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Management of Financial Institutions

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Management of Financial Institutions - MGT 604
VU
Lecture #14
INCREASING FOREIGN DIRECT INVESTMENT
Pakistan must increase Foreign Direct Investment, if it intends to enhance the growth of its
economy. The experience of the developing countries is that FDI is directly related to
economic growth. Two recent examples from the developing world are China and India.
The following factors have proven to be critical for attracting foreign investment:
1.
World-class physical infrastructure
2.
A secure law and order situation
3.
Skilled and productive labor
4.
Innovative capacities
5.
Agglomeration of efficient suppliers, competitors
6.
A well-developed institutional infrastructure
Foreign Interest in Local Financial Markets
With the rapid growth in Pakistan's economy, foreign investors are taking a keen interest in
the corporate sector of Pakistan. In the recent years, majority stakes in many corporations
have been acquired by multinational groups.
Enhancing and Sustaining a Growing GDP
There have been two problems with the GDP growth rate in Pakistan. First, Pakistan has not
been able to sustain growth over the long term. Sometimes Pakistan grows at a rate of
around 7 percent and sometimes it retreats to a 3 percent growth rate.
Second, the growth rate of the economy in Pakistan has not been linked to improvement in
human development factors. Basic indicators like education, health, poverty, safe drinking
water, etc., have been neglected in Pakistan. The "trickle down theories" and market forces
of the 1970s and 1980s have failed to provide relief for the general public. A need exists to
link the growth rate of the economy to improvement in human development. The basic
argument is that a higher growth rate is of limited utility if it does not benefit the population
as a whole, including the poor.
How can Pakistan improve and sustain its growth rate?
Production in agriculture must be enhanced because of its large share of the GDP.
Agricultural production can be improved by taking two kinds of measures. First, the
government must provide facilities to small and medium landowners to cultivate their lands.
These facilities may include the provision of seeds, fertilizers, machinery, and water.
Second, the government must play an important role in determining the prices of the goods
produced in the agriculture sector. It is really discouraging to farmers when they are not
getting adequate prices for their products, exacerbating rural flight to urban areas.
Industrial Sector
In the industrial sector, the government must place emphasis on the development of small
and medium industries. The government can facilitate this by providing targeted loans to
this sector. Pakistan can substantially increase export earnings from light industry in the
areas of carpet and textiles, sports equipment, dairy products, etc. The sick heavy industrial
units promoted in the past should be rationalized, because they have become a burden on
the economy. India is a classic case study of effective transition in this regard.
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Management of Financial Institutions - MGT 604
VU
Inter-provincial harmony in Pakistan
There is a need to create inter-provincial harmony in Pakistan. In the past there has been a
perception of deprivation and exploitation of the smaller provinces by the larger ones. Inter-
provincial tensions have revolved around issues of resource distribution, investment and
employment, water issues, etc. These factors hinder the growth rate of the economy.
Pakistan needs to create inter-provincial harmony to achieve better growth.
Achieving a Favorable Balance of Trade
Pakistan's trade balance has been in deficit most of the time since the country's
independence. Despite much effort by successive governments to liberalize trade, Pakistan's
trade regime still has many barriers that are preventing it from being successful. Pakistan
has faced various problems in trying to integrate its economy with world markets. The
opponents of economic integration with world markets argue that it will lead to de-
industrialization of Pakistan. The basic problem for Pakistan is that its exports are mostly
raw materials, which are subject to severe price fluctuations in international market prices.
The main exports of Pakistan, cotton and rice, are less competitive in international markets.
Managing the Debt
The external debt can be managed by taking the following policy measures:
1)
Controlling the non-development expenditures of the government, which are
currently consuming around 70 percent of public revenue
2)
Accelerating and sustaining the GDP growth rate
3)
Introducing an effective judicial system that strengthens accountability. This will
help in reducing economic corruption and mismanagement.
4)
Continuing austerity measures and containing current expenditures on the part of the
government.
5)
Providing more incentive to Pakistani citizens abroad and foreign residents of
Pakistan to transfer their currency into the country. Foreign remittances will help in building
up the foreign exchange reserves, thereby reducing the demand on the public debt.
Economic Resilience
Despite this record of sustained growth, Pakistan's economy had, until a few years ago, been
characterized as unstable and highly vulnerable to external and internal shocks. However,
the economy proved to be unexpectedly resilient in the face of multiple adverse events
concentrated into a four-year period.
The Asian financial crisis;
Economic sanctions -- according to Colin Powell, Pakistan was "sanctioned to the
eyeballs";
Global recession;
Severe rioting in the port city of Karachi;
Heightened perceptions of risk as a result of military tensions with India -- with as
many as a million troops on the border, and predictions of impending (potentially nuclear)
war;
The post-9/11 military action in neighboring Afghanistan, with a massive influx of
refugees from that country;
The 2005 Pakistan earthquake
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Management of Financial Institutions - MGT 604
VU
Conclusion
Despite these adverse events, Pakistan's economy kept growing, and economic growth
accelerated towards the end of this period. This resilience has led to a change in perceptions
of the economy, with leading international institutions such as the IMF, World Bank, and
the ADB praising Pakistan's performance in the face of adversity.
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Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  7. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS:Banking Inspection Department
  8. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Debt Management
  9. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Training Programs by SBP
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  11. MAJOR DRIVERS OF FINANCIAL INDUSTRY:GLOBAL FINANCIAL SYSTEM, The World Bank
  12. INTERNATIONAL FINANCIAL INSTITUTIONS:ADB Projects in Pakistan, Paris Club
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  18. ROLE OF COMMERCIAL BANKS:Problem bank management, BANKING SECTOR REFORMS
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  21. ROLE OF COMMERCIAL BANKS IN MICRO FINANCE SECTOR
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday
  45. RECAP:FINANCIAL INSTITUTIONS, CENTRAL BANK,