Attractive investment opportunities a must for boosting savings rate

Oct 30 - Nov 05, 2000

Pakistan needs large scale investment for accelerating the economic growth rate. The objective cannot be achieved without boosting investment in productive activities. The quantum of investment is largely dependent on the savings rate that is driven by the philosophy 'incentive for savings'. The declining return on National Savings Schemes (NSS) and mark-up being paid by financial institutions and high rate of inflation have become serious impediments for boosting savings rate.

Historically, people used to keep their savings with commercial banks either as time deposits or in their savings accounts. Investments in NSS products, currencies, gold, real estate and commodities were other available options. However, with the recent declining trend in return on bank deposits and NSS products, people are in desperate search for other alternatives. The quest is also supported by the Supreme Court judgment regarding abolishing Riba from the economy. Even much earlier, than the day this judgment was announced, a large number of people were in search of interest free financial products. There was a pressure on financial institutions to come up with Riba free products. Though the initiative was taken as back as in early eighties, the lack of commitment, uncertainty and dearth of expertise did not allow the financial institutions in the country to come up with financial products truly based on Islamic injunctions.

Investment in NSS products, despite yielding lower return, is still considered most secure because of being backed by the government. The investors in these products mainly comprise of widows, old people and those who are interested in getting fixed and/or regular income. However, they feel a pinch now due to reduction in rate of return.


Domestic and foreign commercial banks, put together, have an elaborate network of branches throughout the country. Almost each bank has its own niche market and has its own strength and weakness. Deposits with banks are perceived secure. This perception has helped the banks in mobilizing low cost funds and earn high yield by investing the funds in T-Bills/government securities. In last couple of years the scenario has changed to a large extent. With the growing competition among the banks in resource mobilization, reduction in T-Bills yield, foreign currency deposits being expensive and low demand for credit, the return on PLS accounts and time deposits are on a constant decline and do not commensurate with the rate of inflation in the country. However, as a result of the recovery campaign of November 1999, large scale restructuring of loans and change in the rules regarding provisions against doubtful loans, commercial banks are expected to pay better return on deposits. To maintain deposits level almost every bank is trying to come up with innovative financial products to suit the needs of various groups.

Now financial institutions offer various products which have the advantage of daily calculation of mark-up to advance profit payment. This clearly indicates that these institutions have realized the need of various income groups and have started offering products to suit the needs of each group. Thanks to growing competition for resource mobilization that has also forced the banks to optimize operating costs to enable themselves to offer competitive return. While the return on deposits may be comparable, the inflow of deposits is dependent on a number of other factors. These include: branch network, quality of service and other fringe benefits. These factors often play a decisive role in selecting a bank or branch when one has to make a selection.

After the freezing of foreign currency accounts in May 1998, the preference for dollar deposits has come down considerably. Even the banks discourage maintaining such accounts, at times, due to higher exchange risk cover. Some of banking sector analysts say that it was not the rate of return on deposits but the probability of gains due to persistent rupee depreciation that encouraged people to accumulate dollars. Yet another reason was preference of dollar deposits as the most acceptable collateral by banks. The recent dollar buying spell was also due to expectations of massive devaluation of rupee. The buying pressure led to exchange rate volatility which further intensified the lust for accumulation of dollars. However, the volatility has reduced to a large extent and the difference between kerb and official rates is expected to come down further once the inflow of funds from multilateral lenders resumes.


As the returns are going down, it has become imperative that people should not look towards bank deposits/NSS only. Mutual funds, equities and debt instruments, currencies, real estate and gold should also be considered for investment to maintain a diversified investment portfolio to earn higher return. Each option offers opportunities and has pitfalls. While services of investment consultants may be available in the country, the ultimate responsibility of making prudent decision lies with the investor.

According to Arif Habib, Chairman, Karachi Stock Exchange, with the increasing number of listed companies and large capital base corporations the daily trading volume has increased manifold over the years. It is mainly due to better market information, brokerage houses opening more and more branch offices and media printing exhaustive reports about the performance of listed companies. It is also because of improved infrastructure and market efficiency. Arif said that despite a negative perception about equities market, performance of various sectors is worth mentioning. Net asset value of a large number of companies have improved over the years. Still, many scrips are selling at a discount and prices are very attractive. As the signs of economic revival have started appearing there are prospects for better dividend yield.

Over the last couple of years number of companies declaring cash dividend is on an increase. To make the equities market more efficient and attractive the Securities and Exchange Commission of Pakistan (SECP) is trying hard to play its due role. This has improved corporate governance, encouraged greater disclosure and also helped in restoring confidence of investors. However, according to Arif, a lot has to be done to improve market efficiency. Creation of Central Depository, KATS, display of real time information and monitoring of brokers behaviour have further consolidated the confidence of investors which will lead to larger investment in equities and debt instruments.

Debt instruments, mainly Term Finance Certificates (TFCs), have been floated. They offer the advantage of fixed income. Individual investors are still reluctant to invest in TFCs due to support from secondary market. Mostly institutional investors invest in these certificates. Globally the debt market is larger in size as compared to equities market, but it is the other way round in Pakistan.

One of the reasons for lack of interest of issuers is compulsory rating by an independent credit rating agency. However, some analysts strongly believe that disclosure is the main issue. In Pakistan many listed companies prefer to publish the bare minimum information in annual reports and would never like to make the maximum disclosure. Such companies prefer to borrow from banks rather than mobilizing resources from capital market. Another issue is credible track record for credit rating. While there is no obligation for paying dividend to shareholders, no issuer can avoid paying agreed return to TFC holders.

According to Dr. Amjad Nazir, Head of Asset Management, National Investment Trust, the analysis of performance of bank deposits, gold, dollar, Defence Savings Certificate and stock market for the last 25 years indicates the highest growth in investment in stocks. However, he was skeptical that an individual who did not have thorough knowledge of stock market might loose all his money. In his opinion interest in investment in stocks is driven by the attitude towards risk, age of a person and time horizon. Still the key factor affecting the return on investment is the diversification of the portfolio.

Dilating his point, he said that investment in open-end mutual funds may be the best for individuals. The sale and repurchase price, based on net asset value, is calculated on daily basis. This provides an opportunity to investors to make capital gains besides earning regular dividend income. Since an open-end fund is diversified, selection of scrips is strictly on the basis of economic fundamentals and it is also managed by professionals, the probability of substantial losses is minimized.

Dr. Amjad has a point of caution for investors. In his opinion, the time horizon for investors in equities market should be about three years. This period allows an investor to earn a reasonable dividend as well as make capital gains. An analysis of local equities market may indicate some spikes during three to six months period. However, over a longer period the adverse impact of such surges is minimized. He also suggested that old persons, who need regular and guaranteed income should not invest more than 30 per cent of their total portfolio in equities market and should invest preferably in fixed income securities.

At present there are two open-end mutual funds in Pakistan, i.e. National Investment Trust (NIT) and Unit Trust of Pakistan (UTP). As against this there are 39 closed-end listed mutual funds. Out of these the largest number pertains to the funds managed by the Investment Corporation of Pakistan (ICP) and remaining are managed by the private sector. An analysis of mutual funds managed by ICP shows that at present all these funds are quoted/traded at discount when compared with net asset value. Another observation is that quoted price per share, in case of a number of funds, is even below par value. This indicates a lack of interest of investors in closed-end mutual funds.

According to M. Habib-ur-Rahman, Chief Executive, ABAMCO, "Investment in an open-end fund is most suitable for individuals. If one looks at the number of mutual funds operating globally it is amazing. For example, the first mutual fund, Unit Trust of India, was established in India in 1964. The size of total mutual funds in India at present is estimated over five trillion Indian rupee". Apparently, it looks that individuals know very little about the advantages of investing in mutual funds in Pakistan that was also confirmed by Rahman. The largest investment in mutual funds in Pakistan, at present, pertain to institutional investors. Whereas in India mutual funds have grown in number and size mainly due to the keen interest of individual investors— who have realized the advantage on investing in mutual funds.

If one looks at the performance of mutual funds in Pakistan, it generally reflects the performance of listed companies. The reason being that these funds have invested mainly in equities. However, BSJS Balanced Fund stands distinguished. As the name reflects, BSJS has made investment in a diversified and balanced portfolio. It has made investment in equities, debt instruments and money market, etc. Since its establishment it has been paying regular dividend to its shareholders. As compared to this all those funds that have total investment in equities have been experiencing performance full of surges.


A smaller segment of investors, which has large amounts at its disposal and also have strong holding power, have been investing in real estate, gold bars and commodities. To make an investment in these options one needs to have thorough knowledge of the trade. At present prices of real estate are down — a cyclic behaviour. A factor responsible for this is said to be the on going process of documentation. In the recent past there used to be a huge difference between the market price and the price used for registration purpose. Other reasons for lack of interest in real estate are: constant increase in the prices of construction materials, delays in handing over of the possession by the builders and poor law and order situation, particularly in Karachi. The last factor has adversely affected the prices of houses in almost all the localities. It is due to the preference for living in apartments. This shift towards apartments is on a constant increase. However, living in apartments has its own disadvantages/hazards. The apartments which ensure proper maintenance, security, uninterrupted supply of water and stand-by electricity system have been registering constant increase in the market value of the property.

Pakistan needs grooming of the bread of investment advisors. The services of equities analysts/brokers and real estate agents are available. However, the country now needs investment advisors who can help in developing a diversified portfolio to ensure regular return.

While some Riba free products are being offered for investment by the financial institutions, there is still a need for improvised products. This needs: greater commitment of the financial institutions, efforts to develop innovative products and to commence extensive promotional campaigns.