Financial Market in Pakistan

A financial market is a place for buying and selling of financial securities such as stock and bounds.
Financial market facilitates the raising of capital (in the capital markets), the transfer of risk (in
the derivatives markets) and In matching those who want capital to those who have it.

Financial Market in Pakistan consists of following

 Money Market which provides short term funds.

 Capital Market which makes long terms funds available to businesses and industries.

The Financial market can be reclassified into two categories.

 Primary Market in which new shares or bonds are issued.

 Secondary Market in which securities previously issued are traded such as Shares, Bonds,
Commercial Papers, Options and Mutual Fund.

The banking sectors and non-banking sectors are regulated by the central bank, State Bank of
Pakistan. While rest of the market (lease, stock exchanges, modarabas, mutual funds and
insurance) is regulated by Securities and Exchange Commission of Pakistan.

FINANCIAL MARKETS AND THEIR ROLES:

COMMERCIAL BANKS

A type of bank providing checking and saving accounts, credit cards and business loans. Such a
bank induces public to deposit their savings in the banks and offers a wide range of services such
as:

 Deposit Mobilization
 Money transfer
 Financing working capital
 Financing other trade related mode (import and export)
 Investing in government securities
 Call money operations

These banks are of three categories: Public Sector Banks, Private Bank and Foreign Banks.
LEASE -FINANCE EQUIPMENT INVESTMENT BANKS

Investment banks perform a variety of functions. Primarily, they assist corporations to raise equity-
capital by underwriting the public issues. They also assist companies desiring of mergers and
acquisition and derivatives. In addition, they provide services like trading of derivative, foreign
exchange, fixed income instruments and shares listed on the stock exchanges. Such banks cannot
take deposits. They manage their affairs by charging fees such as retainer fee, advisory fees based
on the transactions, commission on underwriting and other financial services.

DEVELOPMENT BANKS

These banks provide guidance in selection of industrial units and extend direct financial assistance
to partly cover their financial requirements. Also, they engage themselves in promotional activities
to attract investors towards neglected sectors through publishing brochures and research papers.
Besides, they help in assessing feasibility of potential projects. Such banks are responsible for
speeding up the pace of economic growth in the country in conformity with the national objectives,
plans and priorities. Their core functions are:

 Direct financial assistance

 Catalytic function
 Mobilization of domestic savings
 Ensuring balance regional and industrial growth
 Expanding entrepreneurial base by encourage new comers

At one time, there were 14 Development Banks in Pakistan. However, most of them have been
closed one after another as their bad debts mounted up. It is natural as they take substantial risks
in promoting new types of industrial projects in underdeveloped areas sponsored preferably by
new-comers. Nevertheless, their contribution brings fruits to the economy in the shape of
successful industrial units and transfer of technology. At present, 8 development banks are
operating which mostly are joint-venture with other Islamic Countries.

MICROFINANCE BANK

A microfinance bank would cater to the credit needs of poor households and their small enterprises.
Thus, microfinance bank provide credit to those poor who are not considered creditworthy by the
commercial banks and other financial institutions. On the other hand, the microfinance bands
recognize every single human being as a potential and creditworthy entrepreneur. In addition, they
provide basic training in start of a small business, simple book-keeping and accounting. The main
aim of microfinance institutions is alleviation of poverty through helping poor persons to earn
some money especially the women.
ISLAMIC BANKS

In Islam, it is prohibited to charge interest on any loan. However, it is acceptable to pass on funds
to a needy person or corporation for trade purpose in which case profit could be shared on an
agreed basis whereas loss should be shared according to the funds invested. Besides, there are
certain businesses where any form of deal is forbidden like alcohols and pork. Accordingly,
Islamic bank refer to a banking activity which is consistent with the Sharia, the Islamic Laws.
Otherwise, there is no difference between the traditional banks and the Islamic bank.

DISCOUNT HOUSES

These are firms which buys and discounts bills of exchange, banker’ acceptance, commercial
paper, etc. Discount houses also tender for treasury bills, deal in short-dated government bonds,
and are an important part of the short-term money markets.

INSURANCE COMPANIES

Insurance is a hedge against the risk of a contingent and uncertain loss. In other words, it is the
equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. For
this service, the insurer charges a fee called premium depending upon the risk involved. Besides
traditional insurance companies, there are many Islamic insurance companies in Pakistan known
as Takaful operators. Takaful is an Islamic insurance concept based on mutual co-operation,
responsibility, assurance, protection and assistance between groups of participants. These
companies believe in promoting the cause of Takaful as well as promoting the insurance business
in a Shariah Compliant i.e. halal and Riba-Free insurance.

STOCK EXCHANGES

Stock exchange is a place where securities are bought and sold. Such securities include shares,
derivative, unit trusts and bonds. It also provides facilities for the issue and redemption of
securities. Prices of shares and bonds are influenced by their demand and supply like in other
commodities. To list a security on the stock exchange, there are certain requirements. Transactions
in the stock exchange are conducted by members only. Stock exchange serves both as a primary
market for the initial public offerings and as a secondary market for their subsequent buying and
selling Investors are not bound to sell stock or bond through the stock exchange. They can directly
deal with the seller. Similarly, there is no compulsion that stock must be traded on the exchange.
The securities can change ownership out of the exchange which is called ‘over the counter” or
“curb dealings.”
LEASING

It is a contract where owner of an asset agrees to allow someone to use it for a fixed rental. It can
be for fixed or indefinite period. It is a binding contract which sets out terms of lease agreement
between the owner and the user. Leases are of various types mainly the financial lease and an
operating lease. The financial lease is long-term and non-cancellable contract where the user
assumes some of the risks of ownership and has the right to keep the assets or get it transferred to
its own name after fulfilling the necessary conditions. In operating lease, the owner transfer only
the right to use the assets which is returned at the end of the lease. There are some other types
especially in the aircraft industry like wet lease and dry-lease and. In wet lease, a company agrees
to provide an aircraft along with pilot and crew and would be responsible for the maintenance of
the aircraft. Dry lease, on the other hand, refers to leasing only the aircraft.

MODARABA

If is a form of partnership which has two distinct parties the financier and the manager. The
financer takes no part of management of the business. The profits are distributed among the
subscriber while the manager is paid the usual salary. Modaraba is one the modes of Islamic
finance. It is like mutual fund minus its un-Islamic features. Not only in Pakistan, the Islamic
financial services industry has witnessed a phenomenal growth all over the Islamic world. The
Modaraba Sector has been able to create a market niche for itself in the corporate sector. This
model is enjoying a unique recognition due to its well-designed structure with proper rules and
regulations defined by the regulators. It has proved its resilience in this time of global financial
turmoil.

MUTUAL FUND

It is a professionally managed type of pooled investment for acquiring securities like stocks, bonds,
marketable securities and commodities. The profit is distributed by way of dividend to all
investors. Financial market in Pakistan experienced boom conditions in1991 due to liberalization
policies of the government. There was a manifold increase in the number of listed companies;
number of commercial banks, local and foreign and financial instruments like commercial paper.

But it has still to develop and many suggestions have been made the public sector should reduce
its dependence on State Bank of Pakistan. The infrastructure projects should be financed through
domestic bonds of longer maturities (10-20 years). The financial sectors (capital markets, micro
credit, banking and non-banking sector) should have a better and more clearly delineated division
of responsibilities. Foreign institutional investors should be encouraged to take up private equity
funds, private pension funds, provident and gratuity funds and Real Estate Investment Trusts.
Mortgage financing should be encouraged.