SHAMSUL GHANI (shams_ghani@hotmail.com)
Dec 28, 2009 - Jan 03, 20

Pakistan's financial sector performance during CY-09 was essentially influenced by the fag-end effects of two international factors: the extended process of globalization and the late-2007 outbreak of global financial crisis triggered by the collapse of US mortgage market. Until 2007, globalization appeared to have a beneficial influence on our economy when it used to grow at an average rate of seven per cent. Then surfaced the "long due" political intervention.

The destabilization process got further impetus from the negative changes on the world economic front and our burgeoning economy came down like a house of cards. Renewed and increased IMF dependence and a 40 percent rupee depreciation was all we got in the process.

Interestingly, the global financial crisis has its roots in the US agenda of globalization that was unfolded on the world economies to gain economic ascendancy through aggressive promotion of free market concept. Prior to Regan, most of the US presidents, particularly the Democrats, stuck to Keynesian economic theories that decreed that the over-supplied markets must correct themselves through price cuts to bolster demand and thus reach an equilibrium state. Regan era saw Milton Friedman school take the front seat. Friedman derided the idea of price cuts in over-supplied market situations. Rather he professed dumping of excess production in new - particularly developing - markets. This ushered into an era of economic hit men. This mutant specie of hit men would lure the developing economies to increase consumption and development with the help of expensive World Bank and IMF loans, which they will never be able to repay. The height of indiscretion was that the same policy of credit-based increased consumption was sold to the US citizens through subprime mortgages. Regan era is also known for the deregulation frenzy that allowed the US financial sector to develop dubious financial derivatives. Alan Greenspan, the former Fed chairman and a proponent of Friedman theories failed to see through the destructive powers of these derivatives and chose to look to the other side till such time the derivative market imploded.

Pakistan's financial sector, being totally banks-centric - the banking sector accounting for as much as 89 percent of financial sector market capitalization - escaped the domino effect owing to its banking sector's so-called strength. Unfortunately (or fortunately), this strength was acquired at the expense of bank depositors who were, and are still being, short changed. The banks have been enjoying for the last 6-7 years spread as high as 7 to 10 percent. Keeping aside the question of morality, one can say that the banks nearly managed to survive the global onslaught by virtue of their illegitimate profits. The lop sided structure of our financial sector has created a number of anomalies that threaten a financial breakdown during the course of some high powered boom-bust cycles. Mutual funds, Modarabas, Leasing and insurance, all are under-grown and thus under-performing financial sub-sectors.

Mutual funds are not allowed to be managed by independent fund managers. The conglomerate syndrome decrees that they be put on the back burner as the holding group has still more pressing business to perform, that is the operations of group's commercial and investment bank chain. Leasing companies are found ever struggling for infusion of fresh business funds that are extremely hard to come by. The rising interest rate era almost stymied this sector. Moreover, the banks also continued to undertake leasing operations. This placed leasing companies in a highly disadvantageous position as they were not able to raise enough cheap funds to compete with banks who were awash with excessive damn-cheap liquidity. The investment banks which are a form of mutual funds but lot more aggressive in nature were subjected to a severe test during CY-09. Their market capitalization touched the floor when stock exchange crashed but could not recover during the stock market recovery phase.

This sector recorded a negative growth of 29 percent in market capitalization during the period when Kse-100 index recovered from a low of 5865 to the present high of 9184. This betrays the excessive element of speculation present in the operations of investment banks. This is highly damaging to the very concept of investment.

Insurance was another financial sub-sector that recorded a negative growth during the stock recovery process. This sector, like mutual funds, Modaraba and leasing, remains under-developed. It has inherent linkages with the other financial sub-sectors. Banks generate business for this sector through inventory and asset insurance. Banks in league with the leasing and Modaraba sectors also generate motor insurance business. The recent motor leasing boom provided impetus to the insurance sector which inflated its bottom line through increased high-rate motor insurance business. The subsequent credit crunch triggered by liquidity crisis and SBP tight monetary stance dried the leasing business and hence the motor insurance business. In order for the insurance sector to flourish, it will have to broaden its base by enhancing its outreach both on life and non-life sides and by further developing of synergy with the banking sector through product innovation.


Financial sub-sector Market capitalization Dec-09 (Kse-100=9184)      
Weight percentage        
Market capitalization Dec-08 (Kse-100=5865)        
Market capitalization        
Y-o-Y % change        
Close end mutual funds 16,316 1.9 10,810 5,506
Modarabas 4,132 0.5 4,175 (43)
Leasing 5,610 0.7 5,375 235
Investment banks 67,585 8.0 95,210 (27,625)
Commercial banks 675,729 80.4 424,527 251,202
Insurance companies 71,190 8.5 93,430 (22,240)
Total 840,562 100.0 633,527 207,035

The CY-09 was marked as high interest rate period when the SBP policy rate tool was used to control inflation and contract credit and money supply. During the first quarter of CY-09 the interest rate remained at its peak that is 15 percent. A 100 bps cut was applied on 20 April 2009, followed by another cut of 100 bps on 17 August 2009. Finally a 50 bps cut was announced on 24 November 2009. The overall financial sector in this high rate scenario has managed to perform to the satisfaction of many. On stock market capitalization, it has recorded an aggregate positive growth of 32.7 percent against a Kse-100 index rise of 56.6 percent. Not so bad, one should say.