Structural Issues and Reforms in Financial (non-bank) Market in Pakistan

A large body of research now links financial sector development, including the depth of the banking system, liquidity in capital market, and financial liberalisation to long-run growth and poverty reduction. According to a recent World Bank report,1 “As the dust settles from the great financial crises of 1997-98, the potentially disastrous consequences of weak financial markets are apparent”. The report further states that the importance of getting financial policy making right has become one of the most critical development issues in this century. In the past, there have been two extreme approaches concerning financial market regulation. One clearly supports the central role of state in the financial markets, whereas, the other sees state intervention more of a problem than as the solution. Of these two rather diverging ideologies, the International Financial Institutions (IFIs) advocate the development of market institutions, more liberalisation and lesser role of state. Pakistan has been following IFI advice in this regard. However, after the East Asian Crisis, a strong point of view has emerged that believes that in developing countries, ruling out state’s role from financial markets is unrealistic. But, the state has to play a developmental role. According to Stiglitz (1991), “governments have played a central role—whether good or ill may be debated—in the development of most of those countries which today belong among the more developed”. The financial policy focus in developing countries is quite often donor directed and is tilted towards the provision of diversified financial services. Capital market development is an important element of this policy, as it is considered as a flexible alternative to bank financing and useful in diversifying ownership of assets.