The financial system of Pakistan has several components that enable the exchange of goods and services between lenders and borrowers. However, the system faces significant criticism. Pakistan runs on 80-85% undocumented or "black" money that is not taxed due to smuggling and other illegal activities. This undermines the effectiveness of monetary policy. Several financial institutions in Pakistan also face issues. Commercial banks are supposed to provide loans to SMEs but instead invest in government bonds. Investment banks have limited options for firms. The regulatory bodies like the central bank and SECP also face independence and effectiveness problems. Overall, Pakistan needs reforms to its financial system to increase transparency, broaden access to financial services, and strengthen regulatory oversight.

1. Criticism of financial System of Pakistan
On a regional scale,the dinancial systemisthe systemthatenableslendersandborrowerstoexchange goodsand
services. There are five componants of financial system:
1_MONEY
Money is the anything commonly accepted as payment for goods services and debts.
NEAR MONEY
It is an asset which has allot of charactersrtics similer with money,it has majorly four types;
Debit cards credit cards Bonds Shares
CRITICISM
Pakistan 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.
undocumentedmoneymakesthe monetorypolicyinefficientsincethere isunawareness of currentmarketmoney
supply.
Recentlythe actressandmodel AyyanAli was caughtsmugglingmoneythatshowsthe levelof involvementinthis
dirty business.
Way forward
To curb the blackmoneyout of economythe most simple yetmost radical stepmightbe to change the currency
notesof particularvalue (e.gRs500or Rs 1000). That’show all moneyblackmoneyoutinthe marketswouldcome
back to the banks and those depositedalready inthe banksdoesn’tneedto worry. Onlyhurdle indoing it can be
is its logistics.
2_FINANCIAL INSTRUMENTS
A real or virtual document representing a legal agreement involveing some sort of monetory value.
Problems of financial instruments
Althougha large potential inthe market,still Pakistanhasfinancialsecurities(FS) whichcanbe countedonfinger
tips. Justlike if one wwantstoinvestinthe capital protected( low risk) mutual fundshe hasthe onlyandonlytwo
secs available (Pakistan Sarmaya Mehfooz Fund AND HBL Mustahekum Sarmaya Fund 1 )
Evenif securitiesof particularrisk/returnprofile are availableinthe range of products; these productsare so
ambiguouslydefinedthatone gets confusedwhetheritis the sec of his needor not. E.g most of the websites of
bankswhichofferanykindof securitydoesnotprovideeasyaccessorconvenience toaccessandunderstandtheir
product for example if you go on UBL’s website there isn’t any directives for investment in their securities.Then
luckilyif youknow abouttheirproduct “ UBL ProfitCoD” ; its website sayscall at xyz numberand thenwhenyou
call at that numberyouonlyfindoutto visittheirparticularbranchesaround.Itbecomesreallyhecticforinvestor
to compare one security with another to diversify the risk.

2. 3_FINANCIAL INSTITUTIONS
In financial market there are many types of financial institutionsare intermediariesexistfor the flow of funds.
There are two types of financial institutions:
i)Depository financial institution
Theses are which offer or take time deposits.
ii) non depository institutions
these 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.
CRITICISM
CB are suppose to provide loans to te SMEs but in Pakistan they are noty doing there job. But insteadthey
become usedtoof investinginGovtmentalpapersandlongtermloanssince theyare safertpoinvestandgive
higher returns. Due to lack of other financial institutions in Pakistan CB are in monopolistic position.
WAY FORWARD
There shouldbe properregulationsforCBstodo theirdeicatedjob of providingsmall loanstoindividualsand
SMEs. And for long term loans there should be more IBs and DFIs.
B) INVESTMENT BANKS (IB)
It gives;
Long term financing or project financing
Underwriting and IPOs
Research and Advisory services for Risk management
Mergers and acquisitions
Criticism on INVESTMENT BANKS (IB)
Due to fewerIBsfirmsandcorporationshaslimitedIBstoresortfortheircorporate purposessuchasmergers
& 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 FORWARD
There should be more IBs in the Pakistani market to have more options available
for market.

3. 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 ofagricultural toolsand 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.
CRITICISM
DFIs 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 FORWARD
More 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.
CRITICISMON MFs
NO proper marketing
Poor govtmental policies
Low savings
Limited MFs available to the investors to invest in.
WAY FORWARD
MFs should mobilise savingof theindividualinvestorsatmax throughthe offeringof varietyof funds.Fundsshould
be clearlydefine itsnature and shouldbe easilyaccessible to enable the investorstocompare 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 providesloansforbigprojects whichdoes notdictates anytermsandcondtions tothe borrowing
country or it does not tries to influence the fiscal or any other policy of the country.

4. CRITICISMON WB
1. 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.Forexample,the WorldBankhelpedfundBrazil tobuildroadIthe heartof amazon
forest. By improving the main highway into the forest, subdividing the land, and granting
ownershipof the landtosettlers,theprogramcausedanintensemigrationandlandrushthat
resulted in the wide-spread destruction of the rainforest.
3. Big 8 to 9 most contributingcountriestothe WB takesaway half of the depositsthemselves
at relativelylowerinterestrates.Whichleaveotherdevelopingcountriestopay higherinterst
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 providessoftloansfor whichthere are strict conditions applied.Borrowerhasto work according to the
dictations of the IMF.
CRITICISMON 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,forexample,istiedto cuts in
doctors' and teachers' salaries and decreases in social security payments.
3. Historysuggests thatIMF bailoutsdeepen,ratherthensolve,economiccrisis like InSouthKorea,the
IMF sparkedarecessionbyraisinginterestrates,whichledtomore bankruptciesandunemployment.
WAY FORWARD FOR PAKISTAN
First,there shouldbe more focus on self reliance.Andif loansare taken itshouldbe made sure that it won’t
go in corrupt hands and should be used only for development projects.
FINANCIAL MARKETS
SHEEBA’S PART
4_REGULATORS AND POLICY MAKING AGENCIES
A) CENTRAL BANK
It develops monitory policyandthusimpactmoneysupply,interestrates,inflationandcurrencyvaluation. It
Regulates all the financial institutions except stock and bond market and the brokerage houses.
CRITICISMON CENTRAL BANK OF PAKISTAN
Biggest criticism on SBP is that it is still not independent in makingmajor monetorypolicy decision. Like we
have witnessed in Zardari’s era various chairmanof SBP were replaced to make it work under the Govt. e.g
for printing money and interest rates changings.
WAY FORWARD

5. SBP shouldworkwiththe Govtandnotunderthe Govt.Govt and SBPshouldaligntheirpolicybefore 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 bodywhich developsamodernandefficientcorporate sectorand capital market.It
Encourages investment and economic growth in the country
CRITICISMON 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 FORWARD
For availability of more options to investors it should establish bond market. It
Shoulddemutualizethe stockmarket. Itshouldworkmore onpreventionof insidertradingand 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.
 CRITICISMON 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.
 Interestpaymentsalongwithdefense expenditure constitutemore thanhalf 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 FORWARD
There is strong need for increase in development fundsand reductionon non development funds as todays
investmentwouldbe tomorrowsearnings. Simplicityshouldbe followedinall the ministriesandreliance 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:

6. 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 FORWARD
Regulations 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 FORWARD

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