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Ice-breaking launch by Arif Habib Investments

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 five years.

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 fund industry:

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 companies.

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 country.

Capital market

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 reform efforts.

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 reducing poverty.

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 market.

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 Arif.