or derivatives – does not take place between individuals but rather financial institutions such as banks and investment firms. this has important implications for the functioning of these markets because it introduces several important types of frictions. as we have all witnessed in the past years, many of these entities are very large, at least in terms of their balance sheets. besides giving rise to the too - big - to - fail problem that has been at the heart of the current financial crisis, the size of these financial institutions has profound implications for the way investment portfolios are constructed and assets are traded, because it makes a large difference whether an agent wants to buy or sell 100 shares or 100, 000 shares. for large investors, the impact of their actions on market prices is no longer negligible and they potentially incur large transaction costs due to “ market impact ”, such that fluctuations in market liquidity – the ease with which a security can be transformed into cash – become a first - order concern. based on this real - world insight, acharya and pedersen bis central bankers ’ speeches developed the liquidity adjusted capital asset pricing model ( capm ), 1 which shows that investors do not only require compensation for bearing the risk associated to an asset ’ s fundamentals but also will command an additional premium related to the asset ’ s liquidity risk. their theory is strongly supported by numerous empirical studies and can explain real - world phenomena such as the episodes of a flight to liquidity that we have witnessed more than once during the past years. another salient feature of financial institutions that has featured prominently in the current financial crisis is leverage. in fact, most market participants do not finance their entire trading positions with equity but rather fund part of their investments by pledging the securities as collateral in repurchase agreements and asset - backed commercial paper. this implies that asset prices are also affected by funding liquidity, a concept that refers to the ease with which a security can be used to raise outside capital. in the years preceding the 2007 – 2008 financial crisis, leverage in the financial sector build up steadily fuelled by high demand for dollar - denominated short - term debt in conjunction with low interest rates. when the first rumours of problems in the market for sub - prime mortgages began to spread, uncertainty of exposures to potential losses directly translated into funding liquidity problems. in an equally rigorous and elegant contribution, pedersen and his co - author markus brunnermeier – winner of the 2008 bernacer

. mr. zahid husain was amongst those great personalities. 8. he never hesitated in accepting the challenging tasks and, in the same spirit, led the central bank successfully in those testing periods of our country ’ s history. the nation also recognized his commendable efforts and has tried to repay her debt to him for the meritorious services rendered for the country. accordingly, on the occasion of the silver jubilee of state bank of pakistan in 1973, it was decided to institute an annual series of lectures and to name the series in commemoration of mr. zahid husain. 9. since then, we have organized 17 lectures in the series and invited eminent economists and financial experts from around the globe as guest speakers. the latest one took place in the year 2010 wherein mr. kent mathews, sir julian hodge professor of banking and finance, cardiff business school, united kingdom shared his thoughts with the audience on “ banking efficiency in emerging market economies ”. these lectures provided an excellent opportunity for the participants to share ideas on issues of topical importance. 10. before moving forward, i would like to express my sincere gratitude to justice ( retired ) nasir aslam zahid – the son of mr. zahid husain – for his attendance. he scarcely needs an introduction. he is one of the most prominent personalities of the country – not only due to his status and accomplishments in the judiciary but also for his postretirement service to the nation. he served all of the judiciary ’ s vital organs – he was the chief justice of sindh high court, then a judge of the federal shariah court, before finally serving the supreme court of pakistan. he enjoys an untarnished reputation within and outside the judicial circle. even after retirement, he has continued serving the nation with his involvement in human rights issues and education. he is currently the dean, faculty of legal studies and the head of the hamdard school of law at the hamdard university, karachi. i am thankful that he has very kindly accepted our invitation and spared the time to grace the occasion with his presence today. 11. now, before introducing our speaker for the day, allow me to humbly add a few words about the role played by state bank of pakistan with regard to today ’ s subject – “ micro - credit and financing of small business ”. first, our own research department has been engaged in documenting, through national surveys, the workings of the product, labor and credit markets of the informal sector