Financial Markets

(Capital and Money Market)

03
Financial System
 Existence of a well organized financial system

 Promotes the well being and standard of living of the people of

a country

 Money and monetary assets

 Mobilize the saving

 Promotes investment

 Organized and Non-Organized

Flow of Funds
Financial System
 Financial System of any country consists of financial
markets, financial intermediation and financial instruments
or financial products
Financial Markets
 Matching principle
 Primary and secondary market transactions
 Direct and intermediated financial flow markets
 Wholesale and Retail markets
 Money markets
 Capital markets
Matching principle
 Short-term assets should be funded with short-term
liabilities

 Longer-term assets should be funded with equity or

longer-term liabilities
Primary and secondary market transactions
 Primary market transaction
 The issue of a new financial instrument to raise funds to
purchase goods, services or assets by
 Businesses
 Company shares or debentures
 Governments
 Treasury notes or bonds
 Individuals
 Mortgage
Primary and secondary market transactions
(cont.)
 Secondary market transaction
 The buying and selling of existing financial instruments
 No direct impact on original issuer of security
 Transfer of ownership from one saver to another saver
 Provides liquidity which facilitates restructuring of portfolios of
security owners
Direct and intermediated financial flow
markets
 Direct flow markets
 Users of funds obtain finance directly from savers
 Advantages
 Avoids costs of intermediation
 Increases range of securities and markets
 Disadvantages
 Matching of preferences
 Liquidity and marketability of a security
 Search and transaction costs
 Assessment of risk, especially default risk
Direct and intermediated financial flow
markets
Direct and intermediated financial flow
markets (cont.)
 Intermediated flow markets
 A financing arrangement involving two separate contractual
agreements whereby saver provides funds to intermediary, and
the intermediary provides funding to the ultimate user of funds

 Advantages
 Asset transformation
 Maturity transformation
Direct and intermediated financial flow
markets (cont.)
 Advantages (cont.)
 Credit risk diversification and transformation
 Liquidity transformation
 Economies of scale

 Sectorial flow of funds

 The flow of funds between business, financial institutions,
government and household sectors and the rest of the world
 Influenced by fiscal and monetary policy
Direct and intermediated financial flow
markets (cont.)
Wholesale and retail markets
 Wholesale markets
 Direct financial flow transactions between institutional
investors and borrowers
 Involves large transactions

 Retail markets
 Transactions conducted primarily with financial intermediaries
by the household and small- medium business sectors
 Involves smaller transactions
Financial Markets
 Mechanism which allows people to trade
 Affected by forces of supply and demand
 Process used in Finance, Financial markets facilitates
Capital Markets and Money Markets

 Money Markets
 instruments traded mature in one year or less
 Capital Markets
 includes instruments with maturities greater than one year
Capital Markets
 Debt Markets
 treasury, corporate, mortgage-backed, money market,
municipal, etc...
 Equity Markets
 stock markets
Why Capital Markets Exist
 Capital markets facilitate the transfer of capital
(i.e.financial) assets from one owner to another.
 They provide liquidity.
 Liquidity refers to how easily an asset can be transferred
without loss of value.
 A side benefit of capital markets is that the transaction
price provides a measure of the value of the asset.
Role of Capital Markets
 Mobilization of Savings & acceleration of Capital
Formation
 Promotion of Industrial Growth
 Raising of long term Capital
 Ready & Continuous Markets
 Proper Channelisation of Funds
 Provision of a variety of Services
The role of the stock exchange
 Raising capital for businesses
 Mobilizing savings for investment
 Facilitate company growth
 Redistribution of wealth
The role of the stock exchange
 Corporate governance
 Creates investment opportunities for small investors
 Government raises capital for development projects
 Barometer of the economy
Factors contributing to growth of Capital
Market
 Establishment of Development banks & Industrial financial
institution.
 Legislative measures
 Growing public confidence
 Increasing awareness of investment opportunities
Factors contributing to growthof Capital
Market
 Growth of underwriting business
 The process by which investment bankers raise investment capital from
investors on behalf of corporations and governments that are issuing securities
(both equity and debt).
 Mutual Funds
 Credit Rating Agencies
Capital Market Deficiencies
 Lack of transparency
 Physical settlement
 Variety of manipulative practices
 Institutional deficiencies
 Insider trading
Money Market
 Market for short-term money and financial assets that are
near substitutes for money.
 Short-Term means generally period upto one year and
near substitutes to money is used to denote any financial
asset which can be quickly converted into money with
minimum transaction cost
Money Market
 It is a place for Large Institutions and government to
manage their short-term cash needs
 It is a subsection of the Fixed Income Market
 It specializes in very short-term debt securities
 They are also called as Cash Investments
Money Market
 Wholesale markets in which short-term securities are
issued and traded
 Securities highly liquid
 Term to maturity of one year or less
 Highly standardised form
 Deep secondary market
 deep market show greater price stability and fewer wild volume swings
 No specific infrastructure or trading place
 Enable participants to manage liquidity
Defects of Money Market
 Lack of Integration
 Lack of Rational Interest Rates structure
 Shortage of funds in the Money Market
 Seasonal Stringency of funds and fluctuations in Interest
rates
 Inadequate banking facilities
Money Market Instruments
 Treasury Bills
 Commercial Paper
 Certificate of Deposit
 Money Market Mutual Funds
 Repo Market
Financial Regulators
 Securities and Exchange Commission of Pakistan (SECP)
 State Bank of Pakistan
 Ministry of Finance
Securities and Exchange Commission of
Pakistan (SECP)
 Functions
 Regulates Capital Market.
 Checks Trading of securities.
 Checks the malpractices in securities market.
Securities and Exchange Commission of
Pakistan (SECP)

 It tries to develop the securities market.

 Promotes Investors Interest.
 Makes rules and regulations for the securitiesmarket
Conclusion
 The financial system needs to be fairly integrated, stable,
efficient.
 Weaknesses need to be addressed.
 The reforms have been more capital centric in nature.
 Foreign capital flows and foreign exchange reserves have
increased but absorption of foreign capital is low.