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 government securities.

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 banks.

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 expenses.

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).

TOP 10 DIVIDEND PAYING MODARABAS
NAME OF MODARABA	DIVIDEND
1st Imroz Modaraba	50%
1st Grindlays Modaraba	40%
1st Habib Modaraba	20%
1st Habib Bank Modaraba	16%
1st Equity Modaraba	14%
Modaraba Al-Mali	12.5%
1st Punjab Modaraba	12%
BRR International Modaraba	11%
1st Al-Noor Modaraba	10%
1st Fidelity Leasing Modaraba	10%

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.