Commercial banks are reluctant to sanction long-term credit to commerce and industry.

This is primarily due to maturity-mismatch i.e. they are holding short-term repayable
deposits which are not comparable to long-term credit. This is where NBFIs come into
action. The large scale manicuring sector and mega infrastructure projects are largely
dependent on the availability of credit from NBFIs which fosters economic development.
Unlike commercial banks, they finance corporations through equity participation also,
which is a unique feature of NBFIs.
Employment Generation:
Employment generation is one of the prime objectives of any macroeconomic policy. To
achieve full employment in the economy; governments earmark huge amounts to be
disbursed through NBFIs to private sector. This influx of funds from public sector to
private sector via NBFIs spawns business activities thus minimizing unemployment rate.
Capital Formation:
Capital formation is the increase in capital stock of a country. It raises productive
potential of a country. The chief objective of any DFI is to increase long-term capital
formation particularly in the industrial sector. This capital formation results in the
improvement of macroeconomic indicators especially GDP growth, employment, and
incomes. NBFIs are ways and means of capital formation.
Financial Markets Development:
NBFIs form a significant part of financial markets. They underwrite public issues of
corporations. They provide much needed capital to new start-ups through venture capital.
They are the source of liquidity in these markets. The effective functioning of financial
markets largely depends on NBFIs.
Attracting Foreign Grants:
Not all NBFIs are development-oriented but among them which enjoy this distinctive
feature are recipients of the bulk amount of grants and aids from country governments
and donor agencies. Khushhali Bank of Pakistan, for example receives grants from Asian
Development Bank (ADB) in this regard.
Breaking Vicious Circle of Poverty:
NBFIs often sometimes serve as a governments instrument in breaking vicious circle of
poverty. They raise living standards of masses through their operations. The case of
microfinance banks is worth mentioning here. In Bangladesh, Grameen Bank has pulled
out millions from abject poverty. National Rural Support Program (NRSP), Kashf
Foundation, Akhuwwat, Agha Khan Foundation and many others are doing same job in
Pakistan. Thus vicious circle of poverty turns into virtuous circle of prosperity.
Specialized Credit:

Some NBFIs are dedicated to a particular sector. Provision of funds to the sectors like
housing, agriculture, industry and SMEs are carried out through these. They act as a
conduit of transferring public capital to private sector.
In a nutshell, NBFIs are inevitable for sustainable economic development.

Questions:
1. Define

the non banking financial institutions (NIIFIS).

2. Difference between financial institutions and non banking
financial institutions.
3. What are the functions of the NBFIS?
4. Describe the role of NBFIS in developing of an economy.

CHAPTER-5
MONEYTARY POLICY
Chapter Summary:
5.1 Definition
5.2 Mechanisms of Monetary Policy
5.3 Definition of Dear Money and Cheap Money
5.4 Difference between Dear Money and Cheap Money
5.5 When Dear Money and Cheap Money is needed.
5.6 Limitations of Monetary Policy