The Asian Development Bank (ADB) has asked the Securities and Exchange Commission of Pakistan (SECP) to strengthen regulatory framework for non-banking financial companies (NBFCs), private pension funds, housing finance and development of mortgage markets and investment banking.
The international donor has submitted recommendations for providing loan of $400 million and technical assistance grant of $1 million to support Second Generation of Capital Market Reform Program. According to the bank's report, Pakistan's financial sector is dominated by banks. However, unlike most other countries, bank dominance has increased over the last 5 years.
It says that over-reliance on the limited range of banking services and products is not only a constraint for savings mobilisation and investment finance, it also poses considerable risks to the stability of the financial sector and the economy in total as experienced during the Asian financial crisis.
It said that the SECP adopted rules for insurance and non-bank financial companies in December 2002 and April 2003 respectively. Basic prudential regulations for NBFCs were adopted in January 2004. However, they were not in line with international best practices. SECP, therefore, drafted amendments to the NBFC rules to strengthen them, and submitted the amendments to the government in January 2007 for clearance.
The Ministry of Law has not cleared the amendments on the ground that SECP does not have sufficient legal mandate to enforce prudential requirements, the report said. Under the program, the government will strengthen prudential requirements for non-banking financial companies. That requires amendments to the Company Ordinance to strengthen SECP's legal mandate.
In addition, the program requires the government to clarify SECP's legal mandate in respect to its powers, functions, and responsibilities over non-bank financial companies and submitting to Parliament for approval legislation on such companies.
The ADB has also pointed towards the weak enabling environment for NBFCs. The legal status of non-bank financial companies, including important classes of institutional investors such as mutual funds, investment banks, and others, is recognised in the 1984 Companies Ordinance. However, the Companies Ordinance does not provide legal mandate for SECP for licensing, prudential regulation, and supervision of such companies.
This is a serious constraint for sound development of NBFCs, since it limits the scope for establishing and enforcing a sound regulatory framework. Typically, regulation and supervision of such companies would be covered under a substantive law such as exists in Pakistan for securities markets and the insurance industry, the ADB said.
About mutual funds, the bank is of the view that the mutual funds are the single most important type of institutional investors in Pakistan. The state-owned National Investment Trust (NIT) is by far the largest mutual fund. The NIT's dominating market position and implicit credit guarantee as a state-owned company constrain the development of private sector mutual funds by distorting competition.
It also said that there is lack of regulatory framework for private pension funds. The introduction of private pension schemes could have a significant positive impact on the development of equity and bond markets, and vice versa.
However, this requires such schemes to be properly regulated to protect the pension savings of individuals. In Pakistan, a regulatory framework for voluntary contribution-funded private pension schemes has yet to be established.
The same applies to employer-sponsored pension arrangements, for which SECP is assigned authority (as for other private pension products). However, these schemes currently have no direct oversight or supervision other than by tax authorities. This constitutes a regulatory gap that is potentially dangerous as it leaves participants unprotected, the ADB added.
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