TESTING THE HEALTH OF KARACHI STOCK MARKET
PROF. DR. KHAWAJA AMJAD SAEED
Apr 23 - 29, 2007
An analysis of Listed Financial Sector on Karachi Stock Exchange (KSE) consisting of six components namely, Closed-Ended Mutual Funds, Modarbas, Leasing, Investment Banks, Commercial Banks and Insurance Sector has been carried out. Accordingly, six articles have been developed. The first one appeared in PAGE (April 2-9, 2007). This focused on the analysis of "Closed-Ended Mutual Funds". This is the second article which will focus on analysis Modarbas listed on KSE. The analysis is based on information available in the Daily Quotation Sheet of KSE of November 30, 2006.
A nine-point framework has been developed for carrying out analysis. This consists of the following:
1. Market Share
2. Paid up Capital
3. Par Value
4. Historical Growth
6. Market Capitalization
7. Share in GDP
8. Market Value Compared to Par Value
9. Distribution as Return
Based on the foregoing framework, analysis carried out is now presented.
MARKET SHARE: Total number of companies listed on KSE was 652. Against this total, number of Modarbas listed on KSE was 27. This represents 4%. It Modarbas are to be popularized as one of the Islamic instruments of finance, it is advisable to increase its share though strategic move.
PAID UP CAPITAL: Listed paid up capital of KSE was Rs. 518 billion. Out of this a sum of Rs. 7 billion related to Modarabas. Accordingly its share in KSE total paid up capital was 1.35%. If it is intended to enlarge the share of Modarbas on KSE, a conscious effort will be needed to achieve the above strategic objective.
PAR VALUE: It is interesting to note that par value of Modarbas was very low compared to today's financial level. Only 4% Modarba companies had Rs. 5 as par value, while 96% of Modaraba Companies had a par value of Rs. 10. It is high time that the regulators in Pakistan start thinking to enhance the par value to at least Rs. 100.
HISTORICAL GROWTH: The following box captures the position relating to historical growth of Modarba companies in Pakistan:
Box No. 1
HISTORICAL GROWTH OF MODARBAS IN PAKISTAN
The introduction of Modarbas started during Zia-ul-Haq's regime and continued till 1996. This represented 92% of Modarabas companies which were listed on KSE. Later from 1997 to 2006, only two Modarba companies were listed. This Islamic financial instrument yearns to be popularized. Who will take the initiative?
TURNOVER: During January-October 2006, KSE had a total turnover of Rs. 56 billion. Against this the share of listed Modarbas was only 0.16%. This dismal performance of extremely low volume of turnover on KSE speaks volumes of small share of Modarbas on KSE relating to turnover.
MARKET CAPITALIZATION: KSE market capitalization was Rs. 2,952 billion. Against this, total market capitalization of Modarbas was Rs. 6 billion-representing only a share of 0.20%. This is too small.
SHARE IN GDP: Total GDP of Pakistan is U.S $ 128 billion. Share of KSE listed companies was 38% and the share of Modarbas was only 0.078%.
MARKET PRICE COMPARED TO PAR VALUE: One of the Acid Test for checking the financial health of a company is to compare the par value with the ruling market value. Based on this, 85% Modarbas were below their par values. Accordingly, these represent sickness which needs to be properly diagnosed, reasons ascertained and treatment to turn these into healthy ones be initiated. If a Modarbas is quoted below 25% of its par value, the spirit of section 295 of the Companies Ordinance, 1984 be carefully examined for a positive step. Since Modarbas are governed under a special law, the provisions of sections 295 and 296 of the above Ordinance be incorporated, with appropriate changes, in the law governing Modarbas. This will be a right step for paving the way for an institutionalized approach for corrective action.
DISTRIBUTION AS RETURN: Distribution to Modarba holders is another important indicator. Based on our analysis, Box No. 2 presents the position:
Box No. 2
DISTRIBUTION AS RETURN ANALYSIS
Distribution as Return
All Modarbas were not in a position for impressive distribution as 85% of these were quoted below par. No distribution was announced by 25%.
CONCLUSIONS & RECOMMENDATIONS
Based on foregoing analysis, the following conclusions emerge along with recommendations:
1. A Policy Statement is needed whether we wish to promote Modarbas as an Islamic financial instrument or not. If the answer is in the positive, then, under the Modarbas Association of Pakistan, a workshop be held to help develop a strategy to introduce Modarbas on wider scale and with changes in the existing legislation governing Modarbas.
2. Sickness in 85% of existing Modarbas be diagnosed and corrective action be initiated to turn sick Modarbas into healthy ones.
3. Appropriate changes be made in law governing Modarbas in the light of Sections 295 and 296 of the Companies Ordinance, 1984.
4. A platform of accountability for holding annual general meting for reviewing the financial and operating information may be considered for a positive action.
5. Some suggestions have been offered during the review of the performance of Modarbas in this article. These may be considered by stakeholders.