POTENTIAL OF CAPITAL MARKET IN PAKISTAN IS YET TO BE EXPLOITED
Oct 22 - 28, 2012
Capital market is an important barometer of the health of an economy and important component of the financial sector. Capital market is a vehicle whereby capital is deployed from sources where it is in excess to the sources where it is in short supply.
The capital market facilitates mobilisation and intermediation of private savings and allocation of medium and long-term financial resources for investment through a variety of debt and equity instruments of both private and public sectors.
However, true potential of capital market in Pakistan is yet to be exploited. Due to host of internal and external issues, capital market here has not grown as per its potential. Capital market here fails to mobilise domestic resources and channelize them efficiently to the most productive investments. An efficient capital market provides a wide-range of attractive opportunities for both the domestic and foreign investors. Capital markets, have, however, remained vastly occupied by a few families and their business groups in Pakistan.
The Securities and Exchange Commission of Pakistan (SECP) is introducing reforms to bring about revival of capital market within next two years and enhance financial literacy in the country, sources in the SECP said.
According to them, SECP is on the way to ensure establishment of fair, vibrant and inclusive market. The SECP has recently introduced several new schemes and was on way to introduce many others to create financial literacy among the people.
The sources maintained that the SECP intends to launch Invest Education Programme with the help of various stakeholders which is aimed at holding seminars, conferences, events and dissemination of literature to educate people, particularly the youth to enhance their financial literacy. The SECP has recently launched Takaful Insurance Rules that would enable the old companies to introduce Islamic financing.
The sources expressed the hope that Islamic Takaful would help enhance investment in the insurance which is as low as 0.7 percent. The SECP targets to enhance the overall insurance from the existing 0.7 percent to 1.2 percent during next three years, an increase of about 70 percent.
Financial experts told PAGE that the capital market in Pakistan had played a positive role in the development and expansion of the economy. Like other sectors of the economy, they said, the capital market has also done remarkably well, although there is a lot of room for further improvement.
They said although government has an important role to play in shaping the legal, institutional and business environment but major responsibility still rests with the corporate sector to achieve a higher level of corporate governance. They called upon the need to focus on achieving the highest standards of corporate governance, transparency and professionalism in order to strengthen investors' confidence.
They said that capital market provides the people with the investment opportunities and the companies to raise funds for expansion and development for further investments. They said that reforms introduced by the Security Exchange Commission of Pakistan (SECP) to provide transparency and better governance of the capital market needs to be recognized and appreciated, as it would provide solid foundations to attract more investors domestically and internationally. They said the SECP has been actively pursuing a capital market reform programme geared towards the development of a modern and efficient corporate sector and capital market, based on sound regulatory principles that provide impetus for high economic growth.
Elaborating, the experts said, today's ownership structure in the majority of the companies is mostly concentrated and closely held by business group and family-run businesses. It is quite evident that in the majority cases, the promoters or directors, through the 'associated companies' indirectly own the company shares. The family-owned companies have, therefore, controlling equity interests leading to insider control and concentrated ownership in such companies, they said, adding, "There are still over 60-percent companies which are controlled by the prominent business groups and families of Pakistan. These groups of companies include Nishat group, Gul Ahmed group, Crescent group, Sapphire group, Din group, Adam group, Dawood group, Younus Brothers group, Dewan group, Rupali group, etc.
Highlighting shortcomings of Pakistan's stock markets, they said low equity base, lack of dept in the market, pricing of equities, taxes on bourses and poor economic conditions of the country are major issues hindering growth of capital market. They said that Pakistan's limited industrial base reduces the choices available. The herd mentality in establishing industries has resulted in over-capacity in sugar, textiles, synthetic fiber and cement. The financial sector is affected with high percentage of non-performing assets and defaults in an environment where borrowers' quality, financial health and ability to repay is increasingly suspect. Though a number of public sector companies are listed, inefficient management and fear of government using their balance sheet for its own budgetary support keeps in investors away from these companies. On the other hand, they said heavy government borrowing to finance successive budget deficits has severely limited the availability of credit to the private sector for capital market investments. Even the pension funds, government securities and related funds have been used for borrowing by the government, they added.
They said the equity base in Pakistani companies has been very low ranging between 25% to 30% of the assets. Private limited companies avoid listing because of the following reasons:
- Historically, low cost debt was available from development finance institutions. The cost was further subsidised if the project was based on local machinery. This made debt extremely attractive and inhibited development of a large equity base.
- Most of the companies are owned by large industrial groups, many of whom have adequate capital at their disposal and do not need to apply to the general public for funds.
- The management of profitable family-owned entities avoids going public and share the benefits with the general public as well as open its operations to greater transparency that listing on the stock exchange requires.
In an efficient capital market, timely flow of information gives all participants a fair chance to share in the potential profits. However, there is no market in the world that enjoys absolute degree of efficiency. There is always some degree of inefficiency, which can be exploited by the insiders, and few well-informed at the expense of the participants. The ordinary investors in Pakistan are deprived of a level playing field. If we want growth of capital market in its true sense, not only fair and level playing field is a pre-requisite but national economy also needs to be strengthened.