Fixed versus Flexible Exchange Rates

What are the advantages and disadvantages of fixed exchange rates?

Exchange Rate

Fixed exchange rate: If the government of the country regulates the rates at which its currency is exchanged for other currencies, the system is called fixed exchange rate.

Flexible Exchange Rate: If the government of the country does not interfere in the valuation of its currency in any way, the exchange rate system is called flexible exchange rate.

Advantages of fixed exchange rate: The main arguments advanced in favor of the system of fixed or stable exchange rates are as follows:

1. Promotes International Trade
2. Necessary for Small Nations
3. Promotes International Investment
4. Removes Speculation
5. Necessary for Small Nations
6. Necessary for Developing Countries
7. Suitable for Currency Area
8. Economic Stabilization
9. Not Permanently Fixed

Disadvantages of Fixed Exchange Rates: The main disadvantages of the system of fixed or stable exchange rates are as follows:

1. Discourage Foreign Investment
2. Monetary Dependence
3. Cost-Price Relationship not Reflected
4. Not a Genuinely Fixed System
5. Difficulties of IMF System

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Overview of Bangladesh Capital Markets

Introduction

Overview of Bangladesh Capital Markets

Capital Market mainly refers to the Stock and Share market of the country. When banking system cannot totally meet up the need for funds to the market economy, capital market stands up to supplement it. Companies and the government can raise funds for long term investments via the capital market. The capital market includes the stock market, the bond market, and the primary market. Securities trading on organized capital markets are monitored by the government; new issues are approved by authorities of financial supervision and monitored by participating banks. Thus, organized capital markets are able to guarantee sound investment opportunities. This paper reveals the various aspects of the Capital Market in Bangladesh.

Definition

Capital market can be termed as the engine of raising capital, which accelerates industrialization and the process of privatization. In other words, capital market means the share and stock markets of the country. It is a market for long term fund.

Objectives

Capital market, being an essential element of today’s economy, demands an intensive and special attention. The objective of this study is to look into every aspect of Bangladesh capital market and identify its various pros and cons along with some recommendations to overcome the existing problems. The specific objectives of this study are:

• To give an overall idea about the capital market-its structures, functions, importance, etc.
• To identify the current situations of our capital market of Bangladesh.
• To compare the relative conditions of Bangladesh capital market to other countries of the world.
• To sort out the problems associated with our capital market.
• To suggest some practicable solutions to these problems.

Functions

The functioning of an efficient capital market may ensure smooth flotation of funds from the savers to the investors. When banking system cannot meet up the total need for funds to the market economy, capital market stands up to supplement. To put it in a single sentence, we can therefore say that the increased need for funds in the business sector has created an immense need for an effective and efficient capital market. It facilitates an efficient transfer of resources from savers to investors and becomes conduits for channeling investment funds from investors to borrowers. The capital market is required to meet at least two basic requirements: (a) it should support industrialization through savings mobilization, investment fund allocation and maturity transformation and (b) it must be safe and efficient in discharging the aforesaid function. It has two segments, namely, securities segments and non-securities segments.

Features of the Capital Market

1. Link between Savers and Investment Opportunities: Capital market is a crucial link between saving and investment process. The capital market transfers money from savers to entrepreneurial borrowers.
2. Deals in Long Term Investment: Capital market provides funds for long and medium term. It does not deal with channelizing saving for less than one year.
3. Utilizes Intermediaries: Capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These intermediaries act as working organs of capital market and are very important elements of capital market.
4. Determinant of Capital Formation: The activities of capital market determine the rate of capital formation in an economy. Capital market offers attractive opportunities to those who have surplus funds so that they invest more and more in capital market and are encouraged to save more for profitable opportunities.
5. Government Rules and Regulations: The capital market operates freely but under the guidance of government policies. These markets function within the framework of government rules and regulations, e.g., stock exchange works under the regulations of SEBI which is a government body.

Rules and Regulations

DSE follows following rules for conducting safe, efficient, and reliable stock trade in Bangladesh.
Listing Terms

• Listing Regulation 1999
• Direct Listing
• Process of Listing
• Settlement of Stock Exchange TR -98
• Automated Trading Regulations – 99
• Investors Protection Fund Regulation – 99
• Margin Rules – 99
• Members Margin Regulation – 2000
• DSE Board & Admin Regulation - 2000

Problems

Securities markets in Bangladesh encountered problems both from supply side issues and demand side issues. The status and development of Bangladesh stock market has to be examined when to diagnose the problems and perceive their causes. Some problems of the Capital Market of Bangladesh are mentioned below:

• Lack of infrastructure and physical facilities
• Existence of only dealer-broker-members (no specialist/market maker)
• Market dominated largely by unsophisticated investors
• Lack of diversity in products' availability in the market 
• Inefficient capital market—both operational and informational
• Lack of proper and adequate disclosures
• Certifiers of financial statements and property evaluators of the company are the same/identical
• Management and Owners (Councilors) of DSE are entwined
• Lack of enforcement with the compliance of rules and regulations
• Corporate governance—sponsor-owners are managing the firm. In al-most all cases, no professional managements are hired to run the affairs of the listed company.
• Lack of ethical orientation, education about capital & securities markets.
• Lack of trust, self-respect among interest groups. These are important preconditions for building up a healthy and investment friendly market atmosphere.
• Lack of potential securities and narrow options for the investors.
• Disclosure problem-inadequate disclosure, concealment of facts or some-times fabricated disclosures appear in the annual reports. 

Measures to Be Taken to Resolve the Problems

Capital market development is related with the financial deepening, which in turn, depends on effective financial intermediation as well as on the availability of a wide variety of financial instruments. So now a days in respect of socio economic condition in Bangladesh it is a burning needs to overcome or resolve the problem of capital markets. The following measures can be undertaken for the development of capital market:

• The listed companies that pay regular dividend should be given tax incentives and tax rebates as well.
• The mode of privatization of industries will be implemented through public issue of shares. This will deepen the securities market, diffuse ownership and bring in market disciplines.
• The government should off-load its equity holdings in SOEs and MNCs through stock market. This will improve the supply of securities in the market.
• Bond market needs to be developed. The implementation of government securities with medium-term and long-term maturities will also broaden the base of bond market.
• Establishment of a separate judicial security tribunal for dealing with cases related to securities market.
• Disclosure of information to the public in the fullest possible dissemination system can make the people aware about the latest situation.

Conclusion

In Bangladesh we have a capital market that is yet to be further nurtured to get the fruit out of it. Without doing this we cannot undergo heavy industrialization and other capital based development. We have various problems like the market has been suffering from inadequacy of good scripts. Out of around three thousands public companies, only two hundred and twenty have issued securities keeping` a large number away from the securities market. It is further observed that Government is still holding lion portion of many blue chip company shares. We must overcome these sort of problem to strengthen our capital market. Various methods and policies may be adapted regarding this, but the investors’ mindset is one of the most important thing that must be changed to ensure the development of the market. If we can strengthen the market properly, it is only then we can have a sound economy in terms of capital and related developments in our country.

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Determinants of Profitability for a Company

Determinants of Profitability Factors

Performance evaluation is the cumulative consideration of factors that may be representative indicators or appraisal of an individual or entity’s activity, or performance in reference to some standards over a period of time. It considers the degree of goal attainment, how items are measured, and what standards are to be applied. This is very easy to evaluate the performance of a company by watching simply the profitability. But by which this profitability is determined is the main concern for a company. For making easy to understand about the determinants of profitability I am going to describe some factors by which profit is determined.

1. SALES: Sales are an important factor in determining profitability. The return on sales ratio measures profits after taxes based upon the current year's sales. If sales numbers are high, a company is better prepared to handle adverse market conditions and economic downtrends. The gross profit margin is a measure of gross profit earned on sales. An effective sales strategy is essential in increasing a company's profitability.
2. PRICING: Price setting is a key factor in determining profit. Careful analysis is necessary in determining the correct pricing strategy for a company. A business owner must look at what competitors are charging and determine what prices he should charge to maximize profits. An important factor to consider in pricing strategy is determining what price customers are willing to pay for a product. Customers will pay more for niche products or services that are not readily available elsewhere. A business owner does not want to leave money on the table by undercutting the price charged for products and services.
3. EXPENSES: For a company to become profitable, income must exceed expenses. Expenses can be defined as the cost of resources used in the activities of a business. Profits for the company are determined by analyzing what is left over after expenses are subtracted from total revenue. Any cost-saving measures initiated by a company will bring expenses down and increase overall profitability.
4. MONOPOLY: The degree of competition a firm faces is important. If a firm has monopoly power then it has little competition, therefore demand will be more inelastic. This enables the firm to increase profits by increasing the price. However govt. regulation may prevent monopolies abusing their power e.g. the OFT can stop firms colluding (to increase price) Regulators like OFGEM can limit the prices of Gas and Electricity firm.
5. FASHIONABEL: The degree of competition a firm faces is important. If a firm has monopoly power then it has little competition, therefore demand will be more inelastic. This enables the firm to increase profits by increasing the price. However govt. regulation may prevent monopolies abusing their power e.g. the OFT can stop firms colluding (to increase price) Regulators like OFGEM can limit the prices of Gas and Electricity firm
6. ECONOMIC CONDITION: The State of the economy. If there is economic growth then there will be increased demand for most products especially luxury products with a high YED. For example manufacturers of luxury sports cars will benefit from economic growth but will suffer in times of recession.
7. ADVERTISING CAMPAIGN: A successful advertising campaign can increase demand and make the product more inelastic, however the increased revenue will need to cover the costs of the advertising. Sometimes the best methods are word of mouth. For example it was not necessary for YouTube to do much advertising.
8. SUBSTITUTES: Substitutes, if there are many substitutes or substitutes are expensive then demand for the product will be higher. Similarly complementary goods will be important for the profits of a company.
9. EFFICIENCY: The more efficient a company the more it will be able to earn profit. It will be able to produce product quickly and cost effectively. An efficient company can compete perfectly with the competitors by which they can increase profitability.
10. SPREAD: Spread is the difference between receiving and giving the amount of interest. For the banks spread is the most important factor for determining the profit. The more spread says the more profit earned by the bank.

The objective of this paper is to examine the factors that determine the profitability of a firm. This objective has been achieved thus far. The above factors say the profitability of a firm undoubtedly. There may have many other factors by which profitability can be determined. But I have tried my best to show the most important factors for determining the profitability of a company. I think after understanding the factors and watching them of any company we easily will be able to say about the profitability of a company. I mean they are very much helpful for determining the profitability for a company. 

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Example of Various Types of Basic Physical Abilities

Physical Abilities

Physical ability is defined as the ability to perform some physical act. It is generally determined through nutrition, exercise, and how much we rest. It permits or facilitates achievement or accomplishment, of some activity.

Physical abilities can be classified into nine categories. Practical examples of those nine types of physical abilities are as follows:

No.	Types of Physical Abilities	Example
01.	Dynamic Strength	The strength of a rickshaw puller is a nice example of dynamic strength. They use muscular force repeatedly and continuously for pulling the rickshaw.
02.	Trunk Strength	Trunk strength is used for lifting heavy load (i.e. a sack of 1000 kg rice).
03.	Static Strength	Static strength is to exert force on an object that we cannot move, the muscles stay the same length and it is useful for things like arm wrestling.
04.	Explosive Strength	People may use his explosive strength while breaking any door of a house, if required.
05.	Extent Flexibility	People use extent flexibility while lifting any object from ground to a higher place, which is above of his head.
06.	Dynamic Flexibility	People use dynamic flexibility while cycling.
07.	Body Coordination	Swimming is a good example of Body Coordination.
08.	Balance	We can also see balancing ability while cycling.
09.	Stamina	For a long duration and hard working game (i.e. football, marathon, long distance swimming, etc.) stamina is absolutely necessary.

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Factors Affecting Profitability of Commercial Banks

Profitability Factors of Commercial Banks

Determinant factors of bank profitability are separated to both internal factors which is controlled by bank management and external factors outside the control of management and under the condition of massive environment. The basic goal of any business and economic bank is profitability. Banks use all of their efforts to achieve the objectives and meet the economic needs of the community they serve and they are considered as one of the main tools of monetary policy in each country's economic system for on one hand gather small savings and wandering funds in the hands of the people and on the other hand in line with the implementation of economic policies and credit which has been set, direct the financial resources to steering the wheel of manufacturing and industrial sectors.

Over the past few years of the establishment of commercial banks, in addition to financial services for different activities it has been effort for increasing the profitability and less relied on government resources.

Bank Specific Variables

The bank-specific variables are selected by using some key drivers of profitability like earnings, efficiency, risk taking and leverage. Profitability is driven by the ability of a bank in generating sufficient earnings or in lowering operational cost, implying being more efficient. Furthermore, due to the special nature of banks, risk taking and leverage are also very important drivers for profitability. Theoretical academic literature suggests that there is a risk-return trade off, higher risks is associated with higher profits. Risk taking could relate to the quality of assets, liquidity of assets and to the capital structure of a bank. Hence, the following part of this particular section clearly presents the bank-specific variables that are used in this particular study.

 

The Profitability Factors

• Capital strength: The equity-to-asset ratio measures how much of bank’s assets are funded with owner’s funds and is a proxy for the capital adequacy of a bank by estimating the ability to absorb losses.
• Operational efficiency: Cost to income ratio shows the overheads or costs of running the bank, including staff salaries and benefits, occupancy expenses and other expenses such as office supplies, as percentage of income.
• Income diversification: The concept of revenue diversifications follows the concept of portfolio theory which states that banks can reduce firm-specific risk by diversifying their portfolios. Moreover, the decline in interest margins during the last decade has changed the traditional role of banks and forced them to search for new sources of revenue.
• Liquidity risk: Liquidity risk is one of the types of risk for banks; when banks hold a lower amount of liquid assets they are more vulnerable to large deposit withdrawals. Therefore, liquidity risk is estimated by the ratio of liquid assets to total assets.
• Size: There is consensus in academic literature that economies of scale and synergies arise up to a certain level of size. Beyond that level, financial organizations become too complex to manage and diseconomies of scale arise. The effect of size could therefore be nonlinear; meaning that profitability is likely to increase up to a certain level by achieving economies of scale and decline from a certain level in which banks become too complex and bureaucratic. Hence, the expected sign of the coefficient of bank size is unpredictable based on academic literature.
• Asset Quality: There appears to be a consensus that bank profitability is directly related to the quality of the assets on its balance sheet; that is, poor credit quality has a negative effect on bank profitability and vice versa. This relationship exists because an increase in the doubtful assets, which do not accrue income, requires a bank to allocate a significant portion of its gross margin to provisions to cover expected credit losses; thus, profitability will be lower. This was in line with the theory that increased exposure to credit risk is normally associated with decreased firm profitability. Indicating that banks would improve profitability by improving screening and monitoring of credit risk.

Industry-specific variables

This subsection discusses the industry concentration variable separately from bank-specific variables as far as this variable is to some extent external. That means managers cannot change the variable immediately like that of bank-specific variables.

Industry Concentration Level 

The SCP hypothesis states that a more concentrated sector favors bank profitability motivated by the benefits of greater market power. The efficiency theory explains the positive relationship between concentration and profitability as an indirect consequence of efficiency.

 

Macroeconomic variables

The macroeconomic control variables are external for banks‟ managers and uncontrollable. The growth of real gross domestic product and the inflation rate are selected as possible macro-economic variables that can affect bank profitability in this study.

• Real GDP growth: Poor economic conditions can worsen the quality of the loan portfolio, generating credit losses and increasing the provisions that banks need to hold, thereby reducing bank profitability.
• Inflation: Another important macro-economic condition which may affect both the costs and revenues of banks is the inflation rate (INFL).

This study examines the bank-specific, industry-specific and macro-economic factors affecting bank profitability.

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