AU-Financial Institutions and Markets

WEL COME
YOU ALL
IN THE SUBJECT OF
“FINANCIAL
INSTITUTIONS AND
MARKETS ”
BY
Malik Dilawar
Ex-Vice President, Sr. Training Manager, North
UBL, Islamabad, Pakistan
Tel:0092-51-2231537(Res.)
Cell: 0333-5187793
Email: malik.dilawar01@yahoo.com
Financial Institutions and Markets-
Over view of financial system
What is Financial Market?
• A financial market is a market in which
people trade financial securities, commodities, and
value at low transaction costs and at prices that
reflect supply and demand. Securities include stocks
and bonds, and commodities include precious metals
or agricultural products.
• The term "market" is sometimes used for what are
more strictly exchanges, organizations that facilitate
the trade in financial securities, e.g., a stock
exchange or commodity exchange. This may be a
physical location (like the NYSE, BSE, LSE, JSE) or an
electronic system (like NASDAQ).
Why Financial Market?
• Simple response is that a well-developed, smoothly

operating financial markets play an important role in
contributing to the health and efficiency of an economy.
There is a strong positive relationship between financial
market development and economic growth. Financial
markets help to efficiently direct the flow of savings and
investment in the economy in ways that facilitate the
accumulation of capital and the production of goods and
services. The combination of well-developed financial
markets and institutions, as well as a diverse array of
financial products and instruments, suits the needs of
borrowers and lenders and therefore the overall economy.
Why are financial markets and
institutions important?
• Financial markets play a critical role in the accumulation of
capital and the production of goods and services. The price
of credit and returns on investment provide signals to
producers and consumers—financial market participants.
Those signals help direct funds (from savers, mainly
households and businesses) to the consumers, businesses,
governments, and investors that would like to borrow
money by connecting those who value the funds most
highly (i.e., are willing to pay a higher price, or interest
rate), to willing lenders. In a similar way, the existence of
robust financial markets and institutions also facilitates the
international flow of funds between countries.
Does the financial system matter for
economic growth?
• In the financial system funds flow from those who have surplus funds to
those who have a shortage of funds, either by direct, market-based
financing or by indirect, bank-based finance. The former British Prime
Minister William Gladstone expressed the importance of finance for the
economy in 1858 as follows: "Finance is, as it were, the stomach of the
country, from which all the other organs take their tone."
• The financial system comprises all financial markets, instruments and
institutions. Some experts ask whether the design of the financial system
matters for economic growth. According to cross-country comparisons,
individual country studies as well as industry and firm level analyses, a
positive link exists between the sophistication of the financial system
and economic growth.
• A well-developed financial system should improve the efficiency of
financing decisions, favouring a better allocation of resources and thereby
economic growth.
The Financial Market/System-Purpose
Provides for efficient flow of funds from saving

to investment by bringing savers and
borrowers together via financial markets and
financial institutions.
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Basic components of the financial
system: Markets and institutions.
Financial System has the following three components:
1. Financial Instruments; means financial securities,
financial assets, claims on entity’s future income i.e.
bonds, shares, commercial papers, certificate of
Deposits and others.
2. Financial markets are markets where financial
instruments are traded. Trading in financial markets
mean buying and selling of the financial instruments.
There are many types of market classifications. Primary
and secondary market, money and capital markets,
foreign exchange market, commodity market etc. etc.
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Basic components of the financial
system: Markets and institutions.
3.Financial institutions (also called financial
intermediaries) facilitate flows of funds from savers
to borrowers. Financial institutions channelize
funds from those who have surplus money known
as surplus units and provides to neediest known as
deficit units. Here funds means financial resources.
Financial institutions buys and sells the financial
instruments and plays the role of intermediation on
their customer’s behalf. Financial institutions
generate handsome profit through the
intermediation activities.
FINANCIAL SYSTEM
The word "system", in the term "financial
system", implies a set of complex and closely
connected or interlined institutions, agents,
practices, markets, transactions, claims, and
liabilities in the economy.
The financial system is concerned about
money, credit and finance-the three terms are
intimately related yet are somewhat different
from each other
Five Segments of Financial System
1. Money
2. Financial Instruments
3. Financial Markets
4. Financial Institutions
5. Central Bank
1. Money
• To pay for purchases
• To store wealth
• Evolved from gold and silver coins to paper money to today’s electronic funds
transfers
• Traditional Paycheck system vs. ATM Withdrawals
• Mailed transactions vs. E-banking
2.Financial Instruments
• To transfer wealth from savers to borrowers
• To transfer risk to those best equipped to bear it.
• Once investing was an activity reserved for the wealthy
• Costly individual stock transactions through stockbrokers
• Information collection was not so easy
• Now, small investors have the opportunity to purchase shares in “mutual funds.”
3.Financial Markets
• To buy and sell financial instruments quickly and cheaply
• Evolved from coffeehouses to trading places (Stock exchanges) to electronic networks.
• Transactions are much more cheaper now
• Markets offer a broader array of financial instruments than were available even 50 years ago
.
4.Financial Institutions
• Provide access to financial markets
• Banks evolved from Vaults and developed into deposits- and loans-agency
• Today’s banks are more like financial supermarkets offering a huge
assortment of financial products and services for sale.
• Access to financial markets
• Insurance
• Home- and car-loans
• Consumer credit
• Investment advice
5.Central Banks
• Monitors financial Institutions
• stabilizes the Economy
• Initiated by Monarchs to finance the wars
• The govt. treasuries have evolved into the modern central bank
• control the availability of money and credit in such a way as to ensure:
• low inflation,
• high growth, and
• The stability of the financial system
Structure of State Bank
and its role in Economic
System.
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Structure of State Bank and its role in
Economic System.
The governance framework of State Bank of Pakistan (SBP) is specified in the
State Bank of Pakistan Act, 1956 amended at times to make it more
autonomous. The Act provides for an independent Central Board of Directors
and empowers it with general superintendence and direction of affairs and
business of the Bank. The governor is the chairperson of the Central Board
and manages the affairs of the Bank on its behalf. Except for the governor, all
directors of the Central Board are non-executive. The committees constituted
by the Central Board comprise non-executive directors and representatives
from the management. They carry out comprehensive review and analysis of
the various proposals before these are taken to the Central Board. There are
also some management committees to deliberate upon the issues before
taking any decision on them, including Corporate Management Team (CMT)
which is the apex management committee.
Economic System.
Central Board of Directors
The Central Board of Directors consists of the governor, secretary finance and seven
non-executive directors, including one director from each province, nominated by the
federal government ensuring representation from Agriculture, Banking and Industrial
sectors. The diversified and rich experience of the directors provides an appropriate
balance of expertise and views on a range of issues affecting the strategic direction of
the Bank. The directors of the Central Board hold office for three years, and are
eligible for re-nomination on the expiry of their tenure.
As provided in the State Bank of Pakistan Act, 1956, the Central Board formulates and
monitors Monetary and Credit Policy, determines and enforces the limits on borrowing
from the central bank by the federal and provincial governments. It also tenders
advice to the federal government on interaction of monetary and fiscal exchange rate
policy, analyzes and advises on the impact of various policies on the state of the
economy and discharges such other functions as may be necessary for formulating
monetary policy and regulating the monetary system of the country.
Economic System.
To assist the Central Board of Directors, following
committees are constituted:
i) Committee on Audit
ii) Committee on Investment
iii) Committee on Building Projects
iv) Committee on Human Resources
v) Committee on Monetary and Credit Policies
Financial Sector of Pakistan
State Bank of Pakistan SECP
Banks (51) Stock Exchanges
DFIs (8) Leasing Cos.
NCBs(2) DNC Bs(4) Mutual Funds Modarba Cos
Listed Brokrage
Private Banks Foreign Banks ICP’s Private Sector
Houses
(21) (6)
Life Insurance General Ins.Cos
Provincial-owned Specialized Banks
(4) Cos.
Banks (3)
NBFIs
Micro- Finance Banks(11)
Investment Banks HFCs DHs Vent. Cap.co.

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Organizational Chart of Banking
Supervision
Executive Director
Director Director Direcrtor Director

Banking Policy Department Banking Supervision Department Banking Inspection Department Islamic Banking Department
Senior Joint Director(s) Senior Joint Director(s) Senior Joint Director(s)
Joint Director(s) Junior Joint Director (s) Joint Director(s) Junior Joint Director(s) Joint Director(s) Junior Joint Director(s)
Divisional Head Divisional Head Divisional Head Divisional Head Inspection In-charge Inspection In-charge
Assistant Director(s)/ Assistant Director(s)/ Assistant Director(s)/ Assistant Director(s)/ Assistant Director(s) Assistant Director(s)
officer(s) officer(s) officer(s) officer(s) officer(s) officer(s)
Unit In-charge Unit In-charge Unit In-charge Unit In-charge
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Economic System.
• The State Bank of Pakistan, since its inception,
has been making relentless efforts with
sincerity and honesty for the development of
the country's economy. The banking industry
has made significant progress in recent years
and the State Bank has taken a number of
measures ensuring that people at large reap
the benefits of economic growth,
sustainability of growth momentum and
competitive environment
Over view of Banking Industry in
Pakistan
List All banks Working in Pakistan;
Public Sector Bank (Both federal and provincial)
. National Bank of Pakistan
- First women Bank
. The Bank of Punjab
. The Bank Of Khyber
. The Sindh Bank
Specialized Bank
. Industrial Development Bank
. Zarai Taraqiati Bank Limited[1]
. Punjab Provincial Cooperative Bank
. SME Bank
Private Banks
• Allied Bank Limited • MCB Bank Limited
• Summit Bank • My Bank
• Bank Alfalah • NIB Bank Pakistan
• Bank AL Habib • Royal Bank of Scotland
• Faysal Bank Pakistan
• Habib Bank Limited • Standard Chartered Bank
• Habib Metropolitan Bank Pakistan
• Habib Bank AG Zurich • Soneri Bank
• JS Bank • Silkbank Limited
• United Bank Limited
Development Financial Institution;
.Pak China Investment Company Limited
. Pak Kuwait Investment Company Limited
.
Pak Libya Holding Company Limited
.Pak Iran Joint Investment Company Limited
.Pak-Oman Investment Company Limited
.Saudi Pak Industrial and Agricultural Investment Company
Limited, Islamabad
. House Building Finance Corporation
. Investment Corporation of Pakistan
. Pak Brunei Investment Company Limited
Micro and Islamic Banks
Microfinance Banks
1. . NRSP Micro Finance Bank Limited
2. . The First Micro Finance Bank Limited
3. . Khushali Bank Limited
4. . Karakuram Bank
5. . Pak Oman Micro Finance Bank
6. . Rozgar Micro Finance Bank, Karachi
7. . Tameer Microfinance Bank Limited
8. . FinCa Microfinance Bank Limited
9. . Apna Microfinance Bank Limited
10. - U microfinance bank Limited
11. - Mobil microfinance bank Limited
Islamic Banks
. Meezan Bank Limited-Premier Islamic Bank In Pakistan
. AlBaraka Islamic Bank (Merged into Al Baraka Bank (Pakistan) Limited[11])
. BankIslami Pakistan Limited
. Dubai Islamic Bank Pakistan limited
. Dawood Islamic Bank Limited
Other Financial Institutions
. Trust Investment Bank Limited
. JS Investment Bank Limited
. Atlas Investment Bank Limited
. First Credit & Discount Corp Limited
. National Discounting Services Limited
. Asian Housing Finance Limited
. Citibank Housing Finance Company Limited
. House Building Finance Corporation
Functions of Central Bank
• Traditional Functions
Primary Functions
Secondary Functions
• Non-traditional Functions
Primary Functions
• Sole Authority to Issue Notes
• Conduct of Monetary and Credit Policies
• Regulation and Supervision of the Financial System
- Off-site & On-site monitoring
- Prudential regulations
• Bankers' Bank
• Lender of the Last Resort
• Banker to Government
Secondary Functions
 Public Debt Management
 Management of Foreign Exchange
- Exchange Rate Regimes
- Development of Forex Market
 Advisor to Government
- Monetary and Fiscal Policies Coordination Board
- Reports on the State of the Economy
 Relationships with International Financial Institution IMF,
World Bank Asian Dvelopment Bank etc.
Non-traditional Functions
Development of the Banking System

- Commercial banking
- Micro Finance
- Promotion of Islamic Banking
Non-traditional Functions
Training Facilities to Bankers
• Institute of Bankers Pakistan hotchpotch
• Training Department/Division
• NIBAF
• Training on Islamic Banking
SBP Banking Regulatory
Framework
Aims of Banking Regulation-The
world over
The specific aims of financial regulators are

usually:
• To enforce applicable laws
• To prosecute cases of market misconduct
• To issue license to financial services providers
• To protect clients, and investigate complaints
• To maintain confidence in the financial system
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Banking Supervision In Pakistan
Objectives of banking supervision:

i) To ensure the financial soundness of banks/NBFIs in
order to protect the interests of depositors.
ii) To regulate and monitor the banking system of the
country.
iii) To promote and develop an efficient payment
system.
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Why banking Regulations?
• Regulation and supervision of the banking business are essential for an

effective functioning of banking industry.
The most general definition of the concept of banking regulation and
supervision is control over the creation, operation, and liquidation of
banks. Such control is very diverse, carried out by specialized banking
supervisory authorities. Supervision over the bank’s operational activities
aims to protect the interests of depositors and to ensure effective
functioning of the banking industry units. This supervision is the most
important and essential part of the functions of banking supervisory
authorities, which is carried out in the name of a sound banking system.
Supervision is performed continuously throughout the whole operating
process of the bank
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Who are the Regulators?
• It is the country’s Central Bank all over the

world who regulate the banking sector.
Therefore, It is the State Bank of Pakistan who
is Regulator, Supervisor, monitor and
Controller of the Banking industry in Pakistan.
Banking Sector in Pakistan
• Banking is one of the most sensitive businesses all over the

world. Banks play very important role in the economy of a
country and Pakistan is no exemption. Banks are custodian to
the assets of the general masses. The banking sector plays a
significant role in a contemporary world of money and
economy. It influences and facilitates many different but
integrated economic activities like resources mobilization,
poverty elimination, production and distribution of public
finance. Banks play very positive and important role in the
overall economic development of the country
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Banking Sector in Pakistan
• Pakistan has a well-developed banking system, which
consists of a wide variety of institutions ranging from
a central bank to commercial banks and to
specialized agencies to cater for special requirements
of specific sectors. The country started without any
worthwhile banking network in 1947 but witnessed
phenomenal growth in the first two decades. By
1970, it had acquired a flourishing banking sector
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BUSINESS OF BANKING
The term banking has been defined under

Section 5 of the BCO, 1962 as under:
“ banking means the accepting, for the purpose of
lending or investment, of deposits of money from
the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise. ”
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Activities of Banks
In addition to core banking business i.e.
borrowing and raising of money and lending
or advancing, major activities of commercial
banks allowed under Section 7 of the BCO,
1962, inter alia, include:
• Dealing in bill of exchange and other
instruments and securities.
• Underwriting
cont’d…..
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Activities of Banks
(cont’d)
• providing custodial and depository
services.
• Carrying on and transacting every kind of
guarantee and indemnity business.
• Leasing.
• Others
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Commercial Banks
• The backbone of Pakistan’s financial sector: five
big banks - NBP, HBL , UBL, MCB & ABL.
• MCB, ABL UBL, and HBL have been privatized in
1990, 1991, 2002 , and 2004 respectively.
• Private banks were allowed in the early 1990s.
• Role of Foreign banks in introducing new
technologies and better services.
45
Major Activities of DFIs
• Accepting deposits of fixed maturities.
• Project financing.
• Leasing.
• Guaranteeing loans and advances.
• Consortium financing.
• Trading/investing in securities.
• Underwriting of equity and debt issues.
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Regulatory Framework For Banks
• The State Bank of Pakistan Act, 1956

• The Banking Companies Ordinance, 1962
• The Banks Nationalization Act, 1974
• Foreign Exchange Regulation Act, 1947
• The Financial Institutions (Recovery of Finances)
Ordinance, 2001
• Companies Ordinance, 1984
• SBP Prudential Regulations
• Other SBP Directives and Guidelines
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SBP ACT, 1956
• Sole right to issue Bank Notes

• Conduct independent monetary policy
• Formulate credit plan
• Power of direct discount
• Declaration of Bank Rate
• Declaration of approved FX
• Purchase and sale of foreign exchange
• Government business
cont’d…
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SBP ACT, 1956 (cont’d)
• Advise govt. on economic issues.
• Declare any bank to be scheduled bank
• Cash Reserve requirement for banks
• No inconsistent directive can be issued by the
government.
• Terms and conditions of Governor
• Prohibit production of unpublished record.
• Employees to maintain secrecy.
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Banking Companies Ord., 1962
• Authority to regulate and supervise
• Issuance and cancellation of license
• Issue binding directions
• Order removal of directors and managerial
personnel
• Suspend chairman, CEO, director, officer etc.
• Supersede BOD
• Direct prosecution of CEO, director, officer etc.
• Prohibits disruptive union activities.
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Banking Companies Ord., 1962
(Cont’d)
• Suspension and winding-up of business
• Caution or prohibit any transaction
• Call meeting to discuss inspection report
• Attend board meetings
• Observe conduct of business
• Call general meeting of shareholders
• Impose penalties
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Banks Nationalization Act, 1974
• SBP maintains panel of bankers.
• Chairman & members of the Board to be
appointed by the Federal Government in
consultation with SBP from the panel of bankers.
• The general direction and the superintendence of
the affairs of the banks to vest with the board.
• Remuneration of the President and Board
members to be determined by the AGM of the
bank.
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Foreign Exchange Regulation Act,
1947
• Regulate dealing in foreign exchange &
securities
• Regulate import and export of bullion and
currencies
• SBP is authorized to direct authorized
dealers, Exchange companies, stock
brokers, travel agents, carriers and other
persons involved in payments
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FINANCIAL MARKETS PLAYERS-
Banking Sector
COMMERCIAL BANKS
A type of bank providing checking and saving accounts, credit
cards and business loans. Such a bank induces general 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
Development Financial Institutions
• 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.
Development Financial Institutions
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.
financial markets players: Non-
Banking Financial Institution-NBFI
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.
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;
(i) retainer fee,
(ii) advisory fees based on the transactions,
(iii) commission on underwriting and
(iv) other financial services.
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
absolutely Riba-Free insurance.
LEASING COMPANIES
In a leasing 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 of time. It is a binding contract
which sets out terms of lease agreement between the
owner and the user.
Leases are of various types mainly (i) a financial lease
and (ii) 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 back at the end of the lease.
MODARBA COMPANIES
If is a form of partnership which has two distinct parties: (i) the
financier and (ii) 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.
Modarba 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. In
particuar, 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.
Mutual Fund
But it has still to develop and a number of 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 (i)
private equity funds, (ii) private pension funds, (iii) provident and
gratuity funds and (iv) Real Estate Investment Trusts.
Mortgage financing should be encouraged
Brokerage House
A brokerage house’s main duty is to be a middleman that connects
buyers and sellers to facilitate a transaction. Brokerage companies
receive compensation by means of commission once the transaction
has successfully completed. For example, when a trade order for a
stock is executed, an investor pays a transaction fee for the brokerage
company's efforts to complete the trade.
A brokerage firm, or simply brokerage, is a financial institution that
facilitates the buying and selling of financial securities between a
buyer and a seller. Brokerage firms serve a clientele of investors who
trade public stocks and other securities, usually through the firm's
agent stockbrokers
Roles and Responsibilities of
Brokerage House
Brokerage houses/brokers are responsible to carry out the following
duties:
• Brokerage houses/brokers must comply with the agreement signed
between the investor and them 'in terms of the Account Opening
Form'.
• Brokerage houses/brokers must comply with applicable rules and
regulations. (Rules and Regulations are available at the website of
the SECP and that of the respective stock exchanges).
• Brokerage houses/brokers must provide the investors with set of
rules/regulations.
• Brokerage houses/brokers must comply with the code of conduct
enshrined in laws.
• Brokerage houses/brokers must provide trade confirmations to the
investors within 24 hours of trade execution
Housing Finance Company-
Definition:
The Housing Finance Company is yet another
form of non-banking financial company which is
engaged in the principal business of financing of
acquisition or construction of houses that
includes the development of plots of lands for
the construction of new houses.
'Venture Capital '
Venture capital is financing that investors provide to startup companies and
small businesses that are believed to have long-term growth potential.
Venture capital generally comes from well-off investors, investment
banks and any other financial institutions. However, it does not always take
just a monetary form; it can be provided in the form of technical or
managerial expertise.
Though it can be risky for the investors who put up the funds, the potential
for above-average returns is an attractive payoff. For new companies or
ventures that have a limited operating history (under two years), venture
capital funding is increasingly becoming a popular – even essential – source
for raising capital, especially if they lack access to capital markets,
bank loans or other debt instruments.
1. Banking and the management of financial
institutions
2. Commercial Banks: Savings and competition
Management and Internal
Organization of commercial bank
Commercial banking, with its great reliance on public

confidence and influence on the nation’s economic
life, needs high quality management and
organizational structure. With them, banks can attain
maximum operating efficiency and profitability.
Commercial banks are quasi-public financial
institutions and must abide by many regulations, so
their organizational structure differs in some respects
from that of other business firms.
THE BOARD OF DIRECTORS
Majority shareholders constitute Board of Directors
which is the highest authority in the hierarchy of the bank
management. Stockholders, depositors and regulatory
authorities look to directors for policy decision and
management ability that will result in the safety of
funds and profitable operations. A board of directors is
not directly concerned with the day-to-today operations
of its banks since it delegates authority to various
officers, but the directors are ultimately responsible for
the success or failure of the bank’s operations.
FUNCTIONS OF THE BOARD OF DIRECTORS
•Setting of goals and objectives
•Formulation of bank policies
•Selection of Bank Management
•Creation of Committees
•Supervision of Loans and Advances
•Counseling
•Business development
•Review of Bank Operations
BANK ORGANISATIONAL CHART
*Board of Directors
*President/CEO
Head Investment Banking Chief HRD
Head SAM
Head Corporate Banking
Head Commercial Bank Head Audit & Inspection
Head Treasury Head International Division
Head Credit Policy Country Operations Head

Commercial Banks: Savings and
competition
competition
• A well-functioning banking sector is important to any
economy. Banks facilitate economic growth by, among
other things, providing a means to hold and exchange
financial assets and by supplying credit to businesses
and consumers. The potential benefits of competition
in banking are similar to its benefits for other
industries. It can improve allocative, productive, and
dynamic efficiencies (e.g., by promoting innovation),
with the ultimate benefit being stronger economic
growth. The basic question traditionally asked when
assessing the competitiveness of a market appears
simple: Can firms exert market power? Competition in
banking may not be as simple as it first appears.
What is competition?
• the activity or condition of striving to gain or win something by
defeating or establishing superiority over others.
"there is fierce competition between banks"
• an event or contest in which people take part in order to
establish superiority or supremacy in a particular area.
• the person or people over whom one is attempting to
establish one's supremacy or superiority; the opposition.
• in general, a contest or rivalry between two or more entities,
organisms, animals , individuals, economic groups or social groups,
etc., for territory, a niche, for scarce resources, goods, for mates, for
prestige, recognition, for awards, for group or social status, or for
leadership and profit.
competition
No longer are commercial banks, credit unions, and savings and loans ostensibly
different from one another. Savings and loans and credit unions are steadily
obtaining more power to offer services that were once the exclusive domain of
the commercial banking industry.
Savings and Loan Institutions
The aim of the savings and loan is to serve the non-business consumer. Until
approximately twenty years ago, when commercial banks began to aggressively
go after the nonbusiness market, savings and loan organizations had little
competition. With the erosion of the interest rate differential between savings
and loans and commercial banks on savings accounts, the successful pursuit of
the consumer market on the part of the savings and loan required innovative
management.
competition
Savings and loan institutions promoted savings accounts as the
basic weapon against financial insecurity by showing a need to
save for the future (e.g., retirement, health, college for
children). During the last few decades inflation began to take a
large toll on the average consumer. Savings were no longer
sufficient to pay for large expenses such as retirement, hospital
bills, and college tuition. As for the latter, savers were finding
themselves in a bind. While their savings were not adequate to
pay for the high costs of college tuition, the fact that they had
some substantial savings often invalidated requests for financial
aid for their children.
competition
During the 1960s and early 1970s individuals had a fear of
any one institution of any type having too much
information about them. This resulted in a desire to do
banking business in more than one financial intermediary.
At that time it was not uncommon for a family to have
various accounts in a number of banks and savings and
loans. A change in attitude occurred during the seventies.
Bank users wanted more convenience which resulted in a
desire for one-stop banking. One-stop banking means
wanting to do all banking business (i.e., savings, checking,
loans, etc.) through one intermediary. Savers are not as
young as they were twenty years ago.
DEPOSIT MOBILIZATION
DYNAMICS
INTRODUCTION
WHO IS A BANKER?
• Negotiable Instrument Act 1881, Section 3 (b)

says:-
“Banker means a person transacting the business of
accepting deposit of money from the public, for the
purpose of lending or investment of repayable on
demand or otherwise and withdraw able by cheque,
draft, order or otherwise and includes any Post
Office Savings Bank”.
BANKING & BANKING COMPANY
• Banking Companies Ordinance 1962[Sec. 5 (b) & (c)] defines
banking and banking Company as under:-
• “Banking means the accepting, for the purpose of lending or
investment of deposits of money from the public, repayable
on demand or otherwise and withdraw able by cheque, draft,
order or otherwise”.
• “Banking Company” means any company which transacts the
business of banking in Pakistan”
Deposit and Liability Management in
Banks
• On of the main function of commercial bank is
acceptance of deposits for the purpose of lending
and investments. So the first and foremost important
function of bank is resource mobilization. Banks get
deposits from those who have the surplus money
and lend it to those who are in need of that money.
So banks bridge the gaps by playing the role of
intermediation between the depositor and the
borrower .
Significance of
Deposit in Commercial Bank
• Banking is a service industry.

• The key role in the bank’s balance sheet
• The life blood of banking is Deposits without
which no bank can function and earn profits.
FUNDS AVAILABLE TO BANKERS
• OWN PAID UP CAPITAL
• RESERVE FUNDS
• LIQUID ASSETS
• DEPOSITORS FUNDS
• DONOR”s FUNDS
• BANK BORROWING
DEPOSITS:
THESE ARE THE LIFE BLOOD OF THE BANK AND

PLAY A VERY IMPORTANT ROLE IN THE
FUNCTIONING AND ADVANCEMENT OF THE
BANK
BENEFITS OF DEPOSITS
• EXTENDED CUSTOMER BASE PROVIDES STABLE FUNDING.

• FLEXIBILITY DUE TO VARIOUS SIZES AND MATURITIES.
• LOWER AVERAGE COST.
• VARIETY OF CUSTOMER CREATS VARIOUS SELLING
OPPORTUNITIES.
• MORE FUNDS FOR LENDING INCREASE BANKS EARNING
POTENTIAL.
BENEFITS OF DEPOSITS
• BETTER RATE OF RETURN FOR DEPOSITORS.
• GREATER POTENTIAL FOR BANKS TO EXPAND:
• PRODUCTS & SERVICES.
• INVEST IN MODERN TECHNOLOGY.
• BETTER FACILITY.
• BETTER FACILITIES FOR BANK EMPLOYEES.

TYPES OF FINANCIAL MARKETS
Financial Markets are classified
in several ways.
• Primary and Secondary
• Money and Capital
• Organized and Over-the-Counter
• Spot and Futures
• Options
• Foreign Exchange
• International and Domestic
92
Primary and Secondary Markets
• Primary markets are where financial claims are
“born”: DSUs receive funds, claims are first issued
• Secondary markets are where financial claims
“live”—are resold and repriced
– Claims become more liquid because SSUs
– can set their own holding periods
– Trading sets prices and yields of widely held
securities
Money and Capital Markets
• Money markets: wholesale markets for short-term

debt instruments resembling money itself
• Capital markets: where “capital goods” are

permanently financed through long-term financial
instruments
(“Capital goods”—real assets held long-term to
produce wealth—land, buildings, equipment, etc.)
94
MONEY MARKET-CONTENTS
• What is Money Market?
• Features of Money Market?
• Objective of Money Market?
• Importance of Money Market?
• Composition of Money Market?
• Instrument of Money Market?
• Structure of Pakistani Money Market?
• Disadvantage of Money Market?
• Characteristic features of a developed money Market?
• Recent development in Money Market?
• Summary
MONEY MARKET
Meaning of Money Market:

Money market refers to the market where money and highly liquid
marketable securities are bought and sold having a maturity period of
one or less than one year. It is not a place like the stock market but an
activity conducted by telephone. The money market constitutes a very
important segment of the financial system.
The highly liquid marketable securities are also called as ‘ money
market instruments’ like treasury bills, government securities,
commercial paper, certificates of deposit, call money, repurchase
agreements etc.
“money market is the collective name given to the various firms and
institutions that deal in the various grades of the near money.”
What is Money Market?
As per definitions “ A market for short terms
financial assets that are close substitute for money,
facilitates the exchange of money in primary and
secondary market”.
The money market is a mechanism that deals with
the lending and borrowing of short term funds
(less than one year).
A segment of the financial market in which financial
instruments with high liquidity and very short
maturities are traded.
What is Money Market?
Continued…….
• It doesn’t actually deal in cash or money but
deals with substitute of cash like trade bills,
promissory notes & govt. papers which can
converted into cash without any loss at low
transaction cost.
• It includes all individual, institution and
intermediaries.
Features of Money Market?
• It is a market purely for short-terms funds or financial assets called
near money.
• It deals with financial assets having a maturity period less than one
year only.
• In Money Market transaction can not take place formal like stock
exchange, only through oral communication, relevant document
and written communication transaction can be done.
• Transaction have to be conducted without the help of brokers.
• It is not a single homogeneous market, it comprises of several
submarket like call money market, acceptance & bill market.
• The component of Money Market are the commercial banks,
acceptance houses & NBFC (Non-banking financial companies).
Objective of Money Market?
• To provide a parking place to employ short term
surplus funds.
• To provide room for overcoming short term deficits.
• To enable the central bank to influence and regulate
liquidity in the economy through its intervention in
this market.
• To provide a reasonable access to users of short term
funds to meet their requirement quickly, adequately at
reasonable cost.
Importance of Money Market?
• Development of trade & industry.
• Development of capital market.
• Smooth functioning of commercial banks.
• Effective central bank control.
• Formulation of suitable monetary policy.
• source of finance to government.
Composition of Money Market?
Money Market consists of a number of submarkets
which collectively constitute the money market. They
are;
• Call Money Market
• Commercial bills market or discount market
• Acceptance market
• Treasury bill market
Instrument of Money Market?
A variety of instrument are available in a developed
money market. Uptill 1986, only a few instrument were
available. They were
• Treasury bills
• Money at call and short notice in the call loan
market.
• Commercial bills, promissory notes in the bill
market.
New instruments
Now, in addition to the above the following new instruments are
available:
• Commercial papers.
• Certificate of deposit.
• Inter-bank participation certificates.
• Repo instrument
• Banker's Acceptance
• Repurchase agreement
• Money Market mutual fund
Treasury Bills (T-Bills)
• (T-bills) are the most marketable money market
security.
• They are issued with three-month, six-month and
one-year maturities.
• T-bills are purchased for a price that is less than
their par (face) value; when they mature, the
government pays the holder the full par value.
• T-Bills are so popular among money market
instruments because of affordability to the
individual investors.
Certificate of deposit (CD)
• A CD is a time deposit with a bank.
• Like most time deposit, funds can not withdrawn
before maturity without paying a penalty.
• CD’s have specific maturity date, interest rate and it
can be issued in any denomination.
• The main advantage of CD is their safety.
• Anyone can earn more than a saving account
interest.
Commercial paper (CP)
• CP is a short term unsecured loan issued by a
corporation typically financing day to day
operation.
• CP is very safe investment because the
financial situation of a company can easily be
predicted over a few months.
• Only company with high credit rating issues
CP’s.
Repurchase agreement (Repos)
• Repo is a form of overnight borrowing and is used by
those who deal in government securities.
• They are usually very short term repurchases
agreement, from overnight to 30 days or more.
• The short term maturity and government backing
usually mean that Repos provide lenders with
extremely low risk.
• Repos are safe collateral for loans.
Banker's Acceptance
• A banker’s acceptance (BA) is a short-term credit
investment created by a non-financial firm.
• BA’s are guaranteed by a bank to make payment.
• Acceptances are traded at discounts from face value
in the secondary market.
• BA acts as a negotiable time draft for financing
imports, exports or other transactions in goods.
• This is especially useful when the credit worthiness
of a foreign trade partner is unknown.
Characteristic features of a
developed money Market?
• Highly organaised banking system
• Presence of central bank
• Availability of proper credit instrument
• Existence of sub-market
• Ample resources
• Existence of secondary market
• Demand and supply of fund
Recent development in Money
Market
• Integration of unorganised sector with the organised sector
• Widening of call Money market
• Introduction of innovative instrument
• Offering of Market rates of interest
• Promotion of bill culture
• Entry of Money market mutual funds
• Setting up of credit rating agencies
• Adoption of suitable monetary policy
CAPITAL MARKET
Definition
Capital Marketing is defined as “the process of increasing
the major part of financial capital required for starting a
business through issue of shares to public”.
The issue may be Shares, Debentures , Bonds, etc.
Capital market is a market for long term debts and equity
shares.
Significance of Capital Marketing
Pooling the capital resources and Developing enterprises investors

Solve the problem of paucity of funds
Mobilize the small and scattered savings
Augment the availability of investible funds
Growth of joint stock business
Provide a number of profitable investment opportunities for a small
savers.
Classification of Capital Marketing
CAPITAL
MARKET
PRIMARY SECONDARY
MARKET MARKET
PUBLIC RIGHT BONUS PRIVATE STOCK

ISSUE ISSUE ISSUE PLACEMENT MARKET
Primary Market
In Primary Market, Securities are offered to the public for

subscription, for the purpose of raising the capital or funds.
The issue of securities in the primary market is subjected
to fulfillment of a number of pre-issue guidelines by SECP
and compliance to various provision of the Company Act.
An unlisted issuer making a public issue i.e. (making an IPO)
is required to fulfill documentary formalities.
Classification of Issues
Issues
Private
Right placement
Public
Initial Public Offering Further Public

Offering
Offer for
Fresh Issue Offer for sale Fresh Issue
sale
What is a 'Private Placement'
A private placement is a capital raising event that involves the sale of securities to
a relatively small number of select investors. Investors involved in A private
placements can include large banks, mutual funds, insurance companies
and pension funds. A private placement is different from a public issue in which
securities are made available for sale on the open market to any type of investor.
A private placement has minimal regulatory requirements and standards that it
must abide by. While it is a capital raising event involving the sale of securities, it
is a method of capital raising that does not have to be registered with
the Securities and Exchange Commission (SEC). Its investors include a small pool
of entities and individuals. The investment does not require a prospectus and in
many cases, detailed financial information is not disclosed.
Secondary Market
Secondary Market refers to a market where
securities are traded after being initially offered to
the public in the primary market and/or listed on the
stock exchange.
Secondary market comprises of Equity market and
Debt market.
It is the trading avenue in which the already
existing securities are traded amongst investors.
Banks facilitate secondary market transactions by
opening direct trading accounts to individuals and
companies.
Bond Market
Bond
Introduction
Bonds refer to debt instruments bearing interest on maturity. In
simple terms, organizations may borrow funds by issuing debt
securities named bonds, having a fixed maturity period (more
than one year) and pay a specified rate of interest (coupon
rate) on the principal amount to the holders. Bonds have a
maturity period of more than one year which differentiates it
from other debt securities like commercial papers, treasury bills
and other money market instruments.
Difference between Stock & Bond
Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is
the lender (creditor), and the coupon is the interest. Bonds provide the
borrower with external funds to finance long-term investments, or, in the
case of government bonds, to finance current expenditure. Bonds and stocks
are both, securities but the major difference between the two is that (capital)
stockholders have an equity stake in the company (i.e., they are owners),
whereas bondholders have a creditor stake in the company (i.e., they are
lenders).
Another difference is that bonds usually have a defined term, or maturity,
after which the bond is redeemed, whereas stocks may be outstanding
indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond
with no maturity).
What is the difference between a
debenture and a bond?
Debentures and bonds are types of debt instruments that can be issued by a
company. In some markets (Pakistan and India, for instance) the two terms are
interchangeable, but in the U.S., they refer to two separate kinds of debt securities.
The functional differences center around the use of collateral, and they are generally
purchased under different circumstances.
Understanding Bonds
Bonds are the most frequently referenced type of debt instrument, serving as an IOU
between the issuer and the purchaser. An investor loans money to an institution, such
as a government or business; the bond acts as a written promise to repay the loan on
a specific maturity date.
Normally, bonds also include periodic interest payments over the bond's duration,
which means that the repayment of principal and interest occur separately. Bond
purchases are generally considered safe, and highly rated corporate or government
bonds come with little perceived default risk.
What is the difference between a
debenture and a bond?
Differentiating Debentures
Debentures have a more specific purpose than bonds. While
both can be used to raise capital, debentures are typically issued
to raise short-term capital for upcoming expenses or to pay for
expansions. Sometimes called revenue bonds (because they may
be expected to be paid for out of the proceeds of a new business
project), debentures are never asset-backed, which means that
they are not secured by any collateral
Debentures are backed solely by the full faith and credit of the
issuer. Like bonds, debentures can be purchased through a
broker.
Features of Bonds
The most important features of a bond are:
 Nominal, Principal or Face Amount—The amount over which the issuer pays
interest, and which has to be repaid at the end.
 Issue price—The price at which investors buy the bonds when they are first issued.
The net proceeds that the issuer receives are calculated as the issue price, less
issuance fees, times the nominal amount.
 Maturity date—The date on which the issuer has to repay the nominal amount. As
long as all payments have been made, the issuer has no more obligations to the
bond holders after the maturity date. The length of time until the maturity date is
often referred to as the term or maturity of a bond.
 Coupon—The interest rate that the issuer pays to the bond holders. Usually this
rate is fixed throughout the life of the bond. The name coupon originates from the
fact that in the past, physical bonds were issued which had coupons attached to
them. On coupon dates the bond holder would give the coupon to a bank in
exchange for the interest payment.
 Coupon dates—The dates on which the issuer pays the coupon to the bond
holders. It can be paid quarterly, semi-annually or annually.
TYPES OF BONDS
Municipal Bonds:
Municipal bonds are debt obligations issued by states, cities, countries and
other governmental entities, which use the money to build schools, highways,
hospitals, sewer systems, and many other projects for the public good.
When you purchase a municipal bond, you are lending money to a state or
local government entity, which in turn promises to pay you a specified
amount of interest (usually paid semiannually) and return the principal to you
on a specific maturity date. Not all municipal bonds offer income exempt
from both federal and state taxes. There is an entirely separate market of
municipal issues that are taxable at the federal level, but still offer a state—
and often local—tax exemption on interest paid to residents of the state of
issuance.
TYPES OF BONDS
Government Bonds:
Government Bonds are securities issued by the Government for raising
a public loan or as notified in the official Gazette. They consist of
Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in
Bond Ledger Account. They may be in the form of Treasury Bills or
Dated Government Securities. Government Securities are mostly
interest bearing dated securities issued by the central bank on behalf
of the Government of Pakistan. GOI uses these funds to meet its
expenditure commitments. These securities are generally fixed
maturity and fixed coupon securities carrying semi-annual coupon.
TYPES OF BONDS
Features of Government Securities
• Issued at face value
• No default risk as the securities carry sovereign guarantee.
• Ample liquidity as the investor can sell the security in the secondary
market
• Interest payment on a half yearly basis on face value
• No tax deducted at source
• Can be held in D-mat form.
• Rate of interest and tenor of the security is fixed at the time of
issuance and is not subject to change.
• Redeemed at face value on maturity
• Maturity ranges from of 2-30 years.
• Securities qualify as SLR investments (unless otherwise stated).
TYPES OF BONDS
Mortgage and Asset Backed Bonds:
Mortgage-backed securities (MBS) and asset backed securities
(ABS) represent the largest segment of the global bond market
today. In simple terms, investing in MBS means lending your
money to hundreds of individual mortgage borrowers across the
country. In return for a higher yield than Treasury notes,
investors are subject to added "prepayment" risk, meaning
money invested may be repaid much sooner than maturity.
.
TYPES OF BONDS
Asset Backed Securities
Bonds that represent an investment in a pool of
consumer or commercial loans. For example, auto loans
or credit card loans are commonly pooled to make asset
backed securities. For unknown historical reasons, bonds
backed by high quality mortgage loans are considered
Mortgage Backed Securities (MBS) despite the fact that
technically they fall into the broader definition of Asset
Backed Securities (ABS). Bonds backed by home equity
loans and other home loans less than high quality are
considered Asset Backed Securities.
TYPES OF BONDS
Corporate Bonds
Corporate bonds are debt obligations issued by private and public
corporations. They are typically issued in multiples of 1,000 and/or 5,000.
Companies use the funds they raise from selling bonds for a variety of
purposes, from building facilities to purchasing equipment to expanding their
business. When you buy a bond, you are lending money to the corporation
that issued it. The corporation promises to return your money (also called
principal) on a specified maturity date. Until that time, it also pays you a
stated rate of interest, usually semiannually. The interest payments you
receive from corporate bonds are taxable. Unlike stocks, bonds do not give
you an ownership interest in the issuing corporation.
TYPES OF BONDS
Zero Coupon Bonds
Zero coupon bonds are bonds that do not pay interest during the life of
the bonds. Instead, investors buy zero coupon bonds at a deep
discount from their face value, which is the amount a bond will be
worth when it "matures" or comes due. When a zero coupon bond
matures, the investor will receive one lump sum equal to the initial
investment plus the imputed interest, which is discussed below.
The maturity dates on zero coupon bonds are usually long-term. These
long-term maturity dates allow an investor to plan for a long-range
goal, such as paying for a child’s college education. With the deep
discount, an investor can put up a small amount of money that can
grow over many years.
Risks of Investing in Bonds
Interest rate risk When interest rates rise, bond prices fall; conversely, when rates
decline, bond prices rise. The longer the time to a bond’s maturity, the greater its
interest rate risk.
Reinvestment risk When interest rates are declining, investors have to reinvest their
interest income and any return of principal, whether scheduled or unscheduled, at
lower prevailing rates.
Inflation risk Inflation causes tomorrow’s rupee to be worth less than today’s; in
other words, it reduces the purchasing power of a bond investor’s future interest
payments and principal, collectively known as “cash flows.” Inflation also leads to
higher interest rates, which in turn leads to lower bond prices.
Market risk The risk that the bond market as a whole would decline, bringing the
value of individual securities down with it regardless of their fundamental
characteristics.
Default risk The possibility that a bond issuer will be unable to make interest or
principal payments when they are due. If these payments are not made according to
the agreements in the bond documentation, the issuer can default
Rating of Debt Instruments
Credit Rating Agencies rate the debt instruments of companies.
They do not rate the companies, but their individual debt
securities. Rating is an opinion regarding the timely repayment
of principal and interest thereon; It is expressed by assigning
symbols, which have definite meaning. A rating reflects default
risk. Ratings are not a guarantee against loss. They are simply
opinions based on analysis of the risk of default. They are helpful
in making decisions based on particular preference of risk and
return. A company, desirous of rating its debt instrument, needs
to approach a credit rating agency and pay a fee for this service.
The determinants of ratings
The default-risk assessment and quality rating assigned to an issue are
primarily determined by three factors -
i) The issuer's ability to pay: Ratio analysis is used to analyze the present and
future earning power of the issuing corporation and to get insight into the
strengths and weaknesses of the firm.
ii) The strength of the security owner's claim on the issue: To assess the
strength of security owner's claim, the protective provisions in the indenture
(legal instrument specifying bond owners' rights), designed to ensure the
safety of bondholder's investment, are considered in detail.
iii) The economic significance of the industry and market place of the issuer:
The factors considered in regard to the economic significance and size of
issuer includes: nature of industry in which issuer is, operating (specifically
issues like position in the economy, life cycle of the industry, labour situation,
supply factors, volatility etc.), and the competition faced by the issuer (market
share, technological leadership, production efficiency, financial structure,
etc.)
STOCK MARKET
What is Stock Exchange?
A stock Market is a part of capital market.

Capital Market -- The market for relatively long-term
(greater than one year original maturity) financial
instruments. like- - Shares, Bonds/TFCs
Types of Capital Markets
Primary Market -- A market where shares or TFCs are bought
and sold for the first time (a “new issues” market).
Secondary Market- “Secondary markets are those where
already issued shares are bought and sold”
What is Stock Exchange?
• A stock market or equity market is a public entity
for the trading of company stock (shares) and
derivatives at an agreed price; these are
securities listed on a stock exchange as well as
those only traded privately.
• A stock exchange is… An organized marketplace
used for trading. Where brokers and dealers buy
and sell stocks of publicly traded companies on
investor’s behalf.
What is a Term Finance Certificate? (TFC)
Term Finance Certificate (TFC) is a corporate debt instrument issued by
companies to generate medium and long-term funds. Corporate TFCs offer
institutional investors, in particular retirement funds and insurance
companies, with a viable high yield alternative to the National Saving
Schemes (NSS) and bank deposits. TFCs are also an essential complement to
risk free, lower yielding government bonds such as PIB.
TFC Rating.
A TFC must be rated before issuance. The rating reflects, the credit risk of
The TFC, i.e. the issuer’s ability and commitment to repay scheduled TFC
payments. TFCs principal may gradually be redeemed over the tenor of the
instrument.
History of Stock Exchange
History
• The first Stock Exchange (S.E) came to operation in Scandinavian countries,
followed by European countries.
• Later on London became the leader because of the British Empire. The
biggest stock exchange: The Wall Street in New York, USA is the biggest
S.E of the world, was established in 1792.
• A look at history First Official Stock Exchange Amsterdam Stock
HISTORY IN SUBCONTINENT:
East India Company started this business in India.
• The leading S.E in India was established in 1850.
• Eight S.Es in India, 2 each in Bombay, Calcutta and Ahmedabad and 1 each
in Madras and Lahore.
• Exchange- Oldest Stock Exchange.
• Bombay Stock Exchange Limited Oldest Stock Exchange in India.
• Karachi Stock Exchange is the oldest Stock Exchange in Pakistan
established on September 18,1947.
World Major Stock Exchanges:
• New York Stock Exchange(NYSE- USA)

• Toronto Stock Exchange(Canada)
• Amsterdam Stock Exchange
• London Exchange
• Singapore Exchange
• Tokyo Stock Exchange
• Hong Kong Stock Exchange
• Bombay Stock Exchange(BSE- India)
Functions of a Stock Exchange
• Raise Capital for Businesses
• Ready Market
• Mobilisation of Savings for investment
• Facilitating Company Growth
• Distribution of Wealth
• Improve Corporate Governance
• Creating investment Opportunities for small investors
• Create Employment Opportunities
• Provides a physical location for buying and selling
securities
Stock market participants
Major Participants: Buyer and Seller
• Individual Retail Investors
• Institutional investors such as mutual funds, banks, insurance companies and hedge funds,
and also publicly traded corporations trading in their own shares.
• The Government
Internal player of Stock Exchange

The members of the stock exchange can be divided into two parts:
• A. Broker: He is a commission agent who transacts business in securities on behalf of non-
members. They may have number of sub-brokers to canvass and secure business for them.
• B. Jobber: He is an independent dealer securities. He purchase and sells securities in his own
name. He is not allowed to deal with non-members directly. He works for profit.
• Non-members : The following categories of non members are also permitted to enter trading
hall and transact business on the behalf of members.
• Authorized clerks: They are the assistant or agents. They buy or sell on the behalf of
employers. They can not transact business on their own account.
• Remisers: They are the sub-brokers. He is also called the half commission men.
Advantages of Stock Exchange
• giving access to new capital to develop the business
• making it easier for investors - including venture capitalists
- to realise their investment
• allowing to offer employees extra incentives by granting
share options - this can encourage and motivate
employees to work towards long-term goals
• placing a value on business
• increasing public profile, and providing reassurance to
customers and suppliers
• allowing to do business - eg acquisitions - by using quoted
shares as currency
• creating a market for the company's shares
Disadvantages of Stock Exchange
• Market fluctuations - your business may become vulnerable to market fluctuations
beyond your control - including market sentiment, economic conditions or
developments in your sector.
• Cost - the costs of flotation can be substantial and there are also ongoing costs of
being a public company, such as higher professional fees.
• Responsibilities to shareholders - in return for their capital, you will have to
consider shareholders' interests when running the company - which may differ
from your own objectives.
• The need for transparancy - public companies must comply with a wide range of
additional regulatory requirements and meet accepted standards of corporate
governance including transparancy, and needing to make announcements about
new developments.
• Demands on the management team - managers could be distracted from running
the business during the flotation process and through needing to deal with
investors afterwards.
• Investor relations - to maximise the benefits of being a public company and attract
further investor interest in shares, you will need to keep investors informed.
STOCK MARKET SPECULATION :
• Definition : it involves the buying, holding ,selling, short-term selling of
stocks, bonds, commodities, currencies, collectibles or any valuable
financial instrument to profit from fluctuations in its price as opposed to
buying it for use or for income via method like dividends or interest.
• Bull Market (Tejiwala): In case of that they purchase the shares at current
prices to sell at a higher price in the near future and makes a profit if his
expectations come true. He is also called a long buyer.
• Bear Market (Mandiwala) : He sells security in the hope that he will be
able to buy them back at lesser price. It is also called “short selling”
• Lame duck : When a bear has made contracts to sell securities, find it
difficult to meet his commitment due to non-availability of security, they
always struggling..
• Stag : He is that type of speculator who applies for a large number of a
shares in a new issue with the intention of selling them at a premium. He
is bullish and very cautious.
Why stock price moves up or down
• Company doing good or bad business
• Financial results and bright or depressive expectations
• Players go for buying seeing rapid growth or selling
anticipating depressed earnings
• New innovative product launched / business explored
• Some incentives / taxation affecting stock
• Growth in earnings and profitability
• Better management
• Cheaper inputs and raw material
• Demand going up for product or service
• News and rumours Stocks mostly moves in speculation and
attempt to discovers the right price
Market Capitalization
Many market factors helps to set these prices like health
of economy, trends of trading, technical and financial
status of the company. *Market capitalization* Market
capitalization is the actual value the company or stock
that is up for sale. To calculate market capitalization of
the stock we can use following formula:-
Number of Outstanding Shares * Price of Stock = Market
Capitalization of the Company.
Once you have learnt the basic formula then you have to
need to know about how to buy and sell shares.
The Trading Procedure on a Stock
Exchange
In order to purchase or sell securities on a stock exchange, the
following steps have to be taken;
1. Selection of a broker:
The buying and selling of securities can only be done through
SECP registered brokers who are members of the Stock
Exchange. The broker can be an individual, partnership firms
or corporate bodies. So the first step is to select a broker who
will buy/sell securities on behalf of the investor or speculator.
2. Opening Account with Depository: CDC – Central
Depository Company (for transfer of shares). There are three
types of accounts open in CDC company; Investors Account –
open by investors’ own name Sub-Account – open through
broker Group Account – under the control of broker
Exchange
3. Placing the Order:
• After opening the Account, the investor can place the order. The order can
be placed to the broker either personally or through phone, email, etc.
Investor must place the order very clearly specifying the range of price at
which securities can be bought or sold. e.g. “Buy 100 equity shares of a co.
for not more than Rs 500 per share.”
4. Executing the Order:
• As per the Instructions of the investor, the broker executes the order i.e.
he buys or sells the securities. Broker prepares a contract note for the
order executed. The contract note contains the name and the price of
securities, name of parties and brokerage (commission) charged by him.
Contract note is signed by the broker.
.
Exchange
Settlement: Last stage
• This means actual transfer of securities. This is the last
stage in the trading of securities done by the broker on
behalf of their clients. There can be two types of
settlement.
(a) On the spot settlement:
It means settlement is done immediately and on spot
settlement follows. T + 2 rolling settlement. This means any
trade taking place on Monday gets settled by Wednesday.
(b) Forward settlement:
It means settlement will take place on some future date. It can
be T + 5 or T + 7, etc. All trading in stock exchanges takes place
between 9.55 am and 3.30 pm. Monday to Friday.
-Role and function of a depository
-Central Depository Company of
Pakistan (CDC)
Role and function of a
depository
• CDS aims at ensuring the safety and soundness of Pakistani
marketplaces by developing settlement solutions that increase efficiency,
minimize risk and reduce costs.
• In the depository system, securities are held in depository accounts,
which is more or less similar to holding funds in bank accounts.
• Transfer of ownership of securities is done through simple account
transfers. This method does away with all the risks and hassles normally
associated with paperwork.
• Consequently, the cost of transacting in a depository environment is
considerably lower as compared to transacting in certificates Promoters
/ Shareholders
Central Depository Company of
Pakistan (CDC)
Central Depository Company of Pakistan (CDC) Central Depository
Company of Pakistan Limited provides central depository services
for equity, debt and other financial instruments. The company
handles electronic (paperless) settlement of transactions carried
out at stock exchanges. It also handles various transactions that
include deposit and transfer of securities, pledging of securities,
pledge release, pledge call, and withdrawal of securities. The
company also provides investor account services, trustee and
custodial services, and share registrar services. It serves brokers,
asset management companies, banks, and general retail investors,
as well as issuers and registrars of securities. Central Depository
Company of Pakistan Limited was incorporated in 1993 and is
based in Karachi, Pakistan. It has branches in Karachi, Lahore, and
Islamabad, Pakistan
CDC’s function
Primarily, CDC’s function was to operate the Central Depository System (CDS) for all
financial instruments traded in Pakistan Capital Market. However, with the ever
growing capital market, the co, has diversified its business beyond the traditional
depository domain and offer the following services as well
• Investor Account Services
Launched in 1999-Allows the retail investor to open and maintain custody
accounts directly with CDC.
• Trustee and Custodial Services
Launched in 2002-Serves as a Trustee to Open-end and Closed-end Mutual
Funds and Voluntary Pension Schemes.
• Share Registrar Services
Launched in 2008-Provides share issuing companies state-of-the-art facilities of
registrar and transfer agents, including customer dealing on behalf of the
companies.
CDC’s function
• ITMinds Limited (Wholly owned subsidiary of CDC)
Launched in 2009 -Provides Business Process Outsourcing (BPO)
services which include provision of back office functions to the
Mutual Fund industry.
• CISSII (Centralized Information Sharing Solution for Insurance
Industry)
(Developed and managed by CDC Pakistan)
Launched in 2014-Offers online information sharing solution for the
life insurance industry. It allows life insurance companies to share
information such as acceptance of claim, postponed or declined
risks, malpractices of agents and group life claims experience for
the purpose of achieving greater efficiency and transparency in the
Industry
Mortgage Market
Definition of mortgage market
A market for loans to people and organizations
buying property a market for mortgages that
have been bought by financial institutions and
are then traded as asset-backed securities.
WHAT IT IS A MORTGAGE LOAN?
• A mortgage loan, or simply mortgage, is used either by purchasers
of real property to raise funds to buy real estate, or alternatively by
existing property owners to raise funds for any purpose, while
putting a lien on the property being mortgaged. The loan is
"secured" on the borrower's property through a process known
as mortgage origination. This means that a legal mechanism is put
into place which allows the lender to take possession and sell the
secured property ("foreclosure" or "repossession") to pay off the
loan in the event the borrower defaults on the loan or otherwise
fails to abide by its terms. The word mortgage is derived from a
"Law French" term used by English lawyers in the Middle
Ages meaning "death pledge" and refers to the pledge ending
(dying) when either the obligation is fulfilled or the property is
taken through foreclosure. A mortgage can also be described as "a
borrower giving consideration in the form of a collateral for a
benefit (loan)"
A mortgage is a loan in which property or real estate is used

as collateral. The borrower enters into an agreement with
the lender (usually a bank) wherein the borrower receives cash upfront
then makes payments over a set time span until he pays back the
lender in full.
HOW IT WORKS (EXAMPLE):
Mortgage loans are usually entered into by home buyers without
enough cash on hand to purchase the home. They are also used to
borrow cash from a bank for other projects using their house
as collateral.
• There are several types of mortgage loans and buyers should assess
what is best for their own situation before entering into one.
• Types of loans are characterized by their term dates (usually from 5
to 30 years, some institutions now offer loans up to
50 year terms), interest rates (these may be fixed or variable), and
the amount of payments per period.
• Mortgages are like any other financial product in that their supply
and demand will change dependent on the market. For that reason,
sometimes banks can offer very low interest rates and sometimes
they can only offer high rates. If a borrower agreed upon a high
interest rate and finds after a few years that rates have dropped, he
can sign a new agreement at the new lower interest rate -- after
jumping though some hoops, of course. This is called "refinancing."
WHY IT MATTERS:
• Mortgages make larger purchases possible for individuals lacking
enough cash to purchase an asset, like a house, up
front. Lenders take a risk making these loans as there is
no guarantee the borrower will be able to pay in the future.
Borrowers take risk in accepting these loans, as a failure to pay will
result in a total loss of the asset.
• Home ownership has become a cornerstone of the American
Dream. For most people, their home is their most valuable asset.
Mortgages make home buying possible for many Americans.
Mortgages are not always easy to secure, however, as rates
and terms are often dependent on an individual's credit score and
job status. Failure to repay allows a bank to legally foreclose and
auction off the property to cover its losses.
• Mortgage borrowers can be individuals mortgaging their home or
they can be businesses mortgaging commercial property (for
example, their own business premises, residential property let to
tenants, or an investment portfolio). The lender will typically be a
financial institution, such as a bank, credit union or building
society, depending on the country concerned, and the loan
arrangements can be made either directly or indirectly through
intermediaries. Features of mortgage loans such as the size of the
loan, maturity of the loan, interest rate, method of paying off the
loan, and other characteristics can vary considerably. The lender's
rights over the secured property take priority over the borrower's
other creditors, which means that if the borrower
becomes bankrupt or insolvent, the other creditors will only be
repaid the debts owed to them from a sale of the secured property
if the mortgage lender is repaid in full first.
Basic terminology of Mortgage
lending
• Mortgage lending is the primary mechanism used in many countries to finance
private ownership of residential and commercial property (see commercial
mortgages). Although the terminology and precise forms will differ from country
to country, the basic components tend to be similar:
• Property: the physical residence being financed. The exact form of ownership will
vary from country to country, and may restrict the types of lending that are
possible.
• Mortgage: the security interest of the lender in the property, which may entail
restrictions on the use or disposal of the property. Restrictions may include
requirements to purchase home insurance and mortgage insurance, or pay off
outstanding debt before selling the property.
• Borrower: the person borrowing who either has or is creating an ownership
interest in the property.
• Lender: any lender, but usually a bank or other financial institution. (In some
countries, particularly the United States, Lenders may also be investors who own
an interest in the mortgage through a mortgage-backed security. In such a
situation, the initial lender is known as the mortgage originator, which then
packages and sells the loan to investors. The payments from the borrower are
thereafter collected by a loan servicer.
Basic terminology of Mortgage
lending
• Principal: the original size of the loan, which may or may not
include certain other costs; as any principal is repaid, the principal
will go down in size.
• Interest: a financial charge for use of the lender's money.
• Foreclosure or repossession: the possibility that the lender has to
foreclose, repossess or seize the property under certain
circumstances is essential to a mortgage loan; without this aspect,
the loan is arguably no different from any other type of loan.
• Completion of documentation: legal completion of the mortgage
deed, and hence the start of the mortgage.
• Redemption: final repayment of the amount outstanding, which
may be a "natural redemption" at the end of the scheduled term or
a lump sum redemption, typically when the borrower decides to
sell the property. A closed mortgage account is said to be
"redeemed".
Mortgage market
• Who are the lenders?
The first step in understanding the mortgage market is to
understand who is actually loaning the money. An important
distinction that we must make is between institutional lenders and
private lenders. Institutional lenders are:
- Commercial banks
- Savings and loans
- Credit unions
- Mortgage banking companies
- Pension funds
- Insurance companies
Mortgage market
• These lenders make loans based on income and credit of the borrower.
Private lenders, on the other hand, are either individuals or small
companies. They are not regulated by the government, so their lending
guidelines may be more flexible.
Another thing you should know about lenders is the difference between
mortgage brokers and mortgage bankers. Many people see the word
“mortgage company” and think they are banks that lend their own money.
This is not always the case. If you are dealing with a mortgage banker
then, yes, they are a direct lender. This means they lend you their own
money and make money from the interest they charge.
Mortgage brokers, on the other hand, are middlemen that are responsible
for putting lenders and borrowers together. The advantage to a mortgage
broker is that they might have access to many different lenders that do not
deal directly with the public.
Mortgage market
• The primary and secondary mortgage market
Now that you know who the lenders are and the types of loans, you
should understand how the market itself works. There is a primary
and secondary market for mortgages. The primary lender is the one
who deals directly with the public. They are the ones that originate
the mortgage loans. But they do not lend the money themselves. A
primary mortgage lender makes money from the loan processing
fees rather than the interest paid on the loan.
These primary lenders often lend money to customers and then
sell a large number of the notes to investors in the secondary
market. This replenishes their cash reserves. The lenders on the
secondary market are the ones who make money from the
interest.
Mortgage Market in Pakistan
• In Pakistan mortgage finance is a relatively small sector, which is
developing slowly. At the moment mortgage finance facility is being
offered by almost all major commercial banks as well as HBFC which
is an institution dedicated to providing home loans only. Banks offer
different percentage financing for different purposes, the maximum
is 75% of property’s value if the loan is required for constructing a
house; this percentage is lower for renovation. However, the
problem lies in the fact that this facility is not easily accessible by
self-employed people or the ones belonging to lower income
groups, hence creating a housing crisis. Banks tend to play safe
when it comes to lending funds; they target the salaried class as the
default risk is lower in this case. The lack of enforcement of
foreclosure laws also makes the banks hesitant to offer mortgage to
lower income bracket. Moreover, such loans tie up the bank’s funds
for long periods with finance tenor ranging from 3 years to 30 years
Despite the growing economic and social importance that
development economists are attributing to housing finance, it remains
largely underdeveloped in Pakistan. Private mortgages remain small
and unaffordable. Housing finance is expensive and still rationed in
favor of higher income populations. Pakistan does not have the kind of
mortgage market, operating in the US, Europe and even in India. There
could be so many reasons behind this. Government as well as State
Bank of Pakistan making their all-out efforts for the development of
housing finance in the country. However. Pakistan’s housing shortage
had reached around 10 million units and is expected to grow every
year by 0.7 million units. This is an alarming situation and needs to be
dealt with immediately. Most of this shortage is due to lack of housing
available for the lower income strata and an underdeveloped
mortgage finance market
Mortgage Industry Overview
In a 2009 report, World Bank estimated a Housing
Shortfall of around 8 million units in Pakistan
ABAD claims annual incremental demand of 600,000

units of which 50% is met by the private/public
investment leaving an annual shortfall of 300,000
units
Taking 600,000 incremental demand and 500,000
units from the backlog, total annual housing needs
come to 1.1 million
Mortgage Industry Overview
At an average price of Rs. 1 million per unit, total funding
requirement is Rs 1.1 trillion per year
Assuming that only 10% of housing needs can be converted into

effective demand, total funding needs are Rs.110 billion
At 70% LTV (Loan–to-Value Ratio), this translates into Rs. 77 billion

per annum housing credit requirement
Mortgage lending in Pakistan less than 1% of GDP, far from the 14 %

registered in Chile, 5 % in Colombia, 2.5 % in India and 65% in USA
Housing Finance Market
No. of • Commercial Banks : 22

Institutions • Islamic Banks : 05
involved in • DFIs : 02
Housing • MFBs : 02
• Islamic Banking Branches : 07
Finance
Mortgage Market of Pakistan
(Gross Outstanding)
Major Stakeholder
Banks
Government
Customer
Authorities
Mortgage
Realtors
Finance Local
Authorities
Appraisal
Law Firms
Firm
SBP-REGULATIONS FOR
HOUSING FINANCE
REGULATION R-15
• Banks/DFIs shall determine the housing finance limit, both in urban and
rural areas, in accordance with their internal credit policy, credit
worthiness and loan repayment capacity of the borrowers. At the same
time, while determining the credit worthiness and repayment capacity of
the prospective borrower, banks/DFIs shall ensure that the total monthly
amortization payments of consumer loans, inclusive of housing loan,
should not exceed 50% of the net disposable income of the prospective
borrower.
• The bank should not allow housing finance for the purchase of land but
can extend finance for the purchase of land and construction on it.
• The bank may allow housing finance for construction of houses against
land owned by their customers
Types of Housing Finance
• Buying a Home
– Loan for Purchase of a constructed residential property like house, duplex,
apartment and townhouse, where the said property can be mortgaged with
the bank. With a maximum financing limit of 85% you can easily buy a house
or apartment that best fits your requirements\
• Building a Home
– Building a Home is loan for construction of home over a residential plot. The
financing will be done in tranches. Customer provides the detailed BOQ (Bill of
Quantity) and approved building plan for the construction. The customer,
together with his/her architect and the bank’s approved appraiser, will
prepare the BOQ.
Types of Housing Finance
• Home Equity - Renovation
– Home equity loan is against residential property (as mentioned in “Home
Purchase’), which the borrower already owns, for the purpose of making
improvements in the property.
• Land Plus Construction

– Land + Construction loan is for Purchase of land and subsequent construction.
The financing is done in 5 trenches (1st trench for purchase of land and
subsequent 4 trenches for construction as per BOQ). The customer has to start
construction within 6 months of purchase of land.
• Balance Transfer Facility

– Balance transfer is for financing of Mortgage taken out from other Banks
REGULATION R-18
• The house financed by the bank/DFI shall be mortgaged in bank’s/DFI’s
favour by way of equitable or registered mortgage.
• Registered Mortgage:
– In registered mortgage (RM), the mortgagor binds himself to repay the mortgage money
on a certain date and transfers the mortgaged property absolutely to the mortgagee but
with the condition that it will re-transfer it to the mortgagor upon the payment of
mortgage money as agreed. The mortgagee acquires the right to sell but only where
mortgagor defaults in repayment of the loan.
• Equitable Mortgage:
– Being the most common and generally accepted, equitable mortgage (EM) is completed
by deposit of title deed of the Property. EM also gives the right to sell to the creditor
upon default by the borrower but only after obtaining permission of the court. The
deposit of title deed is documented by means of a Memorandum of Deposit of Title
Deeds [MODTD].
REGULATION R-19
• Banks/DFIs shall either engage professional expertise or
arrange sufficient training for their concerned officials to
evaluate the property, assess the genuineness and integrity of
the title documents, etc.
• PBA approved companies on penal or sufficient training for

internal staff looking after the above tasks
REGULATION R 20-21
Regulation- 20
• The bank’s/DFI’s management should put in place a
mechanism to monitor conditions in the real estate market (or
other product market) at least on quarterly basis to ensure
that its policies are aligned to current market conditions
Regulation- 21
• Banks are encouraged to develop floating rate products for

extending housing finance, thereby managing interest rate
risk to avoid its adverse effects.
REGULATION R-21 (Classification)
Category Determinant Provisions
Substandard Overdue by 90 25% provision of the difference form the outstanding
days or more principal balance less the Forced Sales Value of mortgage
properties to the extent of 75% of such FSV
Doubtful Overdue by 180 75% provision of the difference form the outstanding
days or more principal balance less the Forced Sales Value of mortgage
properties to the extent of 50% of such FSV
Loss Overdue by one 100% provision of the difference form the outstanding
year or more principal balance less the Forced Sales Value of mortgage
properties to the extent of 75% for first year; 60% for
second year; 45% for third year; 30% for fourth year and
20% for fifth year
Issues in Housing Finance
– Undocumented Economy
– Our Legal Framework affecting Foreclosure of loan, takes long
time to initiate legal prosecution against delinquent borrowers.
– Transfer, Tenancy, Rent Control: it refers to the weak property
transfer process in all over in Pakistan including in Urban or Rural
areas both.
– Rationalization of Transaction Costs: It varies with area and
concerned allotment authorities.
– Integrated land registration information system
– Financing on Housing project: there is no mechanism of project
financing because of the potential threat of land grabbing mafias
and political interventions.
Issues in Housing Finance
– Supply of land for affordable housing: availability of
land for affordable housing is difficult
– Structuring and streamlining Large Scale Developer’s
Finance Facilitate low-cost/low-income housing models
and products
– Facilitate Real Estate Investment Trusts (REITs)
– Provision of long term funding for housing loans
– Housing Observatory (housing market information
system)
– Capacity building of the mortgage banking industry in
Pakistan
Process Flow Customer
Branch Sales
Verifications Login RHQ
Appraisal
Recommendation
Legal
Underwriting
Decision
Consumer Operations
for Booking
World Bank’s initiative to promote
housing finance in Pakistan:
World Bank has been developing a house financing plan for Pakistan to
help deal with the housing shortage crisis. WB along with PMRC
(Pakistan Mortgage Refinancing Company) are going to help in
development of the mortgage sector, focusing mainly on the lower
income brackets. The World Bank will be providing funds to banks
through PMRC to increase the lending volume, specifically to lower
income group. The target is to help expand the housing finance sector
in such a way that it is profitable for the banks but also easily
accessible than conventional loans. On-lending support is another way
the World Bank plans to help banks increase their lending power;
banks will be able to lend the money they have borrowed from other
organizations/people.
All in all the landscape for mortgage finance is improving in the
country with SBP, World Bank and PMRC working on introducing new
regulations and policies to expand the sector. Hopefully the market will
become more functional in the near future.
Foreign Exchange Market
What is Foreign exchange market?
I. Introduction
A. The Currency Market:
where money denominated in one currency is bought
and sold with money denominated in another currency.
B. International Trade and Capital Transactions:
facilitated with the ability to transfer purchasing power between countries
C. Location
1. OTC-type: no specific location
2. Most trades by phone, telex, or SWIFT
SWIFT: Society for Worldwide Interbank Financial Telecommunications
BASIC CONCEPTS/TERMINOLOGIES
Foreign Currency v/s Foreign Exchange
As per Foreign Exchange Act, (Section 2), 1947.

•(c) "Foreign Currency" means any currency other than
Pakistan currency;
•(d) "Foreign Exchange" means includes any instrument
drawn, accepted, made or issued under clause (8) of section
17 of the State Bank of Pakistan Act, 1956, all deposits,
credits and balance payable in any foreign currency, and any
drafts, traveler’s cheques, letters of credit and bills of
exchange, expressed or drawn in Pakistan currency but
payable in any foreign currency;
Financial Markets
• Financial market is a place where
Resources/funds are transferred from those
having surplus/excess to those having a
deficit/shortage.
192
Foreign Exchange Markets
• The market where the commodity traded is
Currencies.
• Price of each currency is determined in term
of other currencies.
193
What is an Exchange Rate ?
Exchange Rate is the price of one country's currency
expressed in another country's currency. In other
words, the rate at which one currency can be
exchanged for another.
e.g. Rs. 117 per one USD
Major currencies of the World

USD
EURO
YEN
POUND STERLING
What is a Foreign Exchange Transaction ?
– Any financial transaction that involves more than
one currency is a foreign exchange transaction.
– Most important characteristic of a foreign exchange
transaction is that it involves Foreign Exchange Risk.
PARTICIPANTS IN THE FOREIGN EXCHANGE
MARKET
• All Commercial Banks
(Authorized Dealers only).
• State Bank of Pakistan.
• Corporate Treasuries.
• Public Sector/Government.
• Inter Bank Brokerage Houses.
• Resident Pakistanis
• Non Residents
• Exchange Companies/Money Changers
FOREIGN EXCHANGE REGIMES
• Fixed exchange rate/pegged rate;

Managed by the Government
• Free floating rate;

Managed by market demand/supply mechanism
• Managed floating rate;
Mixture of the above two- Government intervention
Components of a Standard
FX Transaction
 Base Currency (USD/PKR)
 ‘Dealt’ or ‘Variable’ Currency
 Exchange Rate
 Amount
 Deal Date
 Value Date
 Settlement Instructions
Value Date Conventions
Currencies are traded both in Ready and forward
value dates.
1) Ready: Settlement on the deal date. e.g. Pakistan
2) Value Tom : Settlement on next day. e.g. Canada
3) Spot Transaction : settlement usually in two working days.
In international FX transactions, Spot is the Standard value
date.
Why Spot Date ?
• Time Zone Difference

• Her stat Risk
4) Forward Transaction: Settlement at some future date ahead
of the spot.
199
FX Rate Quotation:
In the forex market rates are always quoted ‘two way’.
Two way quote gives both ‘Bid’ and ‘Offer’.
e.g. USD/PKR= 58.55 / 60
Bid / Offer
‘Base Currency’ Vs. ‘Dealt Currency’
Number of variable or dealt currency unit in one unit of base currency.

In international quotes base currency comes first.
e.g. BC/VC
USD/PKR= 58.55/60
Price maker Vs. Price Taker
The bank quoting the price is ‘price maker’ or

‘market maker’.
The bank asking for the price or ‘quote’ is the

‘price taker’ or ‘user’.
RATE QUOTATION CONVENTIONS
IN-DIRECT QUOTATION:
“Price of one Unit of Foreign Currency in terms of Domestic
Currency”
e.g. USD/PKR = 59.45/50
Buy One USD at 59.45
Sell One USD at 59.50
Spread 00.05
In the international market, almost all currencies are quoted
indirectly.
202
RATE QUOTATION CONVENTIONS
DIRECT QUOTATION:
“Price of one Unit of Domestic Currency in terms of Foreign Currency”
e.g. EURO= 1.2805/12
Buy One Euro at 1.2805
Sell One Euro at 1.2812
Spread 0.0007
Five Currencies are quoted in Direct Terms

1) Pound Sterling
2) Euro
3) Australian Dollar
4) New Zealand Dollar
5) Irish Punt
203
FORWARD TRANSACTIONS
1. Out right sale/purchase of a currency against the other for settlement
at a future date at the predetermined exchange rate.
2. Forward rates are quoted as premium or discount over spot rate.
3. Forward rates depend upon interest rate differential between the two
currencies.
4. Currency with higher interest rates is at discount wrt currency having

lower interest rate.
5. Currency with lower interest rates is at premium wrt currency having

higher interest rate.
Calculating Forward Rate
Interest rate of USD = 1.25%

Interest rate of PKR = 6%
Spot Rate = 58.50
DB for PKR = Actual/365
DB for USD = Actual/360
Six month Forward Rate =

spot rate x (1+ .06*181/365)/(1+.0125*181/360)
=59.87
ORGANIZATION OF THE FOREIGN EXCHANGE
MARKET
2. Forward Market
a. arbitrageurs
b. traders
c. hedgers
d. speculators
What is arbitrage business?
• In economics and finance, arbitrage is the practice of taking
advantage of a price difference between two or
more markets: striking a combination of matching deals
that capitalize upon the imbalance, the profit being the
difference between the market prices. When used by
academics, an arbitrage is a (imagined, hypothetical,
thought experiment) transaction that involves no
negative cash flow at any probabilistic or temporal state
and a positive cash flow in at least one state; in simple
terms, it is the possibility of a risk-free profit after
transaction costs. For example, an arbitrage is present
when there is the opportunity to instantaneously buy
something for a low price and sell it for a higher price.
Foreign exchange traders
• Currency trading is the buying and selling of different world
currencies. Currency trades are conducted by buying or selling one
currency relative to another by the currency traders on the expectation
that the relative value of the currencies will move in one direction or
another.
• If a particular trader believes the value of the U.S. dollar will fall in the
future relative to the British pound, that trade sells the U.S. dollar and
British pound currency pair. Traders can profit when currency values rise
and fall, as long as they pick the right direction in a trade. Currency trading
is often very volatile, reports .
Financial Hedger
An investor who takes steps to reduce the risk of an investment by making an offsetti
ng investment. There are a large number of hedging
strategies that a hedger can use. Hedgers may reduce risk, but in doing so they also
reduce their profit.
Hedger
in the futures market try to offset potential price changes in the spot market by buying
or selling a futures contract.
In general, they are either producers or users of the commodity or financial product
underlying that contract. Their goal is to protect their profit or limit their expenses.
For example, a cereal manufacturer may want to hedge against rising wheat prices by
buying a futures contract that
promises delivery of September wheat at a specified price.
If, in August, the crop is destroyed, and the spot price increases, the manufacturer can
take delivery of the wheat at the
contract price, which will probably be lower than the market price. Or the manufactur
er can trade the contract for more than
the purchase price and use the extra cash to offset the higher spot price of wheat.
What is a 'Speculator‘?
A speculator is a person who trades derivatives, commodities, bonds, equities
or currencies with a higher than average risk in return for a higher-than-
average profit potential. Speculators take large risks, especially with respect
to anticipating future price movements, in the hope of making quick, large
gains.
Speculators are typically sophisticated risk-taking investors with expertise in
the markets in which they are trading; they usually use highly leveraged
investments, such as futures and options.
These investors are call speculators due to their tendency to attempt to
predict price changes in more volatile sections of the markets, believing, or
speculating, that a high profit will occur even if market indicators may suggest
otherwise. Normally, speculators operate in a shorter time frame than a
traditional investor.
.
What is a 'Speculator‘?
Although one can argue that all investment is speculation, an
acknowledged speculator will buy or sell a security solely to
reap a typically short-term profit from the price movement of
that security. This motivation differs significantly from those of
more traditional investors or hedgers.
For example, consider the purchase of corn futures. A hedger
may purchase these securities in order to offset any negative
movements in the price of corn and thus stabilize his or her
portfolio (these people might be corn growers or cereal
companies, for instance). A speculator, however, may buy the
very same security simply because he or she has reason to
believe the position will increase in value. He or she simply
bets on which way the market is going to go.
Factors affecting the Currency
Exchange Rate
• The rate of interest is directly proportional to the currency exchange. A low interest rate
reduces investment deals from foreign countries. In time, the currency value drops in the
global market. A high interest rate provides more opportunities for investment, and the
currency value increases.
• The trade balance is the difference between the export value and the import value of a
country. If the resultant value is negative, the country is in a trade deficit and as a result the
value of its currency is low. If the trade balance is positive, the country is said to have a trade
surplus, and the demand for its currency is high.
• A high inflation rate in a country is an indicator of the high prices of commodities. If
commodities are priced high, the currency value drops because purchasing power is reduced.
Likewise, a lower inflation rate increases the currency value. If a country has high rates of
unemployment, the currency value is low and vice versa.
• Political instability results in a weak economy and thereby decreases the currency value. On
the contrary, a stable political economy involves less financial risk and increases the value of a
country’s currency.
MARKET
II. CLEARING SYSTEMS
A. Clearing House Interbank Payments System (CHIPS)
- used in U.S. for electronic fund transfers.
B. Fed Wire
- operated by the Fed Reserve of US
- used for domestic transfers
III. ELECTRONIC TRADING
A. Automated Trading
- genuine screen-based market
What is SWIFT?
• Founded in Brussels in 1973, the Society for the Worldwide Interbank
Financial Telecommunication (SWIFT) is a co-operative organization
dedicated to the promotion and development of standardized global
interactivity for financial transactions. SWIFT's original mandate was to
establish a global communications link for data processing and a
common language for international financial transactions. The Society
operates a messaging service for financial messages, such as letters of
credit, payments, and securities transactions, between member banks
worldwide. SWIFT's essential function is to deliver these messages quickly
and securely -- both of which are prime considerations for financial
matters. Member organizations create formatted messages that are then
forwarded to SWIFT for delivery to the recipient member organization.
SWIFT operates out of its Brussels headquarters and processes data at
centers in Belgium and the United States. SWIFT currently provides
messaging and transaction processing services for over 7,000 financial
organizations located in 194 countries worldwide.
What is CHIPS?
Clearing House Interbank Payments System
The Clearing House Interbank Payments System (CHIPS) is a bank owned automated funds-transfer
system for domestic and international high value payment transactions in U.S. dollars. It is a real-time
final settlement payment system that continuously matches, off-sets and settles payments among
international and domestic banks.
CHIPS provides real-time, immediate and final settlement of payment messages continuously
throughout the day similar to Fed wire. During the business day, system participants can send their
payments to CHIPS. Funds are released by available funds on hand (no overdrafts are permitted) or
through offsetting. A “balance release algorithm” continuously searches the queue of unreleased
payments and uses this patented off-setting algorithm to match and release payments.
CHIPS’ ability to perform real-time bilateral and multi-lateral off-setting means that very large payments
can be released earlier in the day, and that participants realize greater liquidity efficiency savings than
those possible in pure RTGS systems. With real-time off-setting, the system continuously offsets
payments between two or more CHIPS participants. A payment is considered final and irrevocable at the
instant CHIPS releases it.
Since CHIPS’ inception The Clearing House management has implemented a number of credit, systemic
and liquidity risk reduction measures to better manage individual participant risk, eliminate daylight
overdraft exposure, and virtually eliminate systemic risk.
MARKET
B. Results:
1. Reduces cost of trading
2. Threatens traders’ oligopoly of information
3. Provides liquidity
IV. SIZE OF THE MARKET
A. Largest in the world 2016: $5.9 trillion daily
The major Forex pairs and their
nicknames:
The major Forex pairs and their
nicknames:
DEFINITION of 'Currency Pairs'
Two currencies with exchange rates that are traded in the retail forex market. The rates of
exchange between foreign currency pairs are calculated as the factor by which a base currency is
multiplied to yield an equivalent value or purchasing power of foreign currency. The currency
exchange rates of foreign currency pairs float, meaning that they change continually based on a
multitude of factors.
The most traded pairs of currencies in the world are called the Majors. They constitute the
largest share of the foreign exchange market, about 85%, and therefore they exhibit high market
liquidity.
The Majors are:
1. EUR/USD
2. GBP/USD
3. AUD/USD
4. USD/CHF
5. NZD/USD
6. USD/CAD
7. USD/JPY
Forex Market Size
1. The trading volume of the Forex market is 4X the global GDP
2. $5.9zxdf trillion dollars per are traded every day in the forex market.
3. More than 85% of the global forex market transactions happens on only 7 currency pairs
known as the majors (EURUSD, USDJPY, GBPUSD, AUDUSD, NZDUSD, USDCAD, USDCHF)
4. If you spent one dollar every second around the clock, it would take you 31,688 years to spend
a trillion dollars. Therefore, to spend $5.9 Trillion, the value of Forex, would take you 126,118
years.
5. The volume of retail forex trading represents just 5.5% of the whole foreign exchange market
6. Forex trading daily volume is about 53 times more than the New York stock exchange.
7. Deutsche Bank is the world’s largest foreign exchange dealer with over 21% in market share
8. There are over 170 different currencies around the world today that make up the Forex
market.
9. Forex is the only market that runs for 24 hours per day.
10. The Forex market is the most liquid market in the world.
11. The Forex market is 12X larger than the futures market and 27X larger than the equities
(stock) market.
Forex Market Size-Currency Status
Currency Status
1. The US Dollar is the first most traded currency, being part of
almost 90% of global trades.
2. The Euro is the second most traded currency (EUR 33.4%)
3. The British Pound (GBP, 11.8%) is the third most traded currency
4. The Japanese Yen (JPY, 23%) is the forth most traded currency
5. The Australian Dollar (AUD 8.6 %) is the fifth most traded currency
6. The Swiss Franc (CHF, 5.2%) is the sixth most traded currency
7. The Canadian Dollar (CAD 4.6%) is the seventh most traded
currency
8. The Mexican Peso (MXN 2.5%) is the eighth most traded currency
9. Chinese Renminbi (CNY 2.2%) is the ninth most traded currency
10. New Zealand Dollar (NZD 1.4%) is the tenth most traded currency
THE FORWARD MARKET
I. INTRODUCTION
A. Definition of a Forward
Contract
an agreement between a bank and a
customer to deliver a specified amount
of currency against another currency at
a specified future date and at a fixed
exchange rate.
THE FORWARD MARKET
2. Purpose of a Forward:
Hedging
the act of reducing exchange rate risk.
THE FORWARD MARKET
B. Forward Rate Quotations
1. Two Methods:
a. Outright Rate: quoted to
commercial customers.
b. Swap Rate: quoted in the
interbank market as a
discount or premium.
THE FORWARD MARKET
CALCULATING THE FORWARD
PREMIUM OR DISCOUNT
= F-S x 12 x 100
S n
where F = the forward rate of exchange
S = the spot rate of exchange
n = the number of months in the
forward contract
THE FORWARD MARKET
C. Forward Contract Maturities
1. Contract Terms
a. 30-day
b. 90-day
c. 180-day
d. 360-day
2. Longer-term Contracts
PART IV.
INTEREST RATE PARITY THEORY
I. INTRODUCTION
A. The Theory states:
the forward rate (F) differs from the spot rate
(S) at equilibrium by an amount equal to the
interest differential (rh - rf) between two
countries.
2. The forward premium or

discount equals the interest
rate differential.
(F - S)/S = (rh - rf)
where rh = the home rate
rf = the foreign rate
3. In equilibrium, returns on
currencies will be the same
i. e. No profit will be realized
and interest parity exists
which can be written
(1 + rh) = F
(1 + rf) S
B.Covered Interest Arbitrage
1. Conditions required:
interest rate differential does
not equal the forward
premium or discount.
2. Funds will move to a country
with a more attractive rate.
3. Market pressures develop:
a. As one currency is more
demanded spot and sold
forward.
b. Inflow of fund depresses
interest rates.
c. Parity eventually
reached.
C. Summary:
Interest Rate Parity states:
1.Higher interest rates on a currency offset by
forward discounts.
2.Lower interest rates are offset by forward
premiums.
International and Domestic Markets
• Help participants diversify both sources and uses of
funds
• Examples of major international markets:

Eurodollars—US dollars deposited outside U.S.
Eurobonds—bonds issued outside US but
denominated in $US
232
Introduction to Market Efficiency
• The financial market has direct influence of the money along with information
there in. The prices of financial assets at a point of time reflect the expectations of
investors which are shaped mainly by the available information. Accuracy and the
quickness in which market translated the expectation into prices are termed as
market efficiency. Fama (1970) stated, ‘A market in which prices always fully reflect
available information is called efficient.’ In an efficient market price rapidly
translate in to the available information market efficiency is used in context to the
‘informational efficiency’ rather than the ‘operational efficiency’ and the
‘allocative efficiency’. The concept of operational efficiency is basically related to
the efficiency of the market microstructure and is influenced by the factors as time
taken to execute the order and the number of bad deliveries. The operationally
efficient market keeps the transaction costs at minimum. On the other hand, the
concept of ‘allocative efficiency’ refers to the application of basic concept of
‘Pareto-efficiency’ of economics in the field of financial markets. Financial markets
are efficient in Pareto sense if they allocate the capital to different products in an
efficient way and any further reallocation of capital cannot increase the national
output.
• Efficient Market Hypothesis The efficient market hypothesis (EMH)
deal with informational efficiency and strongly based on the idea
that the stock market prices or returns are unpredictable and do
not follows any regular pattern so it is impossible to “beat the
market”. According to the EMH theory security prices immediately
and fully reflect all available relevant information. The EMH theory
suggests that the asset prices are determined by the demand and
supply in the competitive market with rational investors Rational
investors gather information very rapidly and immediately
incorporate this information into stock prices. Only new
information, i.e. news, cause change in prices but the news, by
definition, is unpredictable; therefore stock market which is
immediately influenced by the news is also unpredictable. James
Lorie has defined the efficient market as follow-
Some definition of Market Efficiency
• FAMA “(Efficient markets) … means the ability of the capital market to
function efficiently, so that prices of securities react rapidly to new
information. Such efficiency will produce prices that are appropriate in
term of current knowledge and investors will be less likely to make unwise
investments.
• Jensen (1978) defines “A market is efficient with respect to information
set if it is impossible to make economic profits by trading on the basis of
information set ”.
• Malkiel (1992) provides a closely related definition of efficient market
hypothesis as “A capital market is said to be efficient if it fully and
correctly reflects all relevant information in determining security prices.
Formally, the market is said to be efficient with respect to some
information set, φ, if security prices would be unaffected by revealing that
information to all participants. Moreover, efficiency with respect to
information set, φ, implies that it is impossible to make economic profits
by trading on the basis of φ”.
Introduction to Market
Efficiency
Efficient Market Hypothesis (EMH)
Implications of EMH theory may be pointed out as follows:
• In efficient market stock price is always at the “fair” level a stock
price change only when its fair value changes.
• market is efficient if the reaction of market prices to new
information is immediate and unbiased.
• Stock prices immediately react on the news.
• Stock price changes are unpredictable because no one knows
tomorrow’s news.
• Stock prices follow random walk, if price of today goes up nobody
can tell what would be the price of tomorrow.
• It is impossible for investors to consistently outperform in the
market.
Forms of Efficient Market Hypothesis:
• In 1970, Fama classified efficient market hypothesis in three categories according
to the level of information reflected in market prices –
• weak form,
• semi-strong form and
• strong form;
• Weak form: The weak form efficiency is also popularly known as ‘random-walk’. In
weak form of market efficiency stock prices reflect by all available trading
information which can be derived from the market data such as past price, trading
volume etc, so nobody can use information related to past price to identify the
undervalued security and make a big profit by them, It implies that no one should
be able to outperform the market using something that "everybody else knows".
If the markets are efficient in weak from, technical trading rules cannot be used to
make profit on a consistent basis. This form of market efficiency is called weak-
efficiency because the security prices are the most publicly and easily accessible
pieces of information.
Semi-Strong Form:
In semi-strong form all publicly available information are incorporated into
current stock prices. Publicly available information includes past price
information plus company’s annual reports (such as financial reports,
balance sheet and profit and loss account), company's announcement,
macro economic factors such as (inflation, unemployment etc) and others.
Some information (to the extent anticipated in advance) is discounted even
before the event is announced and some before the event took place. Such
matters like earnings reports, bonus, and rights affect the market even in
anticipation before the formal announcements. Semi-strong form implied
that share prices adjust to publicly available new information very rapidly
and in an unbiased fashion, such that no one should be able to outperform
the market using something that "everybody else knows". This indicates that
a company's financial statements are of no help in forecasting future price
movements and securing high investment returns.
Strong Form:
In strong form of efficiency stock prices quickly reflect all types of
information which include public information plus companies inside or private
information. Thus, it is the combination of public and private information that
is incorporated into current prices. This form implies that even companies
management can not make profit from inside information; they cannot take
advantage of inside affairs or important decision or strategies to beat the
market. According to strong-form market efficiency, inside information is also
already incorporated into stock prices, the common rational behind this is
unbiased market anticipation that already react in to market before
companies strategic decision. Strong form of efficiency is hard to believe in
practice except where rules and regulations of law are fully ignored. Studies
(Reilly & Brown, 2008) that examined the result of the corporate insiders and
stock exchange specialists do not support the strong form of efficient market
hypothesis. Empirical evidence has been mixed, but has generally not
supported strong forms of the efficient-market hypothesis.
Efficiency in financial markets
• Allocational Efficiency: highest/best use of funds

– DSUs try to fund projects with best cost/benefit ratios
– SSUs try to invest for best possible return for given
maturity and risk
• Informational Efficiency: prices reflect relevant

information
– Informationally efficient markets reprice quickly on
new information;
– informationally inefficient markets offer opportunities
to buy “underpriced” assets or sell “overpriced” assets
• Operational Efficiency: transactions costs minimized
240
Risks of Financial Institutions
• Credit or default risk: risk that a DSU may not pay as

agreed
• Interest rate risk: fluctuations in a security's price or
reinvestment income caused by changes in market
interest rates
• Liquidity risk: risk that a financial institution may be
unable to disburse required cash outflows, even if
essentially profitable
241
Risks of Financial Institutions, cont.
• Foreign exchange risk: effect of exchange rate

fluctuations on profit of financial institution
• Political risk: risk of government or regulatory action

harmful to interests of financial institution.
242
Valuation of Securities in Financial
Markets
• Securities are valued as the present value of their expected
cash flows, discounted at a rate that reflects their uncertainty
• Market pricing of securities
– Different investors may value the same security differently based on
their interpretation of information
• Impact of valuations on pricing
– Every security has an equilibrium market price at which demand and
supply for the security are equal
• Favorable information results in upward valuation revisions; unfavorable
information results in downward revisions
– Securities reach a new equilibrium price as new information becomes
available
Valuation of Securities in Financial
Markets (cont’d)
• Impact of the Internet on the valuation process
– The valuation of securities is improved as a result of the
internet because of
• Online price quotations
• The availability of the actual sequence of transactions for some
securities
• Increased information about firms issuing securities
• Online orders to buy or sell securities
Financial Market Regulation
• Many regulations attempt to ensure that businesses
disclose accurate information
• Disclosure
– The Securities Act of 1933 intended to ensure complete
disclosure of relevant financial information on publicly
offered securities
– The Securities Exchange Act of 1934 extended the
disclosure requirements to secondary market issues
Financial Market Regulation (cont’d)
• Regulatory response to financial scandals
– Enron, WorldCom and other scandals involved
• Exaggerated earnings
• Failure to disclose relevant information
• Auditors not meeting their responsibilities
– Existing regulations were not completely
preventing fraud
Financial Market Regulation (cont’d)
• Increased regulation is existing or emerging in
these areas:
– Provision of more complete and accurate financial
information
– More restrictions to ensure proper auditing by
auditors
– Proper oversight by the firm’s board of directors
Global Financial Markets
• Financial markets vary among countries in terms of
– The volume of funds that are transferred from surplus to deficit units
– The types of funding that are available
• How financial markets influence economic development
– Many foreign countries have converted to market-oriented economies
• Allows businesses and consumers to obtain financing
– Many Eastern European countries allowed for privatization, the sale of
government-owned firms to individuals
• Financial markets in these countries ensure that businesses can obtain
funding from surplus units
Global Financial Markets (cont’d)
• Global integration
– Many financial markets are globally integrated
• Participants move funds out of one country’s market and into
another
• Foreign investors serve as key surplus units in the U.S. by
purchasing securities
• U.S. investors serve as key surplus units for foreign countries by
purchasing foreign securities
– Market movements and interest rates have become more
correlated between markets
• Global integration (cont’d)
– Barriers to global integration
• Lack of information about foreign companies
• Different accounting regulation
• Excessive cost of executing international transactions
– Financial market integration within Europe
• Elimination of regulations
• Merging of some European stock exchanges
• Adoption of the euro
• Role of the foreign exchange market
– The foreign exchange market facilitates the
exchange of currencies
– Financial intermediaries serve as brokers and/or
dealers in foreign exchange markets
– Foreign exchange market
• The exchange rate is the market-determined price of a
currency
– Price changes in response to supply and demand
Overview of Financial Institutions (cont’d)
• Competition between financial institutions (cont’d)

– Impact of the internet on competition
• Online commercial banks
– Lower costs and higher interest rates
• Online services by banks
– Reduces costs and increases efficiency
• Online insurance companies
– Reduces operating costs
• Online brokerage firms
– Reduces operating costs and fees
Overview of Financial Institutions (cont’d)
• Consolidation of financial institutions

– Reduction in regulations has resulted in more
opportunities to capitalize on:
• Economies of scale
• Economies of scope
– Mergers have resulted in financial conglomerates
– Consolidation may increase expected cash flows or reduce
risk, or both
Global Expansion by Financial Institutions
• Various financial institutions have expanded

through international mergers, resulting in:
– More services to clients
– An international customer base
• The introduction of the euro has increased
international mergers

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• Simple response is that a well-developed, smoothly

Provides for efficient flow of funds from saving

NCBs(2) DNC Bs(4) Mutual Funds Modarba Cos

Investment Banks HFCs DHs Vent. Cap.co.

Director Director Direcrtor Director

Senior Joint Director(s) Senior Joint Director(s) Senior Joint Director(s)

Development of the Banking System

The specific aims of financial regulators are

Objectives of banking supervision:

• Regulation and supervision of the banking business are essential for an

• It is the country’s Central Bank all over the

• Banking is one of the most sensitive businesses all over the

The term banking has been defined under

• The State Bank of Pakistan Act, 1956

• Sole right to issue Bank Notes

It is a professionally managed type of pooled investment

Commercial banking, with its great reliance on public

Head Investment Banking Chief HRD

Head Commercial Bank Head Audit & Inspection

Head Treasury Head International Division

Head Credit Policy Country Operations Head

• Negotiable Instrument Act 1881, Section 3 (b)

• Banking is a service industry.

THESE ARE THE LIFE BLOOD OF THE BANK AND

• EXTENDED CUSTOMER BASE PROVIDES STABLE FUNDING.

• BETTER RATE OF RETURN FOR DEPOSITORS.

• GREATER POTENTIAL FOR BANKS TO EXPAND:

• PRODUCTS & SERVICES.

• INVEST IN MODERN TECHNOLOGY.

• BETTER FACILITIES FOR BANK EMPLOYEES.

• Money markets: wholesale markets for short-term

• Capital markets: where “capital goods” are

Meaning of Money Market:

Pooling the capital resources and Developing enterprises investors

PUBLIC RIGHT BONUS PRIVATE STOCK

In Primary Market, Securities are offered to the public for

Initial Public Offering Further Public

A stock Market is a part of capital market.

• New York Stock Exchange(NYSE- USA)

Internal player of Stock Exchange

A mortgage is a loan in which property or real estate is used

ABAD claims annual incremental demand of 600,000

Assuming that only 10% of housing needs can be converted into

At 70% LTV (Loan–to-Value Ratio), this translates into Rs. 77 billion

Mortgage lending in Pakistan less than 1% of GDP, far from the 14 %

No. of • Commercial Banks : 22

• Land Plus Construction

• Balance Transfer Facility

• PBA approved companies on penal or sufficient training for

• Banks are encouraged to develop floating rate products for

Verifications Login RHQ

As per Foreign Exchange Act, (Section 2), 1947.

Major currencies of the World

• Fixed exchange rate/pegged rate;

• Free floating rate;

• Time Zone Difference

‘Base Currency’ Vs. ‘Dealt Currency’

Number of variable or dealt currency unit in one unit of base currency.

The bank quoting the price is ‘price maker’ or

The bank asking for the price or ‘quote’ is the

Five Currencies are quoted in Direct Terms

2. Forward rates are quoted as premium or discount over spot rate.