“The role of financial intermediaries in Pakistan economy with a

few local examples of banks and other institutions.”

Introduction
Financial Institutions perform the vital function of intermediation between providers of
investable funds (depositors, securities holders etc.) and the users of such funds
(namely businesses). No economy can progress unless its financial sector facilitates
its business activity consistently, and in the case of a developing country like
Pakistan, these FIs act as a necessary catalyst for economic growth as well. The two
of the significant roles played by the financial intermediary in the economy are the
creation of funds and governing the payments system
For instance to know how Financial intermediaries work let’s look at a example that
was given in the investor book.com. Mrs. A. is a housewife and deposits her savings
into her account with the XYZ bank every month.

On the other hand, Mr. B is a young entrepreneur who is seeking a loan to start his
venture. Now, Mr. B has two options for availing the loan:

 The first is that he can find and convince the individuals who are looking for
investment opportunities, or;
 he can approach the XYZ bank for a loan

We can see that the first option is uncertain, and it will take a lot of time to find the
investors. However, the second option is more convenient and quick.

Types of Financial Intermediaries

There are several financial intermediaries formed to serve the different aims and
objectives of the customers or members or lenders and borrowers. These entities are
explained in detail below:

Banks: The central and commercial banks are the most well known financial
intermediaries simplifying the lending and borrowing process, along with providing
various other services to its customers on a large scale. For example state bank of
Pakistan and Al Habib bank are among one of the active financial service providers
in Pakistan
Non-Banking Finance Companies: A NBFC is a financial company engaged in
activities such as advancing loans to its clients at a very high rate of interest
Stock Exchanges: The stock exchange facilitate the trading of securities and
stocks, and in every trading activity, it charges the brokerage from each party which
is its profit. For example Pakistan’s stock exchange is facilitating trade in Pakistan.
Mutual Fund Companies: The mutual fund organizations club the amount collected
from various investors. These investors have identical investment objectives and
risk-taking ability. The funds are then collectively invested in the securities, bonds,
and other investment options, to ensure a capital gain in the long run
Insurance Companies: These companies provide insurance policies to the
individuals and business entities to secure them against accident, death, risk,
uncertainties and default. For this purpose, they accept deposits in the form of
premium, which is pooled into profitable investments to gain returns. The insured
person can claim the money in case of any mishap as per the agreement. In
Pakistan efu insurance, state life and Jubilee Insurance are among the top Insurance
companies.

Investment Bankers: These banks specialize in services like initial public offerings
(IPO), other equity offerings, proving for mergers and acquisitions, institutional
client’s broker services, underwriting debts, etc. As a result of constant mediation,
between the investor or public and the companies issuing securities
Pension Funds: The government entities initiate a pension fund. A certain amount is
deducted from the salary of the employees each month. This collected sum is then
invested in different schemes to gain profits. The investor’s fund is returned with
interest after their retirement.

Importance of SBP: The State Bank of Pakistan, as the central bank of a

developing country, has played two very critical roles with respect to the financial
sector. Firstly it ensures soundness of banks and DFIs through prudential oversight
with a view to maintain financial stability; secondly it pursues a developmental
objective under which it facilitates financial markets developments and enhancement
of access to finance. Over the years much has been accomplished, yet a lot more is
yet to be achieved.
The banking system, which constitutes 88 percent share of the total financial sector,
is comprised of 34 commercial banks and 4 specialized banks. The share of non-
bank financial institutions is approximately 12 percent, and includes leasing
companies, Mudarabas, insurance companies, investment banks, housing finance
companies, venture capital companies, and mutual funds. The Banking sector of an
economy is generally the most significant player and performs three primary
functions which include the facilitation of the payment system, mobilization of
savings, and allocation of loanable funds. By virtue of its pivotal role, the banking
sector can exert its positive influence on various other segments of the economy.

The current structure of the financial sector in Pakistan is the result of several policy
shifts and developments. The eras of financial sector developments in Pakistan can
broadly be segregated into 1947–70, 1971–90 and 1991 to date period. Prior to
1971, the primary focus was on developing commercial banks in the private sector
and creating development finance institutions backed by the government. The
private sector development, however, almost clogged during the period 1971–1990,
owing to the nationalization policy of the government. During this period, the banking
sector came under the government’s control. Since 1990s, more liberal and market-
based reforms have been followed.
The financial intermediaries are as crucial to the economy as the blood is to the
body. Some of its significant benefits are discussed below
Low Risk: The involvement of intermediaries reduces the risk of fraudulent
Convenience: Exchange becomes suitable for the investor as well as the borrower.

Economies of Scale: The cost involved in the lending and borrowing of funds like
analyzing credit position, operational expenses and cost of paperwork decreases to a
large extent.

Greater Liquidity: The financial intermediaries like banks allow investors or

depositors to withdraw their amount at any point of time, as per their requirement.

Safe Investment: For the investor’s point of view, financial intermediaries are
considered to be more trustworthy and reliable than lending money directly to an
individual to yield interest

Conclusion

Financial intermediaries are essential for the growth of a country. They act as the
backbone of the economy and facilitates the circulation of money in the market from
the individual’s households and accounts
References

https://theinvestorsbook.com/financial-intermediaries.html

https://economicpakistan.wordpress.com/2008/01/15/banks-financial-institutions-of-
pakistan/amp/

https://accountlearning.com/role-of-financial-intermediaries-in-economic-
development/