Financial System of Pakistan

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

ROLE OF BANKS IN FINANCIAL SYSTEM

Banks play an important role in financial system of any country there are some specific functions that banks perform in a financial system. These are; y Delegated Monitoring

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

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

Risk Sharing and Banking Crises

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

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

This role of Banks has dual impact. If on the one hand, close and durable relationships provide better access to firms and ameliorate some of the information problems characterizing lending relationships, on the other hand, they also involve inefficiencies related to the hold-up and the soft-budget-constraint problems. y Banks also play an important role in corporate governance

Financial Markets in Pakistan

Financial Markets in Pakistan consists of two markets. y y MONEY MARKET: It provides short term funds CAPITAL MARKET: Makes long term funds available to businesses and industries

The Financial markets are further classified into; y y PRIMARY MARKET: In this new shares or bonds are issued and, SECONDARY MARKET:In this securities previously issued are traded such as Shares, Bonds, Commercial Papers, Options and Mutual Fund.

Financial Intermediaries in Pakistan

The financial intermediary sector of Pakistan is composed of the money market and capital markets, with primary and secondary dealers.Financial intermediaries of Pakistan include: y y y y y y Commercial Banks Deposit institutions Credit unions Financial advisor or broker Pension funds Insurance companies