Federal Investment Bonds

Bonds are of three different maturity periods viz. three years, five years and ten years.
Short-term FIBs have also been issued.
Individuals, institutions and corporate bodies including banks, irrespective of their
residential status can purchase bonds. There is no quantitative limit on purchases.
Bonds are redeemable at par on completion of their respective maturity period. In case
cash is require before the maturity date of the bond, the investor may approach his banker
et his bonds converted into cash at the market price. In the manner, the government bonds
can be traded freely in the secondary market before their maturity date. Each bank is
required to display daily sale and purchase prices of bonds at their main branches in
major cities.
WAPDA, NDFC, BEL, PICIC, and some other firms have also issued non-government
corporate bonds and certificates. Trading is very limited. Investment banks which were
expected to play a major market-making role have not succeeded in doing so. Term
Finance Certificate (TFCs) has been issued by financial and manufacturing companies
from time to time. 62 TFCs instruments have been issued on the KSE during 1996-2003
(21 of these were issued in 2002-2003).
The secondary market is shallow and largely confined to the public debt sector. The
range of financial assets available is limited. The growth of the secondary market has
been restricted by the expansion of the national saving schemes (NSS), which are very
popular with the public. Rates of return in the secondary market are generally lower than
those offered by the national saving schemes although rates on these schemes have been
drastically reduced during 2000-2002. The growth of the secondary market is limited
bythe interventions of the government in the auctioning process to hold down interest
rates.
Such intervention has been reduced since 1997, when the autonomy of the state bank was
recognized through the amendment of the State Bank of Pakistan Act 1962.
About Rs.5 billion worth of TFCs were issued during 1995-2000. There was major
upsurge in 2002 but the secondary market in TFCs is very undeveloped. Pakistan
Investment Bond issues are significantly larger (exceeding Rs.100 billion in 2001-2002
for example). A secondary market has not developed in PIBs and PIBs are not regarded
as a capital market instrument. The public is not informed of what the government does
with the money raised through Pakistan Investment Bond issues.
((money and banking in Pakistan, fifth edition, SA Meenai, oxford university
press,2004))
Hindrances in development of Bond Market
• Fiscal and Trade Deficits
• Law and Order Problem
• Bad Governance, lack of accountability on the part of bureaucracy,
Public and Private Sector institutions.
• Ineffective Implementation of law and delay in adjudication
• Lack of market expertise
• Lack of awareness of new financial products
• Lack of infrastructure and automation
• Lack of stringent regulatory policies and their effective enforcement.
• Lack of self-policing system in the market.
• Lack of awareness of market ethical values.
• Political interference in the regulatory functions.
• Clear laws curtailing clear interpretations
• Inconsistent supply and small size issues of Government Bonds.• Corporate Bond
market being not cost effective due to stamp duties
levied by the issuance and time taking procedure for their approval.
• Non issuance of sovereign Sukuk.
• Transaction cost as stamps duties on Commercial Paper making them
non cost effective.
Opportunities ????
Action plan for development of Bond
Market of Pakistan
o Create depth in money and securities market to improve the
transmission channel of monetary policy. This would facilitate
investors/issuers to have better view of interest rate movements. This
includes introduction of SBP own instruments, review of monetary
policy execution framework to switch over to explicit interest rate
targeting, establishment of Market Stabilization Fund (an arrangement
in which government share the cost of monetary policy operations
with central bank), capacity building of DPCO, Projections of
Government Cash flows.
o Building up institutional and market microstructure for developing
Government securities market in Pakistan i.e. developing distribution
channel through market makers and dealers having expertise in
securities business.o Keeping consistent supply of large size long-term government
instruments for creating liquidity and proper yield curve. To achieve
this goal, reopening, stripping and fundability need to be allowed
o Timely market information to he issuers as well to investor through
data dissemination.
o Diversifying the investor base. The steps include development of
Asset Management Firms/Mutual Funds/Discount Houses to diversify
investor base through legislative support.
o Containing crowding-out effect through reducing deficit financing for
developing Corporate Bond Market.
o Creating appetite for bond market by supporting Islamic Fund
Industry, Mortgage and Infrastructure Finance initiatives.
o Building Bench mark curves i.e. Revaluation, Clean, IRS, zero
coupon curves.
o Aligning Sub National/local Governments/Public Sector requirements
with Government Bond Market by providing them same
infrastructure.
o Reducing fees/Stamp duties on Corporate Bonds/Commercial papers
to make them cost effective.
o Allowing Supranational Bonds in Pakistan to create liquidity in
Corporate Bonds Market and to have best international practices
through their presence.
o Attracting non-resident investors by providing them better
opportunities to have positive yields by extending some concessions
like tax exemptions.o New legislation aligned with current environment for Government
as
well Corporate Securities Market.
o Creating tax base on equity providing level playing field to all
investors.
o Allowing international depositories linked with domestic depositors
for facilitating international investors to invest in Pakistan.
o Establishing cross border settlement mechanism. This would reduce
cost of doing business in own and with others markets.
o Developing Derivatives market for facilitating investors/issuers to
hedge the risks on their portfolios.
o Developing Bond Market in sequenced manner i.e. from simple to
complex instruments/infrastructure.
o For developing above Government as well regulators (central bank
and securities commission) to work together in devising policies and
than coordination in their implementation process.