Vibrant and stable financial sector and capital market play a significant role in the economic growth of a country. This, however, is only possible in the wake of a wide range of saving and investment products being available to meet the risk appetite of investors and the funding needs of borrowers. Unfortunately, this is not the case in Pakistan where the banking and non-banking financial sectors have not performed up-to the mark on this account. Even the banking sector despite having dominant position and privatization has not come up with major innovative products to adequately meet requirements of both depositors and borrowers at the grass root level.
Investment in government paper continues to dominate the overall balance sheet of the banking sector while credit to private sector is limited to well-established corporate houses, leaving a large segment of small and medium size enterprises (SMEs) starved of funding. The non-banking financial sector also presents a bleak picture, not only in terms of financial assets, but also with regard to participation and outreach to the general public.
A sector wise breakup of the country’s GDP reveals that amongst the services, agricultural and industrial sectors – livestock, manufacturing, wholesale and retail trade, transport storage and communication, and crops are the major contributors towards the GDP. On the other hand, a sector wise breakup of the market capitalization of listed companies depicts that commercial banks, oil and gas exploration companies, food and personal care products and cement sectors constitute the major part of the market capitalization. Comparison of the two indicators emphasizes the need to attract major sectors of GDP into the listing net to make the capital market a true representative and contributor of the country’s economy.
The financial sector is mainly dominated by the banks which are still the popular option for majority investors because of their ease of outreach and acceptability in the general public. It is accordingly imperative that they function in accordance with fundamental principles of good governance, transparency and investor protection, as well as being well-positioned, technologically updated and offer a diverse array of investment alternatives, to deliver their responsibilities in an effective manner. Following structural and development initiatives need to be taken in this context:
1- Possibility of introduction of new products and systems aimed at increasing efficiency of the exchange, depository and clearing companies needs to be assessed. These include development and implementation of a model for Professional Clearing Members (PCMs) which will perform custody and settlement functions for the Trading Only category of brokers, as required under the categorization of brokers. NCCPL, CDC, or the banks may act as such PCMs under defined parameters.
2- A road map needs to be developed in coordination with commercial banks for enabling investors to apply for IPOs online/electronically to facilitate investors by giving them benefits of automation and reduced turnaround time involved.
3- In coordination with the Government of Pakistan, the State Bank of Pakistan, PSX and other stakeholders, feasibility of launching new products for the debt market needs to be explored. Possibility of introduction of various types of bonds will be assessed, to satisfy the needs of both issuers and investors.
4- Considering that banks have an important role to play in futures markets, the possibility of allowing banks to trade in derivatives futures contracts needs to be assessed. Banks may also play the role of market maker providing liquidity and branch outreach to a futures exchange.
5- Setting up a panel of investment bankers/financial advisors to participate in IPO generation drive
6- Instead of issuing dividend warrants, banks and companies should promote e-dividends enabling shareholders to receive cash dividends through direct credit in their respective bank accounts.
7- Further, to increase the market outreach, the possibility of creating capital market hubs and expansion of the depository outreach to small investors through banking system branch network and post office network needs to be explored. The major banks in the country, on account of their comprehensive outreach are in a unique position to provide access of capital markets to the general public and custodial services though the banks network will result in a substantial broadening of the investor base in the country. Increase
8- Establishment of Capital Market Hubs in various cities of Pakistan will enhance the outreach of mutual funds, stockbrokers, leasing companies, investment banks, mudarabas and insurance sector to encourage investors in remote areas. Capital market hub has already been established in Abbottabad and facilitation centers have been opened in major cities such as Sialkot. These hubs will enable asset management companies, brokerage firms and banks along with the CDC and stock exchange to open their branches in these cities, and will also enable the investors to benefit from the services of the participating entities in a one-stop-shop.