Financial Markets in Pakistan

A financial market is a place for buying and selling of financial securities such as stocks and bonds. It facilitates:

The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets In matching those who want capital to those who have it.

Financial Market in Pakistan consists of (i) Money Market which provides short term funds and (ii) Capital Market which makes long terms funds available to businesses and industries. The Financial market can be reclassified into (i) Primary Market in which new shares or bonds are issued and (ii) Secondary Market in which securities previously issued are traded such as Shares, Bonds, Commercial Papers, Options and Mutual Fund. Of this, the banking sectors and non-banking sectors are regulated by the central bank, State Bank of Pakistan. While rest of the market (lease, stock exchanges, modarba, mutual funds and insurance) is regulaled by Secruities and Exchange Commission of Pakistan. A sketch showing financial markets in Pakistan is shown at right-hand side and further explained in the paragraphs that follow. FINANCIAL MARKETS COMMERCIAL BANKS A type of bank providing checking and saving accounts, credit cards and business loans. Such a bank induces general public to deposit their savings in the banks and offers a wide range of services such as:

Deposit Mobilization

Money transfer Financing Working Capital Financing other trade related mode (import and export) Investing in government securities Call money operations

These banks are of three categories (i) Public Sector Banks, (ii) Private Bank and (iii) Foreign Banks.

LEASE -FINANCE EQUIPMENT INVESTMENT BANKS Investment banks perform a variety of functions. Primarily, they assist corporations to raise equity-capital by underwriting the public issues. They also assist companies desiring of mergers and acquisition and derivatives. In addition, they provide services like trading of derivative, foreign exchange, fixed income instruments and shares listed on the stock exchanges. Such banks cannot take deposits. They manage their affairs by charging fees such as (i) retainer fee, (ii) advisory fees based on the transactions, (iii) commission on underwriting and (iv) other financial services.

PICIC was once a premier development in Pakitan but has merged with a commerical bank.

BOND MARKET OUTLOOK DEVELOPMENT BANKS These banks provide guidance in selection of industrial units and extend direct financial assistance to partly cover their financial requirements. Also, they engage themselves in promotional activities to attract investors towards neglected sectors through publishing brochures and research papers. Besides, they help in assessing feasibility of potential projects. Such banks are responsible for speeding up the pace of economic growth in the country in conformity with the national objectives, plans and priorities. Their core functions are:

Direct financial assistance Catalytic function Mobilization of domestic savings Ensuring balance regional and industrial growth Expanding entrepreneurial base by encourage new comers

At one time, there were 14 Development Banks in Pakistan. However, most of them have been closed one after another as their bad debts mounted up. It is natural as they take substantial risks in promoting new types of industrial projects in underdeveloped areas sponsored preferably by new-comers. Nevertheless, their contribution brings fruits to the economy in the shape of successful industrial units and transfer of technology. At present, 8 development banks are operating which mostly are joint-venture with other Islamic Countries. Click thumbnail to view full-size

MICROFINANCE BANK A microfinance bank would cater to the credit needs of poor households and their small enterprises. Thus microfinance bank provide credit to those poor who are not considered creditworthy by the commercial banks and other financial institutions. On the other hand, the microfinance bands recognize every single human being as a potential

and creditworthy entrepreneur. In addition, they provide basic training in start of a small business, simple book-keeping and accounting. The main aim of microfinance institutions is alleviation of poverty through helping poor persons to earn some money especially the women.

ISLAMIC BANKS In Islam, it is prohibited to charge interest on any loan. However, it is acceptable to pass on funds to a needy person or corporation for trade purpose in which case profit could be shared on an agreed basis whereas loss should be shared according to the funds invested. Besides, there are certain businesses where any form of deal is forbidden like alcohols and pork. Accordingly, Islamic bank refer to a banking activity which is consistent with the Sharia, the Islamic Laws. Otherwise, there is no difference between the traditional banks and the Islamic bank.

DISCOUNT HOUSES These are firms which buys and discounts bills of exchange, banker' acceptance, commercial paper, etc. Discount houses also tender for treasury bills, deal in shortdated government bonds, and are an important part of the short-term money markets. INSURANCE COMPANIES Insurance is a hedge against the risk of a contingent and uncertain loss. In other words, it is the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. For this service, the insurer charges a fee called premium depending upon the risk involved. Besides traditional insurance companies, there are many Islamic insurance companies in Pakistan known as Takaful operators. Takaful is an Islamic insurance concept based

on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. These companies believe in promoting the cause of Takaful as well as promoting the insurance business in a Shariah Compliant i.e. halal and absolutely Riba-Free insurance.

STOCK EXCHANGES Stock exchange is a place where securities are bought and sold. Such securities include shares, derivative, unit trusts and bonds. It also provides facilities for the issue and redemption of securities. Prices of shares and bonds are influenced by their demand and supply like in other commodities. In order to list a security on the stock exchange, there are certain requirements. Transactions in the stock exchange are conducted by members only. Stock exchange serves both as a primary market for the initial public offerings and as a secondary market for their subsequent buying and selling Investors are not bound to sell stock or bond through the stock exchange. They can directly deal with the seller. Similarly, there is no compulsion that stock must be traded on the exchange. The securities can change ownership out of the exchange which is called over the counter or curb dealings.

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http://s4.hubimg.com/u/4098635_f1024.jpg LEASING It is a contract where owner of an asset agrees to allow someone to use it for a fixed rental. It can be for fixed or indefinite period of time. It is a binding contract which sets out terms of lease agreement between the owner and the user. Leases are of various types mainly (i) a financial lease and (ii) an operating lease. The financial lease is long-term and non-cancellable contract where the user assumes some of the risks of ownership and has the right to keep the assets or get it transferred to its own name after fulfilling the necessary conditions. In operating lease, the owner transfer only the right to use the assets which is returned back at the end of the lease. There are some other types especially in the aircraft industry like wet lease and drylease and. In wet lease, a company agrees to provide an aircraft along with pilot and crew and would be responsible for the maintenance of the aircraft. Dry lease, on the other hand, refers to leasing only the aircraft. Click thumbnail to view full-size

MODARBA If is a form of partnership which has two distinct parties: (i) the financier and (ii) the manager. The financer takes no part of management of the business. The profits are distributed among the subscriber while the manager is paid the usual salary. Modarba is one the modes of Islamic finance. It is like mutual fund minus its un-Islamic features.

Not only in Pakistan, the Islamic financial services industry has witnessed a phenomenal growth all over the Islamic world. In particuar, the Modaraba Sector has been able to create a market niche for itself in the corporate sector. This model is enjoying a unique recognition due to its well designed structure with proper rules and regulations defined by the regulators. It has proved its resilience in this time of global financial turmoil. Click thumbnail to view full-size

MUTUAL FUND It is a professionally managed type of pooled investment for acquiring securities like stocks, bonds, marketable securities and commodities. The profit is distributed by way of dividend to all investors. Financial market in Pakistan experienced boom conditions in1991 due to liberalization policies of the government. There was a manifold increase in the number of listed companies; number of commercial banks, local and foreign and financial instruments like commercial paper. But it has still to develop and a number of suggestions have been made:

The public sector should reduce its dependence on State Bank of Pakistan. The infrastructure projects should be financed through domestic bonds of longer maturities (10-20 years). The financial sectors (capital markets, micro credit, banking and non-banking sector) should have a better and more clearly delineated division of responsibilities. Foreign institutional investors should be encouraged to take up (i) private equity funds, (ii) private pension funds, (iii) provident and gratuity funds and (iv) Real Estate Investment Trusts.

Mortgage financing should be encouraged

Equity Market Review Bearish sentiment were witnessed at Karachi Stock Exchange (KSE) on last week in the absence of any major trigger and falling global markets which made the investors to offload their holdings. However, buying in telecom sector was witnessed on the news that International Clearing House (ICH) has established and would take effect from 1st October of this year. The benchmark KSE-100 index decline 137.62 points during the week to close at 15,253.96 points (down 0.9%WoW). Bullish forces of the week n T-bill yield decline n OGDCL announces discovery at Nashpa 3 n IMF to monitor Pakistan's capacity to repay loans n Forex reserves improve to $14.82 billion n Korean firms to invest $3 billion in hydropower projects n Rs 33 billion issued for PSDP projects Bearish triggers of the week n Fiscal deficit at 8.5% of GDP n Etisalat yet to pay $799 million for PTCL privatization n Country faces huge shortfall of 0.654 MT urea fertilizer $ in million Inflow Outflow Net Inflow Foreigners 16.17 (15.92) 0.25 Local Individuals 180.09 (182.72) (2.63) Other Organization 5.40 (2.39) 3.01 Mutual Funds 19.59 (22.14) (2.55) Banks 20.22 (22.96) (2.74)

Local Companies 106.28 (100.99) NBFC 4.78 (5.40) (0.62) Source: NCCPL

5.30

Future Weekly Review Net open interest in the futures market is recorded at Rs 2.46 billion, a WoW dip of 14.7 per cent due to plunge in selected stocks. While future spreads settled at 11.94 per cent, up by 216bps. Similarly, weekly average future volumes decrease by 37.9 per cent to 12.97 million shares. The top 5 open interest scrips were DGKC, Engro, PSO, LUCK and EFOODS. MTS Weekly Review The investment under Margin Trading System (MTS) on KSE last week hiked by 6.3 per cent at Rs 1,256 million owing to better interest. Whereas MTS volume increased by 4.4% to 27.72 million. Furthermore, average CFS rate in the week increased by 4bps to stand at 14.65 per cent. The top 5 Scripps by MTS investments were ENGRO, PSO, DGKC, NML & HUBC which cumulatively accounted for 59 per cent of the total MTS investment. Outlook We expect benchmark KSE 100 Index to consolidate around 15,200 level. A rise from here will target between 15,400-15,650 mark, however, any downside will test support at the 20-DMA which stands at 15,040 level. Meanwhile, the indicators are mixed suggesting a neutral view. It is therefore suggested to stay cautious on the higher side. In this week, D.G. Khan Cement to announce result of FY12, we expect company to post earning of Rs 3.22 billion (EPS: Rs 7.38). While Attock group would also announce results in which POL, APL & ACPL to post EPS of Rs 52.85, Rs 60.54 & Rs 15.12 along with DPS of Rs 25, Rs 30 & Rs 5.

Fixed Income Market Fixed Income Market also known as Bond Market is a market where participants are issued with new debt. In Pakistan it is mostly comprised of Government Securities i.e. T.Bills, Pakistan Invest Bonds and Sukuk (Islamic Bonds). Corporate Bond Market is composed of Term Finance cerficates (TFC's) and Privately Placed securities. MTB Market Review:- Week ending on 6th September, 2012 witnessed KIBOR of 1, 2 week, 1, 3, 6, 9, 12 months, 2 years and 3 years as follows as compared to preceding week. These rates show slight reduction in rates above one week in line with reduction in MTB yields. Primary data available for last five MTB auction shows that For the auction held on September 06 with maturity of Rs 224 billion, the target was set slightly on the higher side i.e. Rs 225 billion. Contrary to what has been said last week

in the weekly outlook, market participated with higher amount and that too in 12 month T-bill. There can be two reasons for that i.e. market is hoping for further rate cut i.e. 50 to 100 bp in October MPS ( mainly on account of continuous decline in CPI.Data appearing on September 02 for August 12 reflect continuous decline for the second month. CPI now stands at 9.1% on year to year basis. Core inflation is also on decline. Market also perceive these figures fudged due to coming election year, however this charge is quite serious) and second market is not going to enter real sectors due to higher risks mainly from energy crisis and contend to invest in T-bill. This also shows that how weak are banks in their risk management that hinders them to play their due role for the growth of the economy. Secondly SBP is also motivating them to do this by injecting funds through their repo windows at lower rates than MTB yields. This arrangement is helping GOP to bring down its borrowing from SBP but on the other hand the main sufferer of this arrangement is the private sector. The outstanding MTBs i.e. as of May, 12 is Rs 2.45 trillion that has gone around Rs 2.6 trillion in Sept 12 whereas financing provided to the Federal Government by SBP came down to Rs 1.454 trillion as on Aug 17 as compared to Rs 1.518 trillion as on Aug 10. During FY13 credit to private sector has risen in negative i.e. by Rs 48 billion as compared to Rs 31 billion in the last week. Outlook: - Going forward there is no MTB auction in the coming week; hence there would be no primary market activities. Secondary market activities would also remain low this week. PIB's:- Review In PIBs last auctions held on June 7 and July 18 SBP accepted Rs 36 billion and Rs 50.7 billion respectively i.e. higher amounts to the target and that too mainly in 10 year. In PIB auction held on August 16 the trend somewhat reversed after announcement of MPS on Aug 10. SBP received an amount of Rs 30 billion against target of Rs 30 billion with Rs 25 billion in 3 and 5 years. The W.A yields also declined by 139, 152 and 129 bp for 3, 5 and 10 years tenor from its previous auction held on July 18. According to available data its outstanding numbers are now Rs 948 billion as of May 2012 that is a substantial number that has now crossed over 1 trillion (still current data is not available on SBP website) . The next auction of PIB would be held on September 26 with maturities of Rs 15 billion but with higher target of Rs 30 billion. Outlook: - The trend of selling/buying PIB would continue, however prefence would be in 10 year tenor as compared to lower tenors in the last week. Banks would like to hold them as there is no limit on holding PIB's in terms of % of their DTL. National Savings Schemes:- In Pakistan the retail investors mostly prefer National Savings schemes (NSS). The rates in NSS are bit higher than schemes offered by Mutual Funds and Banks. The rates in NSS are also important for Fixed Income Market. Since July first the rates were raised but now they have been brought down immensely i.e. close to 150 bp effective from Aug 27 i.e. I month and one week prior to the scheduled date of revision i.e. from first October 2012 after reduction of discount rate effective from Aug 13. In DSC they are now 11.50% in comparison to previous 12.68%. In SSC they are now 10.70% in comparison to previous 11.90 %, In RIC they are now 11.04% in comparison to previous 12.36 %. In Bahbbod they are now 13.50% in comparison to previous 14.64 %. In Savings account they are now 7.40% in comparison to previous 8.65 %. In savings account they are 7.40% in comparison to previous

8.65%. They are now 13.50% in comparison to previous 14.64 % in pensioners account. In these schemes mobilized amount remained negligible In March, April, May and June 2012. In March it remained negative by Rs 27 billion and in April it hardly mobilized Rs 3 billion. In May it mobilized Rs 48 billion and in June Rs 28 billion. Onward June 2012 it witnessed upward trend due to increase in rates. Out standing position of NSS as of June 2012 is Rs 2.0 trillion as compared to Rs 1.6 tillion in April, 2012. Outlook:- Funds in National Savings Schemes that had started flowing in would slow down onward after immense rate cut in NSS. Sukuk Market i.e. 3 year Ijarah bonds issued by the government has an outstanding amount of Rs 334.8 billion. In April and June 2012 two auctions of sukuk with target as Rs 25 billion were planned against maturities of Rs 5.7 billion in April and Rs 6.4 billion in June. The auction due in June was held on June 22, 2012. The amount picked was Rs 48.7 billion against offered amount of Rs 57.9 billion. Last auction witnessed cut off at 0 at benchmark rate i.e. 6 month T-bill rate of last auction i.e. at 11.9279% and now at 11.9366% in June 2012. In secondary market very thin secondary market trading was held as mostly they are occupied by the Islamic banks to level their SLR requirement that now stands at 19% of their DTL. In the first Qtr of FY2013 GOP has planned to raise Rs 45 billion to be held on September18 (settlement date). The underlying asset for the Sukuk has been arranged as Rs 47.8 billion based on Peshawar to Islamabad motorway. It would carry cut off at 0 meaning yield around 10.26 %. Outlook:- No formidable activity is on horizon this week. TFC's In Corporate side no significant activity is available. Its size is negligible i.e. around 0.5% of GDP with outstanding amount of Rs 60-75 billion. This is highly lower than as compared to outstanding domestic debt of the government. Latest issue (only issue in CY2012) is from KESC that has a target to raise Rs 2 billion with Rs 1 billion as green shoe at 15.50% payable on quarterly basis. Till March 2012 the size of listed TFCs are of Rs 66 billion, privately placed TFcs are Rs 68 billion,Sukuks are of 365 billion including issued by the government and commercial papers are of 2 million . The numbers of outstanding issuances are 37 for listed, 39 for privately placed, 54 for Sukuk and one for commercial papers. So the market is highly thin at the moment. Outlook:- The market is highly illiquid. However with the market perception of discount rate going down in near future market trading would pick up slightly. FX Market FX market is to buy and sell foreign exchange market based on dollars. Rates against the U.S. dollar spot exchange rate as of September 07 2012 as compared to August 31 are as follows PKR - $ parity W End 31 Aug Ready 94.507 94.644 1W 94.693 94.827 1M 95.192 95.428 2M 95.879 96.039 3M 96.492 96.629 4M 97.106 97.234 W end 07 Sep

5M 97.694 97.798 6M 98.289 98.34 1Y 102.26 102.33 The above figures show depreciation in PKR on account of due payments. According to Interest rate parity, Using 10.50 % of PKR discount rate and .25 of US Fed Fund Rate the parity between dollars PKR stands at 102.0310 by using spot rate as on September 07. However due to demand supply factor and since we are on dirty float the exchange rate stood at 94.6442 as of September 07. The inflow against SCRA remained positive in FY13 i.e. IST July to date by $ 64.4 thousand, however in the month of September it has turned negative by $ 48 thousand. The reserves that has gone down from $ 15.18 billion as of August 17 to $ 14.76 billion as on August 24 has again risen slightly as on August 31 to $ 14.82 billion. Pressure would remain on PKR in the coming days. Outlook PKR would remain under pressure due to widening CA deficit and on due repayments. Commodity Market Gold Prices and Rates in Pakistan:- Gold prices and rates in Pakistan are generally subject to two main factors. First of course is the international Gold rates and prices. The second important factor in determining Gold prices and rates in Pakistan is the Pakistan rupee-dollar rate. Gold prices and rates in Pakistan will rise invariably whenever the Pakistani rupee falls and vice versa. Ending of this week i.e. 07-09-12 the Gold prices raced to a somewhat high on Friday i.e. Sept 07 after getting US data on Job that reflects poor performance and increase in inflationary pressure. This can pave way for US Fed to add stimulus steps making investment in precious metal profitable. Spot gold rose almost 2% hitting $ 1733.81 per ounce. In Pakistan it has crossed over the number of Rs 52,000 this week. SILVER Like most commodities, the price of silver is driven by speculation and supply and demand. Compared to gold, the silver price is notoriously volatile. This is because of lower market liquidity, and demand fluctuations between industrial and store of value uses. At times this can cause wide ranging valuations in the market, creating volatility. Silver often tracks the gold price due to store of value demands, although the ratio can vary. The gold/silver price ratio is often analyzed by traders, investors and buyers. Finally this week i.e.07 September, the prices have risen to $33.36 as compared to $31.25 last week. Crude Oil The world's largest countries are drastically changing the way they buy and sell oil and it could affect every person, family, small business and large corporation across the globe. Currently it came down to $ 112.92 as compared to $113 per b last week on anticipation of easing steps of Federal Reserve. US oil also came below $ 94.85 from $ 95.72 as of September 07. Outlook:- For the coming week Gold can hover above $ 1700 per ounce followed by silver in the same proportion. Oil prices would remain in the range of $ 113-$ 115 per b if political stability continued and US oil at $ 94-96.

Derivatives

Exchanges No of Tenors Vol in Rs Highest vol Lowest vol Price trend Crude oil Gold Price Silver Price as on scrips oil 100 100 Oz in 10 Oz Sep 07 traded B price KSE 22 scrips 1 M 9.265 4.104 million 2 thousand rising in 12 Cash settled as compared (cash million as in PTC in AICL scrips except 10 futures to 40 srips settled) compared scrips in negative as on Aug 31 to 9.355 mn as on Aug 31 Mercantile No trading in Rice,wheat,palm oil and KIBOR $96.3497.00 $1735.4- $33.664Exchange. as compared 1739.9 as 33.729 as to $96.60 compared to compared to Trading as of $1691 last $31.7 8 against last week week. In Pkr last week commodities the price is Covers 1-4 months Rs 51,60052,500 and for tola it is Rs 62983 There are 44 companies that KSE list to deal in derivatives, but 8 to 25 companies are commonly in operation in cash settled futures and in delivery. Currently in OTC the size is of above Rs 200 billion in which 70% are of cross currency swaps (current data is not available) SBP is requested to disseminate it on weekly basis for market awareness. Outlook: - Declining trend would continue in derivatives trading.