Government share cut in non-bank funding vital for capital market development

The Chairman of National Investment Trust (NIT), Tariq Iqbal Khan, said in Karachi on Wednesday that the prerequisite in the development of capital market is the reduction in government's share of non-bank funding.
Inaugurating a three-day workshop on 'Capital Markets' at a local hotel, he said that within the market, infrastructure upgradation takes precedence over other issues as half of the malpractices and problems may stem from weak trading clearing and settlement. It is felt that in the near future this would be adequately addressed, with the advent of National Clearing and Settlement System, he added.
The Workshop has been organised by ACE Securities.
Tariq said the theme of the workshop, 'The Role of Capital Market in Pakistan' has to be viewed in the backdrop of its importance in capital formation and economic growth in the country.
Capital and money markets are two important components of the financial infrastructure of an economy.
In this regard capital market can be defined as a set of institutions and individuals which put the savings of an economy into productive channels. As such, funds are collected from surplus sectors and provided to those sectors where there is a demand for utilisation of such funds beneficially.
He said it is therefore essential that the growth of capital market must keep pace with the growth in the other sectors of the economy as it contributes directly by mobilising savings and allocating investment resources.
The present government has not only continued the market-oriented development strategy of the 1990s but also added some new impetus to improve the working and depth of capital market in Pakistan.
The NIT chief said that stock exchanges form an integral part of a country's capital market.
They are important as they create market for securities by providing a secondary market for trading. A stable and well-regulated market, therefore, enables those in need of capital to have a convenient access to the resources which are raised by small savers.
The market capitalisation in Pakistan is around 11 percent of GDP and in comparison with the emerging economies it does not compare well.
Life insurance premium income amounts to less than 0.3 percent of GDP, and has shown some growth over the past few years.
The government is in the process of establishing and improving the framework to facilitate private pension and provident funds which lack a proper regulatory frame work and are offered only by a few large companies.
He said that another important missing link in Pakistan's capital market is its informational asymmetry. What has to be positively reinforced is to provide confidence in the accuracy of information, integrity of transactions and faith in internal control mechanism of major players.
However, bottlenecks in the way of enhanced governance standards in capital markets have improved with stringent regulatory measures and implementation of Code of Corporate Governance.
The capital market, he said, as a whole has gone through a reform agenda in the last decade which has given a new and improved look to the market.
It started from 1992. The two major reforms in the initial stages were the automation of trade and establishment of CDC. Subsequently, the improvement in trading system, bringing more transparency and efficiency in price discovery, also helped the market in its growth.
The Asian Development Bank Programme Loan-I, given in 1997 (CMDP-I), also played a major role in reforming the stock market which enhanced the confidence of the investors.
He suggested the reform agenda for capital market may include:
Improvement of the fiscal, monetary and investment policy environment, improvement in governance and enhanced transparency to improve investor confidence, increase in supply of financial instruments and improvements in market infrastructure, increase in demand for financial instruments through promotion of savings and institutional investment, development of complementary financial services and institutions, provision of selective incentives to stimulate long-term savings and non-speculative equity investment, mobilising long-term resources for savings and investments through market-based financial instruments and institutions, rationalisation of tax treatment for financial instruments and investors, providing selective incentives to stimulate long term savings and non-speculative equity investment, clearing and settlement system to be upgraded further and co-operation with relevant countries to acquire the pertinent technical and professional know-how for training mutual fund human resource in Pakistan.
He said tax incentives for the private sector's participants for putting them on equal footing with those in the public sector are crucial; so is the notion of professionalism and ethical practices, and adequate market knowledge for all those involved in the markets.
It is heartening to note that the recently privatised ICP Mutual Funds have shown a lot of progress and now, except a few, all funds are being traded at a handsome premium.
It is also very encouraging for the market that a variety of mutual funds are in the pipeline which would go a long way to cater to the divergent needs of the investors, he added.
Tariq said that technical and professional collaboration with certain countries, especially with India, is very important. There is great need to provide training and technical expertise to Pakistan's professionals in mutual funds industry.
The Mutual Funds Association of Pakistan (MUFAP) and the Association of Mutual Funds in India (AMFI) have also discussed the possibility of listing of Indian mutual funds on Karachi and Lahore stock exchanges.
Pakistan's stock market's current price-to-earning (PE) ratio is at around 10, while the PE ratio of Indian stock market is around 17.
Thereby, Pakistan's market, being under-valued, seems to be more attractive for Indian investors.
It has been proposed that initially such investments might be made through the mutual funds of each country to minimise sedimentation.
The discussions also took place with AMFI to co-operate and collaborate in education and training of professionals involved in the mutual fund industry. In this regard Pakistan is exploring possibilities of technical co-operation with its counterparts in India.
The neighbouring country has already developed expertise in training and education as well as funds distribution network. It is hoped that MUFAP would further collaborate with its counterparts in India and soon the areas of technical and educational co-operation would be identified, he said.
Further reforms and liberalisation in the mutual funds industry should provide an additional force in driving capital market related developments.
"All said and done, it is my firm belief that Pakistan's capital market will most certainly evolve on firmer and better grounds in line with other emerging markets," he said.
Iqbal Ismail, Chairman of ACE Securities, presented the vote of thanks.