bank is whether of an advance or a developing country. this aspect is of utmost importance for developing countries that still have a relatively weak taxation regime, with lingering suspicion of fiscal dominance hovering most of the time. in pakistan, the government does not have a broad revenue base and the domestic financial markets do not have enough depth to absorb placements of public debt. so, although the precondition of central bank independence is met for pursuing inflation targeting the other conditions is missing. for example, selection of an appropriate price index itself to define the target is problematic in the choice of exchange rate regimes. as the role of market forces is expanding due to liberalization, deregulation and privatization of the financial sector there are changes taking place in the transmission mechanism of monetary policy also. the redefinition of the regulatory role of the sbp, the revision of the prudential norms, the revamping of the bank supervisory tools, the shift towards automation and electronic banking and financial innovations in products and services are contributing to the emergence of a different financial system. i now turn to the exchange rate regime in pakistan. pakistan has adopted the floating inter - bank exchange rate as the preferred option since 2001. sbp has attempted to maintain real effective exchange rate at a level that keeps the competitiveness of pakistani exports intact. but, like other central banks, it does intervene from time to time to keep stability in the market and smooth excessive fluctuations. the managed float has served us quite well as it has conferred a degree of certainty and predictability to the economic agents to make informed judgments about the relative movement of the exchange rate. the accumulation of reserves during the last four years has underscored the credibility of the exchange rate policy and minimized excessive speculative activity. at the same time and until mid 2004 – the exchange rate stability also helped contain inflationary expectations as unlike in the decade of the 1990s when the rupee was depreciating at an average of 120 per cent per year vis - a - vis the dollar, the rupee became strengthened. the current framework of monetary - cum - exchange rate policies and the underlying economic analysis in pakistan can, thus, be broadly characterized as judgment and discretion based rather than model or rule based. the main justification for the current practice is that the economy is undergoing fundamental structural transformation and thus the behavioral relationships among the variables and the time lags influencing the behaviour are in a state of flux and transition. an added complicating factor is that measuring and predicting

companies. under the prevailing legislative structure the supervisory responsibilities in case of banks, development finance institutions ( dfis ), and microfinance banks ( mfbs ) falls within legal ambit of state bank of pakistan while the rest of the financial institutions are monitored by other authorities such as securities and exchange commission and controller of insurance. in pakistan, while the overall assets of the financial sector have increased from rs. 5. 202 trillion in 2005 to rs. 11. 107 trillion in 2011, the share of the financial sector in terms of gdp is very low at 57. 4 percent. in 2011, banks held 74 percent of the financial assets while the share of nbfis was only 4. 7 percent of the total financial sector assets which was around 7. 6 percent in 2005. the low financial sector to gdp ratio and nbfis shadow banking : scoping the issues : a background note of the financial stability board, 2011. bis central bankers ’ speeches declining share in financial sector assets clearly underscores the need for financial sector development and diversification of financial sector assets to attract investors with different return expectations and risk appetite and channelize financial resources for the economic development of the country. therefore, today ’ s conference is very important and we should use this opportunity to understand the key bottlenecks in the way of financial sector development and also come up with concrete measures to address these shortcomings in a sustainable manner. alan greenspan identified the role of nbfis in strengthening an economy, as they provide “ multiple alternatives to transform an economy ’ s savings into capital investment [ which ] act as backup facilities should the primary form of intermediation fail ”. 2 on the other hand, the nbfis offer an alternative to typical commercial banking saving - investment products. however, in pakistan, nbfis other than investment banks and leasing companies which offer saving and investment products on a relatively small spectrum need to develop appropriate and affordable products to increase its market share. the key negative outcome of this is that there remains limited access to funding resources and relatively higher risk avenues to earn spreads. here i would like to briefly touch on the major constraints that the nbfi sector in pakistan is beset with : first, although there has been an increasing effort by nbfis to broaden the range of their business activities and product base, thereby diversifying their revenue streams, the sector is yet to make a breakthrough in this regard. second, the sector is fragmented and each nbfi