Role of Financial Markets in Pakistan

Financial Market
Financial market is referred to as the market where suppliers and demanders of funds can transact business directly. Simply we can say a market in which people and entities can trade financial securities

Roles played by Financial Market in Pakistan

Mobilize money and resources between lenders and borrowers. Helps in relocating resources thus helping in attaining economic growth. Idle and not in use resources are utilized in a better way. Helps government raise funds that are used for making development changes in the country. Serve individuals, corporations and Governments necessary funding in order to run their businesses and programs.

Financial intermediaries and their functions

Financial intermediaries are actually those financial institutions that accept money from savers and use those funds to make loans and other financial investments in their own name in Pakistani institutions. Key FIs are comprised of State Bank of Pakistan (SBP), commercial banks, non-bank financial institutions (NBFIs) and insurance companies. Functions: a) Financial Intermediaries are providing credit to Pakistani industry so that it could be improved. b) Agriculture sector in Pakistan is being improved by financial intermediaries and markets because they are providing farmers with short term and long term loans and machinery is given to them on lease. c) Housing schemes are being introduced in Pakistan so that societies could be built and houses and plots could be given to individuals on installments. d) Financial institutions and markets in Pakistan are helping in poverty reduction by providing loans at low interest rates.

Types of financial market:

A financial market is categorized in following two types: i. ii. Money market Capital market

Role of Financial Markets in Pakistan

Money Market
The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend for a short period of time usually less than a year. Commonly used instruments in the money market are: 1. Commercial paper. 2. Treasury bill 3. Repurchase agreement etc.

Role played by money market in Pakistan

a) Well developed and broad based money market helps economic growth. b) Helps industries to achieve short term loans to fulfill their working capital and short run requirements. c) Helps the commercial banks to earn profit by investing their surplus funds in the purchase of Treasury bills and other securities offered by Govt. d) Helps the central bank in shaping and controlling the flow of money in the country. e) Government borrows funds through the sale of Treasury bills at low rate of interest. f) The savings of the community are converted into investment which leads to proper allocation of resources in the country.

Capital Market
A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year. Sub division: Capital market is further divided into following 2 categories. 1. Primary market. 2. Secondary market. Primary market The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. Secondary market The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold.

Role of Financial Markets in Pakistan

a) Organized Market A central physical location where exchange of securities takes place under a set of rules and regulations. This type of market is also referred to as Auction Market. An organized market has a physical location where companies and governments trade their shares. Only the companies registered in the stock exchange trade their securities through an organized market. Karachi Stock Exchange (KSE) (1947) Lahore Stock Exchange (LSE) (1997) Islamabad Stock Exchange (ISE) (1974) are its examples. b) Over the Counter Market An Over the counter market does not have any physical location where institutes or people could transact. The companies that are not registered in stock exchange trade their securities through over the counter market, where telephonic devices and internet etc are used to sale and purchase securities because there is no central exchange or meeting place for this market.

Role played by capital market in Pakistan

a) Provide opportunities for individual as well as institutional investors. b) Reduces the reliance on bank borrowing. c) Provide financing to government, with which it can do a lot of corrective measures. d) They provide a realistic picture of the nature and effectiveness of Pakistan's financial viability in terms of investment and generating business. e) Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. f) Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses. g) Governments at various levels may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. h) When people draw their savings and invest in shares it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations.