The Imperfect Information Approach to the Structure of Financial System in Pakistan: An Analysis of Response by the Financial Institutions

Abstract

Persistent economic revival and prudent policies of last two regimes have amplified the interest of common man in the mechanism and performance of Financial Institutions in Pakistan. The contemporary trend in the demand of loans by small borrowers and large industrialists along with escalating portfolio investments in stock exchanges of the country are directly linked with an exceedingly significant role of “disseminating information” to the structure of financial institutions. Further this paper more precisely attempts to assess how different financial institutions cope with problems arising from imperfect information and draw some conclusions about financing availability. Furthermore, it analyzes how financial institutions in Pakistan react in the face of adverse selection and moral hazard emphasizing Debt and Equity financing.