June 29 - July 5, 2009

Mutual funds industry is in its infancy and there are challenges for the industry ahead such as stiff competition among mutual funds, limited investment avenues, and ineffective risk management due to the recently increased volatility in the markets.

Pakistan's mutual fund industry lags far behind regional and developed markets. Pakistan's mutual fund industry represents only four per cent of market capitalisation while in India it is almost 20 per cent and in the United States about 40 per cent. Also the size of the assets under management of the funds is only a small fraction of total bank deposits despite that the savers are given negative rate of return on their time deposits in banks, experts told PAGE.

Different types of funds i.e. equity funds, pension funds, income funds, etc., have provided room for cutthroat competition. The mutual funds industry has to be innovative and creative enough to attract the hitherto untapped segments of savers and investors, they said.

According to them, the mutual funds are market-based instruments and the returns on them purely reflect the prevalent good or bad economic and market conditions. Only those savers or investors, who have an appetite for risk, invest in the mutual funds.

The mutual fund industry in Pakistan is a relatively new and emerging sector. The industry saw a phenomenal growth after private sector jumped into it during 2000-2008. During that period huge amount of capital was available, with interest rates very low, inflation also low, and the stock market doing exceptionally well with KSE-100 index crossing the 15000 points mark in 2008 from around 2000 points in the early years of the 2000s, they added.

They said that mutual funds are popular around the world among retail investors because they provide them access to professional expertise and a diversified investment portfolio for nominal fee of one to two per cent a year. The investors are saved from direct exposure to the market by investing in mutual funds, which mitigate risks to their investments. The mutual funds offer advantages to the people for saving and earning reasonably higher returns on their investments than offered by the banks. Also, their investments, unlike time deposits with the banks, are highly liquid, they added.

Securities and Exchange Commission of Pakistan (SECP) is considering making it mandatory for asset management companies (AMCs) to retain certain minimum investment in the funds.

Globally, the mutual funds industry stands at $25.82 trillion and has been exhibiting steady growth. However, in Pakistan, the mutual funds industry is not making due progress due to weak distribution network, heavy reliance on institutional investors, and lack of product innovation.


The State Bank of Pakistan (SBP) has enhanced the Capital Adequacy Ratio (CAR) for Islamic banking branches (IBBs) of conventional banks by one percent to 9 percent.

As per the revision, IBBs should maintain a minimum Islamic banking fund of Rs 50 million at any point of time as seed capital, and should also maintain CAR as applicable on Bank-wide basis (presently 9 percent), prescribed by SBP from time to time.

SBP announced the revision in CAR of IBBs of conventional banks in IBD circular No 4. Capital Adequacy Ratio is the amount of risk-based capital as percentage of risk-weighted assets. The central bank, with reference to clause 7 of Annexure-III of IBD Circular No 2 of 2004, regarding Capital Adequacy Ratio requirement for Islamic banking divisions/branches of conventional banks, has decided to revise clause 7(i) of IBD Circular No 2 (Annexure-III) of 2004 immediately. All other instructions contained in the said Circular remain the same.


The Pakistan Credit Rating Agency (PACRA) has maintained the long-term rating of AA (Double A) and the short-term rating of A1+ (A one plus) of Allied Bank Limited (ABL). PACRA has also assigned a rating of AA- (Double A minus) to the proposed unsecured, subordinated TFC issue of upto PKR 3,000 million by ABL. These ratings denote a very low expectation of credit risk emanating from a very strong capacity for timely payment of financial commitments.

The ratings reflect ABL's good performance prospects emanating from its extensive outreach, sound capital structure and initiatives to tap growth. While seeking to strengthen its infrastructure and control environment, the management intends to withstand in an increasingly competitive environment through achieving diversification in loan book and leveraging expansion and low cost deposit mobilization.