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Shariah-compliant products likely to move forward Pakistan’s mutual funds market

Over the last few years, the local mutual fund industry has shown decent growth in terms of assets as well as product offerings. Mutual Fund asset under management of the mutual fund industry, comprises 20 companies, stood at Rs482 billion. Among its three categories, investors have positioned the biggest sum in open-end funds at Rs445 billion, followed by Rs19 billion in closed-end funds and Rs18 billion in pension funds.

The mutual fund industry is still in its infancy state as it commands up to just 20 percent of private sector bank deposits. The total sum in mutual funds at Rs482 billion forms just 6.4 percent of the aggregate market capitalization of the Pakistan Stock Exchange at Rs7.59 trillion has been witnessed.

In comparison to Pakistan, the size of the Indian mutual fund industry stands at Rs13 trillion with every fourth household feeling safe entrusting their savings to the funds. In the United States 50 million people or one out of every three households invests in mutual funds.

After the stock market crashes of 2005 and 2008 small investors are learning to put their trust and money in the mutual fund industry. The mutual fund industry in Pakistan will have to earn the unit holder’s trust as custodian of public money by offering a measure of guarantee of safety of their money, accompanied by comparatively better returns.

With present confidence the number of investors in mutual funds is on the rise. National Investment Trust is the largest and oldest mutual fund in the country, with Rs91 billion under management and 17 percent of the market share, boasts 55,000 investors on its roll. With 250,000 registered investors the number of NIT unit holders looks considerable. The NIT-Islamic Income Fund was launched on July 4. This is the third Shariah-compliant fund, which has been added to the family of funds offered by the company. The fund would be invested in a diversified portfolio of Shariah-compliant fixed income and money market Investments.

Industry-wise, there are in all 208 mutual funds operating under 19 categories of which as many as nine constitute Islamic funds. Pakistan’s mutual fund industry is also adding into more of Islamic income funds that promise to provide ‘riba-free halal income’.

Equity funds take with the biggest amount under investment by mutual funds, followed by income funds. Fund managers preferred to park the largest amounts in three sectors which included: 15 percent in oil marketing companies; 14 percent in cements and 13 percent in fertilizers.

A big opening for rapid growth in the mutual fund industry was the ‘rules on investment by employees’ provident funds in listed securities, released by the Securities and Exchange Commission of Pakistan (SECP) a couple of years ago.

The rules, titled ‘Employees Provident Fund (Investment in Listed Securities) Rules, 2014,’ allowed investment in ‘listed securities’ including mutual funds at as high as 70 percent of the size of the employees’ provident fund (PF). Growth of Shariah-compliant investment funds in Pakistan is helping fuel demand for sukuk, or Islamic bonds, giving local firms new funding options while strengthening the case for Islamic pensions in other majority-Muslim countries.

ISLAMIC FUNDS DEMAND

Strong demand for Islamic funds, and in turn sukuk, could encourage other countries trying to deepen their Islamic capital markets, in particular in the Gulf region where private pensions are rare. Islamic mutual funds held 242.7 billion rupees ($2.3 billion) in assets as of December, or 37 percent of the total, official statistics show.

Almost two-third of assets in the country’s voluntary pension system (VPS) are now managed under Islamic principles. Attractive yields, tax exemptions and greater flexibility in choosing external managers have made VPS products popular, which in turn adds to demand for sukuk.

Sukuk transactions from manufacturing companies attracted significant interest from such investment funds, while equity funds are also becoming active in initial public offerings. Islamic funds screen their portfolios according to religious guidelines such as bans on tobacco, alcohol and gambling, similar to socially responsible funds in Western markets. They must also adhere to Islam’s ban on interest payments, which confines them to sukuk for their fixed-income investments, a relatively small market where demand has traditionally exceeded supply.

Tax changes have also helped sukuk issuance. Pakistan’s Federal Board of Revenue granted sukuk similar tax treatment to conventional bonds. This has attracted a wide range of issuers: Byco Oil Pakistan Limited raised Rs3.12 billion via sukuk using a credit guarantee and Ghani Gases raised Rs1.3 billion via a privately-placed sukuk.

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