ASSIGNMENT

FINANCIAL MARKETS IN
PAKISTAN



CLASS: M.B.A. 3.5 YEARS
SEMESTER 6
TH

DATED: 5/22/2014



INSTITUTE OF BUSINESS MANAGEMENT AND SCIENCES

FINANCIAL MARKETS
Definition;
Financial markets are those Organizations that facilitate the trade in financial products. i.e. Stock
exchanges facilitate the trade in stocks, bonds and warrants. Stocks and shares are traded between
buyers and sellers in two ways including:
use of stock exchanges;
Directly between buyers and sellers etc.
Or means that the coming together of buyers and sellers to trade financial products. In academia,
students of finance will use both meanings but students of economics will only use the second
meaning.
Households: supply labor, demand products, and save for the future.
Businesses: demand labor, supply products, and invest in productive assets.
Governments: collect taxes and provide public goods (e.g. education, defense).
Surplus spending units ( SSUs) have income for the period that exceeds spending,
resulting in savings. Other words for SSU are saver, lender, or investor. Most SSUs are
households.
Deficit spending units (DSUs) have spending for the period that exceeds income.
Another word for DSU is borrower. Most DSUs are businesses or governments.
Functions of Financial markets
Financial markets facilitate
The raising of capital (in the capital markets);
The transfer of risk (in the derivatives markets);
International trade (in the currency markets).
They are used to match those who want capital to those who have it.
Typically a borrower issues a receipt to the lender promising to pay back the capital. These
receipts are securities which may be freely bought or sold. In return for lending money to
the borrower, the lender will expect some compensation in the form of interest or dividends

Types of Financial Markets
1. Capital Markets
The capital markets consist of primary markets and secondary markets. Newly formed (issued)
securities are bought or sold in primary markets. Secondary markets allow investors to sell
securities that they hold or buy existing securities.
2. Stock Market
The term 'the stock market' is a concept for the mechanism that enables the trading of company
stocks (collective shares), other securities, and derivatives. Bonds are still traditionally traded in an
informal, over-the-counter market known as the bond market.
Commodities are traded in commodities markets, and derivatives are traded in a variety of
markets (but, like bonds, mostly 'over-the-counter').
The stocks are listed and traded on stock exchanges which are entities (a corporation or
mutual organization) specialized in the business of bringing buyers and sellers of stocks and
securities together.
The stock market in Pakistan includes the trading of all securities listed on the
KSE 100,
the LSE 30
ISE 10,
3. Bond Market
The bond market, also known as the debt, credit, or fixed income market, is a financial
market where participants buy and sell debt securities usually in the form of bonds. The
size of the international bond market is an estimated $45 trillion of which the size of
outstanding U.S. bond market debt is $25.2 trillion
References to the "bond market" usually refer to the government bond market because of
its size, liquidity, lack of credit risk and therefore, sensitivity to interest rates.
Because of the inverse relationship between bond valuation and interest rates, the bond
market is often used to indicate changes in interest rates or the shape of the yield curve.
4. Commodity Markets
Commodity markets are markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodities exchanges, in which they are bought and
sold in standardized Contracts.
5. Money Market
The money market is the global financial market for short-term borrowing and lending. It
provides short-term liquid funding for the global financial system. The money market is a
sector of the capital market where short-term obligations such as Treasury bills,
commercial paper and bankers' acceptances are bought and sold.
Money market consists of financial institutions and dealers in money or credit who wish to
either borrow or lend. Participants borrow and lend for short periods of time, typically up
to thirteen months.
Money market trades in short term financial instrument commonly called "paper". This
contrasts with the capital market for longer-term funding, which is supplied by bonds and
equity.
6. Derivatives Market
The derivatives markets are the financial markets for derivatives. The market can be divided into
two, which for exchange traded derivatives and that for over-the-counter derivatives. The legal
nature of these products is very different as well as the way they are traded, though many market
participants are active in both.
1) Futures exchange Market A futures exchange is an exchange which provides a
marketplace where one can buy and sell futures; that is a contract to buy specific quantities of a
commodity or financial instrument at a specified price with delivery set at a specified time in the
future.
2) Spot Markets: immediate payment for immediate delivery
3) Futures or Forward Markets: immediate payment for promise of future delivery
4) Futures contracts: standardized as to amounts, forms, and dates; trade on organized
exchanges
5) Forward contracts: individualized between parties with particular needs
7. Insurance market
Insurance, in law and economics, is a form of risk management primarily used to hedge
against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk
of a loss, from one entity to another, in exchange for a premium. Insurer, in economics, is
the company that sells the insurance.
Insurance rate is a factor used to determine the amount, called the premium, to be charged
for a certain amount of insurance coverage. Risk management, the practice of appraising
and controlling risk, has evolved as a discrete field of study and practice.
8. Foreign exchange market
The foreign exchange (currency or forex or FX) market exists wherever one currency is
traded for another. It is by far the largest financial market in the world, and includes trading
between large banks, central banks, currency speculators, multinational corporations,
governments, and other financial markets and institutions.
FINANCIAL MARKETS IN PAKISTAN
Financial Market in Pakistan consists of (i) Money Market which provides short term funds and (ii) Capital Market
which makes long terms funds available to businesses and industries.
The Financial market can be reclassified into (i) Primary Market in which new shares or bonds are issued and (ii)
Secondary Market in which securities previously issued are traded such as Shares, Bonds, Commercial Papers,
Options and Mutual Fund.
Of this, the banking sectors and non-banking sectors are regulated by the central bank, State Bank of Pakistan.
While rest of the market (lease, stock exchanges, modarba, mutual funds and insurance) is regulated by Securities
and Exchange Commission of Pakistan.
COMMERCIAL BANKS
It is 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
These banks are of three categories (i) Public Sector Banks, (ii) Private Bank and (iii) Foreign Banks.
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.

BOND MARKET OUTLOOK
DEVELOPMENT BANKS
These banks provide guidance in selection of industrial units and extend direct financial assistance to partly cover
their financial requirements. Also, they engage themselves in promotional activities to attract investors towards
neglected sectors through publishing brochures and research papers. Besides, they help in assessing feasibility of
potential projects. Such banks are responsible for speeding up the pace of economic growth in the country in
conformity with the national objectives, plans and priorities.
Their core functions are:
Direct financial assistance
Catalytic function
Mobilization of domestic savings
Ensuring balance regional and industrial growth
Expanding entrepreneurial base by encourage new comers
At one time, there were 14 Development Banks in Pakistan. However, most of them have been closed one after
another as their bad debts mounted up. It is natural as they take substantial risks in promoting new types of
industrial projects in underdeveloped areas sponsored preferably by new-comers. Nevertheless, their contribution
brings fruits to the economy in the shape of successful industrial units and transfer of technology.
At present, 8 development banks are operating which mostly is joint-venture with other Islamic Countries.
MICROFINANCE BANK
A microfinance bank would cater to the credit needs of poor households and their small enterprises. Thus
microfinance bank provide credit to those poor who are not considered creditworthy by the commercial banks and
other financial institutions. On the other hand, the microfinance bands recognize every single human being as a
potential and creditworthy entrepreneur. In addition, they provide basic training in start of a small business, simple
book-keeping and accounting.
The main aim of microfinance institutions is alleviation of poverty through helping poor persons to earn some
money especially the women.
ISLAMIC BANKS
In Islam, it is prohibited to charge interest on any loan. However, it is acceptable to pass on funds to a needy person
or corporation for trade purpose in which case profit could be shared on an agreed basis whereas loss should be
shared according to the funds invested. Besides, there are certain businesses where any form of deal is forbidden
like alcohols and pork.
Accordingly, Islamic bank refer to a banking activity which is consistent with the Sharia, the Islamic Laws.
Otherwise, there is no difference between the traditional banks and the Islamic bank.


DISCOUNT HOUSES
These are firms which buys and discounts bills of exchange, banker' acceptance, commercial paper, etc. Discount
houses also tender for treasury bills, deal in short-dated government bonds, and are an important part of the short-
term money markets.
INSURANCE COMPANIES
Insurance is a hedge against the risk of a contingent and uncertain loss. In other words, it is the equitable transfer
of the risk of a loss, from one entity to another, in exchange for payment. For this service, the insurer charges a fee
called premium depending upon the risk involved.
Besides traditional insurance companies, there are many Islamic insurance companies in Pakistan known as
Takaful operators. Takaful is an Islamic insurance concept based on mutual co-operation, responsibility, assurance,
protection and assistance between groups of participants. These companies believe in promoting the cause of
Takaful as well as promoting the insurance business in a Shariah Compliant i.e. halal and absolutely Riba-
Free insurance.
STOCK EXCHANGES
Stock exchange is a place where securities are bought and sold. Such securities include shares, derivative, unit
trusts and bonds. It also provides facilities for the issue and redemption of securities. Prices of shares and bonds
are influenced by their demand and supply like in other commodities.
In order to list a security on the stock exchange, there are certain requirements. Transactions in the stock exchange
are conducted by members only. Stock exchange serves both as a primary market for the initial public offerings and
as a secondary market for their subsequent buying and selling
Investors are not bound to sell stock or bond through the stock exchange. They can directly deal with the seller.
Similarly, there is no compulsion that stock must be traded on the exchange. The securities can change ownership
out of the exchange which is called over the counter or curb dealings.

LEASING
It is a contract where owner of an asset agrees to allow someone to use it for a fixed rental. It can be for fixed or
indefinite period 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
transfers only the right to use the assets which is returned back at the end of the lease.
There are some other types especially in the aircraft industry like wet lease and dry-lease and. In wet lease, a
company agrees to provide an aircraft along with pilot and crew and would be responsible for the maintenance of
the aircraft. Dry lease, on the other hand, refers to leasing only the aircraft.

MODARBA
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, has the Islamic financial services industry witnessed a phenomenal growth all over the Islamic
world. In particular, the Mudarabah Sector has been able to create a market niche for itself in the corporate sector.
This model is enjoying a unique recognition due to its well designed structure with proper rules and regulations
defined by the regulators. It has proved its resilience in this time of global financial turmoil.
MUTUAL FUND
It is a professionally managed type of pooled investment for acquiring securities like stocks, bonds, marketable
securities and commodities. The profit is distributed by way of dividend to all investors.
Financial market in Pakistan experienced boom conditions in1991 due to liberalization policies of the government.
There was a manifold increase in the number of listed companies; number of commercial banks, local and foreign
and financial instruments like commercial paper.
But it has still to develop and 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.