Financial System of Pakistan

Financial System of Pakistan The financial system in Pakistan has emerged over the years in response to government planning  processes and economic growth for the development of the country. This system, being headed  by the Central Bank (State Bank of Pakistan (SBP), iscomposed of Commercial Banks and a mix of Non-Bank Financial Institutions (NBFIs) including Development Financial Institutions (DFIs), Investment banks, housing finance companies, leasing companies, modarabas and mutual funds, brokerage houses and insurance companies. Three Stock Exchanges at Karachi, Lahore and Islamabad are also a part of Financial System in Pakistan. State Bank of Pakistan being responsible for the monetary policy also regulates Commercial banks and DFIs. Rests of the institutions are being supervised by Securities and Excha nge Commission Commission o f Pakistan (SECP).

ROLE OF BANKS IN FINANCIAL SYSTEM Banks play an important role in financial syste m of any country there are some specific functions that banks perform in a financial system. These are; y

Delegated

Monitoring

The banks taking money fro m the lenders regularly monitor the borrowers to ensure if he/she is investing that loan properly, because if banks do not monitor the borrowers, they are unable then to pay the fixed returns to lenders. y

Growth

of economy

Banks play an important in growth of economy in such a way wa y that there is always the availability of loans in banks for industries and when t his loan is used for industries, it benefits the country. In other words, we can say with t he banking system, a country beco mes more industrialized if  the loan is being used properly. pro perly.

y

Risk Sharing and Banking Crises

The banks provide inter-temporal smoothing of risk that cannot be diversified at a given point in time as well as insurance to depositors against unexpected consumption shocks. Because of the maturity mismatch between their assets and liabilities, however, banks are subject to the  possibility of runs and systemic risk. y

Banks and Economic Crises

Financial shocks at lower extend that affect specific areas may spread through t he interlinkages of other financial institution to the whole financial system and finally results in a larger  economic Crises. y

Relationship Banking

This role of Banks has dual impact. If on the one hand, close and durable relationships provide  better access to firms and ameliorate some o f the information problems characterizing lending relationships, on the other hand, they also involve inefficiencies related to the ho ld-up and the soft-budget-constraint problems. y

Banks also play an important role in corporate governance

Financial Markets in Pakistan Financial Markets in Pakistan consists of two markets. y

MONEY MARKET: It provides short term funds

y

CAPITAL MARKET: Makes long term funds available to businesses and industries

The Financial markets are further classified into; y

PRIMARY MARKET: In this new shares or bonds are issued and,

y

SECONDARY MARKET: In this securities previously issued are traded such as Shares,

Bonds, Commercial Papers, Options and Mutual Fund.

Financial Intermediaries in Pakistan The financial intermediary sector of Pakistan is composed o f the money market and capital markets, with primary and secondary dealers.Financial intermediaries of Pak istan include: y

Commercial Banks

y

Deposit institutions

y

Credit unions

y

Financial advisor or broker 

y

Pension funds

y

Insurance companies