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Thursday, July 29, 2010

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.

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