In an efficient market-based economy, the role of the capital market is critical in mobilising resources and channelling them efficiently for productive uses. The level of capital market development is an important determinant of a country's level of savings, efficiency of investment and pace of economic growth.
Moreover, it makes it easier for new companies to raise longer term risk-capital and reduce their reliance on conventional lenders like banks. A capital market mainly consists of stock (equity) and bonds market.
IN TERMS OF ECONOMIC DEVELOPMENT CAPITAL MARKETS PROVIDE: An important alternative source of long-term capital for productive investments. This helps in diffusing stresses on the banking system by matching long-term investments with long-term capital
Equity capital and infrastructure development capital that has strong socio-economic benefits - roads, water and sewer systems, housing, energy, telecommunications, public transport, etc - ideal for financing through capital markets via long dated bonds and asset backed securities.
Avenues for investment opportunities that encourage a thrift culture, which is critical in increasing domestic savings and investment ratios that are essential for rapid industrialisation. In Pakistan, national savings and investment ratios (as a % of GDP) are well below regional competitors, estimated at 11.3% and 11.6% respectively for FY11.
Broader ownership of productive assets by small savers to enable them benefit from economic growth and wealth distribution. Equitable distribution of wealth is a key indicator of poverty reduction. Scope for public-private sector partnerships to encourage participation of private sector in productive investments.
Assistance to the Government in closing the resource gap, and complement its effort in financing essential socio-economic development activities, through raising long-term project based capital Efficiency of capital allocation through competitive pricing mechanism for better utilisation of scarce resources for increased economic growth.
A gateway for global and foreign portfolio investors, which is critical in supplementing the low domestic saving ratio. In Pakistan, the share of foreign portfolio investment as percentage of market cap is 8%.
Historically in Pakistan, banks have played a much larger role in primary mobilisation of funds in Pakistan as compared to the capital markets. The number of factors behind this include i) Listing requirements and cost of issuance has been fairly significant, making borrowing from banks a cheaper option ii) Companies prefer to avoid the "regulatory burden" and greater disclosure associated with listing and iii) Fear of loss of management control.
Pakistan has made progress with capital market reforms since the 1990s, and country's equity market has seen significant growth and development in recent years in terms of depth, breadth, and infrastructure. In comparison, Pakistan's debt market remains significantly underdeveloped.
In Pakistan, a total of 650 companies were listed on the Karachi Stock Exchange (KSE) as of 2010, with Paid up capital of Rs 894.2 billion. Meanwhile, aggregate market capitalisation as at Dec'10, stood at Rs 3,015 billion (US $35 billion). Market capitalisation to GDP is currently just under 20%, which is low by comparison with many countries in Pakistan's peer reference group eg Bangladesh & Sri Lanka at 44%.
Meanwhile, a viable debt market provides an alternative source of external finance to firms, usually dominated by the banking sector in emerging economies like Pakistan. Similar to the trend observed in most Asian countries, the major drivers of financial assets in Pakistan are deposits and government bonds, whereas corporate bond issuances remain a miniscule portion with the total outstanding (listed) issues at Rs 69.7 billion (0.5 percent of GDP) at end-FY10.
Going forward, in order to attract maximum capital flows and develop a vibrant financial market Pakistan needs to adhere to political stability, prudent macroeconomic policies, structural reforms that foster productivity gains, and further deepen and diversify financial markets.