Our money and capital market is prey to financial dualism. It means that we have two types of money market.
(1) Organised money market
(2) Unorganised money market
The organised money market consists of
(i) State Bank of Pakistan (ii) Commercial Banks (iii) Cooperative banks (iv) Financial institution (v) Insurance companies. While unorganised money market consist of (i) Money Lenders (ii) Brokers (iii) Businessmen and merchants (iv) Friends and relatives (v) Land lords.
Following are the major properties of our unorganised money market.
(a) There is direct link between borrowers and lenders.
(b) The account system is very simple and crude.
(c) The repayment of the loan is also made in the form of grains.
(d) Financial deals are often kept secret.
(e) The rate of interest is high.
(f) It deals with the small businessmen and agriculturists. It means that the major share of domestic population is out of jurisdiction of organised money market.
(g) There is meagre transfer of resources from both markets.
Because of the problems mentioned above our money market is highly fragmented and it has led to create the following problems.
(1) There is reduced use of cheques. People do not know much about the modern financial documents like cheques, drafts, securities and debentures.
(2) The transactions particularly in the villages are non-monetary rather than monetary.
(3) Because of difference in markets there prevail centuries old methods of savings i-e people make their savings in the form of silver, gold and land etc. People hardly know the investment opportunities. The villagers have never heard the name of stock exchanges which are confined to just Lahore, Karachi and Islamabad. The villagers keep their monks with the land lords, money lenders and such other people and get back whenever they are in need of it. The money lenders, land lords and arthiyas do not pay any interest against such deposits. On the other hand, the charge heavy interest against the loans borrowed from them y the poor peasants and tenants.
(4) The stock exchange, ICP, NIT like financial institutions are confined to big cities only. In addition to them commercial banks and specialized credit institutions are also situated in big cities. The urban residents deposit their amount and borrow from these institutions. Where as there are reduced banking fascilities in the village, they neither have the inspiration ot save nor they can avail the opportunity to borrow from banks.
(5) Because of the separate markets there exists a big difference in the rate of interest. In the organised money market the rate of interest is low, the borrowers has the greater opportunities to borrow, the commercial banks can enhance their resources by borrowing from Central Bank, World Bank or selling their shares, the commercial banks follow the bank rate while setting their interest rate, and the central Bank is a chief organised money market, on the other hand, the rate of interest is very high in case of unorganised money market, the lenders provide the loans in a very limited amount, the loans are advanced under very strict conditions and the mortgages are hardly offered by the borrowers.
(6) The arthiyas, money lenders and land lords have monopoly power in unorganised money market. The poor peasants and small traders are at their money. The poor farmers are found very much weak when we find the element of uncertainty in agriculture sector. The uneconomic holdings, big families, disguised unemployment and the natural clamities greatly torture the farmers. In such state of affairs who will lend them? No to talk of commercial banks, the agricultural and cooperative banks are found hesitant in advancing the loans to farmers.
(7) The poor businessmen and farmers not only have to pay heavy interest rate, but also they do not have any share in the foreign exchange reserves of the country where as the small farmers and traders greatly contribute to the earnings of foreign exchange through exportation of cotton and rice etc. Such foreign exchange is allocated to big businessmen who are concerned with organised money market.
(8) Despite shortage of foreign exchange in the country and deficit in the Balance of Payment, the cheap credit money policy is adopted. The exchange rate is artificially kept at low level by following exchange controls. In this way the divergence between organised and unorganised money market widens. The policy of lower rate of interest benefits the big businesses and industrialists, which promotes the unequal income distribution in the country. But because of lower interest rate, the level of savings remain low, demand for loanable funds remain high and the inflow for foreign capital also remains low. The rate of interest deliberately kept at lower level of the organised money market, even below the bank rate.
(9) After 1959’s credit commission recommendations 1974’s nationalization of Commercial banks and establishment of NCCC is was hoped that agri sector will be able to have a greater share in the distribution of credit. But statistics reveal that the major share of agri loans is taken away big the big land lords while the small farmers have a meagre share in agri credit.
(10) All the specialised credit institutions in the organised money market are directly or indirectly government controlled. But these institutions and corporations are furnished by official formalities. People are hardly aware with the modern concepts of money and savings. The broker class is hardly available which could create a link between the saves and investors. The Commercial bank and Corporation follow discriminatory policies. They are kind to big businesses because they think that this class makes the productive investment. While the poor farmers and traders spend the borrowed money on unproductive fields like marriages, liligation and social taboos. According to Prof. Hala Mynt “the banking procedure and rigid law of banks serve as big obstacle in the way of advancing to backwards sector”. To provide loans to agri sector the banks have to face heavy expenses and they are not hoped to get them back.
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