ASSIGNMENT

DCOM-302 Financial And Regulatory Institutions

Submitted to
sir adeel mumtaz
Submitted by
Khuram Shehzad
Roll No: 174514

B.com 2nd Semester Morning

Directorate of Distance Learning Education

Department of Commerce
GC University Faisalabad

QUESTION NO 01

WHY FINANCIAL MARKET ARE IMPORTANT TO THE HEALTH OF AN

ECONOMY? ALSO EXPLAIN THE FINANCIAL INSTITUTION IN DETAIL.

QUESTION NO 02

DESCRIBE MONEY MARKET AND ITS STURCTUR? BRIFLY DISCUSS THE

INSTUMENTS OF MONEY MARKETS WITH EXPLAIN FROM PAKISTANI
MARKET.

QUESTION NO 03

DESCRIBE THE FUNCTION OF THE CENTRAL BANK TO SUPPORT THE

FUNANCIAL SYSTEM OF THE COUNTRY?

QUESTION NO 04

HOW CENTRAL BANK CONTROL THE LEVEL OF ECONOMIC ACTIVITY

WITHIN A COUNTRY? WHY IT IS MORE SUCCESSFUL IN THE PERIOD OF
INFLECTION THAN IN DEPRESSION

QUESTION NO 05
EXPLAIN THE DIFFERENT TYPE OF BANKS? ALSO DESCRIBE THE MAJOR
FUNCTION OF COMMERCIAL BANK?

QUESTION NO 06

EXPALIN FUNCTION OF STOCK MARKET AND PROCEDURE OF TRADING

SHARE IN STOCK MARKET? DIFFERENTIATE BETWEEN KSE 100 INDEX AND
KSE 30 INDEX

QUESTION NO 07

EXPLAIN THE MUTUAL FUNDS AND ITS TYPE IN DETAIL?

QUESTION NO 08

EXPLAIN THE DETERMINATES OF INTREST RATE AND ITS IMPECT ON THE

VALUATION OF SECURITIES.

QUESTION NO 09

DESCRIBE THE ISLAMIC BANKING? BRIEFLY EXPALIN THE MAJOR

DIFFERENCES BETWEEN ISLAMIC AND COMMERCIAL BANKING?

QUESTION NO 10

EXPALIN THE FUNCTION OF THE SECURITY AND EXCHANGE COMMISSION

OF PAKISTAN (SECP)? BRIEFLY DISCUSS THE RULE OF SECP OPERATIONAL
IN PAKISTAN

QUESTION NO 01

WHY FINANCIAL MARKET ARE IMPORTANT TO THE HEALTH OF AN

ECONOMY? ALSO EXPLAIN THE FINANCIAL INSTITUTION IN DETAIL.

ANS:-

WHY FINANCIAL MARKET ARE IMPORTANT TO THE HEALTH OF AN

ECONOMY

A financial market is a market where people and organizations can trade of

financial instruments such as securities and commodities at a low transcript
cost and at prices that optimizes the demand and supply

Financial markets important to economy because

Financial markets accumulate funds from the public who wants to invests for
a return and divert these funds for the organization in need of funds
A good functioning of financial market will leads to better and high economic
growth

Financial markets also facilitates the international flow of funds between

countries

A well-developed financial system should improve the efficiency of financing

decisions, favoring a better allocation of resources and thereby economic
growth.

EXPLAIN THE FINANCIAL INSTITUTION IN DETAIL

A financial institution is an establishment that conducts financial

transactions such as investments, loans and deposits. Almost everyone deals
with financial institutions on a regular basis. Everything from depositing
money to taking out loans and exchanging currencies must be done through
financial institutions. Here is an overview of some of the major categories of
financial institutions and their roles in the financial system.

Commercial Banks
Commercial banks accept deposits and provide security and convenience to
their customers. Part of the original purpose of banks was to offer customers
safe keeping for their money. By keeping physical cash at home or in a
wallet, there are risks of loss due to theft and accidents, not to mention the
loss of possible income from interest. With banks, consumers no longer need
to keep large amounts of currency on hand; transactions can be handled with
checks, debit cards or credit cards, instead.

Commercial banks also make loans that individuals and businesses use to
buy goods or expand business operations, which in turn leads to more
deposited funds that make their way to banks. If banks can lend money at a
higher interest rate than they have to pay for funds and operating costs, they
make money.

Banks also serve often under-appreciated roles as payment agents within a

country and between nations. Not only do banks issue debit cards that allow
account holders to pay for goods with the swipe of a card, they can also
arrange wire transfers with other institutions. Banks essentially underwrite
financial transactions by lending their reputation and credibility to the
transaction; a check is basically just a promissory note between two people,
but without a bank's name and information on that note, no merchant would
accept it. As payment agents, banks make commercial transactions much
more convenient; it is not necessary to carry around large amounts of
physical currency when merchants will accept the checks, debit cards or
credit cards that banks provide. 
Investment Banks
The stock market crash of 1929 and ensuing Great Depression caused the
United States government to increase financial market regulation. The Glass-
Steagall Act of 1933 resulted in the separation of investment banking from
commercial banking.

While investment banks may be called "banks," their operations are far

different than deposit-gathering commercial banks. An investment bank is a
financial intermediary that performs a variety of services for businesses and
some governments. These services include underwriting debt and equity
offerings, acting as an intermediary between an issuer of securities and the
investing public, making markets, facilitating mergers and other corporate
reorganizations, and acting as a broker for institutional clients. They may
also provide research and financial advisory services to companies. As a
general rule, investment banks focus on initial public offerings (IPOs) and
large public and private share offerings. Traditionally, investment banks do
not deal with the general public. However, some of the big names in
investment banking, such as JP Morgan Chase, Bank of America and
Citigroup, also operate commercial banks. Other past and present
investment banks you may have heard of include Morgan Stanley, Goldman
Sachs, Lehman Brothers and First Boston.

Generally speaking, investment banks are subject to less regulation than

commercial banks. While investment banks operate under the supervision of
regulatory bodies, like the Securities and Exchange Commission, FINRA, and
the U.S. Treasury, there are typically fewer restrictions when it comes to
maintaining capital ratios or introducing new products.

Insurance Companies
Insurance companies pool risk by collecting premiums from a large group of
people who want to protect themselves and/or their loved ones against a
particular loss, such as a fire, car accident, illness, lawsuit, disability or
death. Insurance helps individuals and companies manage risk and preserve
wealth. By insuring a large number of people, insurance companies can
operate profitably and at the same time pay for claims that may arise.
Insurance companies use statistical analysis to project what their actual
losses will be within a given class. They know that not all insured individuals
will suffer losses at the same time or at all. 

Brokerages
A brokerage acts as an intermediary between buyers and sellers to facilitate
securities transactions. Brokerage companies are compensated
via commission after the transaction has been successfully completed. For
example, when a trade order for a stock is carried out, an individual often
pays a transaction fee for the brokerage company's efforts to execute the
trade.
A brokerage can be either full service or discount. A full service brokerage
provides investment advice, portfolio management and trade execution. In
exchange for this high level of service, customers pay significant
commissions on each trade. Discount brokers allow investors to perform
their own investment research and make their own decisions. The brokerage
still executes the investor's trades, but since it doesn't provide the other
services of a full-service brokerage, its trade commissions are much
smaller. 

Investment Companies
An investment company is a corporation or a trust through which individuals
invest in diversified, professionally managed portfolios of securities by
pooling their funds with those of other investors. Rather than purchasing
combinations of individual stocks and bonds for a portfolio, an investor can
purchase securities indirectly through a package product like a mutual fund.

There are three fundamental types of investment companies: unit investment

trusts (UITs), face amount certificate companies and managed investment
companies. All three types have the following things in common:

An undivided interest in the fund proportional to the number of shares held

Diversification in a large number of securities

Professional management

Specific investment objectives

Let's take a closer look at each type of investment company.

Unit Investment Trusts (UITs)

A unit investment trust, or UIT, is a company established under an indenture
or similar agreement. It has the following characteristics: 

The management of the trust is supervised by a trustee.

Unit investment trusts sell a fixed number of shares to unit holders, who
receive a proportionate share of net income from the underlying trust.

The UIT security is redeemable and represents an undivided interest in a

specific portfolio of securities.

The portfolio is merely supervised, not managed, as it remains fixed for the
life of the trust. In other words, there is no day-to-day management of the
portfolio.

Face Amount Certificates

A face amount certificate company issues debt certificates at a
predetermined rate of interest. Additional characteristics include: 

Certificate holders may redeem their certificates for a fixed amount on a

specified date, or for a specific surrender value, before maturity.

Certificates can be purchased either in periodic installments or all at once

with a lump-sum payment.

Face amount certificate companies are almost nonexistent today.

Management Investment Companies

The most common type of investment company is the management
investment company, which actively manages a portfolio of securities to
achieve its investment objective. There are two types of management
investment company: closed-end and open-end. The primary differences
between the two come down to where investors buy and sell their shares - in
the primary or secondary markets - and the type of securities the investment
company sells.

Closed-End Investment Companies: A closed-end investment company issues

shares in a one-time public offering. It does not continually offer new shares,
nor does it redeem its shares like an open-end investment company. Once
shares are issued, an investor may purchase them on the open market and
sell them in the same way. The market value of the closed-end fund's shares
will be based on supply and demand, much like other securities. Instead of
selling at net asset value, the shares can sell at a premium or at a discount
to the net asset value.

Open-End Investment Companies: Open-end investment companies, also

known as mutual funds, continuously issue new shares. These shares may
only be purchased from the investment company and sold back to the
investment company. Mutual funds are discussed in more detail in the
Variable Contracts section.

Read more: Series 26 Exam Guide: Investment Companies

Nonbank Financial Institutions

The following institutions are not technically banks but provide some of the
same services as banks. 

Savings and Loans

Savings and loan associations, also known as S&Ls or thrifts, resemble
banks in many respects. Most consumers don't know the differences
between commercial banks and S&Ls. By law, savings and loan companies
must have 65% or more of their lending in residential mortgages, though
other types of lending is allowed.

S&Ls emerged largely in response to the exclusivity of commercial banks.

There was a time when banks would only accept deposits from people of
relatively high wealth, with references, and would not lend to ordinary
workers. Savings and loans typically offered lower borrowing rates than
commercial banks and higher interest rates on deposits; the narrower profit
margin was a byproduct of the fact that such S&Ls were privately or
mutually owned.

Credit Unions
Credit unions are another alternative to regular commercial banks. Credit
unions are almost always organized as not-for-profit cooperatives. Like banks
and S&Ls, credit unions can be chartered at the federal or state level. Like
S&Ls, credit unions typically offer higher rates on deposits and charge lower
rates on loans in comparison to commercial banks.

In exchange for a little added freedom, there is one particular restriction on

credit unions; membership is not open to the public, but rather restricted to a
particular membership group. In the past, this has meant that employees of
certain companies, members of certain churches, and so on, were the only
ones allowed to join a credit union. In recent years, though, these
restrictions have been eased considerably, very much over the objections of
banks.

Shadow Banks
The housing bubble and subsequent credit crisis brought attention to what is
commonly called "the shadow banking system." This is a collection of
investment banks, hedge funds, insurers and other non-bank financial
institutions that replicate some of the activities of regulated banks, but do
not operate in the same regulatory environment.

The shadow banking system funneled a great deal of money into

the U.S. residential mortgage market during the bubble. Insurance
companies would buy mortgage bonds from investment banks, which would
then use the proceeds to buy more mortgages, so that they could issue more
mortgage bonds. The banks would use the money obtained from selling
mortgages to write still more mortgages.

Many estimates of the size of the shadow banking system suggest that it had
grown to match the size of the traditional U.S. banking system by 2008.
Apart from the absence of regulation and reporting requirements, the nature
of the operations within the shadow banking system created several
problems. Specifically, many of these institutions "borrowed short" to "lend
long." In other words, they financed long-term commitments with short-term
debt. This left these institutions very vulnerable to increases in short-term
rates and when those rates rose, it forced many institutions to rush to
liquidate investments and make margin calls. Moreover, as these institutions
were not part of the formal banking system, they did not have access to the
same emergency funding facilities. (Learn more in The Rise And Fall Of The
Shadow Banking System.)

QUESTION NO 02

DESCRIBE MONEY MARKET AND ITS STURCTUR? BRIFLY DISCUSS THE

INSTUMENTS OF MONEY MARKETS WITH EXPLAIN FROM PAKISTANI
MARKET.

ANS:-

Definition: 

Money market basically refers to a section of the financial market where

financial instruments with high liquidity and short-term maturities are traded.
Money market has become a component of the financial market for buying
and selling of securities of short-term maturities, of one year or less, such as
treasury bills and commercial papers. 
Over-the-counter trading is done in the money market and it is a wholesale
process. It is used by the participants as a way of borrowing and lending for
the short term.

Description: 

Money market consists of negotiable instruments such as treasury bills,

commercial papers. and certificates of deposit. It is used by many
participants, including companies, to raise funds by selling commercial
papers in the market. Money market is considered a safe place to invest due
to the high liquidity of securities. 

It has certain risks which investors should be aware of, one of them being
default on securities such as commercial papers. Money market consists of
various financial institutions and dealers, who seek to borrow or loan
securities. It is the best source to invest in liquid assets. 

The money market is an unregulated and informal market and not structured
like the capital markets, where things are organised in a formal way. Money
market gives lesser return to investors who invest in it but provides a variety
of products. 

Withdrawing money from the money market is easier. Money markets are
different from capital markets as they are for a shorter period of time while
capital markets are used for longer time periods. 

Meanwhile, a mortgage lender can create protection against a fallout risk by

entering an agreement with an agency or private conduit for operational,
rather than mandatory, delivery of the mortgage. In such an agreement, the
mortgage originator effectively buys an option, which gives the lender the
right, but not the obligation, to deliver the mortgage. Against that, the private
conduit charges a fee for allowing optional delivery.

Structure of Money market

Structure means support on the basis body will stand. So there are following
components which support the whole money market.
In the structure of money market, there are two components are included

1st Composition or component – Financial institution

There are two parts of financial institution in money market:-

a) organized sector

In this sector there following dealer who deal short term loans in money
market.

I) RBI :-
RBI means reserve bank of India. This is central bank of India. It is issue
short term loan when any bank has any need of short term money.

II) Commercial Banks:-

In commercial banks, there are SBI , Nationalize bank , rural banks , private
banks which deals in short term loans with each other , one bank can take or
give short term loan to each other when they need or extra money , they
want to invest in short term govt. security.

III) Co-operative banks:-

The co-operative banks are also take part in money market. In the top dealer
in this market is state cooperative bank. In the district level central
cooperative bank do dealing in short term loan.

b) Unorganized Sector

In this sector indigenous banks, money lenders deals with each other or with
organized sector.
2nd Composition or component – Financial Instruments or papers

1 ) Call money market

Call money market is the market which deals in short term loans. This loan
can be given for one hour to one or two days .This call loans is given without
any security. The borrower or loan taker will repay the loan at call. So this
loan is also called call loan in this market. The rate of this loan is very high.

II) Treasury bill Market

Treasury bills are the bill which is issued by central govt. This bill is sold by
RBI on the behalf of Govt. There is dealing of treasury bills in treasury bill
market. The main dealer of T.B are the UTI & LIC . This is 90 loan
acceptance bill . This bill can be discounted from any other bank.

III) Commercial bill market

a) Promissory Notes: -
 In this bill, the loan taker give the promise to pay certain amount after
certain period.

b) Bill of exchange

Under this bill firms can sell the good. In this bill loan giver order that his
amount must be give to him or his ordered person after certain period. This
bill can also discounted from bank.

QUESTION NO 03

DESCRIBE THE FUNCTION OF THE CENTRAL BANK TO SUPPORT THE

FUNANCIAL SYSTEM OF THE COUNTRY?

ANS:-

DEFINATION:

A Central Bank is an integral part of the financial and economic system. They
are usually owned by the government and given certain functions to fulfil.
These include printing money, operating monetary policy, lender of last
resort and ensuring the stability of financial system.

• Issue money:

The Central Bank will have responsibility for issuing notes and coins and
ensure people have faith in notes which are printed, e.g. protect against
forgery. Printing money is also an important responsibility because printing
too much can cause inflation.

• Lender of Last Resort to Commercial banks.

If banks get into liquidity shortages then the Central Bank is able to lend the
commercial bank sufficient funds to avoid the bank running short. This is a
very important function as it helps maintain confidence in the banking
system. If a bank ran out of money, people would lose confidence and want
to withdraw their money from the bank. Having a lender of last resort means
that we don’t expect a liquidity crisis with our banks, therefore people have
high confidence in keeping our savings in banks. For example, the US Federal
Reserve was created in 1907 after a bank panic was averted by intervention
from J.P.Morgan; this led to the creation of a Central Bank who would have
this function.

• Lender of Last Resort to Government.

Government borrowing is financed by selling bonds on the open market.

There may be some months where the government fails to sell sufficient
bonds and so has a shortfall. This would cause panic amongst bond investors
and they would be more likely to sell their government bonds and demand
 higher interest rates. However, if the Bank of England intervene and buy
some government bonds then they can avoid these ‘liquidity shortages’. This
gives bond investors more confidence and helps the government to borrow at
lower interest rates. A problem in the Eurozone in 2011, is that the ECB was
not willing to act as lender of last resort – causing higher bond yields.

• Target low inflation.

 Many governments give the Central Bank a target for inflation, e.g. the Bank
of England has an inflation target of 2% +/- 1. See: Bank of England inflation
target. Low inflation helps to create greater economic stability and preserves
the value of money and savings.

• Target growth and unemployment.

As well as low inflation a Central Bank will consider other macroeconomic

objectives such as economic growth and unemployment. For example, in a
period of temporary cost-push inflation, the Central Bank may accept a
higher rate of inflation because it doesn’t want to push the economy into a
recession.

• Operate monetary policy/interest rates. 

The Central Bank set interest rates to target low inflation and maintain
economic growth.  Every month the MPC will meet and evaluate whether
inflationary pressures in the economy justify a rate increase. To make a
judgement on inflationary pressures they will examine every aspect of the
economic situation and look at a variety of economic statistics to get a
picture of the whole economy. See: how the Bank of England set interest
rates.

• Unconventional monetary policy.

The Central Bank may also need to use other monetary instruments to
achieve macroeconomic targets. For example, in a liquidity trap, lower
interest rates may be insufficient to boost spending and economic growth. In
this situation, the Central Bank may resort to more unconventional monetary
policies such as quantitative easing. This involves creating money and using
this money to buy bonds; the aim of quantitative easing is to reduce interest
rates and boost bank lending

• Ensure stability of financial system. 

For example, regulate bank lending and financial derivatives.

QUESTION NO 04

HOW CENTRAL BANK CONTROL THE LEVEL OF ECONOMIC ACTIVITY

WITHIN A COUNTRY? WHY IT IS MORE SUCCESSFUL IN THE PERIOD OF
INFLECTION THAN IN DEPRESSION
ANS:-

If a nation’s economy were a human body, then its heart would

be the central bank. And just as the heart works to pump life-
giving blood throughout the body, the central bank pumps money
into the economy to keep it healthy and growing. Sometimes
economies need less money, and sometimes they need more. In
this article, we’ll discuss how central banks control the quantity
of money in circulation.
The quantity of money circulating in an economy affects both
micro and macroeconomic trends. At the micro level, a large
supply of free and easy money means more personal spending.
Individuals also have an easier time getting loans such as
personal loans, car loans, or home mortgages. 
At the macroeconomic level, the amount of money circulating in
an economy affects things like gross domestic product, overall
growth, interest rates, and unemployment rates. The central
banks tend to control the quantity of money in circulation to
achieve economic objectives and affect monetary policy.
Through this article, we take a look at some of the common ways
that central banks control the quantity of money in circulation.
1. Print More Money
As no economy is pegged to a gold standard, central banks can
increase the amount of money in circulation by simply printing it.
They can print as much money as they want, though there are
consequences for doing so. Merely printing more money doesn’t
affect the output or production levels, so the money itself
becomes less valuable. Since this can cause inflation, simply
printing more money isn't the first choice of central banks. 
2. Set the Reserve Requirement
One of the basic methods used by all central banks to control the
quantity of money in an economy is the reserve requirement. As
a rule, central banks mandate depository institutions to keep a
certain amount of funds in reserve against the amount of net
transaction accounts. Thus a certain amount is kept in reserve,
and this does not enter circulation. Say the central bank has set
the reserve requirement at 9%. If a commercial bank has total
deposits of $100 million, it must then set aside $9 million to
satisfy the reserve requirement. It can put the remaining $91
million into circulation. 
When the central bank wants more money circulating into the
economy, it can reduce the reserve requirement. This means the
bank can lend out more money. If it wants to reduce the amount
of money in the economy, it can increase the reserve
requirement. This means that banks have less money to lend out
and will thus be pickier about issuing loans. 
In the United States (effective January 19, 2017), smaller
depository institutions with net transaction accounts up to $15.5
million are exempt from maintaining a reserve. Mid-sized
institutions with accounts ranging between $15.5 million and
$115.1 million must set aside 3% of the liabilities as reserve.
Depository institutions bigger than $115.1 million have a 10%
reserve requirement.
3. Influence Interest Rates
In most cases, a central bank cannot directly set interest rates
for loans such as mortgages, auto loans, or personal loans.
However, the central bank does have certain tools to push
interest rates towards desired levels. For example, the central
bank holds the key to the policy rate—this is the rate at which
commercial banks get to borrow from the central bank (in the
United States, this is called the federal discount rate). When
banks get to borrow from the central bank at a lower rate, they
pass these savings on by reducing the cost of loans to its
customers. Lower interest rates tend to increase borrowing, and
this means the quantity of money in circulation increases.
4. Engage in Open Market Operations
Central banks affect the quantity of money in circulation by
buying or selling government securitiesthrough the process
known as open market operations (OMO). When a central bank is
looking to increase the quantity of money in circulation, it
purchases government securities from commercial banks and
institutions. This frees up bank assets—they now have more cash
to loan. This is a part of an expansionary or easing monetary
policy which brings down the interest rate in the economy. The
opposite is done in a case where money needs to taken out from
the system. In the United States, the Federal Reserve uses open
market operations to reach a targeted federal funds rate.
The federal funds rate is the interest rate at which banks and
institutions lend money to each other overnight. Each lending-
borrowing pair negotiates their own rate, and the average of
these is the federal funds rate. The federal funds rate, in turn,
affects every other interest rate. Open market operations are a
widely used instrument as they are flexible, easy to use, and
effective.
5. Introduce a Quantitative Easing Program
In dire economic times, central banks can take open market
operations a step further and institute a program of quantitative
easing. Under quantitative easing, central banks create money
and use it to buy up assets and securities such as government
bonds. This money enters into the banking system as it is
received as payment for the assets purchased by the central
bank. The bank reserves swell up by that amount, which
encourages banks to give out more loans, it further helps to
lower long-term interest rates and encourage investment. After
the financial crisis of 2007-2008, the Bank of England and the
Federal Reserve launched quantitative easing programs. More
recently, the European Central Bank and the Bank of Japan have
also announced plans for quantitative easing. 
WHY IT IS MORE SUCCESSFUL IN THE PERIOD OF INFLECTION THAN IN
DEPRESSION

Inflation is generally controlled by the Central Bank and/or the

 government. The main policy tools to control inflation include:

• Monetary policy 
Setting interest rates. Higher interest rates reduce demand, leading to
lower economic growth and lower inflation
• Control of money supply
Monetarists argue there is a close link between the money supply and
inflation, therefore controlling money supply can control inflation.
• Supply-side policies 
policies to increase competitiveness and efficiency of the economy,
putting downward pressure on long-term costs.
• Fiscal policy
A higher rate of income tax could reduce spending and inflationary
pressures.
• Wage controls.
Trying to control wages could, in theory, help to reduce inflationary
pressures. However, apart from the 1970s, rarely used.
Monetary Policy
In a period of rapid economic growth, demand in the economy could be
growing faster than its capacity can grow to meet it. This leads to
inflationary pressures as firms respond to shortages by putting up the
price. We can term this demand-pull inflation. Therefore, reducing the
growth of aggregate demand (AD) should reduce inflationary
pressures.
The Central bank could increase interest rates. Higher rates make
borrowing more expensive and saving more attractive. This should
lead to lower growth in consumer spending and investment. See more
on higher interest rates

Fiscal Policy
The government can increase taxes (such as income tax and VAT) and
cut spending. This improves the budget situation and helps to reduce
demand in the economy.
Both these policies reduce inflation by reducing the growth of
Aggregate Demand. If economic growth is rapid, reducing growth of AD
can reduce inflationary pressures without causing a recession.
If a country had high inflation and negative growth, then reducing
aggregate demand would be more unpalatable as reducing inflation
would lead to lower output and higher unemployment. They could still
reduce inflation, but, it would be much more damaging to the
 economy.

Other Policies to Reduce Inflation

Wage Control
If inflation is caused by wage inflation (e.g. powerful unions bargaining
for higher real wages), then limiting wage growth can help to moderate
inflation. Lower wage growth helps to reduce cost-push inflation and
helps to moderate demand-pull inflation.
However, as the UK discovered in the 1970s, it can be difficult to
control inflation through incomes policies, especially if the unions are
powerful.

Monetarism
Monetarism seeks to control inflation through controlling the money
supply. Monetarists believe there is a strong link between the money
supply and inflation. If you can control the growth of the money supply,
then you should be able to bring inflation under control. Monetarists
would stress policies such as:

• Higher interest rates (tightening monetary policy)

• Reducing budget deficit (deflationary fiscal policy)

• Control of money being created by government

Supply Side Policies
Often inflation is caused by persistent uncompetitiveness and rising
costs. Supply-side policies may enable the economy to become more
competitive and help to moderate inflationary pressures. For example,
more flexible labour markets may help reduce inflationary pressure.

Ways To Reduce Hyperinflation – change currency

In a period of hyperinflation, conventional policies may be unsuitable.
Expectations of future inflation may be hard to change.  When people
have lost confidence in a currency, it may be necessary to introduce a
new currency or use another like the dollar

Ways to Reduce Cost-Push Inflation

Cost-push inflation (e.g. rising oil prices can lead to inflation and lower
growth. This is the worst of both worlds and is more difficult to control
without leading to lower growth.
QUESTION NO 05

EXPLAIN THE DIFFERENT TYPE OF BANKS? ALSO DESCRIBE THE MAJOR

FUNCTION OF COMMERCIAL BANK?

ANS:-

Types of Banks
Some of the most common banks are listed below, but the
dividing lines are not always clean cut. Some banks work in
multiple areas (for example, a bank might offer personal
accounts, business accounts, and even help large enterprises
raise money in the financial markets).
• Retail banks are probably the banks you’re most familiar
with: Your checking and savings accounts are held at
a retail bank, which focuses on consumers (or the general
public) as customers. These banks give you credit cards,
offer loans, and they’re the ones with numerous branch
locations in populated areas. 
• Commercial banks focus
on business customers. Businesses need checking and
savings accounts just like individuals do. But they also need
more complex services, and the dollar amounts (or the
number of transactions) can be much larger. They might
need to accept payments from customers, rely heavily
on lines of credit to manage cash flow, and they might
use letters of credit to do business overseas.
• Investment banks help businesses work in financial
markets. If a business wants to go public or sell debt to
investors, they’ll often use an investment bank.
• Central banks manage the monetary system for a
government. For example, the Federal Reserve Bank is the
US central bank responsible for managing economic activity
and supervising banks. 
 • Credit unions are similar to banks, but they are not-for-profit
organizations owned by their customers (most banks are
owned by investors). Credit unions offer products and
services more or less identical to most retail and
commercial banks. The main difference is that credit union
members share some characteristic in common (where they
live, their occupation, or organizations they belong to, for
example). 
• Online banks operate entirely online – there are no physical
branch locations available to visit with a teller or personal
banker. Many brick-and-mortar banks also offer online
services, such as the ability to view accounts and pay bills
online, but internet-only banks are different: they often offer
competitive rates on savings accounts and
they’re especially likely to offer free checking. 
• Mutual banks are similar to credit unions because they are
owned by members (or customers) instead of outside
investors.
• Savings and loans are less prevalent than they used to be,
but they are still important. This type of bank was important
in making home ownership mainstream, using deposits from
customers to fund home loans. The name savings and
loan refers to the core activity they perform: take savings
from one customer and make loans to another. 

Non-Bank Lenders
Non-bank lenders are increasingly popular sources for loans.
Technically, they’re not banks, but your experience as a
borrower might be similar: you’d apply for a loan and repay as if
you were working with a bank.
These institutions specialize in lending, and they are not
interested in all of the other activities and regulations that apply
to traditional banks. Sometimes known as marketplace lenders,
non-bank lenders get funding from investors (both individual
investors and larger organizations).
For consumers shopping for loans, non-bank lenders are often
attractive – they may use different approval criteria than
traditional banks, and rates are often competitive.

Bank Changes Since the Financial Crisis

The financial crisis of 2008 changed the banking world
dramatically. Before the crisis, banks enjoyed some good times,
but the chickens came home to roost.
Banks were lending money to borrowers who could not afford to
repay and getting away with it because home prices kept rising
(among other things). They were also investing aggressively to
increase profits, but the risks became reality during the Great
Recession.
New regulations: The Dodd-Frank Act changed much of that by
making broad changes to financial regulation. Retail banking –
along with other markets – is now regulated by a new, additional
watchdog: the Consumer Financial Protection Bureau (CFPB).
This entity gives consumers a centralized place to lodge
complaints, learn about their rights, and get help. Moreover,
the Volcker Rule makes retail banks behave more like they did
before the housing bubble – they take deposits from customers
and invest conservatively, and there are limits on the type of
speculative trading banks can engage in.
Consolidation: There are fewer banks – especially investment
banks – since the financial crisis. Big name investment banks
failed (Lehman Brothers and Bear Stearns in particular) while
others reinvented themselves. The FDIC reportsthat there were
414 bank failures between 2008 and 2011, compared to three in
2007 and zero in 2006. In most cases, a failed bank is simply
taken over by another bank (and customers are not
inconvenienced as long as they stay below FDIC insurance
limits). The result is that weaker banks were absorbed by larger
banks, and you don’t have as many names to choose from.
MAJOR FUNCTION OF COMMERCIAL BANK
Commercial banks are the most important components
of the whole banking system.A commercial bank is a
profit-based financial institution that grants loans,
accepts deposits, and offers other financial services,
such as overdraft facilities and electronic transfer of
funds.

According to Culbertson,

Commercial Banks are the institutions that make short

make short term bans to business and in the process
create money.

In other words, commercial banks are financial

institutions that accept demand deposits from the
general public, transfer funds from the bank to another,
and earn profit.

Commercial banks are of three types, which are as

follows:
 • Public Sector Banks:

• Private Sector Banks:

• Foreign Banks:
Functions of Commercial Banks:

Commercial banks are institutions that conduct business for profit motive by
accepting public deposits for various investment purposes.

The functions of commercial banks are broadly classified into primary

functions and secondary functions, which are shown in Figure.

(a) Primary Functions:

Refer to the basic functions of commercial banks that
include the following:
(i) Accepting Deposits:
Implies that commercial banks are mainly dependent on
public deposits.

There are two types of deposits, which are discussed as

follows:
(1) Demand Deposits:
Refer to kind of deposits that can be easily withdrawn
by individuals without any prior notice to the bank. In
other words, the owners of these deposits are allowed
to withdraw money anytime by simply writing a check.
These deposits are the part of money supply as they are
used as a means for the payment of goods and services
as well as debts. Receiving these deposits is the main
function of commercial banks.

(2) Time Deposits:

Refer to deposits that are for certain period of time.
Banks pay higher interest on rime deposits. These
deposits can be withdrawn only after a specific time
period is completed by providing a written notice to the
bank.

(3) Advancing Loans:

Refers to one of the important functions of commercial
banks. The public deposits are used by commercial
banks for the purpose of granting loans to individuals
and businesses. Commercial banks grant loans in the
form of overdraft, cash credit, and discounting bills of
exchange.

(b) Secondary Functions:

Refer to crucial functions of commercial banks. The
secondary functions can be classified under three
heads, namely, agency functions, general utility
functions, and other functions.

These functions are explained as follows:

(1) Agency Functions:
Implies that commercial banks act as agents of
customers by performing various functions, which are as
follows:
(i) Collecting Checks:
Refer to one of the important functions of commercial
banks. The banks collect checks and bills of exchange
on the behalf of their customers through clearing house
facilities provided by the central bank.

(ii) Collecting Income:

Constitute another major function of commercial banks.
Commercial banks collect dividends, pension, salaries,
rents, and interests on investments on behalf of their
customers. A credit voucher is sent to customers for
information when any income is collected by the bank.

(iii) Paying Expenses:

Implies that commercial banks make the payments of
various obligations of customers, such as telephone
bills, insurance premium, school fees, and rents. Similar
to credit voucher, a debit voucher is sent to customers
for information when expenses are paid by the bank.

(2) General Utility Functions:

Include the following functions:
(i) Providing Locker Facilities:
Implies that commercial banks provide locker facilities
to its customers for safe keeping of jewellery, shares,
debentures, and other valuable items. This minimizes
the risk of loss due to theft at homes.

(ii) Issuing Traveler’s Checks:

Implies that banks issue traveler’s checks to individuals
for traveling outside the country. Traveler’s checks are
the safe and easy way to protect money while traveling.

(iii) Dealing in Foreign Exchange:

Implies that commercial banks help in providing foreign
exchange to businessmen dealing in exports and
imports. However, commercial banks need to take the
permission of the central bank for dealing in foreign
exchange.

(iv) Transferring Funds:

Refers to transferring of funds from one bank to another.
Funds are transferred by means of draft, telephonic
transfer, and electronic transfer.

(3) Other Functions:

Include the following:
(i) Creating Money:
Refers to one of the important functions of commercial
banks that help in increasing money supply. For
instance, a bank lends Rs. 5 lakh to an individual and
opens a demand deposit in the name of that individual.

Bank makes a credit entry of Rs. 5 lakh in that account.

This leads to creation of demand deposits in that
account. The point to be noted here is that there is no
payment in cash. Thus, without printing additional
money, the supply of money is increased.

(ii) Electronic Banking:

Include services, such as debit cards, credit cards, and
Internet banking.
Types of Credit Offered by Commercial Banks:
A commercial bank offers short-term loans to individuals
and organizations in the form of bank credit, which is a
secured loan carrying a certain rate of interest.

There are various types of bank credit provided by a

commercial bank, as shown in Figure-2:

Bank Loan:
Bank loan may be defined as the amount of money
granted by the bank at a specified rate of interest for a
fixed period of time. The commercial bank needs to
follow certain guidelines to extend bank loans to a
client. For example the bank requires the copy of
identity and income proofs of the client and a guarantor
to sanction bank loan. The banks grant loan to clients
against the security of assets so that, in case of default,
they can recover the loan amount. The securities used
against the bank loan may be tangible or intangible,
such as goodwill, assets, inventory, and documents of
title of goods.

The advantages of the bank loan are as follows:

a. Grants loan at low rate of interest

b. Involves very simple process of loan granting

c. Requires minimum document and legal formalities to
pass the loan

d. Involves good customer relationship management

e. Consumes less time because of modern techniques

and computerization

f. Provides door-to-door facilities

In addition to advantages, the bank loan suffers from

various imitations, which are as follows:
a. Imposes heavy penalty and legal action in case of
default of loan

b. Charges high rate of interest, if the party fails to pay

the loan amount in the allotted time

c. Adds extra burden on the borrower, who needs to

incur cost in preparing legal documents for procuring
loans

d. Affects the goodwill of the organization, in case of

delay in payment

Cash Credit:
Cash credit can be defined as an arrangement made by
the bank for the clients to withdraw cash exceeding
their account limit. The cash credit facility is generally
sanctioned for one year but it may extend up to three
years in some cases. In case of special request by the
client, the time limit can be further extended by the
bank.

The extension of the allotted time depends on the

consent of the bank and past performance of the client.
The rate of interest charged by the bank on cash credit
depends on the time duration for which the cash has
been withdrawn and the amount of cash.

The advantages of the cash credit are as follows:

a. Involves very less time in the approval of credit

b. Involves flexibility as the cash credit can be extended

for more time to fulfill the need of the customers.

c. Helps in fulfilling the current liabilities of the

organization

d. Charges interest only on the amount withdrawn by the

customer. The interest on cash credit is charged only on
the amount of cash withdrawn from the bank, not on the
total amount of credit sanctioned.

The cash credit is one of the most important

instruments of short-term financing but it has some
limitations.

These limitations are mentioned in the following points:

a. Requires more security for the approval of cash

b. Imposes very high rate of interest

c. Depends on the consent of the bank to extend the

credit amount and the time limit

Bank Overdraft:
Bank overdraft is the quickest means of the short-term
financing provided by the bank. It is a facility in which
the bank allows the current account holders to overdraw
their current accounts by a specified limit. The clients
generally avail the bank overdraft facility to meet urgent
and emergency requirements. Bank overdraft is the
most popular form of borrowing and do not require any
written formalities. The bank charges very low rate of
interest on bank overdraft up to a certain time.

The advantages of the bank overdraft are as follows:

a. Involves no documentation for the extension of
overdraft amount

b. Imposes nominal interest on the overdraft amount

c. Charges fee only on the amount exceeding the

account limit

The disadvantages of the bank overdraft are as follows:

a. Incurs high cost for the clients, if they fail to pay the
amount of overdraft for a longer period of time

b. Hampers the reputation of the organization, if it fails

to pay the amount of overdraft on time

c. Allows the bank to deduct overdraft amount from the

customers’ accounts without their permission

Discounting of Bill:
Discounting of bill is a process of settling the bill of
exchange by the bank at a value less than the face
value before maturity date. According to Sec. 126 of
Negotiable Instruments, “a bill of exchange is an
unconditional order in writing addressed by one person
to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at
fixed or determinable future time a sum certain in
money to order or to bearer.”

The facility of discounting of bill is used by the

organizations to meet their immediate need of cash for
settling down current liabilities.
Conditions laid down by the bank for discounting of bill
are as follows:
a. Must be intended to specific purpose

b. Must be enclosed with the signature of the two

persons (company, bank or reputed person)

c. Must be less than the face value

d. Must be produced before the maturity period.

QUESTION NO 06

EXPALIN FUNCTION OF STOCK MARKET AND PROCEDURE OF TRADING

SHARE IN STOCK MARKET? DIFFERENTIATE BETWEEN KSE 100 INDEX AND
KSE 30 INDEX

ANS:-

EXPALIN FUNCTION OF STOCK MARKET

stock exchange

A stock exchange is a corporation or mutual organisation which provides "trading" facilities

for stock brokers to trade in stocks and other securities. The securities traded on a stock
exchange include: shares issued by companies, unit trusts, derivatives, pooled investment
products and bonds.
 Simply put, stock exchanges are open markets that trade in financial assets. Whether
associated with a company or acting as an individual, a stock exchange is the place where
stocks are bought and sold. There are a number of major stock exchanges around the world
and each of these plays a part in determining the overall economic condition.

Functions of Stock Market

Stocks and shares are collectively referred to as 'equities' or
'securities' and represent an ownership stake in a company. Stock
markets are the place where buyers and sellers exchange these
securities.
A stock market may be physical or entirely virtual. The Bombay Stock
Exchange (BSE) is physically located on Dalal Street in Mumbai City.
Trading was traditionally done in person, but the option to buy/sell
most stocks electronically was added later. Earlier, trading was
initially done by telephone but is now primarily done by computer.
The process of exchange is generally for buyers to name a price they
are willing to pay for a particular stock and for sellers to name their
selling price. In physical markets, brokers and specialists match
buyers and sellers, but this can be done entirely by the computer in
virtual markets. 

Following are some of the essential functions

of a Stock Exchange:
 

• Providing liquidity and Marketability to Existing Securities:Stock Exchange

provides a ready and continuous market for buying and selling securities. It
provides a platform where shares can be sold and bought by buyers and sellers.
• Pricing of Securities:Based on the forces of demand & supply, Stock Exchange
helps in putting a value on the securities which provide instant data to both
buyers and sellers and thus helps in the pricing of securities.
• Safety of Transaction:All participants associated with a stock exchange are well
regulated, and are required to work within the legal framework given by the
regulator. Such a system ensures the safety of transactions. In India, all trading
is regulated by SEBI.
• Contributes to Economic Growth: People get a chance to buy and sell their
shares, letting them invest money. Stock exchange provides a platform by which
savings get channelized into the most productive investment proposals, which
leads to capital formation & economic growth.
• Spreading of Equity Culture: Stock exchanges have extensive information on the
listed companies, which is further available to the public. This data helps in
educating public about investments in securities which leads to spreading of
wider ownership of shares.
• Providing Scope for Speculation: Securities, when purchased solely with a view
of gaining profit through price movement to a target is called speculation. Stock
exchanges provide scope within the provisions of law for speculating in a
restricted and controlled manner.

PROCEDURE OF TRADING SHARE IN STOCK MARKET

Trade = Buy or Sell

To “trade” in the jargon of the financial markets means to buy
and sell. The workings of a system that can accommodate
trading of one billion shares in a single day are a mystery to most
people. No doubt, our financial markets are marvels of
technological efficiency.
Traders and markets must handle an order for 100 shares of
Acme Kumquats with the same care and documentation as an
order of 100,000 shares of MegaCorp.
You don’t need to know all of the technical details of how to buy
and sell stocks, but having a basic understanding of how the
markets work is important for an investor.

Two Basic Methods

There are two basic ways exchanges execute a trade:
• On the exchange floor
• Electronically
There is a strong push as of December 2017 to move more
trading to the networks and off the trading floors, but this push is
meeting with some resistance. Most markets, most notably
the NASDAQ, trade stockselectronically. However, the futures
markets trade in person on the floor of several exchanges, but
that’s a different topic.

Exchange Floor Trades

Trading on the floor of the New York Stock Exchange (NYSE) is
the image most people have, thanks to television and movie
depictions of how the market works.
When the market is open, you see hundreds of people rushing
about shouting and gesturing to one another, talking on phones,
watching monitors, and entering data into terminals. It looks like
chaos.
At the end of the trading day, the floor calms down, but it can
take up to three more trading days for a trade to settle,
depending on the type of trade.
Here is a step-by-step walk-through of the execution of a simple
trade on the NYSE.
• You tell your broker to buy 100 shares of Acme Kumquats at
 market.
• Your broker’s order department sends the order to its floor
clerk on the exchange.
• The floor clerk alerts one of the firm’s floor traders, who
finds another floor trader willing to sell 100 shares of Acme
Kumquats. This is easier than it sounds because the floor
trader knows which floor traders make markets in particular
stocks.
• The two agree on a price and complete the deal. The
notification process goes back up the line and your broker
calls you back with the final price. The process may take a
few minutes or longer depending on the stock and the
market. A few days later, you will receive the confirmation
notice in the mail.
Of course, this example was a simple trade; complex trades and
large blocks of stocks involve considerably more detail.

Electronic Trades
In this fast-moving world, some people are wondering how long a
human-based system like the NYSE can continue to provide the
level of service necessary. The NYSE handles a small percentage
of its volume electronically, while its rival NASDAQ is completely
electronic.
The electronic markets use vast computer networks to match
buyers and sellers, rather than human brokers.
While this system lacks the romantic and exciting images of the
NYSE floor, it is efficient and fast. Many large institutional
traders, such as pension funds, mutual funds, and so forth, prefer
this method of trading.
For the individual investor, you frequently can get almost instant
confirmations on your trades, if that is important to you. It also
facilitates further control of online investing by putting you one
step closer to the market.
That said, you still need a broker to handle your trades, as
individuals don’t have access to the electronic markets. Your
broker accesses the exchange network, and the system finds a
buyer or seller depending on your order.
What does this all mean to you? If the system works, and it does
most of the time, all of this will be hidden from you. However, if
something goes wrong, it’s important to have an idea of what’s
going on behind the scenes.

What Else You Need to Know

If you're planning on managing your own investments and making
your own trading decisions, you should learn some more about
how stock prices are set, how to understand stock quotes, bid &
ask prices, and stock orders. It's important to also understand
how to use trailing stops to protect stock profits to avoid losing
all your gains.
KSE 100 INDEX AND KSE 30 INDEX
KSE 100 INDEX:
KSE 100 Index. Karachi Stock Exchange 100 Index (KSE-100 Index) is
a stockindex acting as a benchmark to compare prices on the
Pakistan Stock Exchange (PSX) over a period. In determining
representative companies to compute theindex on, companies with
the highest market capitalization are selected.
KSE 30 INDEX
KSE-30 Index is calculated using the Free-Float Market Capitalization
methodology. In accordance with methodology, the level of index at
any point of time reflects the free-float market value of 30 companies
in relation to the base period.

QUESTION NO 07

EXPLAIN THE MUTUAL FUNDS AND ITS TYPE IN DETAIL?

ANS:-

Definition of a Mutual Fund

A mutual fund is an investment vehicle made up of a pool of moneys
collected from many investors for the purpose of investing in securities such
as stocks, bonds, money market instruments and other assets.

Types of Mutual Funds

For the purposes of this lesson, we'll focus on the three main types of mutual
funds: equity funds, fixed-income funds, and money market funds.
Let's explore each of these briefly.
Equity funds
 invest in stocks of various sizes and domicile. For example, there are mutual
funds that are classified as global, which have the ability to invest in both the
U.S. and anywhere in the world. Mutual funds that are classified as domestic are
mostly invested in the U.S. Growth funds typically invest in companies that are
expected to have higher growth rates than others.
Fixed-income funds
 mainly invest in bond-oriented investments, such as corporate bonds and
municipal bonds. You may come across a municipal bond mutual fund that is
state-specific. For example, an Ohio tax-free bond fund typically invests only in
Ohio municipal bond funds, so that interest received by the mutual fund holder is
exempt from taxation at both the federal and state income tax levels.
Money market funds
 invest in high-quality, short-term debt instruments, such as government treasury
bills (also known as T-bills). The returns on money market funds have historically
been greater than savings and checking accounts but less than certificates of
deposits. Please note that investments in money market funds are typically not
guaranteed by the FDIC, as most savings, checking, and certificates of deposits
are. It's important to understand this prior to investing.

QUESTION NO 08

EXPLAIN THE DETERMINATES OF INTREST RATE AND ITS IMPECT ON THE

VALUATION OF SECURITIES.

ANS:-

A country’s money supply is mostly the amount of coin and currency in

circulation and the total value of all checking accounts in banks. These two

types of assets are the most liquid (i.e., most easily used to buy goods and

services). The amount of money available to spend in an economy is mostly

determined by the country’s central bank. The bank can control the total amount

of money in circulation by using several levers (or tools), the most important of
which is the sale or purchase of U.S. government Treasury bonds. Central bank

sales or purchases of Treasury bonds are called “open market operations.”

Money demand refers to the demand by households, businesses, and the

government, for highly liquid assets such as currency and checking account

deposits. Money demand is affected by the desire to buy things soon, but it is

also affected by the opportunity cost of holding money. The opportunity cost is

the interest earnings one gives up on other assets to hold money.

If interest rates rise, households and businesses will likely allocate more of their

asset holdings into interest-bearing accounts (these are usually not classified as

money) and will hold less in the form of money. Since interest-bearing deposits

are the primary source of funds used to lend in the financial sector, changes in

total money demand affect the supply of loanable funds and in turn affect the

interest rates on loans.

Money supply and money demand will equalize only at one average interest rate.

Also, at this interest rate, the supply of loanable funds financial institutions wish

to lend equalizes the amount that borrowers wish to borrow. Thus the

equilibrium interest rate in the economy is the rate that equalizes money supply

and money demand.

Using the money market model, several important relationships between key

economic variables are shown:

• When the money supply rises (falls), the equilibrium interest rate falls

(rises).

• When the price level increases (decreases), the equilibrium interest rate

rises (falls).

• When real GDP rises (falls), the equilibrium interest rate rises (falls).

Connections
The money market model connects with the foreign exchange (Forex)
market because the interest rate in the economy, which is determined
in the money market, determines the rate of return on domestic
assets. In the Forex market, interest rates are given exogenously,
which means they are determined through some process not specified
in the model. However, that process of interest rate
determination is described in the money market. Economists will
sometimes say that once the money market model and Forex model
are combined, interest rates have been “endogenized.” In other words,
interest rates are now conceived as being determined by more
fundamental factors (gross domestic product [GDP] and money supply)
that are not given as exogenous.

The money market model also connects with the goods market model
in that GDP, which is determined in the goods market, influences
money demand and hence the interest rate in the money market
model.
The Interest Rate That Impacts Stocks
The interest rate that moves markets is the federal funds rate.
Also known as the overnight rate, this is the rate depository
institutions are charged for borrowing money from Federal
Reserve banks.
The federal funds rate is used by the Federal Reserve (the Fed) to
attempt to control inflation. Basically, by increasing the federal
funds rate, the Fed attempts to shrink the supply of money
available for purchasing or doing things, by making money more
expensive to obtain. Conversely, when it decreases the federal
funds rate, the Fed is increasing the money supply and, by
making it cheaper to borrow, encouraging spending. Other
countries' central banks do the same thing for the same reason.

QUESTION NO 09

DESCRIBE THE ISLAMIC BANKING? BRIEFLY EXPALIN THE MAJOR

DIFFERENCES BETWEEN ISLAMIC AND COMMERCIAL BANKING?

ANS:-
Islamic banking is grounded in Shari'ah, or Islamic principles and
all bank undertakings follow those Islamic morals. Islamic rules
on transactions are called Fiqh al-Muamalat.  Typically, financial
transactions within Islamic banking are a culturally distinct form
of ethical investing. For example, investments involving alcohol,
gambling, pork, and other forbidden items is prohibited.  There
are over 300 hundred Islamic banks in over 51 countries,
including the United States.  
Principles of Islamic Banking
The principles of Islamic Banking follow Sharia law, which is
based on the Quran and the Hadith, the recorded sayings, and
actions of the Prophet Muhammad (PBUH). When more
information or guidance is necessary, Islamic bankers turn to
learned scholars or use independent reasoning based on
scholarship and customs. The bankers also ensure their ideas do
not deviate from the fundamental principles of the Quran.
History of Islamic Banking
The origin of Islamic banking dates back to the beginning of
Islam in the seventh century. The Prophet
Muhammad's (PBUH) first wife, Khadija, was a merchant. He
acted as an agent for her business, using many of the same
principles used in contemporary Islamic banking. In the Middle
Ages, trade and business activity in the Muslim world relied on
Islamic banking principles. These banking principles spread
throughout Spain, the Mediterranean, and the Baltic States,
arguably providing some of the basis for western banking
principles. From the 1960s to the 1970s, Islamic banking
resurfaced in the modern world.
Difference Between Islamic Banking and
Conventional Banking
Let us first understand the major difference between Islamic
banking and conventional banking system. "Islamic banking is an
Ethical Banking System, and its practices are based on Islamic
(Shariah) laws. Interest in completely prohibited in Islamic
banking. It is asset based financing, in which trade of elements
prohibited by Islam are not allowed. For example, you cannot
take a loan for a Wine Shop. On the other hand, Conventional
Banking is an Un-Ethical Banking system based on Man-Made
Laws. It is profit-oriented and its purpose is to make money
through interest".

Islamic Banking and Conventional Banking -

Major Differences
Now, let us review some major differences between Islamic
banking and conventional banking systems:
 Conventional Banking System Islamic Banking System
Money is a product besides medium of Real Asset is a product. Money is just a
exchange and store of value medium of exchange

Time value is the basis for charging interest on Profit on exchange of goods & services is the
capital basis for earning profit

The expanded money in the money market Balance budget is the outcome of no
without backing the real assets, results deficit expansion of money
financing

Interest is charged even in case, the Loss is shared when the organization suffers
organization suffers losses. Thus no concept of loss
sharing loss

While disbursing cash finance, running finance The execution of agreements for the
or working capital finance, no agreement for exchange of goods & services is must, while
exchange of goods & services is made disbursing funds under Murabaha, Salam &
Istisna contracts

Due to non existence of goods & services Due to existence of goods & services no
behind the money while disbursing funds, the expansion of money takes place and thus no
expansion of money takes place, which creates inflation is created
inflation

Due to inflation the entrepreneur increases Due to control over inflation, no extra price is
prices of his goods & services, due to charged by the entrepreneur
incorporating inflationary effect into cost of
product

Bridge financing and long term loans lending is Musharakah & Diminishing Musharakah
not made on the basis of existence of capital agreements are made after making sure the
goods existence of capital good before disbursing
funds for a capital project

Government very easily obtains loans from Government can not obtain loans from the
Central Bank through Money Market Monetary Agency without making sure the
Operations without initiating capital delivery of goods to National Investment
development expenditure fund

Real growth of wealth does not take place, as Real growth in the wealth of the people of
the money remains in few hands the society takes place, due to multiplier
effect and real wealth goes into the
ownership of lot of hands

Due to failure of the projects the loan is written Due to failure of the project, the
off as it becomes non performing loan management of the organization can be
taken over to hand over to a better
management
 Debts financing gets the advantage of leverage
for an enterprise, due to interest expense as
deductible item form taxable profits. This
causes huge burden of taxes on salaried
persons. Thus the saving and disposable
income of the people is effected badly. This
results decrease in the real gross domestic
product
Sharing profits in case of Mudarabah and
sharing in the organization of business
venture in case of Musharakah, provides extra
tax to Federal Government. This leads to
minimize the tax burden over salaried
persons. Due to which savings & disposable
income of the people is increased, which
results the increase in the real gross domestic
product

Due to decrease in the real GDP, the net exports Due to increase in the real GDP, the net
amount becomes negative. This invites further exports amount becomes positive, this
foreign debts and the local-currency becomes reduces foreign debts burden and local-
weaker currency becomes stronger

QUESTION NO 10

EXPALIN THE FUNCTION OF THE SECURITY AND EXCHANGE COMMISSION OF PAKISTAN (SECP)? BRIEFLY
DISCUSS THE RULE OF SECP OPERATIONAL IN PAKISTAN

ANS:-
The Securities and Exchange Commission of Pakistan (SECP) is the successor of the erstwhile
Corporate Law Authority (CLA), which was an attached department of the Ministry of Finance. The
process of restructuring the CLA was initiated in 1997 under the Capital Market Development Plan of
the Asian Development Bank (ADB). A Securities and Exchange Commission of Pakistan Act was
passed by the Parliament and promulgated in December 1997. In pursuance of this Act, the SECP,
having autonomous status, became operational on January 1 1999. [1] The Act gave the organization
the administrative authority and financial independence to carry out the reform program of Pakistan’s
capital market.

The scope of the authority of the SECP has been extensively widened since its creation. The
insurance sector, non-banking financial companies, and pension funds have been added to the
purview of the Commission. Now the SECP's mandate includes investment financial services,
leasing companies, housing finance services, venture capital investment, discounting services,
investment advisory services, real estate investment trust[2] and asset management services, etc. The SECP
also regulates various external service providers that are linked to the corporate sector, like
chartered accountants, rating agencies, corporate secretaries and others.

Organization
The SECP is a collegiate body with collective responsibility. Operational and executive authority of
the SECP is vested in the Chairman who is the SECP's Chief Executive Officer (CEO). He is
assisted by four (4) Commissioners, particularly to oversee the working of various operational units
as may be determined by him.

The SECP is divided into the following five divisions:

• Company Law Division

• Securities Market Division
• Specialized Companies Division
• Insurance Division
• Law Division

DISCUSS THE RULE OF SECP OPERATIONAL IN PAKISTAN

The Securities and Exchange Commission of Pakistan (SECP) is the Official Financial Regulatory
Authority in Pakistan whose mission is to develop a modern-day and well-organized business sector and
a business market based on comprehensive governing principles, in order to boost financing and
promote economic growth and success in Pakistan
The Securities and Exchange Commission of Pakistan was formed on 1st January 1999 by the
government of Pakistan to monitor and regulate financial institutions of Pakistan. Before formation
of SECP, it was monitored by Corporate Law Authority, which falls under Ministry of
FinanceGovernment of Pakistan. The idea of restructuring CLA was initiated in year 1997 by Asian
Development Bank (ADB). Than the Parliament of Pakistan passed Securities and Exchange
Commission act in December 1997 under which SECP became operational to regulate the capital
market of Pakistan.

This Act established evident policy decisions relating to the constitution and organization, controls, and
functions of the SECP, thus giving it executive authority and financial freedom in carrying out its regulatory
and legal responsibilities. It was firstly concerned with the directive of corporate sectorand center
market. While, its authorization has expanded to incorporate supervision and regulation of insurance
agencies, non-banking investments companies and private allowances. The SECP has also been
assigned with supervision of various external service providers to the business and commercial sectors,
including chartered accountants, credit rating agencies, corporate desks, brokers, evaluators etc.
The SECP is an institutional body with communal responsibility. Operational and executive authority of
the SECP is assigned to the Chairman who is the SECP’s Chief Executive Officer (CEO). Four (4)
Commissioners assist him; particularly to manage the working of various functioning units as may be
determined by him.
The SECP is divided into the following 5 divisions:
Company Law Division
Securities Market Division
Specialized Companies Division
Insurance Division
Law Division

The Head office of SECP is situated in NIC Building, Jinnah Avenue, in the blue area of Islamabad,
capital of Pakistan and it has regional office named as Company registration offices (CRO)
in Karachi, Lahore, Peshawar, Sukkur, Multan, Faisalabad and Quetta.
The SECP’s Acting chairman Mr. TahirMahmood had formerly worked in CLA and Joined CLA as
18thgrade officer through Federal Public Service Commission. The Policy board consists of Dr. Waqar
Masood Khan working as Chairman Securities and Exchange Policy Board, the Chairman SECP, Mr.
Justice (Rtd) Muhammad Raza Khan, Mr.Muneer Qureshi and Mr. Ashraf Mahmood Wathra.
The SECP’s official Website is www.secp.gov.pk and its postal address is Securities and Exchange
Commission of Pakistan, National Insurance Corporation Building, Jinnah Avenue, Islamabad-44000,
Pakistan.
DISCUSS THE RULE OF SECP OPERATIONAL IN PAKISTAN

The Securities and Exchange Commission of Pakistan (SECP) has approved Securities
and Futures Advisers (Licensing and Operations) Regulations, 2017 in line with its
objective of fostering the growth of a capital market based on fairness and investor
protection, and promoting transparency, standardisation and improved controls for the
advisory business.

The regulations have been published in the official gazette and also placed on the
SECP website.

In order to achieve the goals of financial inclusion and facilitating capital market
investors in obtaining targeted advice, the new regulatory formwork allows both
companies and individuals with a clean track record and necessary qualifications and
skill set to act as securities or futures advisers. Also, distributors of units of mutual funds
having contracts with multiple asset management companies will be required to obtain
licence as securities adviser with the SECP for the distribution activity.

The regulations provide for matters relating to licencing, financial resources, duties and
obligations, conduct, audit and accounts, and fit and proper for persons and companies
engaged in providing investment advice or recommendation to customers on securities
and futures contracts. Further, advisers will be required to perform risk profiling of each
client, ensure suitability of investment advice given to clients and put in place necessary
policies, procedures and controls to eliminate conflict of interest and ensure protection
of clients’ interests.

Existing entities/individuals already providing advisory/distribution services will be given

six months from the date of commencement of the regulations or commencement of
Part IV of the Futures Act to obtain licence as a securities/futures adviser for
continuation of their business. It is expected that with the introduction of the new
framework, the business of capital market advisory will flourish under proper checks and
balances and the same will also assist in increasing capital market outreach throughout
the country.