Ice-breaking launch by Arif Habib Investments
By AMANULLAH BASHAR
Mar 18 - 24, 2002
Arif Habib Investments have launched two Mutual Funds
worth Rs500 million. This is the first entry of mutual funds in the last
The mutual fund industry in Pakistan is way behind
the developed world as well as the developing countries.
The size of the respective industry is 120 per cent
of the banking deposits in the USA and 12 per cent in India. Whereas, it
is under 3 per cent in Pakistan.
Another statistic is that just the Unit Trust of
India has 40 million investors and as opposed to this, Pakistan's entire
investor base in mutual funds is less than 100,000.
Some of the reasons for the current state of mutual
Abysmal corporate governance of a large number of
listed companies as well as inconsistent government policies resulting
in bad performance of mutual funds investing in the shares of affected
Higher than market interest rates on National Savings
Schemes preventing the growth of a debt market. Out-dated rules and
regulations governing mutual funds which are also very restrictive and
yet these have not kept away bad fund managers. Tax laws are focused at
making up the shortfall in revenue even at the cost of driving away
investment. Practically, non-existed pension system in the private
sector in Pakistan with non-funded pensions at the government levels.
Highly restrictive investment regulations governing large reservoirs of
money such as all types of trust funds and insurance funds, forcing such
entities to invest almost exclusively in government securities.
The core investors in these two funds namely Pakistan
Stock Market Fund (PSMF) and Pakistan Income Fund are compared of
Industrial Groups, Commercial banks, Investment Banks, Modarba and
members of the Stock Exchange.
Finance Minister Shaukat Aziz, speaking at the
launching ceremony has said that economic prosperity depends entirely on
our ability to invest in the future. Investments in fuel growth and
without them there will be not growth. However, investments in turn
depend on savings. Linking savers with investors is the job of financial
intermediaries — such as banks, financial institutions and stock
market. An efficient system of financial intermediation will have the
broadest outreach to mobilize small savings of millions and make them
available to prospective investors; in fact, it is through this system
that even the smallest savers take part in the development of the
The capital market reforms is a comprehensive agenda
of the government that addresses all major areas of marketís
functioning, strengthening the role of equity, development of corporate
debt market, corporate governance, enforcement of corporate laws,
capacity building in SECP, protection of small investor, trading
automation, stock exchange governance and prevention of market abuse are
some of the areas that are covered in these reforms.
The minister for finance dilated upon the
significance of capital market reforms for prospects of mutual funds
launched by Arif Habib Investments.
He expressed his appreciation on what he described
the cordial relations that exist between stock exchange members and SECP.
Both sides have worked toward the total transformation of the market.
The market of today has no resemblance to the market of 2 years ago.
Today, people can put more faith in the market than ever before. The
process is continuing and at its end we will have a market that would
not be dominated by a few players or have a narrow base of investors.
Rather, it will earn the confidence of investors and its role as a major
source of financial intermediation will be firmly established, he
expressed his confidence.
All these strengths of the market should be a boon
for the fund management. In this sense, the funds are being launched on
the back of a rapidly reforming stock market that can support efficient
functioning of widely held mutual funds in the private sector.
Foreign portfolio investment is another important
requirement for development of the capital market. The government has
undertaken numerous reforms to remove distortions from the forex market
and is keenly facilitating investment by the foreign portfolio managers.
In this regard, apart from complete elimination of all the restrictions
of foreign exchange movements that were imposed in the wake of nuclear
tests, government has fully liberalized the exchange rate. The
inter-bank market is totally free in pricing and allocating foreign
exchange according to market needs. The State Bank has no role in the
determination of exchange rate though it intervenes only to stabilize it
through the use of its reserves.
The finance minister said that investment has to be
the key for securing the future of the economy in Pakistan on a
sustainable basis. The external account stability is a signal for the
strength of the economy that should inspire the necessary confidence
among investors to take long-term decisions.
In a related development, the Hundi market has also
come under intense pressure. Already there has been a phenomenal
increase in the flow of remittances from the normal banking channels.
The economy needs to sustain this change and organize the forex market
in a way that would eliminate the need for Hundi like operations.
Indeed, the State Bank is currently working out the details of embarking
on a plan to integrate the two markets.
These developments point to a buoyant economic state
that is likely to be witnessed in Pakistan. It is a combination of hard
reform work and judicious positioning in the international community
that has primarily contributed to this prospect. But these opportunities
would not yield economic rents to us. Rather, these will have to be
exploited through additional efforts that inspire business confidence
and increase the level of investment. In the backdrop of these
challenges, the launching of these funds can be taken as a good omen.
Shaukat Aziz said that the government is fully
determined to help stock market play their due role in the development
of the country. The way Pakistan handled the September crisis of stock
exchange was a testimony to our professional approach as well as
commitment to help the market iron out unusual situations. Having learnt
from recent experiences and in a bid to broaden the base of stock
exchange, the government plans to promote fund management in the
corporate sector in general and in the public sector corporations in
particular. This latter part represents a major avenue of resources that
still lie outside the market whereas for purely economic reasons a part
of them has to be deployed in the stock exchange. The institutional
investors, the government had brought in the market are likely to remain
there in the long run and would be a source of stability in the market,
the finance minister assured. The focus of the privatization policy is
to stimulate stock market activity and to encourage small and individual
investors to come to the market. The recently privatization of the
National Bank's shares would be followed by many other such issues and
the investors can look forward to some activity from the side of the
privatization commission in the stock market, Shaukat Aziz observed.
The finance minister said, "history of economic
development in Pakistan, however, tells us a different story. Rather
than building a strong domestic resource base, Pakistan has largely
depended on foreign savings to fill the investment-savings gap".
"We were never modest in aiming for high rates of growth, but to
meet the investment needs we shied away from mobilizing domestic
savings. We looked to the outside world to make up for the deficiency.
To be sure, there is nothing wrong with borrowing, including foreign
borrowing, so long as these are used to increase future incomes to a
level commensurate with the servicing obligations ensued in the process.
But unfortunately, our repayment capacity did not rise in line with the
burden we accumulated through borrowings. Resultantly, Pakistan faces a
serious debt problem that limits our growth potential and undermines our
Today Pakistan faced with a perennial problem of
fiscal deficit, emanating not from meeting any development needs, but
largely to service past obligations. With a deficit in its budget,
government is a net dis-saver in the economy. To fill the resource gap,
government borrows often at interest rates at which private sector will
not be able to get funds. Thus government demand displaces private
demand for credit and in fashion the debt burden becomes a cause of
slowing down the economy. So long as we continue to face the debt
problem, we will have to live with low rate of economic growth, which in
turn would mean continued high incidence of poverty, he warned.
The reform agenda of the present government
essentially aims at breaking the vicious trap of debt and significantly
In order to iron out these problems, major focus of
the efforts has been devoted to the problems of fiscal management. The
persistent and unremitting fiscal deficit has been brought down to 5.3
per cent last year from the high of 6.7 per cent two years back. A
number of reforms have also been made in expenditure management with a
view to controlling their growth. Fiscal austerity, cutting of waste,
eliminating non-essential needs and checking the growth of public sector
employment are some of the measures undertaken for this purpose. More
importantly, transparency, disclosure and accountability are the main
elements of governance reforms in country's financial management.
Another area in which the government has made serious
grass roots reforms is the banking sector. Besides strengthening the
regulatory functions of the State Bank, the government has inducted
professional managements in banks and DFIs and insulated them from any
external influence. The three NCBs today are in much better shape than
they were a few years ago. The government is committed to their
privatization also. This will bring a fundamental change in the banking
system as these banks continue to occupy the largest share of the
Arif Habib, Chairman of Arif Habib Investments while
speaking on the role of mutual funds in the economy said that the mutual
funds provide an institutional support for a wide range of participants
in the economic chain.
These facilitate flow of capital both institutional
and small savings to the capital market and through that an efficient
allocation to trade and industry which in turn fuels economic growth.
The Mutual Fund business also help alleviate poverty by assisting small
savers to access the securities market which is normally available to
knowledgeable and big investors.
The intermediation provided by the investment
facilitators and distributors channeling savings to the Mutual Funds and
in turn the investments by the Funds in the capital markets through
stock exchange members and other financial intermediaries helps create
business opportunities for thousands of people.
As part of the mutual fund marketing function, Arif
Habib Investments shall also enhancing the use of the Internet for doing
business and we have also commenced investors education programmes, said