MUTUAL FUNDS IN PAKISTAN
Yet to achieve mainstream status
Interview: Rupert Neil Bumfrey: Advisor on Offshore Asset Management
Apr 02 - 08, 2007
Rupert Neil Bumfrey is solely involved in various aspects of Offshore Asset Management, generally in a freelance role was interviewed by Pakistan & Gulf Economist to have his views over Mutual Fund Sector in Pakistan. Though, Rupert has been a resident in GCC especially in Dubai for past 17 years, yet he is a frequent visitor to Pakistan. Being a true professional, Rupert keenly observes the interesting developments in the area of asset management in Pakistan.
While appreciating what it is generally called an economic turnaround in Pakistan, Rupert also believes that Pakistan's economic growth story is undeniable. And due to its correlation, the same goes for the country's mutual fund industry.
The Mutual Fund sector is at the nascent stage and can only grow from here. However, the biggest question is 'what' it will grow into and whether its fundamentals are stable enough to sustain the growth, showed in it's inquisitiveness regarding skill and capacity of the people to give a direction and shape to the sector. Therefore, key to any future success will be the roles played by the regulatory bodies — SBP (State Bank of Pakistan) and SECP (Securities & Exchange Commission of Pakistan). Their oversight of the industry has to become increasingly sector-based and empirical, allowing for both a transparent and free market, Rupert remarked, & removal of currency controls would assist greatly. Currently foreigners have to open a scra to invest, which for some is offputting!
Since mutual funds have yet to achieve mainstream status in Pakistan, the regulators along with the institutions need to promote international best practices and corporate governance, spread consumer awareness, and ultimately, instill and maintain investor confidence.
Pakistan's mutual fund industry is witnessing exceptional growth owing to upturn in the country's economy.
Initially, the market was dominated by public entities NIT (National Investment Trust) and ICP (Investment Corporation of Pakistan), but with the onset of private sector asset managers of the JS ABAMCO and Arif Habib vintage, and more recently, the ingress of local banking institutions (National Bank of Pakistan, United Bank of Pakistan & MCB just to name a few), the mutual fund sector seems to be heading in the right direction - mass retail uptake.
Currently, the sector is in infancy. It accounts for only 2.38% of the country's GDP (compared to 6.00% for India and 69.00% for the United States) and a paltry 16.52% of its national savings, significantly smaller than other developing and developed countries.
PAKISTAN: UPDATE ON MUTUAL FUNDS
Total number of Asset Management Companies: 28
Total Assets under management (AUM):
As a percentage of total stock market capitalization: 6.272%
As a percentage of bank deposits: 5.793%
TOTAL NUMBER OF CORPORATE INVESTORS
December 31st, 2006: 5,119
December 31st, 2005: 4,571
TOTAL NUMBER OF INDIVIDUAL INVESTORS
December 31st, 2006: 137,823
December 31st, 2005: 148,487
The expatriates always play an important role to reinvigorate economies of their homeland as did by Chinese and the Indians. Pakistan also did well in this respect and on an average non-resident Pakistanis remitting over $4 billion. These types of cash flows could be diverted towards mutual funds more comfortably provided the companies manage to win the trust and confidence of the people living outside the country.
Recently, there were reports that investors from Qatar and Kuwait plan to pour in up to $4 billion in the hotel, insurance and oil refinery sectors add to the investment momentum surrounding the country. It is really a positive sign for those who are looking for investors.
It may be recalled that CDC had initiated in the right direction with an excellent idea of organizing some Road Shows in UAE. Follow up on the part of organizers and participants alike, will ensure a return on invested capital.
Meanwhile, Asian Development Bank (ADB) plans to provide $150-200 million "multi-trance facility" to help strengthen the country's insurance, pension and savings systems.
Pakistan has formally sought the one time multi-trenches facility from the bank, the initial details of which were reportedly discussed between Prime Minister Shaukat Aziz and ADB Director General Juan Miranda when he visited Pakistan last month.
The full details of the loan were still to be worked out but the bank has agreed to offer considerable funding for bringing improvements in the insurance, pension and savings systems.
There are "governance" issues in the pension, insurance and savings systems, which needed to be sorted out to make them highly efficient.
Pakistan's pension system at present has been described by ADB as "fragmented" without a central framework for regulation or supervision to encourage retirement savings and protection for beneficiaries. It is; therefore, appropriate to support the development of a policy that will encourage retirement savings through regulations and appropriate incentives. The technical assistance will assess institutional constraints of the National Savings Scheme (NSS) and recommend measures to improve transparency in financial management. It will also assess the merits and feasibility of moving towards a funded scheme managed with a well-conceived investment policy in a variety of investments ranging from government bonds to equity.
The bank believes the financial sector has an important role to play to increase resource mobilization, improve efficiency of allocation, enhance access to financial products and services, contribute to the sustainability of social safety nets and safeguard economic stability.
Regulation and governance of Pakistan's capital market and the corporate sector, the bank maintained and gained credibility with the commencement of the Securities & Exchange Commission of Pakistan's (SECP) operations at the beginning of 1999. SECP's role was further enhanced in 1999 when it was assigned regulatory responsibility for private pensions and other non-bank financial institutions including leasing, housing and investment banks.
Given the critical importance of SECP for capital and non-bank financial markets, it is important that it has adequate capacity ó skills, systems, and procedures ó to effectively discharge its functions.