Money market challenges

 Introduction: Generally a money market is a monitory system that includes the

landing and borrowing of short term funds. Short term means to borrow a d lend
money for less than one year.
 The challenges mean the problem which is faced by money market. The money
market is not in a position or unstable due to banking problem inside the country.
The problems which are faced by money market due to banking problem in
country include liquidity crisis, non performing loans, growing gap between
lending and deposit growth, a distortion in the interest and lack of skilled
manpower etc.

 In Pakistan the primary participant of money market include state bank of

Pakistan, cooperative bank, and commercial bank etc.
 There are a lot of challenges of money market in our country but we explain
some of these which are under.
(1) Division between organized and unorganized sector:
 The first vital and most important challenge which is face or defect the
Pakistan money market is the dichotomy or division into two sectors which
include organized sector and UN organized sector. It means that there are
in Pakistan less or little coordination, cooperation and contact between
these two sectors. This challenge is faced about all developing countries.
For this purpose it is very difficult task for state bank of Pakistan to ensure
uniform and effective implementation of monitory policy in these two
sectors.
(2) Predominance of unorganized sector :
 The second challenge which is faced by money market in our country is that
they give the predominance to unorganized sector over organize sector.
 This makes some defects on our country market. These defects include that
the indigenous or poor services banker strongly occupy a significant position
in money lending business especially in rural areas comparing with urban
areas. The second defect of unorganized sector is that there was no clear
destination between short term and long term loan. The other problem in
unorganized sector is that the purpose of loan is also not clear. Its means
they are not aware about people that for what purpose they take loan. E.g.
they take loan for agriculture purpose, manufacturing purpose, or other daily
operation.
So it means that in unorganized sector the indigenous bankers are hold or involve
at a large portion of a country money market.

(3) Wasteful competition between organized and unorganized sector:

 The other challenge which is face by our money market is a wasteful
competition among different sectors or institution with in country. In Pakistan
the wasteful competition is exist between organized and unorganized sector
but this competition is also exist between the members of these sectors.
e.g. state bank of Pakistan and other banks like commercial banks look each other
is a competitor. Its mean that the wasteful competition is a big challenge for
Pakistan money market.

(4) Inadequate or insufficient banking facilities:

 In developing countries including Pakistan the banking system is
inadequate. The Pakistan money market also faces this challenge. The
defect of this issue is that the facility which is provided by banking in money
market is insufficient to cover the financial requirement of economy. If the
banking facilities are insufficient in the country they effect on money market.
Because the banks are the main participants in money market. The other
reason is that the population size in the country is high and banking
branches or institution are not enough to cover the overall population.
The population is high and banks are less specially in rural areas for which the
reach of is low.
e.g. In FATA (Bajaur agency) the population is 1.5 million and areas are 1290
sq/km in the banking branches are exist in only place which is the capital of bajaur
agency. The total branches of different banks is five.

(5) Shortage or scarcity of capital :

 Shortage of capital is the other issue or shortage of money market in
pakistan.
In Pakistan money market the shortage of capital in money market. It means
that money are less are inadequate available in market to cover the needs or
requirement of industry and any other trades inside the country.
There are a lot of reason of shortage of capital in Pakistan money market but
some of these is under.
(1) Low capacity of people about savings.
(2) Banking facilities are insufficient specially in rural areas.
(3) The people tendency is low about banking system.

(6) Seasonal shortage of money or funds :

 The seasonal shortage of funds is also a big challenge for money market. In
Pakistan there are shortage of capital specially in seasonal of harvesting are
other sowing of crops. For this purpose the former want to receive a short
term loans for performing there short term operation.
e.g the former want to receive a short term loan for sowing the crops on new
technology to improve the quantity of wheat in a season and also for harvesting
the crops from new technologies.
(7) interest rate :

 The other challenge or issue which is face by money market is changes is

interest rate. When in market there rapid changes in interest rate then the
farmer or other small businessman do not take short term credit. The small
farmer or other small businessman can not afford high rate of interest.
When there are rapid fluctuation in the interest rate then the people can not
lend and borrow short term fundes.

(8)Few money market instruments :

 The other issue which is faced by Pakistan money market is few instrument
for borrowing and lending money. But in western countries money market
instrument are more than the instruments use in Pakistan.
e.g These country use commercial papers, federal funds, short live mortgage,
and asset backed securities etc. But in Pakistan the money market instrument
includes promissory note, treasury bill, bill of exchange, call loans , banker
acceptance etc. which is also used by western countries.

(9) people are less familiar with these instruments :

 In Pakistan the literacy rate is low and illiteracy rate is high which is a big
challenge for money market. The other reason is that in Pakistan the lack of
technical education. Because of less education the people is less familiar
with these instrument or not know about these instrument specially in rural
areas. For this purpose people not lend money from those and borrow from
money market. Because they not know about these instruments.

(10)Lacke of GOVT: adherence to the money rules:

 The last challenge which is face by money market lack of government
consistency in money market rules. When the rules money market is not
useful and consistent then the people do not want to lend or borrow the
short term fundes.
 Government measures to money market

The government measure of Pakistan money market is make by two way which
is qualitative and quantitative. Which shortly explain is under.
(a) Quantitative measures: The purpose of is to regulate the total volume of
money in country. It is include the following.
(1) Open market operation (OMOs): The open market operation means the
purchase or sale of government securities in open market by the
commercial banks.
The purpose of selling the government securities by commercial banks to
increase the cash for lending purpose. The purchase and sale of
securities in open market is a powerfull measure to control the reserve
volume of member banks.
(2) Discount rate policy(bank rate policy): Bank rate policy is aofficial rate at
which the central bank of pakistan is lends to the commercial banks in
country. On the other hand discount rate is also the official rate at which
the state bank of Pakistan is prepared to discount the first class bill of
exchange. Through discount or bank rate policy the central bank control
and regulates the bank reserve. In inflation situation in country the central
bank raise the discount or bank rate.
(3) Cash reserve requirements : This is the rule of the central bank that
each commercial banks has to deposit a specific percentage % of its
deposits with central bank. The central bank fix this reserve ratio and they
also make change it for purpose of economic stabilization.
(4) Statuary liquidity requirements: it is also compulsory for all commercial
banks to keep itself a certain percentage as a reserve of its total deposits.
If the central bank enhance the liquidity ratio this will hamper the
commercial bank power to lend. In this way the money market could be
controlled.
(B) Qualitative measurements : The purpose of qualitative measure is
to control or restrict the banks advances to a certain use of credit. It may be
positive or negative. The positive control means to increase in supply or
reduce cost of credit for a specified period and vice versa.

(1) Margin requirements on security loans: Margin requirement means is a

minimum percentage of payment which the purchaser of the stock must be
making on the market value of securities. Margin requirement is the difference
between market value and its maximum loan value. e.g market value of is 500
and margin requirement is 60% then the maximum loan which can advance is
200.

(2) credit rationing: This approach is used by central bank in time financial
crises. In this situation a central bank make ratio the credit for each schedul
bank. In this method the central bank fix maximum amount which each
scheduled bank can draw by rediscounting bill of exchange.

(3) Moral persuasion: The central bank is a minor instrument of “ moral

persuasion” to influence the total borrowing. Moral persuasion means friendly
precaution in credit regulation by monitory authorities in to the competitive
bankers. e.g policy statement, public pronouncement, etc.

(4) direct action: direct action means if a commercial banks are following a
policy which is not consistent with the monitory policy of state bank of
Pakistan. Then the central bank takes a direct action. It may to impose penalty
or refuse to discount the bill of exchange.