INVESTMENT BANKS IN PAKISTAN
Mismatch in deposits and advances often lead to liquidity crunch
SHABBIR H. KAZMI, Special Correspondent
Feb 19 - 25, 2007
For the economic development of a country and well-being of masses it is necessary that productive facilities are created. This needs capital expenditure and there could be many ways of meeting the requirement. However, there are two most common ways - equity and debt. There is an old saying that capital is scarce. Therefore, individuals, business entities and governments are forced to borrow to meet the fund requirement.
In most of the developed economies various institutions provide equity as well as debt. Most often equity and debt is mobilized through stock exchanges. Commercial banks provide short-term credit and investment banks and development financial institutions arrange long-term as well as syndicated loans. However, in Pakistan clear compartmentalization is missing and commercial banks often overstretch themselves and provide medium and long-term finances. At times this leads to mismatch and cause liquidity crunch for the financial institutions.
Till recently mergers and acquisitions were not common and so was the need for financial advisors. However, lately the need for mergers and acquisitions became a necessity. In Pakistan, the largest number of mergers and acquisitions (M&A) has been made in pharmaceutical and banking sectors. Most of the M&A in the pharmaceutical sector was the result of global arrangements. As against this M&A in the banking sector was an indigenous phenomenon.
Similarly, the quantum of borrowing by the corporate entities used to be much smaller in the past and was mostly handled by one financial institution. With the increase in the size of borrowing the need for syndication also emerged. Such syndication first emerged in leasing sector and then became a norm in the banking sector. Another reason for the syndication, as stated above, was the mismatch duration of deposits and advances.
Some of the activities stated above require specialized skill and experts as well as institutions. Typically financial institutions, commonly called investment banks, perform most of these activities. In the 90s a large number of investment banks were incorporated in the country. Over the years accumulated losses of some of these became 'too big a load to carry' or were merged with banks, leasing companies, etc. Some even attained the status of commercial banks.
One may wonder why investment banks became 'endangered species' in Pakistan? The empirical evidence shows that a large number of investment banks were established in 90s, when the stock market was booming. One of the mistakes committed by most of the investment banks was that they invested the largest chunk of total investment in equities. As the equities market plunged so did the investment banks. The bearish spell continued for years and survival became too difficult. The good sponsors, many belonging to large groups kept their entities intact hoping that bearish spell would end soon.
One also wonders why investment banks took such an exposure in the equities market? According to an analyst, "when the stock was booming in 90s and IPOs were coming in a row investment banks not only minted money as financial advisors but earned phenomenal capital gains. As no one was ready to listen about the possible fallout investment banks also continued taking new as well as risky positions. As the stock market plunged suddenly and steeply investment banks could not take exit.
Around the same time leasing business was also growing fast, which prompted investment banks to venture into this area. Some of them were able to compete with leasing companies because of being part of some financially strong group, others continued despite having fierce competition. The bottom line is that in the absence of proper mandate or business propositions investment banks were ready to undertake any activity, which could yield a modest return.
Investment banks have learnt lesson after incurring huge losses. The weaker players have either taken an exit of venturing into other financial activities, ranging from financial advisory service to brokerage of equities. Option of issue of Term Finance Certificates (TFCs) was exercised by some corporates in the rising interest scenario. However, as the interest rates touched new lows corporates preferred not to exercise the option.
Some of the critics are of the opinion that Pakistan's business environment is not very conducive for the survival of the investment banks because most of the financial institutions were offering similar, if not identical services. However, many analysts are of the view that investment banks enjoy good business prospects because of Pakistan's fast growing economy and because of an enormous latent demand.
However, a lot depends on the mindset of Pakistani entrepreneurs. Ironically, the entrepreneurs are keen in selling shares of their companies to general public but are often shy in sharing profit. They skip paying dividend on one or the other context. According to an analyst a large number of listed companies post marginal profit and are not able to pay any dividend. However, sponsors of these ailing companies are filthy rich. One of the factors responsible for the prevailing situation is outrageous tax regime.
Another important factor is that the number of listed companies is on decline. It may be good omen because of increasing number of companies on the defaulters counter. Most of these companies have very small paid-up capital. According to a report, even if half of the small-cap listed companies are removed the listed capital would not go down by 5%. As against this listing of state-owned enterprises, which are not listed, the listed capital would rise significantly.
The government should also encourage takeover of companies. There are many ailing companies but the laws do not support their takeover by the enterprising entrepreneurs. Commercial banks, leasing companies and/or other financial institutions, which have lent money to these entities should facilitate acquisition and merger to save their loans becoming non-performing ones.