Financial Market

Broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade. Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investors geographical location, knowledge of the markets or the profession of the participant.

Explains 'Financial Market'

Financial markets can be found in nearly every nation in the world. Some are very small, with only a few participants, while others like the New York Stock Exchange (NYSE) and the forex markets trade trillions of dollars daily. Most financial markets have periods of heavy trading and demand for securities; in these periods, prices may rise above historical norms. The converse is also true downturns may cause prices to fall past levels of intrinsic value, based on low levels of demand or other macroeconomic forces like tax rates, national production or employment levels. Information transparency is important to increase the confidence of

participants and therefore foster an efficient financial marketplace.

Types of financial markets

The financial markets can be divided into different subtypes:

Capital markets which consist of:

Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.

Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.

Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets may also be divided into primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while in secondary market transactions exist among investors. Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to the ease with which a security can be sold without a loss of value. Securities with an active secondary market mean that there are many buyers and sellers at a given point in time. Investors benefit from liquid securities because they can sell their assets whenever they want; an illiquid security may force the seller to get rid of their asset at a large discount.

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
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.

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 bookkeeping 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 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.

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 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.

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 nonbanking 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.