations, and the liquidity needs of the
individual or entity.

Q-35) Difference between Islamic banking & Traditional banking: Islamic banking, also known as
Sharia-compliant banking, operates based on the principles of Islamic law (Sharia). It differs from
traditional banking in several ways:

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1. Prohibition of Interest (Riba): Islamic banking avoids interest-based transactions as interest is
considered exploitative. Instead, Islamic banks offer profit-sharing arrangements and participate in
business activities alongside their clients.
2. Prohibition of Speculative Activities (Gharar): Islamic banking discourages speculative transactions
that involve excessive uncertainty or risk. Contracts should be based on tangible assets and real
economic activities.
3. Ethical and Social Responsibility: Islamic banking emphasizes ethical and socially responsible
investments. Investments in industries like alcohol, gambling, and pork-related products are
prohibited.
4. Sharing of Profit and Loss: In Islamic banking, profits and losses are shared between the bank and its
customers based on predetermined ratios or agreed-upon profit-sharing contracts. This encourages
a more equitable distribution of wealth.
5. Asset-Backed Financing: Islamic banking promotes financing based on real assets and tangible
transactions. It avoids purely speculative or interest-based transactions.

Q-36) Sukuk Bond and Its Advantages: Sukuk bonds are financial instruments that comply with
Islamic principles. They are similar to conventional bonds but operate within the framework of
Sharia law. Here are some advantages of Sukuk bonds:

1. Compliance with Islamic Principles: Sukuk bonds provide an investment option that is in accordance
with Islamic principles, allowing Muslim investors to participate in the financial markets without
compromising their beliefs.
2. Asset-Backed Nature: Sukuk bonds are typically asset-backed, meaning they represent ownership or
rights to specific assets or projects. This provides investors with a more direct link to underlying
assets, reducing risk.
3. Risk Diversification: Sukuk bonds can offer diversification opportunities in an investment portfolio.
They are available across various sectors and industries, providing investors with exposure to
different asset classes.
4. Long-Term Financing: Sukuk bonds often involve long-term financing arrangements, making them
suitable for infrastructure projects or capital-intensive ventures that require stable funding over an
extended period.
5. Potential for Stable Returns: Sukuk bonds can provide predictable and stable returns to investors.
The profit-sharing structure or rental income associated with the underlying assets provides a
regular income stream.
6. Increased Market Access: The issuance of Sukuk bonds enables Islamic financial institutions and
governments to tap into a broader investor base that includes both Muslim and nonMuslim
investors, thereby expanding their funding sources.

It's worth noting that the specific structure and features of Sukuk bonds can vary, and investors
should carefully review the terms and conditions of each issuance to understand the risks and
benefits involved.

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