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Saturday, July 31, 2010

Role Of Central Bank

Role Of Central BankThe history of central bank in Nepal has a gradual continuous process of growth. Nepal Rastra Bank was established as the National Central Bank under the Nepal Rastra Act, 1955 on April 26, 1956 with objectives of supervising, promoting and directing the functions of commercial banking activities. Nepal Rastra Bank is a non-profit organization fully owned by the government.
As the national central bank, this Bank has the sole right to issue currency notes and coins and is responsible to manage the country's foreign exchange reserves. Nepal Rastra Bank started issuing currency only in 1959.
The role of central bank lies in balancing of the monetary system in the economy. It is very crucial and predominant in the balancing of the monetary system in the economy. It serves in different capacities in co-ordinationg the plans, policies and strategies of money supply and its creation. The central decides how much money to supply in accordance with the needs of the business and industries. In every country, the role of the central bank lies in providing valuable guidelines and directives in regulating the economy so that all the vital indicators like control of inflation, money supply, price level and other related variables are determined. NRB has formulated and implemented five annual monetary policies so far to ensure its role bringing price control, external correction and financial sector stability. Consumer price based on average annual inflation was maintained at 5.5 percent. Balance of payment shows surplus of about Rs.12 billion. There is restructuring of two local commercial banks, seizing passport of willful defaulters, correcting the negative net worth of non-performing banks, encouraging competition to bring down spread, begging exchange rate, liquidity management through open market operations, etc. So, to be specific, the role of central bank can be highlighted in the following pages;

Measuring leading economic variables
The central bank is an integral part of the economy as it develops and measures the various leading economic indicators of economic development. In number of cases, the central bank performs important role to develop macroeconomic variables to keep intact for economic growth from the promotions of various sectors of economy.

Money supply and creation
The central bank has a role to play in the money supply creations and its control according to the needs of economy. If the economy needs more funds, the central bank buys the securities through open market operations in providing funds to stimulate economic growth. But it controls supply of money to minimize the adverse consequences of inflation by raising the bank rate and there by commercial banks to generate money supply in economy.

Foreign currency management

The central bank has a role to play in managing the foreign currencies. It controls the supply of foreign currency in the economy in order to maintain the exchange rate without giving adverse impact on the local currency.

Effective dabt management
The central bank helps in the debt management policies of the government. It pools the funds to finance government in times of need to meet the government budget deficits as well as taking the funds from government whenever it has surplus. It is done through the issue of various of short-term and the long-term debt instruments.

Valuable advise to the government
The central bank has professional exposure with outstanding world and it can advise the government in policy matters to link the monetary policy with the fiscal policy of the government. In various matters and issues, the central bank can advise the government to formulate the development plans and policies with appropriate strategies.

Control and the supervisions of financial institutions
The role of central of the bank lies in encouraging healthy growth of banks and financial institutions through competitions to enhance their efficient operations to stimulate economic growth. They help the banks in times of crises and control them it they go with policies beyond the economic development. They don't allow banks to provide unproductive credit not beneficial from economic prospective.

Managing the credit policy
The central bank has a role to control credit policy through expansions and contractions of money supply to avoid adverse consequences in the economy. They use various weapons of credit control to the economy in right order without creating any trouble in the overall economic development.

Maintaining relationship

The central bank has a coordinating role to play in bringing various sectors of economy to prosper without constraints and bottlenecks. They create linkage with the government at the policy level and cooperate with banks and financial institutions as well as maintain good public relationship with other sectors of the economy. Even at the international level, they have good connections and contact to mobilize funds from global world.

Objectives of Nepal Rastra Bank
Most of these objectives of Nepal Rastra bank specified in Nepal Rastra bank Act are briefly highlighted below:
- To formulate necessary monetary and foreign exchange policies in order to maintain the stability of price and balance of payment for sustainable development of the economy.
- To promote economic stability and liquidity required in banking and financial sector.
- To develop a secured, healthy and efficient system of payment.
- To inspect, regulate, monitor and supervise the financial and banking system
- To promote financial and banking system of Nepal and to flurorish its public credibility.

Functions of Nepal Rastra Bank
Most of these function of Nepal Rastra bank specified in Nepal Rastra bank Act, are briefly highlighted below;
- To manage note issue and money in circulation in the economy
- To formulate necessary monetary policies in order to maintain price stability and to implement these policies.
- To formulate foreign exchange policies for the benefit of the country.
- To determine the system of foreign exchange rate.
- To manage and operate foreign exchange reserve.
- To issue license to commercial banks and financial institutions to carry on banking and financial activities and transactions as well as to regulate, inspect, supervise and monitor them.
- To act as a banker, as adviser and a financial agent of His Majesty's government.
- To act as the banker of commercial banks and financial institutions and to function as the lender of the last resort.
- To establish and promote the system of payment, clearing and settlement and to regulate these activities and
- to implement any other necessary functions which the Bank has to carry out in order to achieve the objectives of the bank under this Act.

Central Banking

Introduction
Central bank is the regulator of banks and other financial institutions that have so far developed in number of countries that include both advanced and developing countries. In this regard, Nepal is no exception to this international phenomena regarding of how the central bank dominates the baking system in the global contCentral Bankingext. But the way how the central bank has developed in Nepal has a curious history because it came only after the development of commercial banks. Central bank has a major task and responsibility to stabilize the economic growth and financial system of economy. Thus, all the government fiscal, monetary and economic policies are being smoothly implemented in the country with the active support and help of central bank. In almost all countries, central bank is assigned with with the basic tasks and responsibilities to promote the economic welfare of the country in broader perspective. This is in consonance to creating favourable and sustainable conditions of macroeconomic development. Considering the recent development, Nepal Rastra Bank being the central bank of Nepal, has revised its monetary policies considering the compliance of international banking standards as started in Basel Report. Growth of commercial banks, finance companies, development banks and regulated coorporatives permitted to take limited banking functions have to follow directives and adjust capital base requirements accordingly and initiate macro credit and priority sector lending to uplift the living standards of the poor living in rural area.


Brief History Of Central Bank
The brief history of central bank is important as it affects the functions and efficient operations of financial market. Unlike commercial bank, central bank is a dominant authoritative bank in highly industrialised countries. In historical perspective, bank of England (1694) was one of the oldest central banks that prove successful in operations and monitoring of other banks. Being originated from Europe, International Conference held in Brussels during 1920 agreed with common agenda of establishing central bank in the most of the European countries. Likewise, European central bank has been developed. In the political business cycle, the independence of central bank is proving very important but questionable and doubtful.
Central bank is a bank that provides financial and banking services for the government of the country and its regulatory system as well as implementing the government's monetary policies. The main functions of central bank are: to manage the government accounts, to accept government deposits, and grant loans to the commercial banks and to control issue of bank notes. Moreover, it tells to manage the public debt, help to manage the exchange rate when necessary and to influence the interest rate structure as well as money supply. In addition, the central bank performs the functions to hold the country's reserves of gold and foreign currency, to manage dealings with other central banks, and to act as a lender of last resort to the banking system. Examples of major central banks include the Bank of England in the UK, the Federal Reserve Bank of the USA, Reserve Bank of India, Bank of Japan, Deustche Bundes Bank in Germany, France Banque De France and Nepal Rastra Bank in Nepal.
The core functions of central banks have continued to be the same in almost every country. They have the monopoly of note issue and they act as bankers to the government. They are the custodians of the metallic and foreign exchange reserves of the countries.They also perform the function of lender of the last report. They also have the function to control and regulate credit. These are the standard functions of a central bank and they are being performed by each and every central bank. However, in the developing economies besides these functions, the central banks have to play a promotional role in widening and designing the financial infrastructure.
As important function of central bank is to regulate the monitory and financial system in such a way as to promote the objectives of economic policy. These presupposes the existence of a well organised financial system. But this is hardly the case in developing economies and therefore the central banks in these countries have to take on themselves the responsibilities of building a viable infrastructures. The functions and responsibilities of the central banks are thus challenging in the developing economies then in the developed countries. Besides playing the traditional role of regulating the growth of money and credit, they have to create and nurture a viable and modern financial system.
Further added responsibility of central bank is to correct balance of payments, to provide equitable distribution of income and wealth, maintain reasonable price, stability and coordinating various ingredients of the macro economic policies of government. As such, central bank is a basic instrument of government's economic policy on one hand and powerful regulator of nation's financial system to avoid all kind of financial scandals and irregularities in regular functions of the banks and financial institutions in the country on the other hand. Even in our country, central bank popularity known by the name of Nepal Rastra Bank (NRB) tlhat is established in April,1956 is the basic regulator responsible for the overall growth of national economy through prudent management of the fiscal and monetary policies
to help support government in maintaining macroeconomic stability of the country.
At the same time, Nepal Rastra Bank is considered as the leading force to control, manage, monitor and supervise the banks and financial institutions so as to protect depositors from fraudulent practice depicted in such institutions. At present, the restructuring and institutional strengthening of Nepal Rastra Bank have encouraged suitable amendment in Nepal Rastra Bank Act. These has been already initiated to empower its scope and coverage in managing the financial system of the economy. Under financial saver reform program initiated from 2,000 onwards, the focus has been on restructuring of Nepal Rastra Bank to enhance staff-productivity, three-stage voluntary retirement plan, strengthening and upgrading regulatory and supervision system, divestiture of shares owned by NRB, upgrading of accounting system and computerisation in operations. NRB took over management of problem-facing entities depending open their performance and financial states and also created an environment for improving low performing and problem-ridden banks and financial institutions NRB strategic plants 2006-2010 prepared to help NRB fulfill its duties and responsibilities in effective manner. Even then, the ways and practices followed by NRB are still not up to the standard due to institutional weakness and inadeqauate professional expertise within the working style of NRB itself. Change in attitudes of those involved in policy and regulatory framework of NRB is still a challenging task that in going ahead.

Friday, July 30, 2010

Classification & Diversity

Classification & DiversityClassification
Financial market can be better understood with a full-fledged knowledge on their various types and categories. Any attempt to classify the financial market becomes arbitary. In fact, there are no any hard and fast rules to classify the financial market. The lines of demarcation are not clear-cut in practice. Even then for the purpose of simplification and make it understandable, financial market is classified in the following order;

Primary Market
It is the market for new issue of securities. securities are issued for the first time in the primary market to raise funds to serve the specific purpose. The government, companies, business firms and industries to tap the needed funds from the market issue there securities. Sometimes, the responsibility to manage the new issues is entrusted to the security dealers and underwriter of securities under different terns and conditions of the issues.
Securities traded in the primary market for the very first time are referred to as Initial Public Offerings (IPO). After the initial trading the securities are no longer IPO and they go for trading in secondary market. To issue securities in the primary market, a firm in Nepal, must follow company Act. The Act has briefly specified the financial, corporate and business information that help investors make profitable investment decisions. In fact, the prospective is a document of public belief to raise confidence of the public to invest in the shares of public limited companies.

Secondary Market
It is the market for existing claims on the securities or outstanding securities. There is trading only on existing securities in secondary market without involving any additional infusion of funds. There is only changing hands of the securities or financial assets from one investor to another investor. The original issues are not obliged to redeem securities and investors can generate sufficient liquidity and marketability by exchanging these securities. Active secondary market trading can enhance the value of the financial assets because capital gain comes from rise in the market price. At present, there is revival of capital market to the extent there is optimistic market recording bullish sentiments bringing stock prices to excess highs as is the case with shares of Development Credit banks, Standard Chartered bank, NABIL, Siddhdartha Bank, Kumari Bank, Nepal Investment Bank,etc. Margin lending for sometime to bring stock market to the technical convection. Afterward relaxation is made to continue margin lending based on 50 percent of six months average market price.

Money Market
A money market is a market for instruments and a means of lending and borrowing funds for relatively short periods, typically regarded as from one day to one year. It is a market for short-term securities issued on a negotiable basis. These short-term securities are actively traded in secondary market. The prices and yields of these securities are closely related to those of the newly issued instruments. Due to short-term maturity characteristic, money market securities fluctuate very little in price when interest rates change. These securities sell before maturity at very close to their purchase price. Large volume of daily transaction takes place in the money market. The various money market instruments such as government treasury bills, negotiable certificate of deposit, bankers' acceptance, Euro dollars, commercial papers, shorts-term bank loans etc, are traded in this market.

Capital market
It is a market for long-term securities issued under various terms and conditions. In this capital market, trading is conducted on the long-term marketable government securities, corporate bonds, common stocks, municipal bonds and mortgage bonds. Government securities pay low interest rate and they are not so much profitable as capital market investment vehicle. Other market instruments provide substantially a higher rate or return. Even then, government securities are used in capital market as they ensure considerable liquidity and safety for financial institutions. Thus, banks and financial institutions are the principal buyers of these securities. Corporate bond is another important instrument used in capital market. Non-bank financial institutions such as insurance companies, pension funds, and individuals are the buyers of corporate bond because of its tax deduction feature on interest paid.

Loan & Securities Market
Another way of classifying financial market is to divide them into market for loans and market for securities. Loan market is negotiated face to face directly between borrower and lender. In contrast, securities market is impersonal or open market where buyers and sellers of securities are unknown to each other. However, they trade through the help of brokers or dealers. In loan market, the loan made my one institution may be sold to another institution. But, borrowers directly negotiate securities issues with the lenders through private placement of bonds issued my business firms and sold to insurance companies. Likewise, there is a market for bonds and equities such as common stock. Bonds involve obligations of companies or government to the vreditors while equities involve evidence of ownership of companies by the stockholders.

Diversity

Financial market is not homogenous beacuse it involves trading not only in a single security or in one type of fund. In fact, transaction in financial market takes place with a wide variety of securities. Moreover, funds are channeled and supplied for different purposes and activities. As such the diversity in financial market implies the exchange of a wide variety of securities in market as well as funds cover differenet terms and conditions of lending. These include among all differences in purpose of loan, differences in times, differences in collateral and interest rate, differences in maturity structure and nature of credit risks involved.
However, there are suppliers of funds interested in buying and holding highly volatile and risky equitiy securities. But, there are conservative investors trying to hold risk-less securities like govenrnment bonds and treasury bills. In the combination of money market and capital market, investors are shifting their strategy from time to time according to their needs to take advantage from diversity of the market. Some loans are purely for business purposes and their are other loans taken for housing and consumer durable. Even the government may a take a loan as a suppliment to tax receipt. In our country, financial market is just in the initial process of growth because a wide variety of financial instruments and the avenues are still to be developed.
The borrowers of the funds in the financial market always reveal various degrees of risks of default. Lenders are ready to assume these risks of default only if the return in the form of promised interest rate is sufficient to compensate for the additional exposure of risk. Again, the question comes about the adequacy of the backing of the collateral to cover the loan in case of default to protect the interest of the lenders. Many other securities are traded in financial market. These comprise trading on mortgage bonds, corporate bond, goverenment securities, tax exempt bonds and many more like that. Take the case of our own country.
Financial market within nine years of its growth taking from 1994-2003 has provided trading in limited variety of securities like common stock, preferred stock, debenture, government bonds, Treasury bills, etc. Even up until now, the wide diversity in financial market continues to remain one of the missing linkages in the country.
Among the various ingredients of the financial market, loan market has grown both in scope and in size. Loan markets are found to differ geographically. Local savings institutions channel funds for local construction through the mortgage market that may be both local-and-regional-based. In larger localities, there are regional stock exchanges to mobilize the funds. Big corporations are often very successful to raise the funds through issue of securities in national and international financial market. There is exchange of funds nationally and internationally as made possible from the existence of the efficient capital market.

Thursday, July 29, 2010

Financial Market: An Introduction

The term financial market refers to the place where financial transactions take place through the network of borrowers and lenders of funds. In other words, financial mFinancial Market: An Introductionarket within the economy brings borrowers and lenders together to place buying and selling orders with the help of brokerage and other financial intermediaries. However, there is the need for infrastructure to encourage better arrangements for trading in securities. Financial market is the mechanism created to facilitate the exchange of financial assets. This market may or may not have a precise physical location. For instance, the Nepal Stock Exchange (NEPSE) is physically located on singh Durbar Plaza in kathmandu City and all the secondary transaction conducted in this stock exchange through channel of the brokers.
In Nepal, Over-The-Counter (OTC)market for stocks is important to be developed for all companies not listed in the stock exchange. In practice, there is out of the floor transactions taking place in Nepal Stock Market. There is a need for the development of professional brokers who have the capacity to connect such transactions throughout the country to manage track prices via computer and telecommunication lines.
Financial market is the hallmark of any modern business enterprise economy. Activity in financial market takes place through the exchange of one financial asset or instrument with another. This is done with the help of market players called the financial intermediaries. The major participants of financial markets serve in different capacities as savers, investors, borrowers and users of funds. In the most modern economies, participation in financial markets is widespread. Directly or indirectly, most individuals, businesses and institutions are involved in the securities in the financial market and are supported by financial intermediaries and facilitators. Individuals, corporate bodies, non-profit organisations and the government are the participants in these transactions of buying and selling of financial assets.
Financial securities exist in an economy when the savings perform different functions from that of investment. Suppose savings and investments are equal, there would be no lending and borrowing in the financial market. However, in real life situation, it is not possible. Some individuals and firms have savings less than their need for investment in real assets so they demand funds to meet their funds deficit from the financial market. In addition, some individuals and firms having their saving greater than their current expenditures so they want to lend their funds in financial assets. Thus, a financial market is a mechanism for transferring funds from the savers to the users.
Financial market is the most important factor that influences the financial activities of the companies whose shares are traded in the financial market.. So, financial markets are mechanisms for channeling savings for investment in real assets. The role of financial markets and financial institutions channel the flow of funds in the economy. Commercial banks, insurance companies, finance companies, and other financial institutions like Employee Provident Fund and Citizen Investment Trust work as intermediaries in the financial market.
However, at present, they are dormant and inactive due to limitations imposed by there acts and thge internal bylaws. Different financial institutions provide and facilitate this process of transfer of funds by creating varieties of financial assets. They sell their own liabilities to raise funds by creating liabilities on their own account to to help the surplus units for investment and purchase securities of the deficit units that supply funds for the users. Thus, these institutions provide very important intermediary service by matching the demand for and supply of funds between savers and users without which capital market is not possible to function. The main ingredients used in financial market consist of money market, capital market, primary market and secondary market. They strongly affect financing decisions of the companies and corporate bodies having independent entities.
In highly developed financial systems, the domestic financial market may mobilize funds not just for domestic needs but also for foreign businesses and governments. Foreign parties may borrow directly in the domestic market through bond issues, etc or may borrow from domestic financial intermediaries. Alternatively, there may be direct overseas investment by domestic business enterprises of individuals. Transactions of this type provide a link with the national markets. All these are the outcome of growing dimensions of financial globalization.
The concept of financial market can be explained with the help of thought provoking ideas generated from the leading contributors and writes well renowned in international perspective. As such, in the words of Charles N. Henning and William Pigott and Robert Hanney Scott (1975), "Financial market is defined as a place where fund suppliers and fund borrowers are brought together with the help of financial intermediaries directly or indirectly. These intermediaries channel nation's savings into most productive uses. Lenders or suppliers of funds exchange money for other financial assets that tend to provide a better future return. The net effect of such a transaction is that they but a claim against some one's money holding at some future date. In fact, they create loanable funds in the financial market."
According to Peter E. Rose (1997), "Financial system is synonymous with financial market that implies collection of market, institutions, laws, regulation and techniques through which bonds, stocks, and other securities are traded through proper determination of interest rate and efficient delivery of the financial services around the world."
Likewise, in the words of David S. Kidwell and Richard L. Peterson (1981), "Financial market in functional perspective is a rational system of collection savings and allocating them efficiently to the ultimate users for investment in productive assets or current consumption."
Anthony saunders and Marcia Milton Cornett_2005), they define that financial markets are arenas through which funds flow.
All the above definitions agree in common viewpoint that financial market is a rational process of transferring the funds from savers to users of funds to facilitate the efficient allocation and growth of financing and investment in financial assets transformation to generate income to savers and users.

Financial Market: General Background

Financial Market: General BackgroundThe growth of the financial market is gaining importance to every interested professionals and investor in general both from domestic perspective and international context. The role of financial sector had made everyone to have their specific goals attuned to take tangible financial benefits from the efficient functioning of the financial system. In broader understanding, prosperity and development of every nation depend much on the manner how financial market plays a role in the transfer of funds from savers to users. Financial market now became an integrating factor in creating the linkage of the various sectors of the economy. Development of real sector is proving significant in financial market.
Taking the case of Nepal, financial system is slowly bringing significant macro-economic policy transformation effect as well as multiplying financial fortunes of the individual investors actively participating in financial markets. Moreover, the government’s role is proving vital to the growth of financial institutions and financial market. altogether, there exist at present 20 commercial banks that comprise 2 local commercial banks that include Rural Development Banks as well. Then, in the chain of development, financial system covers 74 finance companies, 20 insurance companies, 17 saving and credit cooperatives having permission to operate with Nepal Rastra Bank license and 47 Non-Government Organizations licensed to perform limited banking functions in addition to micro credit development banks under the supervision and monitoring of NRB. But latest information revealed that commercial banks have increased to 23, finance companies to 87 and 55 development banks.
The new directives and enforcement of the umbrella act has brought all financial institutions including banks, finance companies, and other financial institutions to be operated, supervised, and monitored by the same act. There are numerous other cooperatives with multi-purpose functions and characteristics registered under department of cooperatives. Moreover, there are two non-bank financial institutions like Citizen Investment Fund and provident Fund playing role in the financial market with different investment schemes beneficial to the investors.
The total networks of the financial system in the economy constitute financial institutions and cooperatives. These institutions differ in age, scope, size, capital base, magnitude, function, and risk-return consideration. Because of the government’s economic and financial liberalization policies, funds transfer effects between users and suppliers of capital tend to be positive. The positive development taking place at present in the country insuring political stability is an outcome of an agreement of the 7 political parties and Maoist Communist Party in settling the disputes. This has been a historical landmark providing hopes and aspirations of opening new arena of capital market development already recording highly optimistic capital market.
However, the scope and coverage of financial market and institutions is not merely confined to the banking system of the country. Significant developments have taken place both in national and international financial system. Going beyond the functions and practices of banks, financial system has given much needed attention to the growth of other non-banking financial institutions. They tend to influence the proper functioning of the financial market.
In Nepal, the short financial history shows totally government initiated and to what extent there has been a major dominance of the single commercial bank, namely, Nepal Bank Limited for a number of consecutive years to perform the major banking function. However, it is only after independence that there had been initiation by the government to develop a number of financial institutions such as Nepal Industrial Development Bank, Agricultural Development Bank (ADB), Government-owned Rastriya Banijya Bank and Rastriya Beema Sansthan. At the same time, cooperatives were established through the efforts of the government. In addition, branches of local commercial banks and ADB have been developed.
Provident Fund Corporation has been gradually diverting its resources to the development of various sectors of the economy. Credit Guarantee Insurance Corporations was established to ensure guarantee on the credit provided by commercial banks to the priority sectors development. Securities Exchange Center was created in its early development and now it is named as Nepal Stock Exchange. However, it is separated from Securities Board to make clear line of demarcation between operations of stock exchange and the policy level formulations and guidelines to regulate stock exchange. At the same time, Citizen Investment Trust has been created to mobilize the resources under various savings schemes like saving devices to mobilize funds for economic development. This is how financial market is in the gradual process of development in the country.
The government’s overall macro-economic development strategy to follow the liberal economic policies has encouraged the growth of joint venture banks, development banks, finance companies, insurance companies, local development banks, cooperatives and NGO-led cooperatives to enlarge the size of the financial market. This makes it possible to have rational and efficient allocation of resources to the productive sectors of the economy. At the same time, government initiated the growth of capital market through the creation of securities marketing center and now it has been known by the name of Nepal Stock Exchange. In addition, regulating authority like securities board has been created with a separate independent role to regulate the securities market in the country. At the same time, market makers, brokers networks and dealers were developed to encourage trading on the floor of exchange through open-cry system basis. Because of these developments, there has been sufficient ground for non-banking financial institution like finance companies, insurance companies and others to grow in undertaking financial intermediary role in the country. The growth of development banks and energy sectors have added the new dimensions of capital market.
Financial market and institutions began to focus attention on the process of the financial intermediaries in channeling the nation’s savings into the best uses by bringing together those who have funds to lend and those who want to meet their expenditures. Efficiency in the functioning of the financial market tends to be considered in the determination and establishment of the financial market tends to be various short-term money market instruments and long-term capital market instruments brought into trading for buying and selling of these wide varieties of securities in the financial market.