Vibrant Financial Services Sector in Pakistan

[Riaz Haq]

Pakistan has been ranked 34 out of 52 countries in the World Economic Forum's first Financial Development Report, which was released in Pakistan through the Competitiveness Support Fund (CSF) in December, 2008.

The report is a comprehensive analysis of financial systems and capital markets in 52 countries that explores key drivers of financial system development and economic growth in developing and developed countries and serves as a tool by which countries can benchmark themselves and establish priorities for financial system improvement.

Arthur Bayhan, Chief Executive of the Competitiveness Support, told the media: "I am very happy to see that financial system in Pakistan is well reformed and competitive vis-à-vis Asia and Europe. Pakistan is ranked ahead of the Russian Federation (35), Indonesia (38), Turkey (39), Poland (41), Brazil (40), Philippines (48) and Kazakhstan (45)."

The United States narrowly edged the United Kingdom to take the top position in the Financial Development Index. The United Kingdom was second while China ranked 24 and India 31.

The Financial Development Index is based on three main pillars - Factors, Policies and Institutions, Financial Intermediation and Capital Availability and Access. These are further divided into sub - pillars.

Under Factors, Policies and Institutions pillar, Pakistan ranks 49th in institutional environment, 50th in business environment and 37th in Financial Stability. In the Financial Intermediation Pillar Pakistan ranks 25th in banks, 42nd in non banks and 17th in Financial Markets. Under Capital Availability and Access, Pakistan ranks 33rd.

Indicators showed that in business environment Pakistan had development advantage in Cost to Export, ranking 6th, Cost of closing business 5th.

In Financial Stability Change in Real Effective Exchange rate ranked 20th, External debt to GDP 10th, Frequency of banking crises 1st, stability index 15th.

In corporate governance Pakistan ranked at the very top in shareholder rights index, 14th in strength of investor protection.

In the Non banks pillar, Pakistan ranked 9th in the Real growth of direct insurance premiums. In equity market movement Pakistan ranked at the top again in equity market turnover.

Importance of Financial Services Sector:

Banks are often described as a nation's economic engine, in part because they provide financial intermediation functions between savers/investors who are looking for safety and growth and consumers/businesses who are looking for access to credit and capital.Banks also play a major role as instruments of the government's monetary policy aimed at regulating interest rates and money supply in the economy. The current economic crisis in the United States and Europe, marked by the ongoing weakness of major banks and the resulting credit and capital crunch, underlines the critical importance of the banking sector in national and global economies. Recognizing the crucial importance of the financial sector in global economic recovery, the Obama administration is allocating the bulk of the stimulus money to restore the health of major U.S. banks.

Banking in Pakistan:

Between 2002 and 2007, Pakistan's accelerated economic growth was underpinned by a strong banking sector. Classified as Pakistan’s and region’s best performing sector, the banking industry’s assets rose to over $60 billion, its profitability remains high, non-performing loans (NPLs) are low, credit is fairly diversified and bank-wide system risks are well-contained. Almost 81% of banking assets are in private hands. Likewise, the present foreign stake comes to 47% of total paid-up capital of all the financial institutions regulated by Pakistan's central bank, the State Bank of Pakistan.

Pakistan's foreign reserves hit a record high of $16.5 billion in October 2007 but fell to $6.6 billion in November, largely because of a soaring import bill. As the commodity prices rose and inflation in Pakistan reached near 25%, the State Bank of Pakistan was forced to raise its discount rates to as high as 15%. However, there has been a dramatic decline in the cost of imports such as oil during the last few months, spelling relief for Pakistan and other non-OPEC developing nations. The price of oil has dropped to about a quarter of what it was last summer.

Pakistan signed a $7.6 billion loan agreement with the International Monetary Fund in November to stave off a balance of payments crisis. It received its first tranche of $3.1 billion that month. In its first assessment since November, IMF has expressed satisfaction with Pakistan's progress. “Initial developments under the program have been positive,” IMF spokesman David Hawley told a regular news briefing, according to Pakistan's Dawn newspaper. “The foreign exchange rate has appreciated somewhat and preliminary information suggests that end-December targets for net international reserves and net domestic assets at the State Bank of Pakistan were met,” he added.

Pakistan's economy deteriorated sharply over the course of 2008, as inflation surged, and the current account deficits jumped on the back of rising oil and food prices, according to a World Bank report.

The report titled ‘Global Economic Prospects 2009’ says political turmoil and ongoing security concerns have also taken a toll on Pakistan’s economy, while the global financial crisis added substantial downward pressures on its financial markets. Pakistan and the International Monetary Fund agreed to lower the target for the gross domestic growth this fiscal year to 2.5 per cent from 3.5 per cent but many analysts said even achieving this target would be very ambitious.

The general deterioration in regional trade balances has been offset by large remittance inflows, which represent a sizable, and generally increasing share of GDP: during 2007, 14 per cent in Nepal, 8 per cent in Bangladesh and Sri Lanka, 4 per cent in Pakistan, and 3 per cent in India.

Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis are expected to be temporary. A relatively rapid rebound is expected in 2010, with a projected revival of GDP growth to 7.2 per cent.

During 2001-2007, former Prime Minister Shaukat Aziz, a banker by training and extensive experience in New York, understood the role of banking, finance, investment and consumer credit in economic growth of a nation. He focused on building strong banking, investment and finance sectors in Pakistan to underpin its economy. He strengthened capital availability, an essential and increasingly important economic input, in addition to labor and land improvements. With higher education budget up 15-fold and overall education spending up 36% in two years, he focused on education to improve the availability of skilled labor to fill new jobs. He pushed land development and public and private construction spending to improve infrastructure and facilities to attract greater business investment and create jobs. Mr. Aziz was largely successful in his efforts.

In general, there are primarily two types of banks in Pakistan: Commercial Banks and Investment Banks. Both types of banks provide financial services essential for Pakistan's economy to function and grow.

Commercial Banks:

Commercial Banks are privately-owned institutions that, generally, accept deposits and make loans. Deposits are money people entrust to an institution with the understanding that they can get it back at any time or at an agreed-upon future date. A loan is money let out to a borrower to be generally paid back with interest. This action of taking deposits and making loans is called financial intermediation. A bank's business, however, does not end there.

Most people and businesses pay their bills with bank checking accounts, placing banks at the center of our payments system. Banks are the major source of consumer loans -- loans for cars, houses, education -- as well as main lenders to businesses, especially small businesses. When banks are strong and the credit flows, it helps the overall economic growth. When banks are in crisis, the impact on business and consumers multiplies the weakness in the economy.

Following is an incomplete list of commercial banks in Pakistan:

* Allied Bank of Pakistan, Karachi
* Arif Habib Bank Limited, Karachi - (Formerly Arif Habib Rupali Bank)
* Askari Bank, Rawalpindi
* Atlas Bank, Karachi
* Bank AL Habib, Karachi
* Bank Alfalah, Karachi
* Crescent Commercial Bank, Karachi.
* Faysal Bank, Karachi www.faysalbank.com
* Habib Bank, Karachi
* Habib Metropolitan Bank, Karachi
* JS Bank
* KASB Bank, Karachi
* MCB Bank Limited (formerly Muslim Commercial Bank), Islamabad
* Mybank Limited, Karachi
* NIB Bank, Karachi
* PICIC Commercial Bank, Karachi
* Saudi Pak Non-Commercial Bank, Karachi
* Soneri Bank, Karachi
* Union Bank, Karachi - Standard Chartered Bank has acquired Union Bank
* United Bank, Karachi
* Bank Of Punjab, Lahore
* Citi bank,Islamabad
* Standard chartered Bank Ltd,Karachi
* ABN Amro Bank Ltd,Karachi Now merged in RBS (Royal Bank of Scotland)
* HSBC Ltd,Lahore


Investment Banks:

Investment banks provide four primary types of services: raising capital (private equity or public offerings of shares), advising in mergers and acquisitions, executing securities sales and trading, and performing general advisory services. Most of the major Wall Street firms are active in each of these categories. Smaller investment banks may specialize in two or three of these categories.

The list of investment banks in Pakistan includes the following:

* Al-Towfeek Investment Bank Limited
* Invest Capital Investment Bank Limited
* Atlas Investment Bank Limited
* Crescent Investment Bank Limited
* Escorts Investment Bank Limited
* First Credit and Investment Bank Limited
* First International Investment Bank Limited
* Fidelity Investment Bank Limited
* Franklin Investment Bank Limited
* Islamic Investment Bank Limited
* Jahangir Siddiqui Investment Bank Limited
* AMZ Securities
* Orix Investment Bank (Pakistan) Limited
* Prudential Investment Bank Limited
* Trust Investment Bank Limited

Finance Expo 2009:

Finance Expo Pakistan 2009 Exhibition was held last week in Karachi to showcase the most competent, dynamically growing and innovative companies that demonstrate the latest financial systems and methods stimulating the development of the banking and finance industry.

The Expo was an opportunity to network with decision makers, economists and experts of Banks, Takaful, Modaraba, Insurance Companies, Asset Management Companies, Stock Exchanges, Security Companies, Financial Education Institutes, & Leasing Companies and also of the fast growing industries like IT & Telecom, Oil & Gas, Alternative Energy & Power Industries, Agriculture, Pharma, Textile, Builders & Developers, Auto as well as Media.

The event is a platform for banking and financial institutions to come together and share ideas and the challenges presented to this rapidly growing industry.

The exhibition and conference highlighted the value that banking, financial institutions and other revenue generating industries bring to boost the economy of Pakistan. Moreover, the Event presents opportunities for displaying products, services and solutions towards the potential buyers.

Summary:

In spite of the international economic crisis, continuing political turmoil and rising militancy in Pakistan, the financial services sector has held up fairly well in the last year. Its future, however, remains tied to a measure political stability in the country that allows economic activity to occur unhindered. Let's hope the nation's political and ruling elites can find a way to find a peaceful way forward.


Related Links:

Introduction to Banking and Economy

Introduction to Investment Banking

Pakistan's Banking Reform

[Riaz Haq]

Former British foreign secretary David Miliband joins Pakistan private equity fund as advisor, according to Express Tribune:

In what appears to be a coup for the fledgling Pakistani private equity industry, Indus Basin Holdings has managed to get Britain’s former foreign secretary David Miliband on board as a senior adviser.

“We are delighted to be able to bring on board the expertise of Miliband who knows the region and its challenges well,” said Indus Basin founder and CEO Aamer Sarfraz, according to a press release issued by Miliband’s office. “He shares our conviction that investment in Pakistan’s agricultural sector can have substantial long-term impact on the country’s poorest farming communities.”

“I am delighted to be advising Indus Basin Holding, a company that is investing in Pakistan’s future at a time of such fundamental importance,” said Miliband in a press statement. “I care deeply about Pakistan, the development of its economy and its future in the wider region. IBH is committed to developing an agricultural sector which has huge potential, but currently lacks investment. I look forward to working with IBH in building support and investment in Pakistan’s agricultural capacity and productivity.”

Officials at the company say they had been trying for the past year and a half to secure the contract with Miliband, who served as Britain’s foreign secretary between 2007 and 2010. He also served as Britain’s secretary of state for the environment, food and rural affairs previously.
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Indus Basin Holdings is only a relatively recent entrant into Pakistan’s nascent private equity and venture capital space but already began to attract a lot of attention for the kinds of big-name investors it was able to attract in its fund, which is focused on capitalising on opportunities presented by raising productivity levels in Pakistani agriculture.

The company’s investors include Tim Draper, the famous American venture capitalist known for being an early investor in Skype and Hotmail, and Baron Lorne Thyssen-Bornemisza, a Swiss aristocrat whose family owns the ThyssenKrupp, a German technology conglomerate with over 670 subsidiaries and 200,000 employees worldwide.

Indus Basin’s investments currently include Agroventures, a Faisalabad-based breakfast cereal manufacturer, and Rice Partners, a company that is focused on contract farming and marketing Pakistani rice directly to North American and European retailers.

http://tribune.com.pk/story/324941/high-connections-david-miliband-...

[Riaz Haq]

Here's a Daily Times report on State Bank of Pakistan's National Financial Literacy Program:

...Pakistan’s first-ever NFLP has been launched with the support and collaboration of Asian Development Bank (ADB), Pakistan Banks’ Association (PBA), Pakistan Microfinance Network (PMN), Pakistan Poverty Alleviation Fund (PPAF) and Bearing Point.

He said the programme has been developed after the Financial Literacy Gap Assessment Survey of beneficiaries. The survey has been helpful in development and adaptation of curriculum and dissemination strategy. The curriculum will also be translated into national and main regional languages including Urdu, Sindhi, Punjabi, Pushto and Balochi, he added.

The SBP governor said that the programme is financed under the ADB-funded Improving Access to Financial Services Fund (IAFSF) and implemented under the oversight of the IAFSF committee, which has representation from SBP, PBA, PPAF, PMN, education sector, and the ADB. Upon completion of the pilot phase, an impact assessment of the pilot will be conducted by a third party, he said, adding that based on the experience and assessment of the pilot, the programme will be scaled-up to target more than half a million beneficiaries all over the country.

Anwar said that in addition to focused training sessions of beneficiaries, the dissemination strategy involves street theatres, board games, comic strips, activity-based competitions, website and media campaigns to reach out to the masses on a larger scale. The training sessions will be sourced from banks, Microfinance Banks (MFBs) and Microfinance Institutions (MFIs) based on their interest and pre-defined qualification criteria, he said and added that in order to encourage and incentivise participation from partners, professional fees and out of pocket expenses of partners will be reimbursed from the programme budget.

Besides involvement of local institutions, the project has formed international partnerships with international financial education programmes including Microfinance Opportunities, Finmark Trust, Association of Microfinance Institutions of Uganda (AMFIU), Sewa Bank, Microfinance Innovation Centre for Resource and Alternatives (MICRA), World Bank Institute, Aflatoun, and others, Anwar added.

The SBP governor said that consumer protection and financial education should be vital components of any financial inclusion initiative. It is now clear that policies, which focus entirely on changing the supply of financial products and services can leave consumers ill-informed, vulnerable and not willing to participate in financial markets, he said, adding that focus of financial literacy programme should be broader than financial inclusion.
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He briefly touched upon various conventional and non-conventional measures adopted by SBP to boost financial inclusion.

SBP introduced Basic Banking Account (BBA), a simplified financial product for low income consumers.

SBP introduced Microfinance Banking Regulations in 2001 to specifically meet the demands of low income consumers.

SBP has adopted innovative solutions to overcome geographical barriers, including branchless banking through retail agents and harnessing technology via mobile-phone banking.

SBP has been managing various market interventions funded by donor agencies:

- The Institutional Strengthening Fund providing grant funding to microfinance providers to top and middle tier MFBs and MFIs for key investments in HR, IT, product development, risk management systems, business plans and branchless banking development.

- The Microfinance Credit Guarantee Facility to link microfinance with financial markets for mobilization of wholesale commercial funding through partial guarantees..

[Riaz Haq]

Here's Peninsula Qatar report on Pakistani banks: The political situation in Pakistan has left local banks with fewer or no avenues to invest except in government treasury bills, a senior official of Pakistan’s second largest bank, United Bank Ltd (UBL), told The Peninsula here yesterday.

Keeping in view the political and economic conditions, Pakistani banks are very much risk-averse. They continue to prefer financing fiscal deficit instead of searching for new investment avenues, taking risks and building partnerships to facilitate credit to the private sector.

Atif R Bokhari, President and CEO of UBL, who was here to open a new branch of the Bank in West Bay, said: “Financing fiscal deficit is not by our choice; this phenomenon is because of the circumstances and environment. After 2007 onwards, economic activities slowed down in Pakistan. If there is no investment by the entrepreneurs, banks are not into the business of setting up their own projects. We need to partner with the local investors. If they are shy of investing in the country at the current situation, obviously there will be no demand for the private sector credit.

Government’s support pricing policy for wheat, cotton and sugar has created immense wealth in the agricultural sector in the last four years. A lot of money has gone into the agricultural sector from the manufacturing area, and agriculture is not known for investment and manufacturing. So due to deposit creation, there are no avenues for investment by the banks other than government T-bills.

“We are in the business of project, corporate and consumer finance. Once things take shape and investment starts coming in, we would not like to buy just T-bills”, added he.

Bokhari admitted that the banks are now risk-averse due to shortage of gas and electricity in the country which is essential to support a vibrant manufacturing sector. Fundamentally these are the issues which are prompting the banks to become risk-averse.

He said he anticipates an improvement in the situation after the general election which is due by the end of 2012 or early next year.

Pakistan is struggling with a number of major issues and one of them is the shortage of power for industrial use. The shortage is 4000 to 5000MW.

The current installed capacity in the country can actually meet the power requirements. But the vicious debt cycle has forced the government to close down some of the less economical power plants.

“Banks and entrepreneurs in Pakistan are realizing that there is no place in the world to hide today. Even if you take the money to the US or Europe, you don’t know what is going to happen. So it’s better to invest in something which you are familiar with and have more control over”, he added.

He further said that the US economy is gradually stabilizing, so there is no fear of double digit recession in the world’s largest economy; secondly, if the Shale Gas in the US materializes, that may bring oil prices down further to enhance global economic output in general and US in particular.

In addition, the equity markets are also recovering; especially the Dow Jones has done remarkably well over the last 18 months. So a lot of money is expected to flow in the US economy, Bokhari added.

http://www.thepeninsulaqatar.com/business-news/194283-pakistani-ban...

[Riaz Haq]

Here's Newsweek Pakistan interview with Steve Bertamini, CEO of Standard Charter Bank:

RBS has left, HSBC is leaving, Citibank has scaled down its presence. As CEO of Standard Chartered bank’s consumer banking division, how do you see the Pakistani market?

The economy is very tough in terms of inflation and interest rates. It’s probably going to take two to three years before the environment materially improves; but having said that, you’re seeing again most large banks doing well in this environment. GDP is continuing to grow, and foreign remittances coming into the country are healthy. These are good trends. Even if the economy grows at only 5 or 6 percent, that’s still much better than economies in the West. Sometimes you lose sight of the fact that things may seem tough but, on a relative basis, you’re still much better off than many.

Other international banks didn’t feel the same way.

Most international banks have a relatively small share of the Pakistani market. We’re something like 7 or 8 percent, and all the other guys are 3 percent. As domestic pressure increases banks will reduce their exposure in either noncore markets or markets outside of their main geography. Pakistan isn’t the only place we’re seeing reduced foreign competition, though we’ve also seen this tends to be cyclical. So whether it’s three or five years from now, all of a sudden when everything’s okay at home again and the balance sheet’s been sorted, you’ll see an influx again, very aggressive pricing, other measures to stabilize the market, people will get in, and life will go on. You should also see this as a cycle, not as a fundamental shift that all of a sudden there’s no interest. Provided Pakistan continues to improve its infrastructure and creates the right environment, foreign investment will come in because you have a large population. The demographics are going in the right direction. There are going to be bumps along the road but this is how these markets move and develop.

How’s your Islamic banking division faring?

We’re seeing a lot of growth in Pakistan. It is a real positive sign to our customers that there’s a commitment from us not only to the country—we’ll have been here 150 years next year—but also to a particular way of banking. However, what we do tends to appeal more to the moderate population. The larger part of the market is actually moderates. We’re more geared toward high value, tech-savvy customers, so I think we can carve a very nice niche.

How do you see technology changing the way we bank in Pakistan?

There is an increasing shift to digital channels. I don’t think that means that the traditional branch goes away but that what the branch does changes. Transactions are shifting and will continue to shift very quickly to digital channels, in some cases primarily to mobile phones because the Internet doesn’t make a lot of sense either because of bandwidth issues or installation costs. Right now you can do increasingly more [digitally], but it’s still just simple transactions. We’re going to see a shift to digital but that’s a complementary channel as opposed to a competing channel. After the financial crisis it’s become clear that there is limited appetite by regulators to allow new people into banking. They’re really focused on ensuring that the banks that are around are sound and well-capitalized. You’re going to see new media companies looking for partnerships with banks as opposed to necessarily being direct competitors.

How has the South Asian consumer banking market changed over the last 10 years?

The competitive gap between foreign and domestic players is now very close. Customers are increasingly more educated, they’re smarter, and they know what they want.

http://newsweekpakistan.com/scope/1389

[Riaz Haq]

Here's a PakistanToday story on the impact of wide rate spreads between deposits and loans in Pakistan:

The government should reduce the high banking spread and bring down the mark up rates to encourage savings, investment and easy credit facility for growth of business activities.
This was stated by Islamabad Chamber of Commerce and Industry (ICCI), President, Yassar Sakhi Butt in a statement issued here on Saturday. He said high banking spread in Pakistan is one of the major causes of low savings, dwindling investment and sluggish business growth in Pakistan.
He said that banking spread in Pakistan was more than 7 percent which was one of the highest while it was 3 percent in USA, 1.7 percent in Japan, 4 percent in India, 4.4 percent in Sir Lanka and 5.5 percent in Nepal and demanded that the State Bank of Pakistan must direct commercial banks to narrow down the gap between lending and deposit rates for providing better returns to the depositors and encouraging savings.
ICCI President said that the banking sector was earning significant mark-up income on the basis of high spreads and high interest rates, which was not a wise approach to facilitate the growth of private sector in the country. He said that banks should reinvest the depositor’s money in private sector's development and business activities rather than investing it in zero risk government securities.
Yassar Sakhi Butt said that the high interest rate was pushing up cost of doing business in Pakistan and was also discouraging new investment as investors are very sensitive to the movement in interest rates. In such circumstances, the increased cost of production would make our products more uncompetitive both in national and international markets, he maintained.
He said that Pakistan was witnessing a sharp decline in private sector investment and it was the high time that SBP should change its tight monetary policy approach and reduce key policy discount rate to encourage the private sector investment and growth of business activities.
ICCI President also criticised the heavy borrowing approach of the Government from the banking sector, which was crowding out the private sector from credit facility. He stressed that instead of resorting to heavy borrowing from banks to reduce fiscal deficit, Government should take measures to expand the tax base by bringing untaxed sectors of economy into the tax net, which was the right approach to generate more revenue and overcome the fiscal deficit.

http://www.pakistantoday.com.pk/2012/07/15/news/profit/icci-suggest...

[Riaz Haq]

Here's an ET story on electronic money order launch in Pakistan:

Pakistan Post has launched an Electronic Money Order (EMO) service at seventeen centres in ten districts of the country on Monday. The service has been initiated with an investment of Rs500 million in a centralised software system, without taking the network of competitors doing business in this field into account, The Express Tribune has learnt.

Out of total funds, Pakistan Post has provided Rs100 million to vendor Telconet, who has installed the system and will supervise it, an official said.

Although the service has been initially launched at seventeen locations in 10 different cities, the investment on the system is difficult to justify, the official added. Service charges are comparatively low, as compared to the Easypaisa and UBL Omni services, but the network offered by Pakistan Post cannot beat that offered by its competitors, he maintained.

For a transfer of Rs10,000, Pakistan Post’s charges are Rs160 less than charges received by competitors, the official added. The whole service, he claimed, is based on the very innocent assumption that the customer considers only service charges, while ignoring the time factor and load on the system. “It seems that no cost-benefit analysis has been carried out, and that the lower prices will only translate into lost revenue. The service should have been competitive in all respects: including service charges, availability of service, available timings and the quality of service,” he added.

Easypaisa is currently providing a similar service at 52 branches of the Tameer Bank, 100 walk-in centres, 750 Telenor franchises, and 10,500 merchants countrywide; while UBL Omni is also providing a similar service at more than 600 locations in the country.

“If I have to collect, say, Rs10,000 from the Lahore General Post Office (GPO), I’ll have to travel more than an hour – all the way from Wapda town to Mall road – and spend nearly Rs200 worth of fuel. I would rather prefer to collect this amount at a point nearest to me, saving both time and money,” Muhammad Imran a customer at the Lahore GPO, told The Express Tribune.

Another point to consider is the system itself, and the marketing strategy employed. The Easypaisa system utilises the cell phone network. All Easypaisa merchants and service centres use mobile phones to carry out a transaction, whereas the system available to the Pakistan Post is based on desktop computers and a virtual private network system. This equipment requires uninterrupted power supply, a difficult-to-meet requirement in times of heavy load-shedding.

http://tribune.com.pk/story/434461/up-and-coming-google-pakistan-ea...

[Riaz Haq]

Here's a news story about plans to build commodity storage facilities for mercantile exchange in Pakistan:

Pakistan Mercantile Exchange (PMEX) is planning to establish Pakistan Collateral Management Company for providing storage facilities for futures trading of commodities in Pakistan. Faisal Malik, Business head of agricultural products, PMEX here on Monday explained investment opportunities and benefits of agricultural commodities futures trading at the PMEX to brokers and general investors.

In this regard, a seminar was conducted by Pakistan Mercantile Exchange (PMEX) at Islamabad Stock Exchange Limited (ISE) on 'Agricultural commodities trading in Pakistan for the commodity traders and general investors'. This seminar was a part of a series of trainings started earlier with special focus on educating the traders and general public about the new deliverable agricultural commodities introduced by PMEX. Basic purpose of these products is to route the investments through regularised Exchanges which is a proper channel and will help in best price discovery of the agri-commodities in Pakistan and also helps in strengthening the economy.

Explaining the basic concepts, he said that the futures contract is an agreement between two parties entered on the floor of the exchange to buy or sell a commodity at a certain time in the future for a certain price. He said that the futures contracts can be useful when marketing grain or livestock because they can be a temporary substitute for an intended transaction in the cash market that will occur at a later date. In the absence of a proper risk-management tool, banks are reluctant to fund farmers. If they do, the interest rates are very high. The availability of futures markets and hedging facilities reduces the risk perception, and banks are willing to provide easy credit to farmers.

Faisal Malik highlighted that a number numbers of products in pipeline for futures trade on international commodities in gold, silver, crude oil, palm olien and futures on domestic commodities to be available in Rice IRRI-6, sugar, wheat and in financial futures to include Karachi InterBank Offered Rate (KIBOR) futures. Other products in futures pipeline are international cotton futures, currency futures, T-Bill futures, domestic cotton futures, maize futures, cottonseed oilcake futures, copper, steel futures and futures on refined petroleum products.
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The "Big" challenges faced by the commodities market, he explained as market awareness, documentation of economy, competition with unregulated trading houses/exchanges, he stated. He further informed that a large number of commodity trading houses commonly known as Forex houses are operating across Pakistan. Even a conservative estimate suggests that their trading volumes are much higher than the combined volume of PMEX and Karachi Stock Exchange (KSE).

A large group of people have attended the session and have shown keen interest entrust in commodity trading. Mian Ayyaz Afzal, Managing Director, ISE appreciate the efforts of PMEX in creating awareness among the general public. He emphasised that there is a dire need to promote saving culture in the country and as an agricultural based country our economy needs such exchanges to regularise the trade of Agri-commodities.

http://www.brecorder.com/top-stories/0/1237990/

[Riaz Haq]

Here's a Wall Street Journal piece on health care in Pakistan:

Given the absence of comprehensive public health-care services, a largely unregulated private sector, with hugely disparate services and prices, has sprung up to fill the void. But currently only 0.8% of Pakistan's GDP is allocated to insurance products, including health insurance, according to the country's insurance regulator. Poor patients often end up taking out loans and falling into debt to pay for private-sector services.

To address such needs, Asher Hasan set up Naya Jeevan—"new life" in Urdu—a nonprofit micro-insurance program for the urban poor.

"Everyone should have access to quality health care irrespective of their level of income," said Dr. Hasan, who grew up between Karachi and the U.K. and then moved to the U.S. to study medicine.

Naya Jeevan, one of 12 finalists in The Wall Street Journal's Asian Innovation Awards, offers an insurance program at subsidized rates under a national group health-insurance model. It tied up with large multinational corporations and local companies to offer subsidized health-insurance plans for their low-income and contractual employees as well as the employees' domestic helpers, who are often poor.

Dr. Hasan's sales pitch to these companies was that health is a right and this is a way for the companies to help their low-income employees. For their domestic staff his pitch was: If a maid or a baby sitter of an executive fell ill, it would disrupt that executive's productivity in the office for as long as it took for the problem to be resolved.

But the program is under scrutiny from the country's insurance regulator, which comes under the jurisdiction of the Securities and Exchange Commission of Pakistan.

Mohammed Asif Arif, the insurance division commissioner at the SECP, said that Naya Jeevan is in violation of the country's insurance laws because it isn't registered as a broker and can't legally offer these products. The regulator issued a notice in September to insurance companies reminding them that it is illegal to sell insurance to unregistered entities. (Naya Jeevan buys insurance in bulk at discounted rates from several insurance companies.)

Mr. Asif Arif said his agency would allow Naya Jeevan time to comply with the rules, without offering a specific deadline.
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Dr. Hasan started Naya Jeevan with $75,000 that he won in 2008 in a New York University Social Entrepreneurship competition. Since then he has received funding from the International Labor Organization, USAID, the Asia Foundation, Google/Tides Foundation and J.P. Morgan Chase JPM +0.36% .

Naya Jeevan has locked in subsidized rates with a handful of Pakistani insurance companies. Under the agreements, it costs a company $1.50 a month per employee to enroll its lower-income employees and home helpers such as janitors, drivers and maids. Of this amount, at least 80% is typically covered by the company and the rest by the employee who is being covered. These employees also can enroll their families in the insurance program, at an additional monthly cost to them of up to $1.50 a person.

If a claim exceeds the amount of an individual policy, the balance of the cost is paid for by the individual's corporate employer. Naya Jeevan says 17,000 people are enrolled in its program.
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"One of the issues in society is that when you send in a low-income person to a gleaming fancy hospital, they may not get treated properly," even though their treatment is covered by the insurance program, Dr. Hasan said. To prevent that, Naya Jeevan works with doctors who can liaise with hospitals on behalf of their patients.

http://online.wsj.com/article/SB10001424052970204846304578090713421...

[Riaz Haq]

Here's an ET report on the start of index futures trading in Karachi:

KARACHI: AKD Securities CEO Farid Alam struck the gong on Friday at the Karachi Stock Exchange (KSE) to mark the commencement of market making in Stock Index Futures Contract (SIFC).

As an index-based contract with its price resting on a pre-determined contract multiplier, the SIFC aims to provide investors with an opportunity to “mimic returns on the KSE-30 Index,” according to Alam, whose company will act as the market maker for the SIFC.

Therefore, the SIFC is designed to provide a hedge for individual investors and institutions to take counter-balancing positions while offering basket exposure to index stocks.

“Global fund managers are becoming increasingly aware of the potential that Pakistan’s capital markets offer, which makes the SIFC more valuable,” Alam said.

Stock index futures – designed to link the stock market with the futures market – were first introduced in 1980 on the New York Stock Exchange (NYSE).

They are a typical example of a derivative – a financial instrument widely blamed for causing the 2008 global financial crisis, which can be defined as a security whose price depends on, or derived from, one or more underlying assets.

The Securities and Exchange Commission of Pakistan (SECP) allows mutual funds to use derivatives for hedging against their risks. Therefore, an index-based mutual fund duplicates the holdings of the underlying index. This means that if the underlying index increases by 5%, for example, the SIFC on that index will also rise by 5% for that mutual fund.

Speaking on the occasion, KSE Managing Director Nadeem Naqvi said stock index futures were introduced on the Bombay Stock Exchange in June 2000.

He added that their activity remained weak until 21 market makers started working in May 2002, as daily trading volumes increased seven times in one year.

Market crash?

Naqvi said many people feared a stock market crash – like the one experienced in 2008 – in view of the KSE’s over-the-top performance in the recent past. Saying that such a crash was highly unlikely, Naqvi noted that market capitalisation was roughly 45% of the country’s gross domestic product (GDP) when the stock market crashed in 2008.

“It’s true that the KSE-100 Index is at a historic high these days, but if you see market capitalisation as a percentage of the GDP, it’s nowhere near the level of 2008,” he said.

Pakistan’s GDP in 2011 was $211 billion. According to the KSE, market capitalisation as of November 13, 2012, was $42.3 billion, which makes it roughly 20% of the 2011 GDP. “I believe the market has a lot of potential to expand and the SIFC is going to help it grow,” Naqvi said.

http://tribune.com.pk/story/466899/market-making-starts-in-stock-in...

[Riaz Haq]

Here's a BR report on Pakistani central bank's strategy for strengthening financial services industry:

The Governor, State Bank of Pakistan (SBP), Yaseen Anwar, has outlined the Central Bank's 10-point banking strategy for the growth of the financial system in the country.

This strategy focuses on implementing a financial inclusion programme for underserved economic sectors of the country, to strengthen consumer protection through legislation and codes of conduct and strengthen competition and efficiency with greater transparency as well as to consolidate the banking sector's corporate governance and risk management practices.

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He said the State Bank's constant monitoring of the banking sector's portfolio has meant that today our banks are profitable, extremely healthy and robust.
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Yaseen Anwar said the World Bank, and renowned publications, the Financial Times and The Economist, have recognized the State Bank's role in promoting innovative solutions, especially in microfinance, to get more people into the banking sector.

SBP Governor said the State Bank regulates the economy as a whole by using monetary policy instruments, which are transmitted through the financial sector.

`The potency of our monetary policy instruments depends on how many people are actively using formal channels of borrowing and lending', he added.

The SBP chief said the State Bank's monetary policy tools have become much more potent since the introduction of secondary markets that trade government securities, and the removal of distortions from within these markets.

Explaining as to how monetary policy works in Pakistan, Yaseen Anwar said that monetary policy tools target the interest rate.

`It's important to understand just how they do that. Different central banks use different tactics, but at the State Bank, we intervene primarily in the overnight interbank market.

This is the market where interest rates on loans that banks make to each other for a day. The central bank itself is a player in this market and steps in to either provide funds in times of need or drain money in times of excess. By doing that it manages the overnight rate to keep it within a certain band.

The monetary policy rate that is announced in the press indicates the ceiling of this band. The overnight rate is linked to all other interest rates in the market. By changing the ceiling of the band, which the overnight rate fluctuates in, the central bank is able to influence interest rates', he added.

The SBP Governor pointed out Pakistan has never undergone a bout of hyperinflation but the past few years have seen higher than average inflation, the effects of which every individual has felt.

Inflation has reduced markedly in the past few months, he said and added: `It was because of this that the Bank decided to reduce its interest rate as well. The benchmark rate now stands at 9.5 percent.

We also expect that average inflation for the year will remain below 9.5 percent. A part of the reduction in inflation may be attributed to State Bank's active monetary management policies'.

He said the State Bank also ensures that the money market is never short of, or in excess of funds, and this means that monetary policy signals are transmitted efficiently.

He recalled: `Our equity market has been a consistent feature in Asia's best performing stock markets. Since we established a secondary market that can buy and sell government debt, our financial markets have become a lot more agile and responsive to policy changes. That's actually been one of the most important outcomes of the financial sector's reformation'.

http://www.brecorder.com/top-news/108-pakistan-top-news/99697-10-po...