Criticism of financial System of PakistanOn a regional scale,the dinancial system is the system that enables lenders and borrowers to exchange goods and services. There are five componants of financial system:1_MONEYMoney is the anything commonly accepted as payment for goods services and debts.NEAR MONEYIt is an asset which has allot of charactersrtics similer with money,it has majorly four types;Debit cards credit cards Bonds SharesCRITICISMPakistan is running 80 toi 85 percent on undocumented money which is called black money.It’s a kind of money which govt cannot trace due to which cannot be taxed.it is created through smuggling etc. undocumented money makes the monetory policy inefficient since there is unawareness of current market money supply.Recently the actress and model Ayyan Ali was caught smuggling money that shows the level of involvement in this dirty business.Way forward To curb the black money out of economy the most simple yet most radical step might be to change the currency notes of particular value (e.g Rs500 or Rs 1000). That’s how all money black money out in the markets would come back to the banks and those deposited already in the banks doesn’t need to worry. Only hurdle in doing it can be is its logistics.2_FINANCIAL INSTRUMENTSA real or virtual document representing a legal agreement involveing some sort of monetory value. Problems of financial instruments Although a large potential in the market, still Pakistan has financial securities (FS) which can be counted on finger tips. Just like if one wwants to invest in the capital protected ( low risk) mutual funds he has the only and only two secs available (Pakistan Sarmaya Mehfooz Fund AND HBL Mustahekum Sarmaya Fund 1 )

Even if securities of particular risk/return profile are available in the range of products; these products are so ambiguously defined that one gets confused whether it is the sec of his need or not. E.g most of the websites of banks which offer any kind of security does not provide easy access or convenience to access and understand their product for example if you go on UBL’s website there isn’t any directives for investment in their securities. Then luckily if you know about their product “ UBL Profit CoD” ; its website says call at xyz number and then when you call at that number you only find out to visit their particular branches around. It becomes really hectic for investor to compare one security with another to diversify the risk.

3 _FINANCIAL INSTITUTIONS In financial market there are many types of financial institutions are intermediaries exist for the flow of funds. There are two types of financial institutions:i)Depository financial institutionTheses are which offer or take time deposits.ii) non depository institutionsthese do not take or offer time deposits.A) COMMERCIAL BANKS

CB are the traditional departmental store of finance which serve as a wide variety of savers and buyers.CRITICISMCB are suppose to provide loans to te SMEs but in Pakistan they are noty doing there job. But instead they become used to of investing in Govtmental papers and long term loans since they are safer tpo invest and give higher returns. Due to lack of other financial institutions in Pakistan CB are in monopolistic position.WAY FORWARDThere should be proper regulations for CBs to do their deicated job of providing small loans to individuals and SMEs. And for long term loans there should be more IBs and DFIs.

B) INVESTMENT BANKS (IB) It gives;Long term financing or project financingUnderwriting and IPOsResearch and Advisory services for Risk managementMergers and acquisitions

Criticism on INVESTMENT BANKS (IB)Due to fewer IBs firms and corporations has limited IBs to resort for their corporate purposes such as

mergers & acquisitions or IPOs etc. since limited IB are available, conflict of interest arises from the role of the investment bank as adviser to both buyer and seller in a single financial transaction. More clearly; same IB is advisor to the seller which is already an advisor to the buyer, therefore, transaction would naturally in favor of any one party.

Same goes in capital market operations, the same investment bank advises the issuer and arranges distribution of stock through its brokerage subsidiaries.

Investment banks have also been accused of encouraging take over and merger activity as a means for increasing their own profits.

investment banks are apparently not interested in creating investment products targeting the common man.

WAY FORWARDThere should be more IBs in the Pakistani market to have more options available

for market.

Investment banks should seek to revitalize investor interest at the long end of the market.

IB must address the issue of asset distributional inequalities by introducing the ranger of products targeting mainly small real sector investor—the shopkeeper, the repair and maintenance business, the small producer of agricultural tools and equipment, the school owners etc.C) DFIs

DFIs are non depository institutions. It funds only projects which contributes to economic development of a country like dams, motorways etc.

CRITICISMDFIs are mostly funded by foreign agencies and govts. Which sometimes try top influence on the borrower govts on its utilization. Like for PAK-Iran gas pipeline needs heavy financing for which World Bank or other major global donor agencies are reluctant to provide financing even though the project is economically very vital for Pak.

83% of the international aids or funds goes to the military instead of financing development projects.

WAY FORWARDMore DFI institutions are badly required in the Pakistan as we have big appetite

for national and regional infrastructure construction projects. Such as power generation plants and its transmission lines, railways and highways etc. D) MUTUAL FUNDS (MFs)

MFs are non depository institutions. It is a large public portfolio that accepts funds from members and them uses these funds to invest in securities. It can be open ended and close ended.

CRITICISM ON MFsNO proper marketingPoor govtmental policies Low savingsLimited MFs available to the investors to invest in.WAY FORWARD

MFs should mobilise saving of the individual investors at max through the offering of variety of funds. Funds should be clearly define its nature and should be easily accessible to enable the investors to compare the level of return with the level of risk. Proper regulations will increase the popularity of mutual funds in Pakistan.E) WORLD BANK (WB)

WB provides loans for big projects which does not dictates any terms and condtions to the borrowing country or it does not tries to influence the fiscal or any other policy of the country.

CRITICISM ON WB1. Its programs are focused on austerity measures that hurt the poor, while allow big

corporations to flourish. As we now seeing the situation in Greece. 2. The World Bank is accused of ignoring the environmental and social impact of projects it

supports. For example, the World Bank helped fund Brazil to build road I the heart of amazon forest. By improving the main highway into the forest, subdividing the land, and granting ownership of the land to settlers, the program caused an intense migration and land rush that resulted in the wide-spread destruction of the rainforest.

3. Big 8 to 9 most contributing countries to the WB takes away half of the deposits themselves at relatively lower interest rates. Which leave other developing countries to pay higher interst rates.

4. In Pakistan, WB fundings become useless due to their inefficient (may be deliberate) monitoring since WB funded many schools and hospitals which don’t realy exist on the ground.

F) IMF IMF provides soft loans for which there are strict conditions applied. Borrower has to work according to the dictations of the IMF.CRITICISM ON IMF

1. Its loans are causing high debt among developing countries on which borrowing country must pay interest on and remain under the conditions of the institution.

2. The IMF has created modern day colonialism in a manner that to ensure its debt repayment that implies policies as to reduce spending on education and health, and transportation subsidies and privatize national assets etc. A recent IMF loan package for Argentina, for example, is tied to cuts in doctors' and teachers' salaries and decreases in social security payments.

3. History suggests that IMF bailouts deepen, rather then solve, economic crisis like In South Korea, the IMF sparked a recession by raising interest rates, which led to more bankruptcies and unemployment.

WAY FORWARD FOR PAKISTANFirst, there should be more focus on self reliance. And if loans are taken it should be made sure that it won’t go in corrupt hands and should be used only for development projects.

FINANCIAL MARKETSSHEEBA’S PART4_REGULATORS AND POLICY MAKING AGENCIES

A) CENTRAL BANK It develops monitory policy and thus impact money supply, interest rates, inflation and currency valuation. It Regulates all the financial institutions except stock and bond market and the brokerage houses.CRITICISM ON CENTRAL BANK OF PAKISTANBiggest criticism on SBP is that it is still not independent in making major monetory policy decision. Like we have witnessed in Zardari’s era various chairman of SBP were replaced to make it work under the Govt. e.g for printing money and interest rates changings.

WAY FORWARD SBP should work with the Govt and not under the Govt. Govt and SBP should align their policy before making it in effect. Like recently SBP has reduced interest rates probably for promoting investments and injected around 800 billion into com banks and on other hands Govt raised tax on certain products.

B) SECP It is a regulatory body which develops a modern and efficient corporate sector and capital market. It

Encourages investment and economic growth in the country

CRITICISM ON SECP Unable to establish bond market. Unable to demutualize stock market. Unable to attract foreign investors. Unable to increase the investor’s confidence in Pakistan. Unable to put into practice insider trading laws and money laundering laws.

WAY FORWARDFor availability of more options to investors it should establish bond market. ItShould demutualize the stock market. It should work more on prevention of insider trading and bring effective vibrant policy to enhance foreign investors confidence too .

C) FINANCE MINISTRY Finance ministry develops fiscal policy and thus impacts revenues and expenses of Govt.

CRITICISM ON FINANCE MINISTRY Current expenditure alone exceeds total revenue Development expenditure has been falling, while current expenditure has grown. Defense expenditure is higher than even development expenditure. Interest payments along with defense expenditure constitute more than half of annual expenditure Domestic debt is greater than foreign debt The financing of the deficit is equally high from domestic sources as foreign sources.

WAY FORWARDThere is strong need for increase in development funds and reduction on non development funds as todays investment would be tomorrows earnings. Simplicity should be followed in all the ministries and reliance on domestic and foreign debt to meet expenditures should b eliminated.

Financial Markets:

A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods.

By nature it’s categorized into:Primary market and Secondary Market

And by maturity it’s categorized into:Money Market: The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities (usually of one year) are traded.

CRITISISM: The money market is highly fragmented and it has led to create the following problems.(1) There is reduced use of cheques. People do not know much about the modern financial documents like cheques, drafts, securities and debentures.(2) The transactions particularly in the villages are non-monetary rather than monetary.

(3)The stock exchange, ICP, NIT like financial institutions are confined to big cities only. In addition to them commercial banks and specialized credit institutions are also situated in big cities. The urban residents deposit their amount and borrow from these institutions. Where as there are reduced banking fascilities in the village, they neither have the inspiration ot save nor they can avail the opportunity to borrow from banks.

Capital Markets:It’s a part of the financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments. Capital Market is divided into 3 markets:

1. Stock Exchange : 2. The Stock Exchange Market provides services for stock brokers and traders to buy

or sell stocks and other securities. It provides facilities for the issue and redemption of securities and other financial instruments.

CRITISISM:Stock market is still in the process of demutualization.

WAY FORWARDRegulations should be made for the confidence of local and foreign investors. And to stop insider trading.

3. Bond Markets : It’s a financial market where participants issue new debt, known as the primary market and buy or sell securities, known as the secondary market.

CRITISISM:1. The bond market does not have a secondary market because SECP never

developed the market.2. The administrative cost of issuing bond is very high.3. The stamping cost is also very expensive.4. People who want to invest in bonds, are investing in governmental bonds because

of which private companies are not issuing bonds/5. People do not indulge in interest based securities because of religious

perspectives.

WAY FORWARDPakistan really need to estab;lish the bond market as an alternative for portfolio of the investors.

4. Foreign Exchange Market : It’s a market in which currencies of different countries are traded. In terms of volume of trade it is the largest market of the world. Foreign Exchange market determines the relative value of the currency, Moreover some of the main characteristics are:a. It is the largest asset class in the world with high liquidity,b. It’s geographical dispersion.c. It is operating 24 hrs a day except weekends.d. Various factors affecting the exchange rate.

CRITICISM:Pakistan has adopted managed float exchange rate system in which the exchange rates fluctuate from day to day and the State Bank of Pakistan intervenes to change the direction of the value of Pakistani’s currency.

WAY FORWARDSBP should deregulate the Forex market to enhance the confidence of investors. SBP should not intervene unless the currency is in really bad condition.