Not a single financial institution has so far introduced margin-financing facility at Lahore and Islamabad stock exchanges

From Khalid Butt, Lahore
July 11 - 17, 2005

Despite the fast approaching deadline of August 26 for making the newly introduced margin financing plan fully operational, the lack of involvement on the part of banks has made the scheme of things look amazingly ridiculous as not a single financial institution has so far introduced margin-financing facility at Lahore and Islamabad stock exchanges.

Amidst frustration due to liquidity crunch in the market in the wake of phasing out of Badla on one hand and lack of interest by the banks for introducing margin financing on the other, the brokers of the LSE and ISE have submitted applications for obtaining margin financing facility to facilitate their investors and to strengthen the stock market activity, but the financial institutions are delaying it on various pretexts.

Soon after the stock market crash, a number of financial institutions introduced margin financing facility in Karachi, but this facility was not available either to brokers or investors both at Lahore and Islamabad stock exchanges.

The Chief Executive of Lahore Stock Exchange, Hamid Imtiazi, has all praises for the newly introduced margin finance scheme, which he feels would be vital for the healthy growth of the capital market in Pakistan.

However, he also feels that there should be an alternate source of financing readily available as the over-cautious and conservative approach of the banking sector so far has not been very conducive to boost the new concept.

Asked for his views on margin financing, Hamid Imtiazi said: "margin financing is the new form of financing that is meant to replace the older version of COT, because the older version has experienced inefficiencies and problems".

The biggest difference between the two is that COT is a post-trade financing mechanism, whereas margin financing is a pre-trade financing mechanism. The shift from COT to margin financing is a much needed step to adopt best international practice. It will help improve risk management and be a more efficient method of financing.

Currently COT is being phased out in an across the board manner. At the time of full phase-out (i.e. 26th August 2005) it is expected that fully functional margin financing will be available to investors when the scheme gets operational. Currently there are efforts underway from banks to have fully integrated systems in place for margin financing.

Margin Financing will help systemize the financing mechanism, which will be beneficial to the market as a whole. It is expected that this system will be refined with the time and practice.

According to a survey made by the PAGE in Lahore, the current controversy stems from the conflicting interests of the two sides. While the regulators are out to clean up the system and provide a more healthy and transparent system, the brokers hold a contrasting view. For the past 50 years the brokers have been running the roost and any change in their stranglehold obviously hurts them immensely. After the recent crisis, regulators were forced to look for a safer and transparent system to Badla, which over the years had developed many snags. It inherently had led to the virtual monopoly of brokers, who also doubled as financers and there cropped up many flaws. A more balanced and careful system was obviously the need of the hour. The regulators, however, need to find ways and means to remove apprehensions, which prevail and bring banks to adopt a more amenable policy than their present rigid approach, which is creating more hurdles than facilitations.

Badla provision by the domestic banks and the development finance institutions (DFIs) has been reported at the lowest ebb by June 2005. The banks and DFIs badla stake at stock market had dropped to Rs 6.38 billion as against Rs 17.20 billion on February 26, 2005.

From January to March 26, 2005, the badla provision by banks and the DFIs remained between Rs 11.40 billion to Rs 14.097 billion, but from April to June this year the badla financing by the financial institutions has rapidly wiped out of stock market, falling to Rs 6.38 billion on June 25, 2005.

Interesting to note is that in March this year the Karachi Stock Exchange-100 index hit the historic mark of about 10,400 points, but crashed to 6,467 points by May 20, as the major market players toppled down the entire market to amass billions of rupees of the small investors on the pretext of non-provision of margin financing in place of gradually phasing out of badla from market. However, the banks and DFIs stake in shares of listed companies continued to revolve around Rs 31.60 billion in January 3, 2005, to Rs 33.94 billion on June 25, 2005, showing no major fluctuation.

The banks and the DFIs have become cautious as the stock market is showing misfortune and appearing direction-less these days, a leading Lahore-based broker said. He also said that the banks and DFIs are giving final shape to margin financing schemes as a result of which they are reluctant to provide badla at stock market. He said that stock market would not take a leap forward until and unless the financial institutions start margin financing at Lahore and Islamabad.