Investment Banking

Article Summary

“Pakistan Capital Markets: Mobilizing for Growth”

Submitted To: Mr. Shahid Hameed

Submitted By: Moiz Damani

(Registration ID: 0935235)

Pakistan’s financial sector has been transformed completely from the past during the recent
years; which could more clearly be described as the “first generation of reforms”. Some
noteworthy factors to discuss are firstly, the mobile cash flow in the economies of region after
the East Asian crisis. Secondly, the change in the global financial flows of capital from the east
to the west, against the previous west to east scenario. This situation is mainly because of the
imbalances the US economy currently faces in the form of budget deficits. The situation
however, is remarkable since the US $1.7 trillion reserves are sufficient enough for the East
Asian economies to finance their economic needs, and also opens up new opportunities for
developing economies like Pakistan to find for itself, new capital flows to financing its needs
from what these countries have to offer. This could make a new beginning of financial flows
which the speaker this is beneficial for Pakistan in the long run.

Thirdly, the incorporation of the financial world and the yet though, the imbalances that
implicates as a result of the strong clan of the G8 countries and investments only in some parts of
the world, that has lead to capital deficient countries, with exposure to currency risks. This as a a
result has made some countries to tighten their monetary policies to make sure they are inline
with the financial stability for the long term.

With careful macroeconomic policies along with measures to deepen the financial markets and
institutions, along with framework of rules that nourishes the financial sector, Pakistan can
achieve its target of future prospects. Pakistan, with 5% average economic growth and with
private sector credit, although improved, but is not up to the mark with the Asian economies.
This shows that Pakistan is far behind from the competition when compared from Malaysia,
Singapore, Thailand and Korea in terms of dept of equity markets, bank assets and bonds
outstanding. Therefore, the market currently faces “lack of depth, breath, and maturity”.

However, with the new system and reforms such as the CDC and UIN in place, Pakistan is set to
cover all its problems. Privatization and consolidation of banks with strict abidance to the
Prudential Regulations, and the increased role of corporate governance, Pakistan has been
marked as just close to India in terms of finance and efficiency.

Considering the equity market, the lack price discovery mechanism with much speculation
taking place makes the market inefficient in terms of determining stock prices, which hurts small
investors that enter the market. The solution to this problem is to increase market depth and
breadth by IPOs much more frequent and vibrant with implementation of rules and regulations
that wipe of chances of risks.

Another aspect that has leaded to improve the image of Pakistani markets is the integration of
banking sector with capital markets. The approval of banks to open subsidiaries for brokerage
has lead to improvements in governance and systems and the way capital markets work.
Incorporation of the asset management companies and banks, in order to provide open-ended and
close-ended mutual fund benefits to small investors has also been helpful in designing a level
playing field for everyone and has also provided rights to small shareholders.

With integration of both in the developed markets, it is seen that the risk transferring and sharing
is much easier. It has also leaded to the creation of instruments such as derivatives and
securitization, which has been an important tool for financial leveraging.

Taking examples from the US, Europe and Chinese economies and banking practices, Pakistan
need to decide which option to go for, since it would be a important decision and a prerequisite
for economies of scale.

Lastly, the emergence of derivates market in Pakistani capital market is a step towards increasing
the depth and breadth of the economy of the country. The State Bank has allowed foreign
currency options, forward rate agreements and interest rate swaps which is slowly but surely
gearing itself in the market.

With the current scenario in place, Pakistan has tremendous growth opportunities by private
capital flow due to the savings trend and gathering that is in the region. Much also needs to be
done though in the form of expanding the capital market and the banking sector. In line with
Basel II accord, and much experience to understand from in terms of international market,
Pakistan should be able to decide the path that needs to be followed to form a framework of rules
that are important to liberalize the market effectively.