In Pakistan, money is usually kept in banks for
security as well as for earning some return. Money is deposited in
current, savings and term deposit accounts. Based on the convenience and
maturity period, the rate of return on these types of accounts vary.
Normally no return or a nominal profit is offered on current accounts.
The return on savings account is lower than term deposit accounts.
People choose the type of accounts depending on their needs for funds
and the return they wish to earn — longer the duration of commitment of
funds higher is the rate of return.
In other countries people usually invest their
savings in high yielding securities, issued by government as well as
corporates. The other alternatives are: gold, equities, debt instruments
and real estate. An individual investor selects the option depending on
his/her needs and the time horizon of investment. In the recent past
most of Pakistanis used to keep their money with commercial banks for
the reasons of security, modest rate of return and, on top of
everything, limited investment opportunities. The other preferred choice
used to the financial products sold through National Savings Centres. In
the neighbouring countries, a large percentage of small savers invest in
mutual funds. Since mutual funds operating in Pakistan had invested in
equities they also felt the burnt. After the mid-nineties, the equities
market in Pakistan suffered from persistent bearish trend and investors
chose to stay away from equities market.
Then came the era of dollarization. A large number of
investors invested in foreign currencies, mostly the US dollars. Though,
the rate of return on foreign currency accounts was low but there were
ample opportunities of making gains due to persistent erosion of rupee
value against dollar. In May 1998 the government froze the foreign
currency accounts and option of investment in dollars became least
attractive. Even at present, investment in foreign currencies is least
attractive because of stability of exchange rate and huge foreign
exchange reserves of Pakistan.
Gold has never lost its glitter. It has always been
considered a safe haven. The latest GoP policy, to free the trade of
gold, may keep investment in gold a very attractive option for a while.
With the popularity of 'Ten tola bars' due to guaranteed purity and an
extensive market throughout the country, the influx of gold in the
country is excepted to remain high in the near future. Therefore, a
vibrant bullion market may erode investment in capital market as well as
As regards the return on government securities, they
have also experienced a declining trend in last five years or so.
Though, there has been pressure on government not to reduce the rate of
return on the securities offered by National Savings Centres, it will be
extremely difficult for the government to maintain rate of return on
these financial products. With the shift in GoP policy, assuming the
role of facilitators and gradually getting out of the business of
managing business and reduction in budget deficit, the need for
borrowing at higher rates may not be there after a while.
RETURN ON DEPOSITS
Almost all the banks offer similar rates of return
that are competitive but do not commensurate the rate of inflation in
the country. Theoretically, the rate of return on deposits is normally
determined by the demand and supply as well as the government's monetary
policy. Lately a declining trend in return on deposits has been
witnessed in Pakistan because of the GoP policy — a concerted effort to
bring down the average lending rates in the country. Alongwith this, the
policy of central bank regarding strict compliance to Prudential
Regulations, has also been a major reason for the declining trend.
According to these regulations banks are required to make appropriate
provisions against the non-performing loans.
However, some sector analysts say, "The banks are
paying much higher return to their shareholders as compared to
depositors." They term this extreme discrimination between shareholders
and depositors. They also believe that the Board of Directors, of such
banks only look after the interest of shareholders and grossly ignore
the depositors who are the main source of funds for the commercial
These analysts also hint towards high operating
expenditures of banks that comprise of significantly large component of
salary and other benefits paid to the employees. It will not be out of
context to mention here that a commercial bank has been following a very
aggressive expansion plan and bulk of its income was utilized by
operating expenses. This bank even did not pay any dividend to its
shareholders because almost total income was eaten up by operating
To understand the future trend of interest rate, it
is necessary to review commercial banking sector in the country. The
restructuring process initiated in the sector has changed the complexion
of commercial banks operating in Pakistan. Two phenomena, privatization
of nationalized banks and induction of private sector in the banking
business, brought in the element of competition and improved efficiency.
As private banks have limited number of branches, they are forced to
invest in technology. This investment is mainly made in ATMs, on-line
banking, credit cards and debt cards. All these are capital intensive
and the use of such facilities is still confined to urban areas.
There has been a gradual shift from use of cash to
plastic money. The banks want to keep customer traffic to branches as
low as possible. The ATMs facility, offering 24-hours cash delivery,
encourages people to carry or keep lower cash in their wallet or at
homes. This allows the banks to retain bulk of the deposits. However,
installation of ATMs in large number and their maintenance is very
expensive proposal. Unless use of technology becomes common, they will
remain a big burden for the banks.
The banks also suffer from surplus liquidity crisis
due to poor demand for credit. Over the last five years fresh investment
and BMR in the industrial sector has remained very low. To overcome this
syndrome, commercial banks have ventured into leasing, consumer
financing and credit extension to agriculture sector. Even venturing
into these activities has not helped in boosting their income.
RIBA FREE INCOME
Many investors are in search of Riba free income. In
this regard various alternatives are available. A number of Modarabas
are listed at local stock exchanges. They offer extremely attractive
dividend yield. The GoP policy to exempt income of Modarabas from
payment of tax, provided they distribute 90 per cent profit among the
certificate holders, is an incentive that has enabled them to pay higher
dividend. Besides investing in Modaraba Certificates, the investors can
also invest in Musharika certificates that are equivalent of
Certificates of Investment issued by leasing companies. Yet another
product, Islamic TFCs issued by Modarabas will be available shortly.
One may feel a bit reluctant in investing in Modaraba
certificates as a number of them are quoted below par value. This is not
a negative point but an incentive because dividend yield on such
certificates becomes extremely attractive. At present there are 46
Modarabas listed at the stock exchanges. To date, 20 Modarabas have
released their financial results for the year ending June 30, 2002. The
dividend declared ranges from 2.5 per cent to 50 per cent. The aggregate
dividend paid by them comes to around Rs 570 million as compared to a
payout of Rs 529 million for the previous year. For the year ending June
30, 2001, leasing companies had paid dividend worth Rs 301 million,
investment banks had paid Rs 421 million and mutual funds had paid Rs
469 million. This clearly indicates that Modaraba sector has been paying
attractive dividend amongst the non-banking financial institutions (NBFIs).
DIVIDEND PAYING MODARABAS
NAME OF MODARABA
1st Imroz Modaraba
1st Habib Modaraba
1st Habib Bank
1st Equity Modaraba
1st Punjab Modaraba
If one talks to equities analysts, all of them say
that investment in equities is the best because they offer incredibly
attractive dividend yield. However, it is a rather risky investment for
a number of reasons. Neither an individual has the expertise nor the
complete information to pick up the correct scrips. Research Departments
of various brokerage houses prepare daily as well weekly reports but
access of these is very limited.
Another problem is that often the investment
decisions are influenced by market movement, people enter the market
when it is going up and often pick up wrong scrips, as they are not
aware of the fundamentals for that particular company and the sector. It
is evident from another fact bulk of the daily trading volume belongs to
less than two dozen companies. Bulk of trade pertains to 'day traders'.
The needs and psyche of the day traders is very different from
investors. The day traders thrive on the volatility of the market,
whereas the objective of a long-term investor should be to maximize
his/her earnings for the investment.
It is difficult to suggest any generic solution for
investors as they have different needs. However, one has to take a few
things into account: income requirement, time horizon of investment and
diversification of investment portfolio. This means keeping some
percentage as cash, plan for divestment to meet other needs. The
diversity of portfolio, spreadover a number of scrips belonging to
different sectors can minimize the risk. All this means a fairly good
knowledge of equities market. One may seek advice from various brokerage
houses, but should always make his/her own decision.
The stock exchanges and Securities and Exchange
Commission of Pakistan (SECP) are making efforts to ensure following of
good governance by the listed companies and to improve transparency and
efficiency of capital market. Therefore, even if one does not make any
investment in equities must get acquainted with the listed companies and
working to stock exchanges.
To conclude, it is also necessary to say that the
local stock exchanges must also arrange awareness programmes for the
investors. Unless investors have the understanding and faith in the
equities market, as a vehicle to improve return on investment, small
investors will stay away from this market.