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Money Market

What Does Money Market Mean?

A segment of the financial market in which financial instruments with high liquidity
and very short maturities are traded. The money market is used by participants as a
means for borrowing and lending in the short term, from several days to just under a
year. Money market securities consist of negotiable certificates of deposit (CDs),
bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal
funds and repurchase agreements (repos).

Money Market

The money market is used by a wide array of participants, from a company raising
money by selling commercial paper into the market to an investor purchasing CDs as a
safe place to park money in the short term. The money market is typically seen as a
safe place to put money due the highly liquid nature of the securities and short
maturities, but there are risks in the market that any investor needs to be aware of
including the risk of default on securities such as commercial paper.

Definition
Short-term, high grade (low risk) financial instruments such as bankers' acceptance, certificates
of deposit (CDs), commercial paper, and treasury bills.

The money market is a component of the financial markets for assets involved in
short-term borrowing and lending with original maturities of one year or shorter time
frames. Trading in the money markets involves:
• Treasury bills,
• Commercial Paper,
• Bankers' Acceptances,
• Certificates of deposit,
• Federal funds,
• Short-lived mortgage-backed and asset-backed securities.

It provides liquidity funding for the global financial system.

Capital market
A capital market is a market for securities (debt or equity), where business
enterprises (companies) and governments can raise long-term funds. It is defined as a
market in which money is provided for periods longer than a year, as the raising of
short-term funds takes place on other markets (e.g., the money market). The capital
market includes the stock market (equity securities) and the bond market (debt).
Financial regulators, Securities and Exchange Commission of Pakistan (SECP),
oversee the capital markets in their designated jurisdictions to ensure that investors are
protected against fraud, among other duties.
Capital markets may be classified as primary markets and secondary markets. In
primary markets, new stock or bond issues are sold to investors via a mechanism
known as underwriting. In the secondary markets, existing securities are sold and
bought among investors or traders, usually on a securities exchange, over-the-counter,
or elsewhere.
There are a number of capital market instruments used for market trade, including:

1. Stocks,

2. Bonds,

3. Debentures,

4. T-bills,

5. Foreign exchange,

6. Fixed deposits,

These are used by the investors to make a profit out of their respective markets.
All of these are called capital market instruments because these are responsible for
generating funds for companies, corporations, and sometimes national governments.

This market is also known as securities market because long term funds are raised
through trade on debt and equity securities. These activities may be conducted by both
companies and governments.

This market is divided into primary capital market and secondary capital market.

The primary market is designed for the new issues and the secondary market is meant
for the trade of existing issues.

Stocks and bonds are the two basic capital market instruments used in both the
primary and secondary markets. There are three different markets in which stocks are
used as the capital market instrument: the physical, virtual, and auction markets.

Bonds, however, are traded in a separate bond market. This market is also known as a
debt, credit, or fixed income market.

Trade in debt securities are done in this market. There are also the T-bills and
Debentures which are used as capital market instruments by the investors.

These instruments are more secured than the others, but they also provide less return
than the other capital market instruments.

While all capital market instruments are designed to provide a return on investment,
the risk factors are different for each and the selection of the instrument depends on
the choice of the investor.

The risk tolerance factor and the expected returns from the investment play a decisive
role in the selection by an investor of a capital market instrument.
Developing Islamic money market

Interest-free liquidity management is the major concern for Islamic banks. The State
Bank of Pakistan (SBP) requires Islamic banks and conventional banks to maintain the
same Cash Reserve Requirement (CRR) of five per cent and Statutory Liquidity
Requirement (SLR) of eight per cent.

Islamic banks can hold their required reserver in special current accounts with SBP or
with the National Bank of Pakistan. Any return on these accounts is the absolute
discretion of the SBP. Recently, the SBP has introduced new SLR policy for the
Islamic banks allowing them to invest in Wada Sukuk but not exceeding five per cent
of their investment potfolio.

Efforts are being made since 1979 to Islamise the financial system for which .The SBP
initially introduced 12 Islamic modes of financing to replace interest-based
instruments. The Council of Islamic Ideology (CII) in a separate report in 1980
advised the SBP to replace the money market discount rate with the arrangement
whereby the SBP would be empowered to finance the banks on profit and loss sharing
basis. Among other recommendations one was to set up interest-free ‘common pool of
funds’ on cooperative basis to replace the existing interest bearing government
securities.

The SBP initially took drastic steps towards the development (and implementation) of
financial instruments based on Islamic principles. Later the whole process came to a
standstill. No effort had been made towards the elimination of interest from inter bank
transactions; inter-government transactions and foreign currency accounts.

Pakistan has witnessed the second wave of Islamisation of financial system since
1999. This time the Supreme Court of Pakistan asked the government to take steps
towards the elimination of interest from the economy. A meeting held under the
chairmanship of the president of Pakistan decided to allow Islamic banks to operate
parallel to conventional banks. In addition, conventional banks were also allowed to
offer Islamic banking services through dedicated Islamic window Various Islamic
countries have developed Islamic money market instruments under the concepts of
Wakala (agent), short-term Sukuk (bonds), and securitisation of assets etc. There are
many others short- term instruments which are acceptable in one Muslim country but
are subjected to some restrictions in other Muslim countries--- especially those issued
under the concept of buy-back agreements and Bai Al-Inah (sale of debt).

Likewise, Islamic money market is also facing serious research deficiencies in the area
of oversight of financial instruments. Innovations are needed to facilitate Islamic
banks to manage their liquidity gap as efficiently as the conventional banks.