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Cover Story

Foreign investment through developing financial sector

Dec 06 -12, 1999

  • Even in times of strong government control of a financial sector, leasing is an excellent way for the private sector to gain a foothold and help create a climate for eventual reform.

  • Commitment to reform of securities markets regulation and infrastructure can lead to abundant flows of new portfolio investment, which stimulate the climate for more positive change in the entire sector.

  • In the process of strengthening securities market, it is important to build a climate for new investment in not only equities but also debt instruments such as corporate bonds and commercial paper.


The International Financial Corporation (IFC) is actively involved in Pakistan in the efforts for development of a strong financial market suggests that it should be led by sound macro-economic policies set in a hospitable political environment.

Reviewing the process of development sector in Pakistan, the International Finance Corporation (IFC) observes that nationalization of Pakistan financial sector in 1970s made any private investment in the sector impossible.

Throughout the 1980s, government domination of much of the sector continued to discourage private participation. In 1989 and 1990, however, the government implemented several market-based reforms as part of a World Bank Financial Sector Adjustment Loan. These moves greatly improved allocation of credit and other resources, supported capital market development and helped ensure a stable flow of long-term foreign exchange resources to private industry.

Although state-owned banks still dominate the banking sector, Pakistan's financial sector has developed considerably since 1990, gaining efficiencies that have helped renew GDP growth, reduce inflation, and achieve initial success in privatization.

IFC feels that under the financial sector liberalization programme, new privately owned local banks have emerged to compete with the state-owned banks and favourable market conditions have developed, attracting the entry of several foreign financial institutions. These reforms have breathed new life into the once-dormant Karachi Stock Exchange, whose market capitalization more than tripled between 1990 and 1996 to about $10.6 billion despite considerable volatility. Its number of listed companies rose from 487 to 782 in that time, with monthly trading volume climbing from $231 million to $6.1 billion. Many new local brokerages, mutual fund companies and investment banks have also been founded and regulatory bodies and securities trading infrastructure have been strengthened.

Citing Hubco Power Co. as an example for development of share market in Pakistan, IFC mentioned the project which was able to raise an important $205 million component of its 1,292 MW oil-fired plant's equity needs in 1995 via securities market. Of this amount $175 million came from international investors via a global depository receipt (GDR) issue, with the remaining $30 million source locally on the Karachi Stock Exchange. Though modest compared with the project's 1.8 billion overall cost, these funds did seal a critical financing gap on the equity side of the largest private investment in Pakistan's history. The Hub Co. project has set many precedents in the privatization of Pakistan's power sector, a process that, while controversial in some regards, has led to efficiency gains and new generation that would not have been possible under government ownership.

As a result of liberal financial policies, initial Pakistani GDRs have been placed in international markets while country funds established and a domestic corporate debt market is fast developing with the potential to play an important role in financial both local firms and private infrastructure projects, IFC anticipates.

Companies which are too small to meet the exchange's listing requirements have the opportunity to benefit from the growth of national leasing and to some extent venture capital industries. Contrary to its experiences in Pakistan, the IFC in its comments about financial markets in neighbouring India has observed that in countries with over-regulated economies such as India, private entrepreneurs can sometimes start new private finance companies in unregulated subsectors such as leasing. Once the industry starts, good regulation can be put in place.

In the backdrop of the above financial scenario developed in Pakistan, the IFC has followed a three-pronged strategy aimed at providing technical assistance to the government on a wide range of financial issue, establishing financial institutions that have often been firsts in the marketplace and delivering and mobilizing resources for the burgeoning private sector, particularly small and medium enterprises.

IFC is hopeful of useful results of these efforts specially in two areas important for the maturation of securities markets anywhere: A modern central depository to facilitate trading volume increases through improved clearance and settlement procedures and an independent rating agency to spur the growth of local debt issues.