"Poverty alleviation" has become a common
slogan. Without effective and strong national financial system poverty
reduction and economic growth are never possible. Financial system that
develops unevenly and lack transparency and proper regulation is more
vulnerable to financial shocks and prone to distress. It is proved that
these shocks and crises disproportionately affect poor people.
Weak financial system, exacerbate poverty levels by
providing inadequate access to capital and financial services to
individuals and to small and medium enterprises, which are key to
Now economists have recognized that the financial
system is essential for development. Improving the financial system can
lead to higher growth and reduce the likelihood and severity of crises.
It is essential in understanding the causes of business cycles and the
working of monetary policy.
"Pakistan may suffer various types of economic
crisis which would be triggered by weak banking and financial regulation
polices. One of the major indicators of the economy is stock exchange
condition. Does it show a stable and natural growth?. Rarely become
bullish, such a huge market just depends on large few industries, there
is no new investment but the shifting of investment making price
bubbles. In this scenario the imposition of capital value tax and badla
financing what will happen next?.
This is the time to prevent these financial crises.
Avoiding crises should be a top priority in any anti-poverty strategy.
Government needs to improve the prudential regulation
and supervision of financial intermediatries, introduce new standards
for data dissemination and implement corporate bankruptcy reform. At the
same time, a cautious approach should be taken to capital account
liberalization. Controls on capital can be an appropriate instrument for
tempering the volatility of capital flows. There is evidence that
capital controls can shift the composition of capital flows towards
longer maturing investment.
Other initiatives and measures are also important for
avoiding crises, such as mechanism to diversify and insure against risk.
But one thing should be kept in mind that actions at the national level
may not be enough to prevent economy wide crises. Domestic actions will
have to be complemented by actions at the international level to foster
global financial stability and help countries.
In thinking about financial reforms, we need to treat
liberalization as a means rather than an end. Instead of pushing for
immediate deregulation, we should be trying to understand the important
role government plays in financial system. These steps will not only
result in the better and more stable allocation of domestic capital, but
also help country to manage international capital flows.
If we discuss the role of the financial system
individual entrepreneurs rarely have enough of their own capital to
undertake investments themselves. Individual savers without pooling
their money, would not be able to take advantage of the potential
increasing returns to scale of their investment and would face a large
degree of risk with little liquidity. Despite that effective financial
system solves these problems by agglomerating capital from many smaller
savers, allocating capital to the most important uses, and monitoring to
ensure that it is being used well. At same time the financial system
transfers, pools, and reduces risk, increases liquidity and conveys
Well functioning financial system does a very good
job of selecting the most productive recipients for these resources and
ensuring that they are using them in high return activities.
What is happening in Pakistan our financial system is
very poor that's why allocation of capital is often in low productive
investments. So difference in terms of growth and total factor
productivity is going to be enormous.
If our government gives these financial sector
priorities in three ways we can strengthen our financial system (1)
knowledge dissemination, (2)
lending and technical assistance, and (3)
partnerships, Government actively disseminates research and knowledge in
a variety of ways. An emerging issue of our time is electronic finance
and electronic security. Electronic finance, which is becoming key to
financial infrastructure, presents great opportunities to reduce the
costs of financial and commercial transactions. If there is a provision
of financial sector knowledge and information services, with a dedicated
team of analysts, serves as hub of communications, research and
resources on financial sector issues.
Government control and its increased concern over
money laundering and the financing of unlawful activities, particularly
as the devastating economic and social consequences are magnified with
fragile financial system. Government should adopt a Financial Sector
Assessment program, which helps to identify financial system strengths
and vulnerabilities and helps to reduce the political crises.
Financial Sector Reform and Strengthening program has
to establish with a mechanism to supports technical assistance such as
risk-based approaches to supervision, the use of early warning tests and
the regulatory ladder. In this way we can expose our supervisors on
Another big problem is lack of access to financial
services. About 3 to 6% of the Pakistani have access to day-to-day bank
and payment services compared with more than 90% in developed countries.
Government has to widen the access to financial services in the country,
by improving the efficiency of regional payment infrastructures and by
promoting the delivery of payment instruments and services to
individuals and to small and medium enterprises. Our country would
become more attractive for the investors.
In conclusion it is clear that the functioning of
financial system is vitally linked to economic growth. A country with
larger banks and more active stock markets grow faster. Industries and
firms that rely heavily our external financing grow disproportionately
faster in countries with well-developed banks and securities markets
than in countries with poorly developed financial system.
The weight of evidence suggests that financial system
are a fundamental feature of the process of economic development and
that a satisfactory understanding of the factors underlying economic
growth requires a greater understanding of the evolution and structure
of financial system.