Financial System of

Pakistan

Group 12
21PGP206: Pol Ajinkya Dattatraya
21PGP222: Shinde Sachin Mangesh
21PGP227: Shruti Deshmukh
21PGP248: Suyasha Chitranshi
21PGP252: Tanvi Joshi
21PGP261: Vishakha Agarwal
 Table of Contents

Brief Overview..........................................................................................................................2
Regulatory Authorities............................................................................................................3
THE CENTRAL BANK OF PAKISTAN.............................................................................3
Organisational Structure of the Central Bank of India...........................................................4
Governor of the Central Bank of Pakistan.............................................................................4
Roles and Responsibilities of the Central Bank of Pakistan..................................................4
Other Financial Regulatory Authorities................................................................................5
1. Competition Commission of Pakistan -.........................................................................5
2. Planning Commission (Pakistan) -.................................................................................5
3. Securities and Exchange Commission of Pakistan -......................................................5
Money Market:.........................................................................................................................5
Major players in Money Market are as following:.................................................................6
Instruments traded in Money Market:....................................................................................6
SLR and CRR:........................................................................................................................6
Capital market..........................................................................................................................7
Equity market.......................................................................................................................7
Derivatives Market.................................................................................................................8
Debt Market in Pakistan.........................................................................................................8
Government bonds market of Pakistan:.................................................................................9
Corporate bonds market of Pakistan:.....................................................................................9
Sukuk (Shariah Compliant instrument) Market: -..................................................................9
Commercial Papers:...............................................................................................................9
Conclusion...............................................................................................................................10
References...............................................................................................................................10
 Brief Overview

 Pakistan has the 5th largest population in the world with a population of over 220
million people.
 It’s per capita GDP (nominal) of $1,543 and per capita GDP (PPP) of $5,964, which
ranks 181st and 174th in the world respectively.
 The economy of Pakistan is the 46th largest economy in terms of nominal GDP.
 It is the 26th largest economy in terms of Purchasing Power Parity (PPP).

After the partition from India and independence in 1947, Pakistan was predominantly an
agriculture country. In the past, the economy has suffered various political disputes, a
population boom and varied levels of foreign investments. However, currently Pakistan is
undergoing economic liberalization with privatization of all government corporations. This is
aimed to attract foreign investments to tackle the growing budget deficits.
Pakistan is a developing country with major urban centres in Punjab and diversified
economies of Karachi.
Under the Ease of Doing Business Index (2020), the World Bank and International Finance
Corporation ranked Pakistan 108 among 190 countries in the world, a jump from 136 from
the previous year.
With an expected hike in energy tariffs and higher oil and commodity prices, the inflation is
expected to increase in FY22. In 2020, the inflation rate in Pakistan was 9.74%.
The poverty in Pakistan has been on a decline since many years. As per World Bank, the
poverty in 2002 was 64.3% and is expected to fall to 4% in FY23.
 Regulatory Authorities

THE CENTRAL BANK OF PAKISTAN

State Bank of Pakistan- Introduction
The Central Bank of Pakistan is the State Bank of Pakistan (SBP). It
was formed in 1948 and not until 1974, when this bank was
nationalized, and new set of functions were set for the bank. Its
operations come under the State Bank of Pakistan Act, 1956. The
headquarters of the Bank is situated in the financial capital of
Pakistan, Karachi. The bank has its branch offices in sixteen cities
including Islamabad, the capital city of Pakistan.

Organisational Structure of the Central Bank of India

Governor of the Central Bank of

Pakistan
Reza Baqir is the Governor or principal officer of
the State Bank of Pakistan, since the year 2019. He
is the 20th Governor of the Central Bank of
Pakistan. He is an Economist by occupation and his Alma mater is Harvard University and
University of California at Berkeley.

Roles and Responsibilities of the Central Bank of Pakistan

The roles and responsibilities of the Bank is similar to the Central Bank of India. Its functions
are divided into two categories: Primary and Secondary functions.
A. Primary Functions
a. It issues currency or printing of money.
b. It is the Banker’s Bank and controls the regulation of the banks and credit
system.
c. It is the Lender of the Last Resort.
d. It has role of control the monetary policies for the economic and thrive macro-
economic achievements.
B. Secondary Functions
a. It performs functions like management of public debt, management of foreign
exchange.
b. It is also responsible for managing relations with other international financial
institutions and guides Government on its various policies.

Other Financial Regulatory Authorities

1. Competition Commission of Pakistan -

It was established through the Competition Ordinance of 2007 by the President of Pakistan. It
was formerly known as Monopoly Control Authority. It is a body of the government of
Pakistan. It is an independent, quasi-judicial and quasi-regulatory body. It works to ensure
healthy competition in Pakistan by enforcing economic competition laws. It was given legal
powers by passing the competition Act 2010.
Dr. Abdul Hafeez Shaikh is the Federal Minister for Finance, Government of Pakistan.
Ms. Rahat Kaunain Hassan is the Ex-Chairperson of Competition Commission of Pakistan

2. Planning Commission (Pakistan) -

The planning commission of is a financial institution of the government of Pakistan. It works
as a public policy development institute. It comes under the Ministry of Planning,
Development and Reforms. It undertakes research studies and initiatives for the development
of the state policy which can in turn lead to the growth of the national economy and the
public infrastructure.
It is highly centralised. It also plays a role in the formulation of 5-year plans in the 20 th
century. 5-year plans are now replaced by Medium Term Development framework. And this
is also formulated by the planning commission.

3. Securities and Exchange Commission of Pakistan -

It is the financial regulatory authority of Pakistan. Its objective is to make the corporate sector
more efficient and modern. And make a capital market on sound principles. So that
investment is encouraged among people and the economy of Pakistan can grow and prosper.

Money Market:

Money market is a market for short-term (for a period of less than a year) funds and financial
assets that are close substitutes for money. It provides a platform for entities to exchange
funds for short term time period. For an economy it also helps Central banks to influence the
liquidity by changing interest rates.
State Bank of Pakistan is the central bank in Pakistan which controls the money market.

Major players in Money Market are as following:

1. Central Bank and Government of Pakistan
2. Primary Dealers/Market Makers
3. Banks
4. Non-bank financial Institution (NBFCs)
5. Money Market Funds & Corporate
6. Money Market Brokers

Instruments traded in Money Market:

1.Treasury bills (Short term):
It is a zero-coupon bond issued by SBP. Issued in a multiple of Rs 5000 and for a period of
3,6 and 12 months. This instrument is having zero risk factor as the borrower is the GoP.
2.Commercial Papers (Short term):
This are the zero-coupon issued at discount to face value as promissory notes by large
financial institutions subjected to strict requirement from SECP (Security and Exchange
Commission of Pakistan) and SBP (State Bank of Pakistan).
This are not backed by any collateral so limited organizations having strong credit rating can
find byers easily.
3.Certificate of deposits/Investments (Short to Medium term):
It’s a promissory note issued by banks. They can not be withdrawn on demand before the
maturity. The depositor will get the principal and interest earned at the end of maturity
period. Both COD and COI are used interchangeably, only difference is the minimum issue
date which is 90 days for COIs and 30 days for CODs.
4.Repo and Reverse Repo Agreements (Short term):
This are the short-term borrowing agreement where borrower agrees to purchase the sold
securities in the future. The date of purchase at higher price is decided at the time of
agreement. Most of the repo transaction takes place between the SBP and other commercial
banks. This all transactions takes place at repo rate.

SLR and CRR:

Cash Reserve Ratio (CRR) is the share of a bank’s total deposit (NTDL) that is mandated
by the State Bank of Pakistan (SOP) to be maintained with the latter as reserves in the form
of liquid cash.
The state bank changes this ratio to control the liquidity in the market, it increases the CRR to
absorb the excess liquidity and reduces it when there is low liquidity in the market.
Current CRR in Pakistan is at 3 percent which lower than India (CRR is 4 percent)
Statutory Liquidity Ratio (SLR) is the minimum percentage that the banks must maintain
in liquid assets (cash, gold or other securities). It is in terms of percentage of NDTL. This are
not kept with SBP but required to maintain by banks.

Current SLR in Pakistan is at 19 percent which lower than India (CRR is 18 percent)

Other than these two SOBS also uses the Repo and reverse repo to control the inflation and
liquidity in the market.

Capital market

Equity market
Capital markets in Pakistan can be divided into Equity market and Debt market which are
regulated by Securities Exchange Commission of Pakistan (SECP).
Pakistan's capital market structure is comprised of an apex market regulator, the Securities
and Exchange Commission Pakistan (SECP), Pakistan Stock Exchange (formed by merger of
the Karachi, Lahore, and Islamabad stock exchanges), Mercantile Exchanges, Central
Depository Company (CDC) and a Clearing and Settlement Company.
In 2017, consortium led by Chinese exchanges acquired 40% stake and control in PSX; later
Pakistan was upgraded to MSCI Emerging Markets status.
As of November 21st, 2021, there are 552 companies listed in PSX across 36 sectors and the
total market capitalization is Rs. 7,837.239 billion. The listing of company on exchange
happens according to the strict rules and regulations laid out by Securities Exchange
Commission of Pakistan (SECP) & the management of Pakistan Stock Exchange Limited.
Two types of markets exist for stocks to trade in Pakistan’s equity market, the primary and
the secondary markets. In primary markets, stocks are issued from companies to investors,
businesses and other institutions for first time through IPO. In the secondary markets,
existing stocks are sold and bought among investors or traders on the stock exchange.
Major indices in stock exchange:
KSE-100: KSE-100 Index
Pakistan’s benchmark stock index KSE-100 Index was introduced in November 1991
with base value of 1,000 points. The Index comprises of 100 companies which are
selected based on sector to which it belongs and its free-float capitalization, which
captures 80% of the market capitalization of the KSE All Share Index
KSE-30: KSE-30 Index
This was introduced in June 2005 with a base value of 10,000 index points to provide
investors with information on how large companies' stocks are performing over a period.
It is calculated using the free-float capitalization methodology.
KSE-ALL KSE: All Share Index
KSE-All Share Index was constructed in August 1995 for the need of all share index, and
it is calculated using total market capitalization method.
KSE-MI30: KSE Meezan Index
It is the index of thirty companies that have been screened for Islamic Shariah criteria.
The Islamic index was first introduced in 2009, with a base period of 30 June 2008.
KSE-MIALL: KSE Islamic All Share Index
Introduced in November 2018 jointly by PSX and Meezan Islamic Bank Limited, All
Shares Islamic Index gauges the performance of the Shariah compliant segment and
companies of the equity market. All those companies’ shares which fulfill the Shariah
screening criteria are included in the All Shares Islamic Index.

Derivatives Market
Derivatives based on financial assets trade on the Pakistan Stock Exchange (PSX), while
commodity-based derivatives trade on the Pakistan Mercantile Exchange (PMEX).
International equity index exposure to investors is provided to investors through various US
Equity Index Futures Contracts on PMEX.
Below are the derivative instruments available in Pakistan’s capital market:
 DFC (Deliverable Futures Contracts) on Single Stocks
 CSF (Cash Settled Futures Contracts) on Single Stocks
 SIFC (Stock Index Futures Contracts)
State Bank of Pakistan has allowed trading in limited number of derivative products (swaps
and options) to the derivative market participants.
 Interest Rate Swaps
 Forward Rate Agreements
 Third Currency Options
 Cross Currency Swaps

Debt Market in Pakistan

The debt market, also known as the bond market, fixed-income market, or credit market, is an
umbrella term for all trades and issues of debt securities. Bonds are issued by the
governments to pay down debts or fund major infrastructure projects. Bonds can be issued by
publicly traded firms to help fund business expansions or ongoing operations. Pakistan's bond
market is made up of

1. Corporate bonds (Term Finance Certificates)

2. Sukuks
3. Commercial Paper. 

Government bonds market of Pakistan: 

1. The Tenors of the bonds issued are 3, 5, 10, 15, 20, and 30 years
2. The issue of these bonds takes place through an auction system in which only Primary
Dealers (PDs) can participate
3. They are issued at Par and coupon payments are to be done semi-annually 
4. These are un-certificated bonds and are tradable in the secondary market 

Corporate bonds market of Pakistan: 

1. The corporate bonds issued in Pakistan are in the form of a term finance certificate
2. TFC is slightly different from the corporate bond because it was specifically designed
to comply with Sharia law. TFC substitutes the words ``expected profit rates” for
“interest rate
3. TFCs can be issued by NBFIs, Public and private companies
Sukuk (Shariah Compliant instrument) Market: -  
1. Sukuks can be called the sharia-compliant version of traditional fixed income
instruments like bonds
2. They produce returns similar to the traditional bonds
3. The major difference between traditional and Sukuk is that Sukuk entitles the holder
to a proportionate share of the returns generated by the arrangement as well as the
return of the capital at a future date.
4. In July 2021, Pakistan issued $1 billion in overseas bonds under the Sukuk
programme. These Sukuk bonds have a subscription fee of $3 billion for 5, 10, and 30
years.

Commercial Papers: 
1. Commercial Paper (CPs) is an unsecured tradable instrument used to raise short-term
working capital by highly rated business organisations. 
2. They are issued in the form of promissory notes and sold to cash-rich financial
organisations looking for short-term MM instruments. 
3. They can even be exchanged on the secondary market, although the secondary CP
market in Pakistan is still developing.
 Conclusion

1. The Central Bank of Pakistan quite in accordance with the system followed in the
Central Banks of other countries. It has functions of maintaining both Traditional and
Development functions
2. The Pakistani economy has not revised the SLR and CRR rations from year 2008 and
2012 respectively
3. The Central Bank of Pakistan quite in accordance with the system followed in the
Central Banks of other countries.
4. It has functions of maintaining both Traditional and Development functions in the
economy with the help of various monetary policies.

References

1. https://www.sbp.org.pk/about/index.asp
2. Bond Market in Pakistan, Muhammad Arif et. Al., State Bank of Pakistan
3. https://accountantexplains.wordpress.com/2016/12/05/six-money-market-instruments-
in-pakistan/
4. https://www.ksestocks.com/AboutPSX
5. http://www.finance.gov.pk/survey/chapters_16/06_Capital_Markets.pdf