Financial Institutions: (Global Perspective)

Financial institutions are also called Financial Intermediaries, these include the following:

• Commercial Banks
• Credit Unions
• Savings and Loan Associations
• Mutual Saving Banks
• Mutual Funds
• Finance Companies
• Pension Funds etc.

 

The role of Financial Institution is to act as Financial Intermediary or to provide function of Financial Intermediation, role of go-between for savers and borrowers.

 

Banks are the largest financial intermediaries. Banks lend to many sectors of the economy.

 

However, banks and other financial institutions compete with one another and this competition has advantage for savers, borrowers and system as a whole.

Key Services Provided by Financial Institutions

 

In addition to matching individuals who have excess funds with chose who need them, the financial system provides three key services for savers and borrowers. These services are risk sharing, liquidity, and information. Financial markets and financial intermediaries provide these services in different ways, making various financial assets and financial liabilities more attractive to individual savers and borrowers. Many financial decisions made by savers and borrowers are shaped by the availability of these services.

 

Risk Sharing
One advantage of using the financial system to match individual savers and borrowers is that it allows the sharing of risks. Risk is the chance that the value of financial assets will change relative to what you expect. Most individual savers are not gamblers and would like to seek a steady return on their assets rather than erratic swings between high and low earnings. Indeed, individuals prefer stable returns on the collection of assets they hold. A collection of assets is called a portfolio. For example, you might hold some government treasury securities, some shares of stock, and some shares in a mutual fund. Although one asset or set of assets may perform well and an¬other may not perform as well, but overall returns tend to average out. This splitting of wealth into many assets is known as diversification. As long as the individual returns do not vary in the same way, the risk of severe fluctuations in a portfolio's value will be reduced. The financial system provides risk sharing by allowing savers to hold many assets. .

 

Liquidity
The second service, the financial system offers to savers and borrowers is liquidity, which is the ease with which an asset can be exchanged for money to purchase other assets or exchanged for goods and services. Savers view the liquidity of financial assets as a benefit. When they need their assets for their own consumption or investment, they can exchange them easily. In general, the more liquid an asset, the easier it is to exchange the asset for something else. You can easily exchange the currency notes for purchasing a book or anything else because it is highly liquid. You can also cash a check within a short period of time to buy clothes. However, selling a car would take more time because personal property is not very liquid. By holding financial claims (such as stock or bonds) on a factory, individual investors have more liquid savings than they would if they owned the machines in the factory. The reason is that the investor can more easily sell the claim than a specific machine in order to buy other assets or goods. Liquid assets allow an individual or firm to respond quickly to new opportunities or unexpected events. Financial assets created by the financial system, such as stocks, bonds, or checking accounts, are more liquid than cars, machinery, or real estate.

 

Financial markets and intermediaries provide trading systems for making financial assets more liquid. In addition to creating financial assets, the financial system provides mechanism for increasing the liquidity of financial assets. Investors can readily sell their holdings in government securities and stocks and bonds of large corporations, making those assets very liquid. During the past two decades, the financial system has made many other assets liquid besides stocks and bonds. One measure of the efficiency of the financial system is the extent to which it can transform illiquid assets into the liquid claims that savers want.

 

Information
A third service of the financial system is the collection and communication of information, or facts about borrowers and expectations about returns on financial assets. The first informational role the financial system plays is to gather information. That includes finding put about prospective borrowers and what they will do with borrowed funds. Obtaining such information would be costly and time-consuming for savers, who of course want all the facts before lending their money. Working through the financial system, a prospective investor is likely to learn more about the borrower than he would if he tried to make the investment on his own.

 

Another problem that exists in most transactions is asymmetric information. This means that borrowers possess information about their opportunities or activities that they don't disclose to lenders or creditors and can take advantage of this information. Sometimes, financial arrangements have to be structured so that borrowers do not take advantage of asymmetric information at the expense of lenders.

 

The financial system specializes in information gathering and monitoring, and arrangements exist for solving problems of asymmetric information."

 

The second informational role the financial system plays is communication of information.

 

Savers and borrowers receive the benefits of information from the financial system by looking at asset returns. As long as financial market participants are informed, the information works its way into asset returns and prices. Information is communicated to borrowers as well as to savers. The incorporation of available information in asset returns is the distinguishing feature of well-functioning financial markets.

Types of Financial Markets

Types of Financial Markets
Financial markets are divided as under:

1. Foreign exchange market.
2. Stock market.
3. Bond market.

Financial markets are one arena in which savers’ surpluses are transferred to borrowers. Savers can buy stocks and Bonds and Business borrowers can obtain funds by issuing stocks and Bonds

Functions of Financial Markets and Financial Intermediaries

The function is explained through the following figure:

 Those who have saved and lending funds, the Lender Savers are at the left side & those who must borrow funds to finance their spending, the Borrower-Spenders are at the right. The arrows show that Funds flow from lender savers to Borrower – spenders via two routes i.e.; through financial markets (Direct Finance) and through Financial intermediaries i.e. Banks etc. (Indirect Finance)

In direct finance borrowers borrow funds directly from lenders in financial markets by selling them securities or bonds which are claim on borrowers’ future income or assets

Types of Finance

The financial system brings together savers and borrowers in following two ways.


Direct Finance
In direct finance, individual savers through financial markets hold the claims issued by individual borrowers.

Indirect Finance
In indirect finance individual savers through financial intermediaries hold claims over the portfolio of assets of the borrowers.

Financial markets provide play field to the financial instruments. Financial instruments are traded by household, business firms, government and foreigners in wide variety of financial markets or markets for financial instruments.
Financial market can at preliminary stage be termed as market for bonds and stock markets.

Purpose of the financial system

Purpose of the financial system

       Most of us at one time or another may need more funds than you have on hand for one purpose or another. At the same time, others spend Jess than their incomes. Those who have surplus funds may be willing to let someone else use their savings if they are compensated for doing so.
       The mismatch of income and spending for individuals and organizations / creates an opportunity to trade. The investor can use the funds saved by different classes of people. The investor would be better off by earning a profit from investing funds in a new venture and savers who have lent their money would be better off 'by receiving the return that the investor pays them for lending their funds.
        Now we can easily understand the functions provided by the financial system in an economy. It moves funds from those who want to spend less than they have available to those who have a desire to purchase durable goods or those who have productive investment opportunities. This matching process increases the economy's ability to produce goods and services. In addition, it makes house- holds and businesses better off by allowing them to time purchases according to their needs and desires. A smoothly functioning financial system thus im¬proves the economy's efficiency and people's economic welfare.
       The financial system provides channels to transfer funds from individuals and groups who have saved money to individuals and groups who want to borrow money. Savers (or lenders) are suppliers of funds, providing funds to borrowers in return for promises of repayment of even more funds in the future.

FINANCIAL SYSTEM & BANKING

Financial System

Complete and complex ever changing set of rules, regulations, procedures, practices policies, conducts; role of institutions (financial institution), Governments, Policy makers and central bank taken together may be called financial system.
The financial system does have its impacts on individuals, businesses, corporations and governments alike. At times in your life, you will be a saver and at other times, you may be a borrower. The financial system channels funds from savers to borrowers and makes it possible for both to achieve their objectives. When the financial system works efficiently, it leads to better health of the economy.

Sources of law:

Sources of law
According to Salmond, following are the main sources:
- Formal sources
- Material sources

Formal Sources
Formal sources are comprised of statutes and decision of the courts.

Material sources
Material sources are comprised of legal sources and historical sources. Legal sources are comprised of the following:
- Legislation
- Precedent
- Customs
- Agreement

The main instruments under the legal sources are legislation and precedent.
First of all Precedent is explained.

Precedent or Case Law:
The decisions made by superior judiciary contain interpretation of law are called case law or precedents. The decisions can be relied upon/cited as precedents in future at the time of adjudication of the cases.

Principles of binding precedent are underlined below
- The decision relied upon must be based upon the interpretation of law.
-The precedent must have nexus to the central point of the case.
- The facts of the precedent being cited and the case being adjudicated upon must be the similar.

Illustrations

Divine law is imperative law on the following basis:


(i) It is laid down by a superior authority (God);
(ii) It is followed compulsorily;
(iii) Its breach constitutes a sin and is punished with divine wrath.

Civil law (the law of the land) is also a form of imperative law on the following basis;
--The superior power is the sovereign
--the compulsion is fear of punishment by the state.
--it is enforced by the physical force of the state. Civil law decides whether an act is innocent or criminal.

International Law
International law has been differently defined by different jurists.
 Salmond takes it as “those rules which govern sovereign states in their relations and conduct towards each other”. Other definitions are: “ the body of rules which by custom or treaty civilized states regard as binding upon themselves in their relations with one another, and whose violation gives the injured party a legal right to redress”; ( Wheaton), “The aggregate of rules to which nations have agreed to conform in their conduct towards one another”; (Lord Russel).

Classification of Law

Classification of Law:


The law is classified into the following branches:
Imperative Law
- Physical or Scientific Law
- Natural or Moral Law

Imperative Law:-

Imperative law is a general rule:

      It is a rule of general application as distinguished from particular application. A rule which applies only to one individual or one set of circumstances at a given time but never afterwards will not be a rule of imperative law. The rules of conduct laid down by a father for the guidance of his son; or by a master for his servant, though laid down by a superior and enforced by physical force, are not imperative law, because they are not of general application.
       On the other hand, ‘general’ does not mean absolutely general, or applicable to all. Thus traffic rules, though applicable to drivers of vehicles only, are imperative law, for they apply generally to all drivers. The rules requiring ministers or the President to take an oath on entering upon office, though applicable to a few or even one individual form part of imperative law for the oath is to be taken by President after President, Minister after Minister, etc. thus “General” here signifies the fact that wherever a particular set of circumstances comes into existence, the rule should be invariably applicable, with exception –though the one affected may be an individual (the Minister) or to class of persons ( the drivers of vehicles).

Imperative law has some authority behind it:

    It is given by some superior, may be human or divine. Every rule of imperative law is given by some authority
–whether divine or religious or political.

Imperative law is enforced by superior power:

     There must be some punishment on breach of imperative law. Rules of imperative law are enforced by some superior power, and the punishment takes such form as bodily or mental suffering. The superior enforces it by either physical force or any other form of compulsion, such as ridicule, contempt or censure. Those subject to imperative law are bound to follow it; thus compulsion is necessary. A rule which people may or may not observe cannot form a part of imperative law.

Concepts of Law

Concepts of Law:
Some of the definitions/concepts from the writings of eminent jurists are given below:

According to Blackstone:--

“Law signifies a rule of action, and is applied indiscriminately to all kinds of action”.

According to Holland:--
“Law refers to a general rule of action, taking cognizance only of external acts enforced by a determinate authority, which authority is human, and among human authorities is that which is permanent in a political society”.

According to Hobbs
“The commands of him and them that have coercive power”

According to Austin
“A law is a rule of conduct imposed and enforced by the sovereign”

According to Salmond
“Law is the body of principles recognized and applied by the State in the administration of justice”

According to John Erskine
“Law is the command of a sovereign, containing a common rule of life for his subjects and obliging them to obedience”.

According to De Montmorency
“Coercion is a weapon of law which law has forged, but it is not the basis of law.”

According to Pound
“Law is the body of principles recognized or enforced by public and regular tribunals in the administration of justice”

According to Wilson
“Law is that portion of the established thought and habit which has gained distinct and formal recognition in the shape of uniform rules backed by the authority and power of Government.”

According to Green
“Law is the system of rights and obligations which the state enforces.”

According to Lord Radcliff
“You will not mistake my meaning or suppose that I depreciate one of the great human studies if I say that we cannot learn Law by learning Law. If it is to be anything more than just a technique it is to be so much more than itself; a part of history and sociology, a part of ethics and a philosophy of life

Jurisprudence

Jurisprudence:


For understanding law, we must have preliminary understanding of jurisprudence.
The legal experts term civil law as science of jurisprudence. Some concepts of jurisprudence are given below:
“Jurisprudence means the knowledge of law, or knowledge of just and unjust”
It deals with laws that are enforceable by the courts.

Kinds of Jurisprudence:

The jurisprudence has been classified as under:
• Analytical Jurisprudence
• Historical Jurisprudence
• Ethical Jurisprudence

Analytical jurisprudence:

It covers the following areas:
It analyses the prevalent law that is the principles of law as exist now. It also studies theory of legislation, precedent and customs and study of different legal concepts such as property, possession, trust, contract, negligence etc

Scope of Analytical jurisprudence:

It analyses the basic principles of civil law, it does not pay any attention to the evolutionary process and their ethical aspects that is whether they are good piece of law or otherwise. We can say that analytical jurisprudence does not consider the historical and ethical aspects.
Its scope can be underlined as given below:
- An analysis of the law
- Treatment of a complex idea or concept in its elementary sub-divisions
- Examination of the relations between civil law and other forms of law
- A study of the legal source of law
- An investigation of the theory of legislation, precedent and custom
- Classification of the entire body of law with reasons thereof.
- A treatment of rights, their kinds and classes, their creation, transfer and extinction
- Dealing with legal liability, its kinds, extent and incidence
- To investigate such legal concepts as property, possession, trust, contracts, persons, acts, intention, motive, negligence. etc.

Historical jurisprudence:

It studies history of law and evolution of law over a period of time and also amendments, introduction of new principles of law.

Scope of Historical Jurisprudence:

It studies the principles of law in their origin and developments that take place over a period of time.
This branch is not the same thing as legal history.

Ethical jurisprudence:

It deals with the law that should be in an ideal state. It lays down the different purposes which should be fulfilled in an ideal state. It studies the modifications in the existing law in order to achieve these purposes and objects. The main object of ethical jurisprudence is the attainment of justice.

Scope of Ethical Jurisprudence:

Ethical jurisprudence deals with the law in the ideal state with law as it should be. Law exists to fulfill certain purposes. It is for this branch of jurisprudence to lay down what those purposes are and whether they are fulfilled by the law existing at any given time. It considers the modifications necessary in the existing law so that it may fulfill the objects for which it exists. The other two branches are concerned with an analysis of the law as it is or as has been without being concerned with its adequacy or inadequacy. Ethical jurisprudence has as its object the attainment of justice.

Advantages of study of jurisprudence:

The following are the advantages of studying this science:
Jurisprudence is the “grammar of law” and teaches the lawyers and the legislator's proper use of legal terms. It ensures homogeneity and accuracy in legal phraseology.
A person who has studies jurisprudence will be able to study foreign laws intelligently.

LEGAL SYSTEM OF PAKISTAN

We know that every body around talks about law according to one’s own perception. Before studying the statutory provisions of law, interpretation and significance of law, it is important to know what law is all about. Law in general sense is defined as under:


“The law consists of rules that regulate the conduct of individuals, businesses, and other organizations within society”

Significance of law


Law is to maintain rights, uphold justice and redress wrongs. Law ensures public order, balance, harmony, peace among the persons within the state and inter-states. We can easily conceive that in the absence of law and legal system there would have been disorder, unrest and chaos all around us.