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Total Marks   20  

BANKING CRISIS & THE GOVERNMENT SAFETY”

 

LEARNING OBJECTIVES:

 

Money & Banking students will be able to understand:

 

  • The importance of central bank, to keep control & check on financial system, financial markets and financial intermediaries”

 

  • The nature of different financial system’s risks & problems, their causes and effects on the whole economic and financial system.

 

Case:

The stability of the economy and financial system is the main objective of the government of each and every country. Any disturbance in the financial system will affect not only financial activities but the economic activities of that country. Such disturbance makes monetary & fiscal policies ineffective and weakens the allocation and utilization of capital. Continuous activities in the financial markets with proper check and control by the government are very necessary for the financial and economic stability. Any disruption in the market acts like a trigger in transmitting and intensifying financial crises.

Suppose an economy whose central bank does not interfere in the activities of financial system. In such system, the information cost is very high and the buyers face many difficulties before making investment in the stock as they don’t get much information about the riskiness of the stocks and all stocks seem alike to them.

Requirement:

1.     Mr. Riaz wants to invest his saving in some high quality stocks or bonds. What problems he faces before investing in such financial market. How does he react to cope up with those problems?

2.      Identify the main problem with the financial system and suggest remedies for it.

3.      How the above scenario in extreme case leads to the collapse of financial system?

    

Note: Complete your comment within 250 words

Important Instructions:

 

1.   Your discussion must be based on logical facts.

2.   The discussion board will remain open for 2 working days.

3.   Do not copy or exchange your answer with other students.  Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4.   Obnoxious or ignoble answer should be strictly avoided.

5.   Questions / queries related to the content of the discussion board, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of discussion board is over.

v  For detailed instructions please see the discussion board announcement

 

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Replies to This Discussion

koi discuss bhi karay ab  

QUESTION : kia 2nd requirement main ye pucha gaya ha k financial system ma jo main problem hai wo bataen aur us problem ko solve karny k lye mashwara dain???

QUESTION:  aur jo main problem hai wo ye ha k information cost bohat high ha r jo buyers hain wo stock main invest karny sy phlye bohat se mushkilat ko face kar rahy hain? ???

please koi batayeenn

hanji yehi :) 

are you sure hira ???? :)

hanji bs yehi question ka idea hai lekin baaki GDB mujhe nai aa rai hay agr apko kuch pta hay to plz share kijye :) 

koi to discuss karo

salam .traiq Bhai please discuss karein. no idea about this GDB.

Tariq bhai where r u today?

Please help us in the solution of gdb

hadd ho gai kisi ko bhi nai ati hay kya -_-

Sir koi idea hi de do thora sa

Read chapter no 29 from book,

i think it will be helpful for us.

Paramount in successful functioning of interest-free financial institution is the presence
of Islamically imbued socio-economic and political environments. The so-called
interest-free banking experiment failed in Pakistan because of ignoring these core
prerequisites. The polity of Pakistan lacks Islamic virtues to strive as a ‘‘single entity’’
for establishing the Islamic order in all walks of life. Overwhelmed by their
materialistic considerations, different sections of the Pakistan society dealt with the
interest-free banking in the context of their ‘‘self-interest’’ and thereby it was not given
much needed public support to prosper in Pakistan.
The government may be held responsible to ruin any chance of success of the
interest-free banking practice in Pakistan. Despite the fact that the government was
put under strict judicial and constitutional bindings to enforce Islamic order in
Pakistan, it exploited the cause of interest-free banking for meeting its political ends.
The government always acted as a patron of the conventional financial system because
of its virtue of providing a captive source of funding for meeting its expenditures


The bureaucrats sitting in the Ministry of Finance did not show any real
enthusiasm to implement the interest-free system as it was posing a threat to their
control over the financial sector of Pakistan. The SBP also did not find any incentive or
compulsion to establish the interest-free banking practice in Pakistan. It showed gross
negligence in providing proper training, documentation and other technical assistance
to banks for practising the approved interest-free modes of financing. Consequently,
banks excessively relied on mark-up financing that was almost akin to the
conventional banking practice. Banks did not find it feasible to enter into the PLS
relationship with business people whose majority maintain double sets of accounts for
the sake of avoiding exorbitant tax payments. The absence of a just and speedy judicial
system also discouraged banks from adopting the PLS system or even those interestfree
modes of financing which hold a nominal risk of non-payment and default.
Business people also showed high reluctance to enter into the PLS relationship with
banks because of their rule of keeping high privacy of their business operations from
an outsider. General depositors remained highly reluctant to bear any real risk on their
so-called PLS deposits at the banking sector of Pakistan. The increasing globalisation
effects and privatisation of the economy of Pakistan also strengthened the case against
the interest-free banking practice in Pakistan.


The fragile economy of Pakistan did not provide favourable grounds for the
institutional development of interest-free banking. The huge burden of domestic and
international loans on the economy and other socio-economic and political constraints,
such as non-performing loans, unsatisfactory level of investment and saving, mounting
budgetary deficits, in-efficient tax system, extravagance style of living of politicians
and bureaucrats, lack of proper infra-structure, abject poverty, unsatisfactory level
of literacy and the deteriorating moral standards of the polity did not allow the
interest-free banking to take its roots in Pakistan.

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