Primary Dealership in Bangladesh

Submitted To Submitted By
Ms. Syeda Mahrufa Bashar GROUP 11
Assistant Professor Farah Naz Aditi; RH-84
IBA, University Of Dhaka. Nahian Iftekhar Alam; ZR-108

Khondokar Mashuk Ibn Mahfuz; ZR-109

Tasviha Taher Trishila; RH-117

Munzareen Kazi; RH-121

Date of submission: March 8, 2018

Introduction
In the context of Bangladesh, Primary Dealers are financial institutions (banks or NBFIs) who
are licensed to trade T-bills and government securities, mainly treasury bonds directly with the
Central Bank on a first hand basis. At present, there are 20 primary dealers in Bangladesh.
Bangladesh first started appointing primary dealers in 2003 with a view to creating and
activating secondary market in T-bills and government securities. Prior to 2013, primary dealers
were appointed on a voluntary basis, allowing banks who wanted to act as primary dealers to
apply to Bangladesh Bank for license. However, after 2013 the government imposed primary
dealership on the newly started nine commercial banks (Islamic Shariah based banks received
waiver) as a condition to get the permission to operate as a bank.

1. Janata Bank Ltd 2. Mutual Trust Bank Ltd

3. Agrani Bank Ltd 4. Jamuna Bank Ltd
5. Sonali Bank Ltd 6. Midland Bank Ltd NRB Bank Ltd
7. NCC Bank Ltd 8. NRB Commercial Bank Ltd
9. Uttara Bank Ltd 10. South Bangla Agriculture & Commercial Bank Ltd
11. Southeast Bank Ltd. 12. NRB Global Bank Ltd
13. Prime Bank Ltd 14. Modhumoti Bank Ltd
15. National Bank Ltd 16. The Farmers Bank Ltd.
17. AB Bank Ltd. 18. Meghna Bank Ltd.
19. Mercantile Bank Ltd 20. Mutual Trust Bank Ltd
Table 1: List of Primary Dealers

Collection of Data
Modhumoti bank being one of those nine newly started bank currently performs the
responsibilities as a primary dealer. The group interviewed the Head of Treasury Department at
Modhumoti bank for a thorough understanding of Primary Dealership in Bangladesh and the
benefits and challenges assosciated with it. The data presented in this report is a reflection of
both the interview and various secondary sources.
Objectives of Primary Dealership
All activities and responsibilities of primary dealers will be aimed at fulfilling the following
objectives.

1. To enhance liquidity and depth in the securities market by facilitating price discovery and
turnover, encouraging voluntary holding of government securities amongst a wide investor base.

2. To develop underwriting and market making capabilities for government securities amongst
the market participants.

3. To facilitate efficient liquidity management, and open market operations of monetary policy
management. (Bangladesh Bank Circulars, 2003)

Responsibilities of a Primary Dealer

Primary market
Every year the government usually faces a budget deficit. It is the responsibility of the Ministry
of Finance to finance the deficit and ensure the smooth functioning of government development
and current expenditures. The Ministry of Finance directs the Bangladesh Bank to work as an
underwriter and collect the money required to fulfill the budget requirement from financial
institutions through issuance of T-bills and treasury bonds. This is where Primary Dealers are
required. Primary Dealers are licensed to buy or sell those T-bills or treasury bonds issued by the
Central Bank to meet the budget deficit directly through an auction.

This is how a primary dealer performs its responsibilities in the primary market by regularly and
actively participating in all primary auctions and issues of Treasury bills and tradable securities,
with bidding commitment for a minimum specified percentage of the primary issues of Treasury
bills and underwriting commitment for a minimum specified percentage of primary issues of
dated Government securities over a year.

Other commercial banks and Non-Bank Financial institutions, Insurance companies, corporate,
individuals, provident fund etc. can also participate in auction through Primary Dealers. The
auction is held online on a screen on the Bangladesh bank website where the Primary Dealers bid
the coupon rate (discount rate) and the price of the bond. Banks usually participate in
competitive bidding while institutions and insurance companies place non-competitive bids
through the primary dealers.

The Primary Dealers are required to maintain success ratios (successful bids: allotted targets) of
40 percent or higher in bids over a year. A Primary Dealer has to, if asked for by the BB,
subscribe in any issue over and above its successful bid but within its minimum bidding or
underwriting commitment, at the weighted average yield of the accepted bids for auctioned
issues, and at par in case of fixed par issues.

A Primary Dealers has to acquire a sizeable portfolio of Treasury bills and Government
securities substantially in excess of its own SLR within the first year of operation as PD. The
Primary Dealers shall actively engage in secondary trading, quoting firm two-way prices and
keeping its trading window open throughout each business day. An annual turnover (total
purchases and sales, inclusive of redemptions at maturity) not less than ten times the average of
month-end stocks of Treasury bills and Government securities over the year is to be attained and
maintained. (Bangladesh Bank Circulars, 2003)

Secondary market
The main responsibility of the Primary Dealers is the creation and control of the secondary
market mainly the market for bonds. Primary Dealers buy or sell treasury bonds to other banks or
institutions as well as individuals. Commercial Banks usually purchase such treasury bonds to
maintain their SLR while individual investors are more interested in Sanchaypatras than bonds as
a medium of investment. (Financial System, 2018)

Benefits of Primary Dealership

1) A Primary Dealer receives a .035% underwriting commission on T-bills and .085% on
treasury bonds.
2) A Primary Dealer shall have the credential of a sub-depository of Treasury bills and
Government securities, for custodial services to its customers.
3) Between bids at the same yield/price for an issue in a primary auction, the bid of a
Primary Dealer will rank higher in priority for acceptance than those of other bidders.
 4) A Primary Dealer shall be eligible for liquidity support from the BB for its operations,
collateralized by Treasury bills and Government securities from its own positions,
through the repo mechanism or such other arrangements as the BB may prescribe from
time to time. (Bangladesh Bank Circulars, 2003)

Challenges
Market Infrastructure
One of the major challenges of primary dealership in Bangladesh is that Bangladesh’s secondary
market is still underdeveloped. Although one of the key objectives of secondary market creation
or starting of primary dealership was to facilitate buying of treasury bonds by individual
investors, this did not occur due to lack of financial literacy, awareness and the increased hassle
of dealing in bonds. People are more interested to invest in “Sanchayapatra” due to ease of
handling and processing.

Lack of Interest from Directors

The bank management usually has to take permission from the directors in case of buying a
bond. The problems lies with the fact that directors are usually less interested to invest in bonds
and rather prefers to invest in personal industrial facilities or long term manufacturing plants thus
making efforts for the efficient running of the secondary market futile.

Lack of Financial Acumen

The lack of depth of knowledge of the bankers or primary dealers in general is also a hindrance
in the smooth functioning of the market in general. The bids are often set arbitrarily without
proper financial engineering or research into matters such as sovereignty, collapse rate etc.,
which results in bids, which tend to push the market towards destabilization.

Low Profit
The profit that banks usually gain from dealing with treasuries is usually much less than that
obtained from the interest payments earned from consumer or business loans. Therefore, banks
devote most of their efforts and attention in loan products rather than the treasuries.
Reliance on CMR
Another major observation is that, unlike most other banks in foreign countries whose one of the
major reasons for buying treasuries is to help them with repurchase agreements, banks in
Bangladesh rely mostly on demand loans for their short term needs which are lent without any
collateral on the basis of CMR (call money receipt) and treasuries are mostly bought just to
maintain the SLR account.

Interest Rate Risk

Although treasury securities do not have default risk, they are still susceptible to associated
interest risks. During a period of soaring interest rates, even if a primary dealer does not have the
capability to purchase the treasury securities offered by the government, they would have to do
so if the Bangladesh Bank makes it mandatory. This results in borrowing from other banks at
high interest rates by repos, thus causing interest loss.

Negligible Commission for Cash Management Services

Primary dealers offer cash management services by helping small investors to buy bonds. The
commission, if any, for these services is negligible. They offer these services out of their sense of
social responsibility. While the sentiment is admirable, the lack of income may be a reason for
the banks' lackluster attitude towards offering these services.

Overall, the market infrastructure is comparatively poor in Bangladesh and primary dealership is
not very lucrative for banks in here, most of the banks unwillingly take on this responsibility by
the order of Bangladesh Bank.
References

Primary Data
All primary data was collected by interviewing Mr. Syed Abdur Rahman, Senior Executive Officer at
Modhumoti Bank Limited.

Secondary Data
Bangladesh Bank Circulars. (2003, July 29). Retrieved from Bangladesh Bank:
[Link]

Financial System. (2018). Retrieved from Bangladesh Bank:

[Link]