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Financial Markets in Pakistan

Updated on November 2, 2011

A financial market is a place for buying and selling of financial securities such as stocks and bonds. It facilitates:

  • The raising of capital (in the capital markets)
  • The transfer of risk (in the derivatives markets
  • In matching those who want capital to those who have it.

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 regulaled by Secruities and Exchange Commission of Pakistan.

A sketch showing financial markets in Pakistan is shown at right-hand side and further explained in the paragraphs that follow.

FINANCIAL MARKETS

COMMERCIAL BANKS

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.

LEASE -FINANCE EQUIPMENT
LEASE -FINANCE EQUIPMENT

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.

PICIC was once a premier development in Pakitan but has merged with a commercial bank.
PICIC was once a premier development in Pakitan but has merged with a commercial bank.

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 are joint-venture with other Islamic Countries.

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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.”

 

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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 transfer 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.

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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, the Islamic financial services industry has witnessed a phenomenal growth all over the Islamic world. In particuar, the Modaraba 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.

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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.

 

Comments

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    • profile image

      sidra munir 6 months ago

      plz tell me examples of financial market

    • profile image

      seher 6 months ago

      thanks for basic info.......

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      shams 11 months ago

      thanks alot dear and respected sir. this article is meticulous and full of knowledge. if possible please how these instruments are traded and what is the structure of stock exchange..

    • profile image

      shams 11 months ago

      thanks alot dear and respected sir. this article is meticulous and full of knowledge. if possible please how these instruments are traded and what the structure of stock exchange..

    • profile image

      mohammad jan 14 months ago

      nice sir

    • profile image

      mehak 15 months ago

      Kindly share information about role of financial markets to the economy of pakistan....

    • profile image

      anu oluokun 20 months ago

      hello, can you incorporate a deposit-taking institution for me in Pakistan?

      thank you

    • profile image

      Wajahat 2 years ago

      Thanks alot sir appreciated your effect

    • profile image

      Namna 3 years ago

      I am thankful to u sir for this informative knowledge....

    • hafeezrm profile image
      Author

      hafeezrm 3 years ago from Pakistan

      Stock Exchanges and Bond Markets in Pakistan. Please go to this link:

      http://finance.gov.pk/survey/chapters_13/06-Capita...

    • profile image

      waqar 3 years ago

      sir plz tell me the example of primary markets in pakistan ???

    • hafeezrm profile image
      Author

      hafeezrm 3 years ago from Pakistan

      Please browse the internet.

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      ADINA AYISHA 3 years ago

      this is indeed a very usefull information

      sir will u plz help me i have to work on assignment and i have to search the role of broker and dealers in financial markets specifically i need the case study too. will u plz tell me from where i can search the relevant inormation...

    • profile image

      malik 3 years ago

      thank you

    • profile image

      syed hube habib 3 years ago

      sir, this really well written article with full of knowledge behind it thanks a lot sir

    • profile image

      iram shehzadi 4 years ago

      thank u so much sir for sharing useful information for us.

    • profile image

      miss salima 4 years ago

      Thanks a lot sir for sharing ur fruitful information.

    • Waqas Ghori profile image

      Waqas Ghori 4 years ago from Regina

      A very informative and beautifully written article indeed.

    • profile image

      jon 4 years ago

      whst

    • profile image

      Farah 4 years ago

      Sir ,

      your effort is wonderful with all information gathered at one place .

    • hafeezrm profile image
      Author

      hafeezrm 4 years ago from Pakistan

      Like what?

    • profile image

      sundas 4 years ago

      AOA sir i am studying about investment and portfolio management by Charles P .Jones and i am facing some diffiulties

    • hafeezrm profile image
      Author

      hafeezrm 4 years ago from Pakistan

      This comes under deficit financing where government issues bond or bills. It ultimately creates inflation as government plans are long term or it would on borrowing to pay off the previous debts. This also affect exchange rates.

    • profile image

      sumairss 4 years ago

      Dear Sir,

      what is the Impact of government marketable security on economy?

    • profile image

      Mohsin 4 years ago

      Great one

    • profile image

      Shafeeq Ahmad Rahi 4 years ago

      Thank you Sir for providing such good information .

    • profile image

      lp11sur 5 years ago

      Dear Sir,

      How Islamic and investments banks come under the category of NON BANKING SECTOR. Islamic banks are also providing identical servises as commercial banks. Could you please explain the reason. I will be grateful. Thanks

    • profile image

      tehreem rizwan 5 years ago

      thanks sir it would help me in completing my assignments of project management

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Zenab Taj and Zohaib Noor for your comments.

    • profile image

      zohaib noor 5 years ago

      really power full for me .

    • profile image

      Zenab Taj 5 years ago

      This is such an informative and helpful for not only finance students but also for other knowledge seekers. well im too doing MBA in finance. will you help me what i have to do further?

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      I am simply MBA in Finance. You must approach a Ph.D.

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      shama 5 years ago

      sir i am doing M.PHIL and i am searching for a good topic for my thesis regarding SECP.Can you help me please?

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Bilawal for your comments

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      Bilawal 5 years ago

      it was very much helpful to know about the financial markets in pakistan !!!

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Muhammad Adil Khan for your comments.

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      Muhammad adil khan 5 years ago

      sir,Thanks for sharing the article.its very simple and easy in order to understand financial markets. i get good information from it.

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Qasim Khan for your comments.

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      Qasim Khan 5 years ago

      very nice sir. its very simple and easy in order to understand financial markets. i get goood information from it.

      thanks sir

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Ali Jan for your comments.

    • profile image

      ali jan 5 years ago

      very nice and useful data.

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      This is a general question. Please research on Google.

    • profile image

      Arslan 5 years ago

      Dear Sir, this is my topic, if u have material plz share on this page or plz email me, at this address

      arslanbhagu@gmail.com

      the topic: -

      "various capital and money market instruments available in the financial markets of Pakistan"

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Rabba for your comments.

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      Rabba 5 years ago

      thx sir for sharing that information it helped me a lot.

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Yousuf Baloch for your comments.

    • profile image

      Yousuf Baloch 5 years ago

      salam sir i am student of MBA FINANCE AT MUHAMMAD ALI JINNAH UNIVERSITY.GOT A LOT FROM YOUR PRECIUOS ARTICLE..........THAKS A LOT

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Saifullah for your comments.

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      saifullah 5 years ago

      dear sir, I m student of MBA( banking & finance). i got a lot of material. thank u so much

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Ghazal for your comments.

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      ghazal 5 years ago

      all the information

      which i have got from it.it is really v precious

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Oshaque Ali for your comments.

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      Oshaque ALI 5 years ago

      Nice and simple words to know about the basics.

      \ Thank u.

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Sajid for your comments.

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      Sajid 5 years ago

      very informative articles.

      Thank you sooo much Sir!

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Economic Growth needs investments. Financial markets induce the general public to save. Such savings together with funds received from foreigners are passed on to economy for development. This is given in details in the initial paragraphs.

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      Naqab Khan 5 years ago

      hafeezrm...plz explain me the roll of financiak markets in economic development

    • hafeezrm profile image
      Author

      hafeezrm 5 years ago from Pakistan

      Thanks Shaista Tabassum for your comments.

    • profile image

      shaista tabassum 5 years ago

      Thanks for providing the information about financial markets in Pakistan.....i cant explain u sir hw much in4mative information in this article.thnx

    • hafeezrm profile image
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      hafeezrm 5 years ago from Pakistan

      Thanks all for visiting my page and leaving nice comments.

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      shakeel baig 5 years ago

      great words by great person ur student shaeel baig

    • profile image

      shanza 6 years ago

      plz see my account

      google type

      www.scribd.com/shanza malik

    • profile image

      Tabinda 6 years ago

      Thank you for this unparallel article. It truly is very helpful.

    • profile image

      usman asif 6 years ago

      excellent struggle

    • profile image

      Muhammad sajid 6 years ago

      very thankful for providng such useful information about financial Markets in pakistan. God Bless you.

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      syeda hafsa hameeda hashmi 6 years ago

      thanks a lot sir the whole stuff is very informative and it will facilitate us to create better understanding of what finacial market basically is.

    • hafeezrm profile image
      Author

      hafeezrm 6 years ago from Pakistan

      Please go to the internet and obtain a list of all the banks. Then, one by one, read the history of the bank. You will come to know about your question.

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      gul 6 years ago

      i am student of M.B.A i m searching for the list of banks acquired by other banks kindly sir help me in my work

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      Yousuf Rehman 6 years ago

      Thanks a lot for your efforts. This is very appreciable

    • hafeezrm profile image
      Author

      hafeezrm 6 years ago from Pakistan

      Dear Ahmed Jan,

      Marketable securities are listed shares and bonds. The stock exchanges are the medium through which these are exchanged.

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      Muhammad Shoaib Latif 6 years ago

      Dear Sir:

      Bundle of thanks for sharing such a valuable info with us.

      Regards;

      Shoaib

    • profile image

      ahmed jan 6 years ago

      sir am searching for marketable securitis in pakistan which are not available in this list here just mentioned about different pakistani banks . but overall it is a good resorcen for students of banking and finance or business students for getting more and more knowledge about our banjking system of paklistan. thank you so much.

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      Owais Hanif 6 years ago

      Respected Sir : i found your article very informative ,iam an ACCA Affiliate, i really Appreciate your knowledge.

    • crystolite profile image

      Emma 6 years ago from Houston TX

      Thanks for this informative article that is well shared.

    • hafeezrm profile image
      Author

      hafeezrm 6 years ago from Pakistan

      Thanks M. Mughal and M. Sajid for your comments.

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      m.sajid 6 years ago

      i learned lot of information and guidence for studies thanks, a lot.

    • profile image

      M.Mughal 6 years ago

      Thanks for providing the information about financial markets in Pakistan

    • hafeezrm profile image
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      hafeezrm 6 years ago from Pakistan

      Dear Akmal Pasha. I am an IBA Graduate myself of 1965 as senior as your grand uncle. Go to my profile and send me a message via hubpage.

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      Akmal Pasha  6 years ago

      An IBA grade of 1995, found this site very exciting especially contextualizing with Pakistani financial scenario. I want to have email contact with Hafeez Saheb, plz manage!

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      Ahsan Raza 6 years ago

      Don't Know about other financial sectors but Islamic Banking is indeed growing in Pakistan.

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      billrobinson 6 years ago from CA, USA

      It has interest me much. Keep on posting more. Thanks for this post.

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      Aisha Nadeem 6 years ago

      Thank u so much Sir for providing us such in depth information and practical examples which has really helped me through out the course so far. It seems while reading your articles that you are in front just like in class and explaining us. I feel so honored and proud that we are blessed with such a great teacher who is praised by all class of people including foreign students.