Contents ECONOMY OF PAKISTAN: PAKIST AN: ........................ ........................... ....................................................... ...................................................... ......................................... ............... 2
FINANCIAL ASSETS ARE INVESTOR FOR THE PURPOSE OF....................................................................................... 2 OVERVIEW OF FINANCIAL MARKET OF PAKISTAN: .......................... .................................................... ...................................................... ........................................... ............... 3 CAPITAL MARKET: ........................................................................................................................................ 3 MONEY MARKET: ........................................................................................................................................ 4 MONEY MARKET MUTUAL FUNDS: ............................... ....................... ................................ ...................... ...... 9 TYPES OF MONEY MARKET MUTUAL FUNDS ...................................................................................................... 9 SPECIAL FEATURES OF MONEY MARKET MUTUAL FUNDS ........................................ ERROR! BOOKMARK NOT DEFINED. THE FOREIGN EXCHANGE MARKET................................................................................................................... 9
FINANCIAL MARKET OF PAKISTAN
Economy
of Pakistan:
The economy of Pakistan is the 27th largest economy in the world in terms of purchasing power, and the 48th largest in absolute dollar terms. Pakistan has a semi-industrialized economy, which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. Growth poles of Pakistan's economy are situated along the Indus River, diversified economies of Karachi and Punjab's urban centers; coexist with lesser developed areas in other parts of the country. T he economy has suffered in the past from decades of internal political disputes, a fast-growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies, bolstered by foreign investment and renewed access to global markets, have generated solid macroeconomic recovery the last decade. S ubstantial macroeconomic reforms since 2000, most notably at privatizing the banking sector have helped the economy.
Financial
assets are investor for the purpose of
(i) Generating Income (ii) Satisfying Transaction Requirements. The balance sheet restrictions can be derived by summing Equation Quarterly data on holdings of five types of financial assets, a) b) c) d) e)
Saving deposits, Fixed deposits, Khas deposit certificates (KDCS), National deposit certificates (NDCS), Defence saving certificates (DSCS),
Overview of financial market of Pakistan: Markets for sale and purchase of stocks (shares), bonds, bills of exchange, commodities, foreign currency, etc., which work as exchanges for capital and credit in known as financial market. OR A financial market is a process that allows people to easily buy and sell financial securities, commodities items of value at low transaction costs and at prices that reflect efficient markets. Pakistan Financial market comprise of
1. Capital Market. 2. Money Market, 3. Forex Market (foreign exchange),
Capital Market:
The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded. Financial instruments traded in the capital market include shares, and bonds. Capital markets, and especially the stock markets in Pakistan, have come a long way over the last decade. Since 1991, when the boom first resulted from the liberalization policies of the government at the time, we have seen many major developments such as a manifold increase in the number of listed companies and the traded volumes, introduction of automated trading and settlement systems on the pattern of the world's modern stock exchanges, as well as intensifying competition for the business evident from the quality of research being published and distributed.
As the workings of capital markets in Pakistan are gradually exposed to the market forces, the impact of various instruments of monetary policy will assume greater significance. In the emerging scenario the effectiveness of monetary policy will largely depend on the growth of non-bank financial intermediaries,
the determination of interest rates, and the substitutability between money and other assets. The money demand function has been fr equently estimated for Pakistan. The substitutability of monetary assets under alternate aggregation procedures is investigated. We supplement the above research by studying the determinants of financial assets and quantify intra-assets substitutability within a system-wide portfolio framework. Stock exchange:
The place where bonds and stocks are exchanged. Its basic function is to enable public companies, governments and local authorities to raise capital by selling securities to investors. Presently, in Pakistan there 3 markets, mainly in Karachi. Stock Exchange in Pakistan:
In Pakistan there are three Stock Exchanges where we can invest through br oker.. 1. Karachi Stock Exchange (KSE) 2. Lahore Stock Exchange (LSE) 3. Islamabad Stock Exchange (ISE) Money Market:
A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, Treasury bills, and repurchase agreements (repos), etc. B anks:
An organization that provides various financial services, for example keeping or lending money is known as bank. There are two types of bank 1. Central bank 2. Commercial bank
Central bank:
A government monetary authority that issues currency and regulates the supply of credit and holds the reserves of other banks and sells new issues of securities for the government. Function of Central Bank
In the monetary and banking setup of Pakistan, central bank occupies central position and perhaps, it is because of this fact that this called as the central bank. In this way, this bank works as an institution whose main objective is to control and regulate money supply keeping in view the welfare of the people. Central bank is an institution that fulfills the credit needs of banks and other credit institution, which woks as banker to the banks and the government and which work for the economic interest of the country. Monopoly of note issue
Note issue primarily is the main function of a central bank in every country. These days, in all the countries where there is a central bank generally it has got the monopoly of the sole right of note issue. In the beginning this was not the function of central bank, but gradually all the central bank gas acquires this function. Bankers, Agent and Adviser to the Government
As banker to the government, central bank provides all those service and facilities to the government which public gets from the ordinary banks. It operates the account of the public enterprise. It mangers government departmental undertaking and government funds and where there is a need gives loan to the government. From time to time, central bank advice the government on monetary, banking and financial matters. Custodian of Cash Reserve of Commercial Bank
Central bank is the bank of banks. This signifies that it has the same relationship with the commercial banks in the country that they gave with their customers. It provides security to their cash reserves, gives
them loan at the time of need, gives them advice on financial and economic matter and work as clearing house among various members bank. Custodian of Nations Reserve of International
Central bank is the custodian of the foreign currency obtained from various countries. This has become an important function of central bank. These days, because with its help it can stabilize the external value of the currency. Lender of the Last Resort
Central bank works as lender of the last resort for commercial banks because in the time of need it provides them financial assistance and accommodation. Whenever a commercial bank faces financial crisis, central bank as lender of the last resort comes to its rescue by advancing loans and the bank is saved from being failed. Clearing House Function
All commercial bank have their accounts with the central bank. Therefore, central bank settles the mutual transactions of banks and thus saves all banks controlling each other individually for setting their individual transaction. Credit Control
These days, the most important function of a central bank is to control the volume of credit for bringing about stability in the general price level and accomplishing various other socioeconomic objectives. The significance of this function has increased so much that for property understanding it. The central bank has acquired the rights and powers of controlling the entire banking. A central bank can adopt various quantitative and qualitative methods for credit control such as bank rate, open market operation, changes in reserve ratio selective controls, moral situation etc. Other Functions
Besides the 7 functions explained above, central banks perform many other functions that are as follows:
Collection of Data
Central banks in Pakistan collects statistical data regularly relating to economic aspects of money, credit, foreign exchange, banking etc. from time to time, committees and commission a reappointed for studying various aspects relating to the aforesaid problem Central Banking in Developing Countries like Pakistan
The basic problem of underdeveloped countries like Pakistan is the problem of lack of capital formation whose main causes are lack of saving and investment. Therefore, central bank can play an important role by promoting capital formation through mobilizing savings and encouraging investment. Commercial banks:
An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as savings, current and fixed deposit account. While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to businesses. Functions of Commercial Banks
The functions of commercial banks are divided into two categories:
A. Primary functions, B. Secondary functions including agency functions. Primary functions:
The primary functions of a commercial bank include: a) Accepting deposits; and b) Granting loans and advances;
a)Accepting deposits
The most important activity of a commercial bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank. b)Grant of loans and advances
The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of r epayment. The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a banks income. Secondary functions:
Besides the primary functions of accepting deposits and lending money, banks perform a number of other functions which are called secondary functions. These are a s follows a) Issuing letters of credit, traveler¶s cheques, circular notes etc. b) Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers. c) Providing customers with facilities of foreign exchange. d) Transferring money from one place to another; & from one branch to another branch of the bank. e) Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc f)
Collecting and supplying business information.
g) Issuing demand drafts and pay orders.
Money Market Mutual Funds:
A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free. Money market funds are generally the safest and most secure of mutual fund investments. Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered.
Types of Money Market Mutual Funds
Money market funds are of two types: 1. Institutional Money Market Mutual Funds:
2 . Retail Money Market Mutual Funds:
The Foreign Exchange Market
The foreign exchange market or forex market as it is often called is the market in which currencies are traded; people trade one country's money for another's. If, for example, you decide to travel to Thailand, you will need to buy some baths, the currency of Thailand, either before you go or once you get there. Though there is no physical existence of this market, the foreign exchange market is the largest financial market in the world, with its average daily traded amount reaching to US $2-2.5 trillion. The development of communication has helped the foreign exchange market more than any other field. The computerized communication network that embraces all the major financial centers of the world is the main trait of the foreign exchange market, where the buyers and sellers of any country can trade currency quickly and efficiently. The main players in the forex market are large banks, governments, central banks, multinational corporations, and currency speculators.
