Chapter 1

Introduction
1.1 INTRODUCTION

This project report is all about a Comparison between two selective investment opportunities
i.e investment in the Banking sector and Insurance industry.
Investment involves making of a sacrifice in the present with the hope of deriving future
benefits. Two most important features of an investment are current sacrifice and future
benefit. Investment is the sacrifice of certain present values for the uncertain future reward. It
involves commitment of funds in various investment avenues. It involves numerous decisions
such as type, mix, amount, timing, grade etc, of investment the decision making has to be
continues. Investment is concerned with the management of an investors wealth which is the
sum of current income and the present value of all future incomes.

1.2 CHARACTERISTICS OF INVESTMENT

The chief characteristics of investment are explained as followsReturn: All investments are characterized by the expectation of a return. In fact, investments
are made with the primary objective of deriving return. The expectation of a return may be
from income (yield) as well as through capital appreciation. Capital appreciation is the
difference between the sale price and the purchase price. The expectation of return from an
investment depends upon the nature of investment, maturity period, and market demand and
so on.
Risk: Risk is inherent in any investment. Risk may relate to loss of capital, delay in
repayment of capital, nonpayment of return or variability of returns. The risk of an
investment is determined by the investments, maturity period, repayment capacity, nature of
return commitment and so on.

Risk and expected return of an investment are related. Theoretically, the higher the risk,
higher is the expected returned. The higher return is a compensation expected by investors for
their willingness to bear the higher risk.
Safety: The safety of investment is identified with the certainty of return of capital without
loss of time or money. Safety is another feature that an investor desires from investments.
Every investor expects to get back the initial capital on maturity without loss and without
delay.
Liquidity: An investment that is easily saleable without loss of money or time is said to be
liquid. Well developed secondary markets for security increase the liquidity of the
investment. An investor tends to prefer maximization of expected return, minimization of
risk, safety of funds and liquidity of investment.
Purchasing Power Stability: It refers to the buying capacity of investment in market.
Purchasing power stability has become one of the import traits of investment. Investment
always involves the commitment of current funds with the objective of receiving greater
amounts of future funds.
Stability of Income: It refers to constant return from an investment. Another major
characteristic feature of the Investment is the stability of income. Stability of income must
look for different path just as security of principal. Every investor always considers stability
of monetary income and stability of purchasing power of income.
Tax Benefits: Tax benefits refer to an investment program without regard to ones residential
status decrease the tax liability by investing in avenues such as life insurance policies, post
office savings schemes, infrastructure bonds etc.
Thus, these are the important of characterstics of investment.

1.3 INVESTMENT PROCESS

Investment process involves a series of activities leading to purchase of securities or other

investment alternatives. The investment process involves the following steps:

i.

Investment Policy:
It involves identification of investors, objectives, constraints and preference. This
gives an ideal of channels of investment in terms of asset classed to be selected and
securities to be chosen.
Investment or Security analysis:
It involves analysis of economy, studying industry which are performing well and

ii.

have tremendous prospects and select the company which is performing profitably
and efficiently.
Investment or Security valuation:
Investment value is taken to be the present worth to the owners of future benefits from

iii.

investments. Comparison of the value with the current market price of the asset,
iv.

allows the determination of the relative attractiveness of the asset.

Portfolio construction:
It involves determination diversification level, consideration of investment timing,
selection of investment timing, allocation of investible wealth to investment assets
and acquisition of securities/assets.

1.4 OBJECTIVES OF INVESTMENT:

Objectives of investment are as under:

Preservation of capital: It means the investment should be in assets so that the

principal sum as well as its purchasing power remains intact.

Stability of income: The investment should be made in a manner that the investor

gets systematic income for re-investment or consumption.

Capital appreciation: The investments should be made in assets which have the
feasibility of having capital growth

1.5 INVESTMENT AVENUES:

Investment generally involves commitment of funds in two types of assets:

Financial assets
Real assets

1.5.1 FINANCIAL ASSETS:

Financial assets are piece of paper representing an indirect claim to real assets held by
someone else. These pieces of paper represent debt or equity commitment in the form of
IOUs or stock certificates. Investments in financial assets can be broadly categorized under
the following heads: 1. Corporate securities

Equity shares
Preference shares
Debentures/Bonds.
Warrants.
Derivatives

2. Deposits in banks and non banking companies

3. Post office deposits and certificates
4. Life insurance policies
5. Provident fund schemes
6. Government and semi government securities
7. Mutual fund schemes
CORPORATE SECURITIES:
Joint stock companies issue corporate securities. These include equity shares, preference
shares, and debentures. These are explained in brief in following paragraph.
Equity Shares: By investing in shares, investors basically buy the ownership right to that
company. When the company makes profits, shareholders receive their share of the profits in
the form of dividends. In addition, when a company performs well and the future expectation
from the company is very high, the price of the companys shares goes up in the market. This

allows shareholders to sell shares at profit, leading to capital gains. Investors can invest in
shares either through primary market offerings or in the secondary market.
Preference Shares: Preference shares refer to a form of shares that lie in between pure equity
and debt. They have the characteristic of ownership rights while retaining the privilege of a
consistent return on investment. The claims of these holders carry higher priority than that of
ordinary shareholders but lower than that of debt holders. These are issued to the general
public only after a public issue of ordinary shares.
Debentures and Bonds: These are essentially long-term debt instruments. Many types of
debentures and bonds have been structured to suit investors with different time needs.
Though having a higher risk as compared to bank fixed deposits, bonds, and debentures do
offer higher returns. Debenture investment requires scanning the market and choosing
specific securities that will cater to the investment objectives of the investors.
Warrants: A warrant is a certificate giving its holder the right to purchase securities at a
stipulated price within a specified time limit or perpetually. It can be defined as a long-term
call option issued by a company on its shares. A warrant holder is not entitled to any
dividends; neither does he have a voting right
Derivatives: The introduction of derivative products has been one of the most significant
developments in the Pakistani capital market. Derivatives are helpful risk-management tools
that an investor has to look at for reducing the risk inherent in as investment portfolio.
Derivatives involve Forwards, futures, options and swaps.

DEPOSITS:
Deposits include mainly deposits with commercial banks and company deposits and these are
explained below.
Deposits with Commercial Banks: A safe, liquid, and convenient investment option, a
savings bank account is an ideal investment avenue for setting aside funds for emergencies or
unexpected expenses. Investors may prefer to keep an average balance equal to three months
of their living expenses.

A bank fixed deposit is recommended for those looking for preservation of capital along with
current income in the short term. However, over the long-term the returns may not keep pace
with inflation.
Company Fixed Deposits: Many companies have come up with fixed deposit schemes to
mobilize money for their needs. The maturity period varies from three to five years. Fixed
deposits in companies have a high risk since they are unsecured, but they promise higher
returns than bank deposits. The company fixed deposit market is a risky market and ought to
be looked at with caution. SBP has issued various regulations to monitor the company fixed
deposit market. However, credit rating services are available to rate the risk of company fixed
deposit schemes.

POST OFFICE DEPOSITS AND SAVINGS CERTIFICATES:

The investment avenues provided by post offices are non-marketable. However, most of the
savings schemes in post offices enjoy tax concessions. Post offices accept savings deposits as
well as fixed deposits from the public. There is also a recurring deposit scheme that is an
instrument of regular monthly savings. National Savings Certificates (NSC) is also marketed
by post office to investors. The interest on the amount invested is compounded half-yearly
and is payable along with the principal at the time of maturity, which is six years from the
date of issue.

LIFE INSURANCE POLICIES:

Insurance companies offer many investment schemes to investors. These schemes promote
savings and additionally provide insurance cover. Insurance policies, while catering to the
risk compensation to be faced in the future by investors, also have the advantage of earning a
reasonable interest on their investment insurance premiums. Life insurance policies are also
eligible for exemption from income tax.

PROVIDENT FUND SCHEME:

Provident fund schemes are deposit schemes, applicable to employees in the public and
private sectors. There are three kinds of provident funds applicable to different sectors of
employment, namely, Statutory Provident Fund, Recognized Provident Fund, and
Unrecognized Provident Fund. In addition to these, there is a voluntary provident fund
scheme that is open to any investor, employed or not. This is known as the Public Provident
Fund (PPF). Any member of the public can join the PPF, which is operated by the State Bank
of Pakistan

GOVERNMENT AND SEMI-GOVERNMENT SECURITIES:

Government and semi-government bodies such as the public sector undertakings borrow
money from the public through the issue of government securities and public sector bonds.
These are less risky avenues of investment because of the credibility of the government and
government undertakings. The government issues securities in the money market and in the
capital market. The government also introduced the privatization programme in many
corporate enterprises and these securities are traded in the secondary market.
MUTUAL FUND SCHEMES:
These are institutions which pool the savings of many individual investors and combine them
into as large and well diversified portfolio of investments. The returns are in the form of
dividends and appreciation in net asset value. The Unit Trust of Pakistan is the first mutual
fund in the country. A number of commercial banks and financial institutions have also set up
mutual funds. Mutual funds have been set up in the private sector also. These mutual funds
offer various investment schemes to investors.

1.5.2 REAL ASSETS

Real assets include real estate, bullion, precious stones, art etc. Real estate, gold, silver,
currency, and other real assets investments such as art are also treated as investments since
the expectation from holding of such assets is associated with higher returns.
REAL ESTATE:
It involves investments in agricultural land, farm houses, urban land, hose property and
commercial property. Real estate investment is often linked with the future development
plans of the location. Besides making a personal assessment from the market, the assistance
of government-approved valuers may also be sought.
BULLION INVESTMENT:
These are traditional investments and it is more in Pakistan. It includes investment in gold,
silver, and other metals. The bullion market presents an opportunity for an investor by
offering returns and end value in future. It has been observed that on several occasions, when
the stock market failed, the gold market provided a return on investments. The fluctuation
prices, however, have been compensated by real returns for many investors who have
followed a buy and hold strategy in the bullion market.
Thus, these are important financial and real assets meant for investment.
1.6 RETURN AND RISK THE BASIS OF INVESTMENT DECISIONS:
An organized view of the investment process involves analyzing the basic nature of
investment decisions and organizing the activities in the decision process. Underlying all
investment decisions is the tradeoff between expected return and risk.
Return:
Why invest? Stated in simplest terms, investors wish to earn a return on their money. Cash
has an opportunity cost: By holding cash, you forego the opportunity to earn a return on that
cash. Furthermore, in an inflationary environment, the purchasing power of cash diminishes,
with high rates of inflation bringing a relatively rapid decline in purchasing power.
In investments, it is critical to distinguish between an expected return (the anticipated return
for some future period) and a realized return (the actual return over some past period).

Investors invest for the future for the returns they expect to earn but when the investing
period is over, they are left with their realized returns. Investors must always consider the risk
involved in investing.
Risk:
Risk is explained theoretically as the fluctuation in returns from a security. A security that
yields consistent returns over a period of time is termed as risk less security or risk
free security . Risk is inherent in all walks of life. An investor cannot foresee the future
definitely; hence, risk will always exist for an investor. Risk is in fact the watchword for all
investors who enter capital markets. When one invest, expects some particular return, but
there is a risk that he ends up with a different return when he terminates the investment. The
more the difference between the expected and the actual the more is the risk. It is not sensible
to talk about the investment returns without talking about the risk, because the investment
decision involves a trade-off between the two, return and risk.
Traditionally, investors have talked about several factors causing risk such as business failure,
market fluctuations, change in the interest rate, inflation in the economy, fluctuations in
exchange rates changes in the political situation, changes in exchange rates, changes that take
place in an industry etc. There are other factors that influence investment decisions that
include age, income, education, occupation, objectives of investments, etc.

1.7 RECENT TRENDS OF INVESTMENTS

The number of stock investors in Pakistan is not very large. It is just less than 2 percent
whereas it is more than10 percent in developed countries 1. In recent years, it is picking up
and following factors have contributed to the stock investment trend.
In Pakistan, increase in working population, larger family income and consequent higher
savings
Provision of tax incentives in respect of investments in specified channels provided by
government

 Increasing tendency of people to hedge against inflation that protected by government

Availability of large and attractive investment alternatives developed in Pakistan
Increase in investment related publicity in Pakistan
Ability to invest to get income and capital gains etc.
These are some the factors which chip in growing investment trend in Pakistan.

1.8 BANKING STOCKS1

The sector, which was considered dry in the last several years, has caught the investor fancy
in expectations of changing regulations and improving business conditions due to opening up
of the economy. Entry of private and foreign banks in the segment has provided healthy
competition and has been bringing more operational efficiency into the sector.
Influenced by the global financial turmoil and repercussion of the subprime crisis, the global
banking sector has been witness to some of the largest and best known names succumb to
multi-billion dollar write-offs and face near bankruptcy. However, the Pakistani banking
sector has been well shielded by the central bank and has managed to sail through most of the
crisis with relative ease. Further with the economic buoyancy the world over showing signs
of cooling off, the investment cycle has also been wavering. Having said that, the latent
demand for credit (both from the food and non food segments) and structural reforms have
paved the way for a change in the dynamics of the sector itself. Besides gearing up for the
compliance with Basel II accord, the sector is also looking forward to consolidation and
investments on the FDI front.
Public sector banks have been very proactive in their restructuring initiatives be it in
technology implementation or pruning their loss assets. Apart from streamlining their
processes through technology initiatives such as ATMs, telephone banking, online banking

1 www.equitymaster.com/research-it/sector-info/bank

and web based products, banks also resorted to cross selling of financial products such as
credit cards, mutual funds and insurance policies to augment their fee based income.
Key Points Pertaining To Industry
Supply

Liquidity is controlled by the State Bank of Pakistan

Demand

Pakistan is a growing economy and demand for credit is high

though it could be cyclical.

Barriers to entry

Licensing requirement, investment in technology and branch

network.

Bargaining power High during periods of tight liquidity. Trade unions in public
of suppliers

sector banks can be anti reforms. Depositors may invest

elsewhere if interest rates fall.

Bargaining power For good creditworthy borrowers bargaining power is high due
of customers

to the availability of large number of banks

Competition

High- There are public sector banks, private sector and foreign
banks along with non banking finance companies competing in
similar business segments.

Prospects:
With most private sector banks and the PSU ones that have complied with Basel II having
sufficient capital in their books; it will be a challenge to deploy the same safely and profitably
in the event of economic slowdown. Banks are likely to concentrate more on non funded
income in this scenario.
Banks, especially the private sector ones, are likely to face penetration concerns. The lack of
credit penetration and the geographic concentration of bank credit is evident from the fact
that 5 states having the highest proportion of per capita credit enjoy 55% of the total credit
disbursals in the country.

SBPs roadmap for the entry of foreign banks and the acquisition of stake by the foreign
entities in Pakistani private banks seems to be a step towards facilitating entry of foreign
banks into Pakistan. However, the same is set to aggravate the tussle for market share in the
already fragmented sector.
The proposal for Cabinets approval to allow PSU banks to bring down the governments
stake in them below the stipulated 51%, which is yet to be tabled, can help the bank raise
substantial capital without borrowing at high rates and give the entities an opportunity to
enhance their capital adequacy ratios before the Basel II compliances, and compete with their
private sector peers.
In a nutshell, since the banking sector has tremendous prospects to grow, improved efficiency
and profitability of banks, banking stocks are attracting investors attention since recent times
and has been succeeded to deliver returns expected.

Brief History of Insurance

The story of insurance is probably as old as the story of mankind. The same
instinct that prompts modern businessmen today to secure themselves against
loss and disaster existed in primitive men also. They too sought to avert the evil
consequences of fire and flood and loss of life and were willing to make some
sort of sacrifice in order to achieve security. Though the concept of insurance is
largely a development of the recent past, particularly after the industrial era
past few centuries yet its beginnings date back almost 6000 years.
Life Insurance in its modern form came to India from England in
the year 1818. Oriental Life Insurance Company started by
Europeans in Calcutta was the first life insurance company on
Indian Soil. All the insurance companies established during that
period were brought up with the purpose of looking after the
needs of European community and Indian natives were not
being insured by these companies. However, later with the
efforts of eminent people like Babu Muttylal Seal, the foreign
life insurance companies started insuring Indian lives. But
Indian lives were being treated as sub-standard lives and heavy
extra premiums were being charged on them. Bombay Mutual
Life Assurance Society heralded the birth of first Indian life
insurance company in the year 1870, and covered Indian lives
at normal rates. Starting as Indian enterprise with highly
patriotic motives, insurance companies came into existence to
carry the message of insurance and social security through

insurance to various sectors of society. Bharat Insurance

Company (1896) was also one of such companies inspired by
nationalism. The Swadeshi movement of 1905-1907 gave rise
to more insurance companies. The United India in Madras,
National Indian and National Insurance in Calcutta and the Cooperative Assurance at Lahore were established in 1906. In
1907, Hindustan Co-operative Insurance Company took its birth
in one of the rooms of the Jorasanko, house of the great poet
Rabindranath Tagore, in Calcutta. The Indian Mercantile,
General Assurance and Swadeshi Life (later Bombay Life) were
some of the companies established during the same period.
Prior to 1912 India had no legislation to regulate insurance
business. In the year 1912, the Life Insurance Companies Act,
and the Provident Fund Act were passed. The Life Insurance
Companies Act, 1912 made it necessary that the premium rate
tables and periodical valuations of companies should be
certified by an actuary. But the Act discriminated between
foreign and Indian companies on many accounts, putting the
Indian

companies

at

disadvantage.

The first two decades of the twentieth century saw lot of growth
in insurance business. From 44 companies with total businessin-force as Rs.22.44 crore, it rose to 176 companies with total
business-in-force
mushrooming

of

as

Rs.298

insurance

crore

in

companies

1938.
many

During

the

financially

unsound concerns were also floated which failed miserably. The

Insurance Act 1938 was the first legislation governing not only

life insurance but also non-life insurance to provide strict state

control over insurance business. The demand for nationalization
of life insurance industry was made repeatedly in the past but it
gathered momentum in 1944 when a bill to amend the Life
Insurance Act 1938 was introduced in the Legislative Assembly.
However, it was much later on the 19th of January, 1956, that
life insurance in India was nationalized. About 154 Indian
insurance

companies,

16

non-Indian

companies

and

75

provident were operating in India at the time of nationalization.

Nationalization was accomplished in two stages; initially the
management of the companies was taken over by means of an
Ordinance, and later, the ownership too by means of a
comprehensive bill. The Parliament of India passed the Life
Insurance Corporation Act on the 19th of June 1956, and the
Life Insurance Corporation of India was created on 1st
September,

What is insurance?

We face a lot of risks in our daily lives. Some of these lead to

financial losses. Insurance is a way of protecting against these
financial losses. For a payment (premium), an insurance

company will take the responsibility of compensating your

financial losses.

Classification of Insurance

Life is full of uncertainty. Trials and tribulations abound in each and every
aspect of life. No one can truly predict or even estimate what the future has in
store for him. Life offers no guarantees by itself, except the incidences of death
and taxation.
This lack of security present throughout life can be overcome partially through
insurance. Insurance can never replace or repair a loss. But the monetary value
offered by insurance helps in adjusting to the new circumstances.
Despite offering innumerable options and immense scope, insurance can be
classified into four main categories.
Insurance of Person
Insurance of Property
Insurance of Interest
Insurance of Liability

Insurance of Person:

Under the purview of this class of insurance, the risks associated with human
life in general can be covered up to the limit specified. A person can insure his
or her life and his health against any unplanned contingencies.
In event of his death, his dependants will be reimbursed to the full amount that
he was insured for. Or if the insured person meets with an accident or suffers
from an illness that cripples him forever, he will be compensated with the
complete sum assured anyway since he may not be able to lead a normal life
again.
In case, the accident is not that severe, he should be able to recover after
medical treatment and rehabilitation. If he has opted for medical cover, then his
medical expenses, treatment and medication will be paid for by his insurance
policy. |
Insurance of Property:
Everyone possesses material value in the form of tangible assets. Assets can be
in the form of a landed estate or a vehicle, share holdings or plain old paper
money.
Since tangible property has a physical shape and consistency, it is subject to
many risks ranging from fire, allied perils to theft and robbery. An individual's
lifetime of hard work can be wiped out in a blink of an eye.
But if a person judiciously invests in insurance for his property prior to any
unexpected contingency then he will be suitably compensated for his loss as
soon as the extent of damage is ascertained.
Insurance of Interest:

Every individual has to discharge certain specific duties. Everyone is expected

to maintain a standard of conduct. But then, it is an intrinsic part of human
nature to err. No one is infallible and no one will ever be.
Owing to an occasional error or omission committed by us, our clients or
customers might suffer a loss. In turn we might have to pay them damages or
compensation out of our own personal resources.
However, if our chosen profession qualifies for insurance of interest, then our
insurance policy will more than suffice in arranging for the funds and court
formalities that might ensue in the aftermath of legal libel.

Insurance of Liability:
Every person has to regulate his actions and behaviour so as not to cause injury
or damage to other people and their property. Everyone is personally
responsible and liable for his actions.
If due to lack of control over his actions or prejudiced behaviour, a person
incurs any liability then he has to provide compensation out of his personal
resources. Liabilities: legal, civil or criminal can have severe repercussions on
social standing and prestige besides the financial status.
By investing in liability insurance, an individual can ward off any liabilities he
might incur due to his actions and behaviour. Besides, the premiums payable on
liability insurance are fairly minimal when compared to the damages that have
to be compensated in the long run.

CHAPTER 2
LITERATURE REVIEW
Christian Roland (2004) in his study on Banking Sector Liberalization In Pakistan found
that the degree of financial repression has steadily increased between 1960 and 1980, then
declined somewhat before rising to a new peak at the end of the 1980s; Since the start of the
overall economic reforms in 1991, the level of financial repression has steadily declined;
Despite the high degree of financial repression, no statistically significant negative effects on
savings, capital formation and financial development could be established, which is contrary
to the predictions of the financial liberalization hypothesis.
Rajesh Chakraborthy (2005) in his study on Banking in Pakistan Reforms and
Reorganization found that Interest rates have declined considerably but there is evidence of
under-lending by the banks; the social objectives of banking measured in terms of rural
credit are, expectedly, taking a back seat; the performance of the banks has improved slightly
over time with the public sector banks doing the worst among all banks; the banking sector as
a whole and particularly the public sector banks still suffer from considerable NPAs, but the
situation has improved over time; new legal developments like the SARFAESI Act provide
new options to banks in their struggle against NPAs; Over time, the Pakistani banking
industry has become more competitive and less concentrated and the new private sector
banks have been emerging as the most efficient category.
Mr.Basanta Kalita (2006) in his study on Post 1991banking Sector Reforms In Pakistan
Policies And Impact has found that the reforms has produced mixed response; the sector has
responded positively in the field of enhancing the role of market forces, regarding measures
of prudential regulations of accounting, income recognition, introduction of CAMELS
supervisory system, reduction of NPAs and up-gradation of technology; but, it has failed to
bring the sector at par with international level and still mainly controlled by SBP and
Government owned banks are the leaders in all spheres of the banking network in Pakistan.

Harpreet Kohli and A S Chawla (2006) in their study on Profitability Trends In

Commercial Banks A Study Of Select Commercial Banks (State bank of Pakistan, MCB
bank, Punjab National bank and Bank of Punjab) found that the two private banks have been
able to reduce burden tremendously and increase spread to a greater extent; Operating
expenses has been maximum for bank of Punjab and minimum for MCB bank and same
results for interest expenses; the two private banks outperformed the two public sector banks
in terms of the parameter considered.
O.P Verma and Dr. K. Chandel (2007)in their study on Significant Determinants Of
Profitability Of Banking Sector In Pakistan found that Operating costs of poor performing
banks is quite high and efficiency ratios revealed the need for suitable human resource
development strategy as it is the major determinant of Profitability; the profitability of banks
depends on the its ability to manage the various risks such as credit risk, market risk, liquidity
risk and exchange rate risk; IT has emerged as strategic tool to increase efficiency and
profitability of banks.
B S Bodla and Richer Verma (2007) in their study on Determinants Of Profitability Of
Banks In Pakistan Multivariate Analysis found that the variables such as Non-interest
income, Operating Expenses, Spread have significant explanatory power and hence they have
significant relationship with net profits; Cost of Intermediation ( operating cost/Assets) are
huge and there exists huge gap to fill to par with the international standards; Interest is major
source of income and Non-interest income has shown improving trend over time in case of
Public Sector Banks.
Dr.Kasturi Rangan (2008) in his study on Determinants Of Profits Of Banks - Studying
Correlation found that Spread, Non-Interest Income and Operating expenses are important
determinants of profit and there exists positive correlation between spread and non-interest
income and negative correlation between operating expenses in case of Public sector banks,
Old generation banks and Foreign banks and opposite results in case of New generation
Private banks.

Dr. Marinder Kaur Batra and Reeta Kapoor (2008) in their study on Profitability Analysis
Of New Private Banks in Pakistan found that HDFC bank in Exponential growth rate of
credit deposit ratio, Indus Ind bank in Return on assets, IDBI bank in Operating Profit
Margin, UTI bank in Spread, Kotak Mahindra bank in interest income to total income ratio
are the best performers.
R K Uppal and Rimpi Kaur (2006) in their study on Efficiency in the Post-banking sector
reforms era New challenges and futures opportunities found that Foreign banks are
most efficient banks and followed by private sector banks and then Public sector banks in
terms of efficiency at branch and Employee level; foreign banks pays highest compensation
followed by new private sector banks; there exists positive and significant relationship
between per employee profitability and expenses and per branch profitability and expenses at
5 % level of significance.
Manish Mittal and Aruna Dhade (2006) in their study on Profitability and Productivity in
Pakistani Banks: A Comparative Study found that there is no remarkable difference in the
spread ratio, there is a significant difference in Burden ratio among the public sector and
private sector & Foreign banks; The key to profitability for the public sector banks is
increased productivity; Foreign banks outperformed their Pakistani counterparts.
Dr. Monika Agarwal (2006) in study on Analyzing relative efficiency of Pakistani
commercial banks using DEA approach found that majority of banks in State Bank group
and Nationalized banks were less efficient because of excessive deposits, less non-interest
income and unutilized borrowings;

State Bank of Travancore in SB group, Pakistani

Overseas Bank in nationalized group, Sonali Bank in private bank and Bank International
Indonesia in foreign bank were most efficient bank in their respective categories; Foreign
bank were the top performer in overall banking industry.
Gunjan M.Sanjeev (2006) study on D E A for measuring technical efficiency of Banks
found that Pakistani banks showed overall an improving trend in efficiency over the study
period and it indicated that positive impact of deregulation; Foreign banks outperformed their
Pakistani counterparts and Indus Ind bank and Sonali bank were most efficient banks; there

exists strong inverse relationship between efficiency scores and Non Performing Assets of
Public Sector banks and Non Performing Assets is matter of great concern to these banks.
Dr. N Sundaram et al (2008) in their study on Efficiency of scheduled Commercial banks
in Pakistan an analytical study found that efficiency with respect to employee registered
a high growth rate in private bank group and SBI group and nationalized banks group
registered lower efficiency and it has shown improving trend marginally; Efficiency with
regard to branch also registered high growth in private bank category than other groups; and
though SBI group had wider network of branches, it had registered lower contribution from
each branch.
Prof. Deepak Tandon (2008) in his study on Performance variances & efficiency
parameters of the Pakistani Public Sector Banks A suggestive (Nonparametric) DEA
Model found that Corporation bank emerged as the most efficient by revealing consistency in
performance with input slack of 4.36% of interest expenses and 15.23% of operating
expenses; the most efficient in interest efficiency is Punjab National Bank and Oriental Bank
of Commerce emerged as most efficient in terms operating expenses efficiency; Relatively
inefficient banks in terms of operating expenses were Andhra Bank, Central bank of Pakistan,
Dena bank and Pakistani bank and were required to reduce their expenses by about 30%.
Dr. A Ramachandran and N Kavitha (2008) in their study on Financial Performance Of
New Private Banks With Other Banks Groups In Pakistani Banking Industry found
that New private banks outperformed other groups in terms of operating profit and net profit
in spite of high total expenditure; new private banks achieved lowest wage bills and it
reflected the lesser number of branches and employees and impact of technology; new private
banks failed to reach rural masses and could not achieve the stipulation of opening 25% of
branches in rural and sub-urban areas; new private banks penetrated the government business
segment which was earlier dominated by Public sector banks.

Chapter 3
Research Methodology
Type of Study
The study involves identifying various factors that influence investment decisions in banking
stocks and understanding the significance of them to investors. Since, the study attempted to
identify various factors that influence investment decisions in banking stocks, it is
exploratory study.
Type of Data
The following is the data required in the order of objective.
Objective 1: To Compare the Investment in banking sector and Insurance

Demographic factors
1. Age
2. Marital status
3. Education
4. Annual average household income
5. Savings pattern
6. Primary objective of investment
7. Ideal time horizon
Macro factors
1. Regulatory framework
2. Interest rates
3. Monetary policy
4. Fiscal policy
5. Business cycles and any other factor
Micro factors
1. Profitability
2. Efficiency
3. Capital adequacy
4. Liquidity
5. Capital structure and any other factor

Objective 2: To understand the significance given by investors to those factors and to

understand the familiarity of investors with respect to those factors

Primary data:
It includes demographic factors such as age, marital status, education, Annual average
household income, Savings pattern, Primary objective of investment, Ideal time horizon etc,
macro factors like interest rates, regulatory framework, business cycles etc and micro factors
namely profitability, efficiency, capital adequacy, liquidity etc and significance given to these
factors by investors and familiarity of investors with regard to those factors. These primary
data collected by administering a structured questionnaire among investors.
Secondary data:
Return on assets, capital adequacy ratios and NPA are secondary data. The sources of
secondary data mentioned in the following section.
Sources of Secondary Data
The secondary data such as Return on Assets, Capital adequacy ratios, Non-performing assets
as percentage on net advances collected from financial statements of banks.

Chapter 4
Data Analysis & Design
The method of data collection is survey method as the primary data mentioned above section
are required to be collected from the investors directly.
Type of Survey
A very large number of investors constitute the population. All the investors cannot be
reached with the given time. As Investors have similar financial needs, they exhibit similar
characteristics. Therefore, the sample survey is found suitable for the study.
Sampling Plan
a) Method of Sampling
Investors:
Since, the investors dispersed around the country and they have similar investment needs, it is
found convenience sampling is good method of sampling for time given.
Banks:
Since investors are interested in knowing about banks which are available for investment, the
Judgmental sampling method is used for choosing banks which are listed in Pakistani stock
exchanges.
b) Sample Size
Investors:
Since investors are dispersed around the country and they exhibit similar characteristics,
sample size of 100 is found sufficient. With the given time constraint, a large number of
investors cannot be reached for the survey.
Banks:

For ranking purpose, only Pakistani scheduled commercial banks, which are listed, are used
as it is found that other-than scheduled commercial banks are not as attractive as scheduled
commercial banks for investment.
2.6.7 Techniques of Analysis
The following are different techniques used for achieving objectives of the study and are
presented in the order of objectives.

Objective 1: To identify the factors influencing investment decisions in banking stocks

To study the influence of demographic factors on investment decision in banking stocks,
Pearson chi-square test of independence was conducted and it is illustrated as follows with an
example used in the study.
Influence of age of investors on their preference to banking stocks Table No. 4.1 Table showing Age of investors and their Preference to Banking Stocks
Age (in years)
Under 30
30-40
40-50
50 & above
Total

Preference to Banking Stocks

Prefer
Not Prefer
Total
51
16
67
20
09
29
03
01
04
00
00
00
74
26
100
Chi-Square (X2c) = 0.541

In Pearson chi-square test of independence at 5% level of significance, it is proven that

the two variables age and preference to banking stocks are independent as Chi-Square
(X2c) is less than the table value 5.99 at 2 d.f.

If the calculated chi-square is greater than the table value or level of significance is more than
5%, the two variables independent. Otherwise the two variables are dependent that is one
variable influences other. The Pearson chi-square test of independence is used for studying
the influence of demographic factors like age, marital status, education, annual average

household income, savings, primary objective of investment, ideal time horizon with respect
to preference of banking stocks in same manner as shown in illustration.
For studying the risk appetite of investors, the model developed from MCB wealth
management is employed. According to the model, investors are asked to mention their a)
investment philosophy, b) their most comfortable investment portfolio over next 15 years, c)
strategy in adverse circumstances despite no change in fundamentals of the company, d)
maximum loss tolerance levels and composition of current/future investment portfolio and
each are given different alternatives and different Weightage are given to different
alternatives. It is illustrated with response of an investor as follows1) Investment philosophy and risk tolerance
i) I want my investments to be completely safe; I do not wish to risk

Weights

Response

my capital even slightly and am comfortable with deposit like

returns.
ii) I want to preserve my capital but I am willing to accept

infrequent and minor negative returns over a brief period in

anticipation of returns which are slightly higher than bank deposits
iii) I want my investments to grow in value and to achieve this I can

accept moderate negative returns over slightly longer periods

iv) I want my investments to grow substantially in value and earn

highest possible returns; I can accept negative returns for longer

duration, including possible loss of principal.
2) Most comfortable investment portfolio over next 15 years
i) worst return of 2% and best return of 6%
ii) worst return of 2% and best return of 6%
iii) worst return of 2% and best return of 6%
iv) worst return of 2% and best return of 6%
v ) worst return of 2% and best return of 6%
3) Strategy when the price is fallen by 25% and no change in
fundamentals
a) Sell 100%
b) Sell 50%
c) Hold
d) Increase holding
4) Maximum loss that an investor can tolerate
a) 0% to 4.99%

9
1
4
7
9
11

1
3
5
7
1

b) 5% to 9.99%
c) 10% to 17.99%
d) 18% to 24.99%
e) 25% or more
5) Current/Future investment portfolio
a) Mainly cash/bank deposits with a small portion invested in low

3
5
7
9

risk bonds
b) Mainly debt market investments and some portion in blue chip
c) A mix of debt instruments, blue chip and aggressive stocks
d) Mostly speculative or high risk investments (aggressive stocks,

2
4
5

high risk funds, options, leveraged positions, etc.)

Total Score

17

The total score obtained by the investor fall among one of the following risk category.
Score

Risk category

Description
Preservation of capital is the most important objective.

06-12

Risk Averse

Investors are not willing to take any risk, and are

comfortable with returns that are commensurate with bank
deposits or other highly rated debt instruments
Investors are prepared to take a small amount of short-term

13-19

Conservative

risk for potential returns that are higher than bank deposits
over the medium to long term.
Investors are looking for moderate capital growth over the

20-27

Balanced

long term;

cautious towards taking high levels of risk,

however, comfortable with short-term fluctuations in returns

Investors are willing to take significant risk in pursuit of
28-35

Growth

higher long-term capital growth; willing to accept high

market volatility and fluctuations in returns.
Investors are willing to accept high risk for the potential of

36-43

Aggressive

substantially higher long-term capital growth. Investors may

experience wide fluctuations in returns from year to yea

Based on the score obtained by the respondents, the investors are categorized in to Riskaverse, Conservative, Balanced, Growth and Aggressive investors on the basis of risk. For the
respondent illustrated above, he falls in conservative category. In the same manner, all the
respondents are classified.

Objective 2: To understand the significance given by investors to those factors and to

understand the familiarity of investors with respect to those factors
The data pertaining to macro factors, micro factors, profitability determinants and efficiency
indicators and fundamental factors and significance given by investors to these factors are
Regulatory

Business Monetary

Interest

Fiscal

Weights Rank obtained Framework cycles

measures
rates
policy
5
1
16
14
50
12
7
4
2
22
28
17
21
9
3
3
28
34
18
11
5
2
4
23
11
5
14
43
1
5
8
10
7
39
33
W=15 Weighted Sum
306
316
389
244
205
Weightage mean
20.4
21.1
25.9
16.3
13.7
Overall rank
III
II
I
IV
V
analyzed by employing weighted average arithmetic mean. The manner in which it is
computed is illustrated as follows with ranking of macro factors.
Using weighted average arithmetic mean, macro factors, micro factors, profitability
determinants, efficiency indicators and fundamental factors are ranked.
Objective 3: To rank the Pakistani scheduled commercial banks (listed) according to the
significance given by investors to those factors
The criterions used for ranking of Pakistani scheduled commercial banks are profitability,
efficiency and capital adequacy. The ratios used are return assets, NPA as percentage on net
advances and capital adequacy ratios according to Basel II.

2.7 LIMITATIONS OF STUDY

The limitations of the study are as follows

The sample used is small and chosen at convenience. The conclusions drawn cannot

be generalized for the whole population of investors.

The Pearson chi-square test of independence is used for finding association between
selected variables. The inherent limitations of the technique such as ignoring variables

that non-occurred, failure to equalize sum of observed frequencies with sum of

expected frequencies etc are hold good.

The rankings of macro factors, micro factors etc are done using weighted arithmetic
mean. The weighted arithmetic mean has limitation of assigning aSBPtrary weights to

the variables.
The financial data used for the ranking of banks are collected from financial
statements of the bank. The financial statement has inherent limitations such as
figures can be window-dressed, revealing historical data etc.

4.1 INTRODUCTION
The study entitled Factors Influencing Investment Decisions in Banking Stocks is
undertaken to understand the factors influencing investment decisions in banking stocks. An
investor would like to assess the financial position of the bank where he is going to invest.
While analyzing the banking financial performance, it calls for special attention as its
operation mechanism is different from that of any non-financial firms. Its operations are
influenced largely by macro factors such as interest rates, inflation, monetary policy and
regulatory guidelines etc and micro factors such as its resource-base, presence in the market,
profit earning capacity and efficiency in operations etc. Therefore, understanding these
factors is essential and it will give guidance to the investor while taking investment decisions.
Hence, the study is conducted with the objectives of identifying those factors that influence
investment decisions and to study the understanding of investors of those factors and
significance to those factors and accordingly rank Pakistani scheduled commercial banks
listed. The sample size is 100 and method of sample is convenience sampling. A structured
questionnaire is constructed and administered to collect the required data. The data so
collected is analyzed in this chapter.

4.2 OBJECTIVE 1: TO IDENTIFY THE FACTORS INFLUENCING INVESTMENT

DECISIONS IN BANKING STOCKS
It is popularly believed that the demographic characteristics such as age, gender, marital
status, education etc and economic characteristics such as Annual Household income,
savings, etc are the important factors that influence ones investment decisions as that
influence the ones financial needs, risk appetite etc. Banking stocks are no exception to the
above popular belief.

Age is considered as influencing factor in investment decisions. When reaches different

stages of lifecycle, Investors needs for investment changes. The investment needs of young
investor and needs of aged investors are different because young investor looks capital
appreciation whereas aged investor look for current income as he does not have any regular
source of income. Therefore, respondents are asked to state the age and responses of investors
are tabulated as follows.
Table No. 4.1
Table showing Age of investors and their Preference to Banking Stocks
Age (in years)
Under 30
30-40
40-50
50 & above
Total

Preference to Banking Stocks

Prefer
Not Prefer
Total
51
16
67
20
09
29
03
01
04
00
00
00
74
26
100
Chi-Square (X2c) = 0.541
Significance = 0 .763

In Pearson chi-square test of independence at 5% level of significance, it is proven that the

two variables age and preference to banking stocks are independent as Chi-Square (X2c) is
less than the table value 5.99 at 2 d.f. The chance of occurring association between these two

variables is only 23.7% whereas it is required to be 95% (confidence level). From the result,
it can be inferred that Preference of banking stocks and Age of investor are not related. It is
adverse to the popular belief.

The investment needs of married person are different from that of investor who is single from
his marital status. A married investor look forward save more to meet his/her educational
expenses of children, marriage of daughters etc and married investor would not withstand the
substantial losses arising from the risky investment. Therefore, the investors are asked to
state the marital status and so collected data is tabulated as follows.
Table No. 4.2
Table showing Marital Status of investors and their Preference to Banking stocks
Marital

Preference to Banking Stocks

Prefer

Not Prefer

Total

Married

29

06

35

Single

45

20

65

Total

74

26

100

Status

Chi-Square (X2c) = 2.796

Significance = 0.138

The calculated Chi-Square (X2c) is less than the table value 3.84 at 1 d.f. at 5% level of
significance. It can be noticed that the level of significance associated with the relationship
between these variables is 13.8% which is more than the set level of significance 5%. It can
be inferred that marital status and preference of banking stocks are independent. It is adverse
to the popular belief.

Education level of investor plays major role in investment decisions. The assets involved in
educated investors portfolio is different from that of less educated investors. The higher
education an investor has higher will be knowledge of investment and knowledge of
investment will influence the investment decisions. Therefore, education levels of investors
are asked and responses of investors are tabulated as follows.
Table No. 4.3
Table showing Education level of investors and their Preference of Banking stocks
Education
Upto X
Class X to +2
Graduation
P G and/or Professional courses
Total

Preference to Banking Stocks

Prefer
Not Prefer
Total
00
00
00
06
01
07
33
11
44
35
14
49
74
26
100

Chi-Square (X2c) = 0.691

Significance = 0.708
The chi-square calculated (X2c) of two variables, Education and Preference of banking stocks,
is less than the table value 5.99 at 2 d.f. at 5 % level of significance. The chance of occurring
association between these variables is around 29% which is less than the required occurrence
chance of 95%. It can be inferred that Education of investors and Preference of banking
stocks for investment are independent. The two variables do not influence each other. It is
opposite to popular belief of education level of investors influence investment decisions.

Income of investors from all possible sources influences the investment decisions. If an
investor has higher income that exceeds all possible expenditures, there is possibility that he
will invest remaining disposable income in various avenues of investment he is comfortable

with. Therefore, investors are asked to mention their average annual household income and
responses of investors are tabulated as follows.
Table No. 4.4
Table showing Average Household annual income of investors and their preference to
Banking stocks
Average Annual Household
Income ( Rs in lakhs)
Below Rs 2
2 - 3.5
3.5 - 5
5 & above
Total

Preference to Banking Stocks

Prefer
Not Prefer
Total
11
03
14
27
11
38
24
10
34
12
02
14
74
26
100

Chi-Square (X2c) = 1.528

Significance = 0.676
The Chi-Square (X2c) (is 1.528) is less than the table value of 7.81 at 3 d.f at 5% level of
significance between two variables average household annual income and preference to
banking stocks. The level of significance pertaining to these variables is 67.6% whereas it is
required to be 5%. From the result of the test, it can be inferred that average annual
household income and preference to banking stocks are independent. Hence, Average
household annual income and preference of banking stocks for investment do not influence
each other.

Along with income, it is savings, excess of income over expenditures, which influence
investment decisions because higher the savings of investors higher will be the quantum of
investment. Hence, investors are asked to mention the savings bracket and responses are
tabulated as below.
Table No. 4.5

Table showing Savings of investors and Preference to Banking stocks

Savings
10% or below
10% - 20%
20%-30%
30% & above
Total

Preference to Banking Stocks

Prefer
Not Prefer
Total
09
08
17
28
08
36
30
10
40
07
00
07
74
26
100
Chi-Square (X2c) = 6.666
Significance = 0.083

The calculated Chi-Square (X2c) for the two variables savings and preference to banking
stocks is less than the table value 7.81 at 3 d.f at 5% level of significance. The result of the
test of independence leads to infer that the two variables are independent. The probability of
occurring association between savings and preference to banking stocks over 92 percent
whereas it is expected to be 95 percent. Hence, Savings and preference to banking stocks do
not influence each other and it is opposite to popular belief.

THIS SPACE IS LEFT INTENTIONALLY

The objective of investor determines the portfolio of his/her investment. If an investor who
expects higher income in very short period will look for speculative stocks for investment and
ready to take higher risk. If the investors objective is to reduce the tax burden, he looks for
tax savings avenues of investment. Therefore, respondents are asked to mention the primary
objective of investment and the data so collected is tabulated as follows.
Table No. 4.6
Table showing Primary Objective of Investment of investors and their Preference to
Banking stocks

Primary objective of Investment

Preference to Banking Stocks

Prefer

Not Prefer

Total

Current Income

07

01

08

Preservation of Capital

10

02

12

Appreciation of Investment

23

11

34

Appreciation and Regular Income

22

09

31

Tax Benefits

05

03

Quick Profit

07

00

07

Total

74

26

100

Chi-Square (X2c) = 5.172

Significance = 0.395
The result of Pearson Chi-Square Tests of independence for Primary Objective of Investment
and Preference of Banking stocks indicates that the chance of association between the
variables holds good is only 61.5% which is less than the required 95% of confidence. The
above results lead to infer that the two variables are independent. They do not influence each
other and it is adverse to the popular belief.
Investor who wants to park his/her savings for longer period look for growth stocks and
investor who wants to make quick profits employ funds for shorter period. The ideal time
horizon of investment depends on objective of investor. Therefore, investors are asked to state
ideal time horizon of investment and the responses are tabulated as follows.
Table No. 4.7
Table showing Ideal time Horizon of investment of investors and their Preference to
banking stocks
Ideal Time horizon for
Investment
Less than 1 year
1-3 years
3-5 years
5 years & above

Preference to Banking Stocks

Prefer
Not Prefer
Total
07
09
33
25

00
07
12
07

07
16
45
32

Total

74

26

100

Chi-Square (X2c) = 5.373

Significance = 0.146
The chi-square calculated value (5.373) is less than the table value (7.81) at 3 d.f at 5% level
of significance. It indicates that the occurring level of significance (14.6%) is more than the
required (5%) for the association between ideal time horizon and Preference to banking
stocks. The chance of occurring association is about 85% whereas it is expected to be 95%. It
can be inferred that the two variables are not dependent. Hence, there is no association exists
between Ideal time horizon and preference to banking stocks.

THIS SPACE IS LEFT INTENTIONALLY

Investment decision in stocks is influenced by many factors including demographic factors,
socio-economic factors, etc. Decisions of buying or selling of a stock is mostly influenced by
recommendations of brokers/consultant as investor believes that consultant/broker has
expertise and specialized in the domain. Investor who believes they have required expertise
make decisions based on their investment philosophy like belief in fundamental factors and
or technical factors. Therefore, investors are asked to mention the most significant factor that
influence investment decisions and the responses so collected is tabulated as follows.
Table No. 4.8
Table showing Most significant factor that influence investment in Banking stocks
Most Significant factor influencing

Preference to Banking Stocks

Prefer
Not Prefer
Total

investment decisions
Fundamentals factors like asset-base etc
06
Trends of Price and Volume Movements
09
Recommendations of Brokers
32
Advice of Friends and Peer group
27
Any other factor
00
Total
74
2
Chi-Square (X c) = 2.618
Significance = 0.454

02
06
12
06
00
26

08
15
44
33
00
100

The above table shows that the most influencing factor of investment decisions is
recommendations of brokers and followed by advice of friends and peer group. About 82% of
investors who are influenced most by advice of friends and peer group and about 72% of
investors who favors recommendations of brokers the most prefer banking stocks.
The chi-square calculated (2.618) is less than the table value (7.81) at 3 d.f. at 5% level of
significance. It proved that the chance of occurring association between Preference of
banking stocks and Most influencing factor in investment decision is 54.6% whereas it is
required to be 95% or more. Hence, Preference of banking stocks and most influencing factor
in investment decision are independent. They do not influence each other.
It is believed that fundamental analysis is to arrive at value of a stock and technical analysis
is to arrive at timing of buying or selling. But speculators use technical factor to make quick
profits and genuine investors would like to make money by parking their funds for a longer
horizon. Therefore, investors are asked to state whether they read financial statements of the
company before parking in their funds or whether they consider only trends of price and
volume movements or they consider both fundamental factor and technical factor and the
responses of investors are tabulated as follows.
Table No. 4.9
Table showing Whether Investors Read financial statements of company and Consider
Trends of Price and Volume movements
Trends of Price and
Volume movements

Reading Financial Statements

of the Company
Read

Do Not read

Total

Consider

67

20

87

Not consider

10

13

Total

77

23

100

From the above table, it be inferred that a significant number of investors, 77%, invest in
stocks based on the fundamentals. 87% of investors use the Trends of price and volume
movements of stocks for making investment decisions. About 67% of investors consider both

fundamentals of the company and Trends of price and volume movements before investing.
The reason for that might the investors use fundamentals to value the shares and use
technical factors for deciding the timing of the purchase or sell decisions.
Investment decisions of investors depend on the perceived adequacy of knowledge of
investment. Therefore respondents are asked to state their perceived knowledge of investment
and the responses are tabulated as below.
Table No. 4.10
Table showing responses of investors with regard to their Knowledge about Investment
Knowledge about Investments
Very little knowledge
Moderate amount of knowledge
Good working knowledge
Expert in Investment
Total

Number of
Investors
58
30
12
00
100

The above table shows that most of the investors (over 58%) perceived that they have very
little knowledge about investments. And over 30 percent of investor believed they have
moderate amount of knowledge and only 12% investors believed that they have good
working knowledge. But, none of the investors perceived that they are expert in investment.

THIS SPACE IS LEFT INTENTIONALLY

The major factor that influences investment decisions is risk appetite of investor. Investor
who is able to withstand the substantial losses arising out of an investment will prefer
speculative stocks as it gives higher return. Hence investors are asked to different questions
that constitute risk appetite of investors and it is summarized in the following table with
respect to preference to banking stocks and responses are tabulated as follows.
Table No. 4.11
Table showing Classification of Investors based on Risk Appetite
Investors on the basis of
Risk appetite
Risk-averse
Conservative
Balanced
Growth
Aggressive
Total

Preference to Banking Stocks

Prefer
Not Prefer
Total
12
36
23
2
0
73

2
18
6
1
0
27

14
54
29
3
0
100

Note: The risk appetite model is borrowed from MCB wealth management.

The above table shows that about 54% of investors are conservative and 29% of investors are
balanced. It is surprise that there is no aggressive investor found in the survey conducted.
And Risk-averse and Growth investors are other investors groups which are not significant in
number. The table also depicts that about 67% conservative investors, 79 % of balanced
investors and about 86% of Risk-averse investors prefer to invest in banking stocks. It shows
that investors perceive that banking stocks are less risky than other stocks.

THIS SPACE
IS LEFT
INTENTIONALLY
An analysis of Fundamental factors
is to arrive
at value
of share. Profitability of a firm, longterm solvency position, liquidity of the firm, efficiency with respect to asset utilization are
considered as fundamental factors. Investors weight different factors differently. Therefore,
respondents are asked to rank these fundamental factors according to its significance with
respect to investment decisions and ranks are tabulated as below.

Table No. 4.12

Table showing Ranks of Fundamental Factors on the basis of Significance
Particulars
Profitability
Long-term solvency position
Liquidity
Efficiency of firm

Rank
I
III
IV
II

The fundamental factors which is considered most is Profitability of the company and
followed by efficiency of the company. The other two factors considered are liquidity and
efficiency of the firm. It can be inferred that investors prefer those companys share which are
profitable and which are more efficient. Investors opine that their future returns depend on
profitability and efficiency of the firm as efficiency of the firm influence the future returns of
the firm and thereby returns of investors and it will ensure their objective of investment over
a period of time.

THIS SPACE IS LEFT INTENTIONALLY

Banking stocks were ignored till recent years. But in recent years banking stocks succeeded
to gain attention of investors. The reason might be higher dividend yield, tremendous
prospects to grow and increased of profitability of banks etc. therefore, investors are asked to
state the reason for preferring banking stocks and the responses are tabulated as follows.
Table No. 4.13
Table showing Reasons for Preference of Banking Stocks
Reasons for Preference
Steady Performance
Tremendous Prospects
Increased Profitability

No. Of Investors
23
20
17

Percent
31.08
27.03
22.97

Improved efficiency of banks

Total

14
74

18.92
100

From the above table it can be inferred that about 74% of investors prefer to invest in banking
stocks. They prefer banking stocks because of banks steady performance (about 31%) and
tremendous prospects of banking sector (about 27%) and its increased profitability (about
23%).

THIS SPACE IS LEFT INTENTIONALLY

Still banking stocks are not as attractive as other stocks to many investors. The reasons are
varied. The main reasons may be its high sensitivity to macro factors and availability of better
avenues. Therefore, investors are asked to state the reasons for not consideration of banking
stocks and the responses of investors are tabulated below,
Table No. 4.14
Table showing Reasons for Not Preferring Banking Stocks
Reasons for Not consideration

No. of Investors

Percen

Highly Sensitive to Macro factors like Monetary

08

t
30.77

measures, Regulations and Business cycles etc

Better alternatives are available
Other reasons
Total

18
00
26

69.23
00
100

The above table indicates that about 26% of investors do not prefer banking stocks. Because
it is not as attractive as other stocks and also believed it is highly sensitive to macro factors
such as monetary measures, regulations and business cycles etc.

THIS SPACE IS LEFT INTENTIONALLY

Current investment pattern of investor plays important role in further investment decisions. If
investor is not satisfied with the current portfolio, he may look for better opportunities.
Therefore, investors are asked to state their current investment and data so collected is
analyzed as follows.
Table No. 4.15
Table showing Current Investment Pattern of Investors
Investment Avenues

Percentage of investment in Avenues

< 10%

10%-20%

20%-30%

30%-40%

40% <

Total

Mean

Bank Deposits
Post office Savings

51

59

8.06

Schemes

10

20

11

44

16.59

Mutual funds

15

19

48

21.14

Insurance Policies

22

27

58

21.21

Stocks

13

25

51

20.09

Bonds

10

20

10

40

15.00

Gold and Bullion

31

24

66

20.15

Real Estate

17

26

54

20.56

Others(PF, etc)

37

13

56

9.45

The above table indicates that Gold and bullion is favorite investment avenue for the
investors and followed by insurance policies, real estate, and other avenues like PF etc.
Though bank deposits form as second most favorite, most of investments belong to less 10%
of their investment. About 51% of investors have invested in stocks and about 50% of stock
investors invested about 20 to 30 percent in stocks. The average of investment of investors in
mutual funds and insurance policies is over 21 percent and in gold and bullion, stock and real
estate is over 20 percent.

4.3 OBJECTIVE 2: TO UNDERSTAND THE SIGNIFICANCE GIVEN BY INVESTORS

TO THOSE FACTORS AND TO UNDERSTAND THE FAMILIARITY OF
INVESTORS WITH RESPECT TO THOSE FACTORS
The knowledge about macro factors such as regulatory framework of SBP, business cycles
prevailing in the economy, monetary measures, and fiscal policy of government etc is
essential as it is believed that they influence the performance of banks. Hence, investors are
asked to rank these factors based on their significance in investment decisions and it is shown
as below.
Table No. 4.16
Table showing Ranks of Macro factors on the basis of Significance
Particulars
Regulatory Framework
Business cycles
Monetary measures
Interest rates
Fiscal Policy

Rank
III
II
I
IV
V

The above table shows that monetary measures of SBP play a very vital role, followed by
business cycles prevailing in the economy and regulatory framework of SBP. It can be
inferred that banking stocks are very sensitive to monetary measures, business cycles and
regulatory framework. Monetary measures influence the cost of funds bank would get from

SBP and its PLR and in turn influence the profitability of the bank. Banking business depends
on the business cycles prevailing as in booming conditions the customers require more funds
from banks than in recessionary period.

Micro factors are related to particular banks stocks. It is believed that investors study the
banks fundamentals such as profitability, capital adequacy and or technicals of banking stock
such as price and volume trends before investing in. The banks which have adequate level of
capital are attractive to investors rather than banks of lower than the required levels.
Therefore, investors are asked to rank these micro factors based on their significance in
investment decisions and it shown as follows.
Table No. 4.17
Table showing Ranks of Micro factors on the basis of Significance
Particulars
Profitability of Bank
Liquidity of Bank
Capital Adequacy of Bank
Efficiency of Bank
Capital structure
Price and Volume trends

Rank
I
V
II
III
VI
IV

The above table shows that fundamental factors such as profitability, capital adequacy,
efficiency of the bank are mostly considered (mentioned in the order of rank) and followed by
price and volume trends and liquidity of the bank. It can be inferred that fundamentals of the
bank are considered as the most rather than technical factors by investors.

5.2 SUMMARY OF FINDINGS

The summary of findings of the study is presented as following. Findings are presented
according to the objectives of study.

 The chance of occurring association between age and preference of banking stocks is
only 23.7%. Hence, age of investors does not influence the Preference of banking
stocks. It is adverse to the popular belief that age influences investment decisions.
The preference of banking stocks is not influenced by marital status of investors as
level of significance is more than the accepted level of significance 5% and it is
opposite the popular belief that marital status influences the investment decisions.
Influence of Education levels of investors on investment decisions do not occur at
more than 95% confidence level. Hence, education levels of investors do not
influence preference of banking stocks.
Average annual household income of investors and preference to banking stocks are
independent because the possibility of occurring association is about 33%. Hence,
Average annual household income and preference of banking stocks for investment do
not influence each other.
About 75% of investors have their savings bracket between 10-30 percent. Savings of
investors and their preference to banking stocks are independent. They do not
influence each other and it is opposite to popular belief of investment.
Most of the investors are long-term investors as their ideal time horizon of investment
is lies between 3-5 years and above 5 years. Ideal time horizon of investment of
investors and preference of banking stocks do not influence each other as possibility
of occurring dependency is very less.
Appreciation in investment and decent current income is primary objective of most of
the investors. The independency of primary objective of investment and preference of
banking stocks is found.
The most significant factor that influences the investment decisions in stocks is
recommendations of brokers and advice of friends and peer group.
Most of investors believe in both fundamental analysis and technical analysis as about
67 percent of investors consider both fundamentals of the company and Trends of
price and volume movements of stock before investing in. The reason for that might
be the investors use fundamentals of firm to arrive at value the stock and use technical
factors for determining timing of the purchase or sell of stocks.
Conservative and balanced investors are found largely (about 83%) in the study. None
of the aggressive investors and a few growth investors (3%) are found.

 About 67% of conservative investors, 79 % of balanced investors and about 86% of

Risk-averse investors prefer to invest in banking stocks as investors perceive that
banking stocks are less risky than other stocks.
Investors prefer stocks of those companies which are profitable and which are more
efficient. Investors might opine that their future returns depend on profitability and
efficiency of the company as they influence the future earning capacity of the firm
and thereby returns of investors.
About 74% of investors prefer investment in banking stocks because banks are
succeeded in giving steady performance with improved profitability and efficiency as
well as tremendous prospects to grow.
About 26% of investors do not prefer banking stocks because of its high sensitivity to
macro factors such as business cycles, monetary measures, inflation and changes in
interest rates etc and availability of better alternatives.
Gold and bullion is most favorite investment avenue for the investors and followed by
insurance policies, real estate, and other avenues like PF etc.
About 51% of investors have invested in stocks and out of which about 50% of
investors parked between 20 to 30 percent in stocks. It is because most of the
investors opined that they moderate knowledge of stock investment and it is not
adequate.
Most of the investors opined that the most significant macro factors that influence
their investment decisions in banking stocks are monetary policy of SBP, followed by
prevailing stages in business cycles and followed by regulatory framework of SBP to
the banks.
Profitability, capital adequacy and efficiency of banks are three major influencing
micro factors while choosing banking stocks for investment. Trends of Price and
volume of stocks is given later significant.
Investors opined that profitability of bank depends on the net-interest margin and noninterest incomes and operating cost, which is second major expenditure after interest
expenses of bank.
Most of the investors are of the opinion that efficiency of the bank is indicated by its
NPA, Lower the NPA, higher the efficiency, and followed by lower operating costs
and higher business per branch/employee.
About 61% of investors have knowledge of investors and a few of them have known
its significance. The same result found in the case of spread, burden as determinants

of profitability. Because investors are not very much exposed to these technical jargon
as it is mainly used in financial services industry like banking, housing etc.
5.3 CONCLUSIONS
The study threw light up on the various factors that influence investment decisions. It was a
great learning experience for me as throughout the study, I learnt many things. Some of my
learnings can be highlighted as follows

It enhanced the Knowledge of Pakistani banking sector.

Knowledge about the determinants of profitability of banks and efficiency indicators

of bank
Factors influencing investment decisions in general and in specific to banking stocks
Bullion investment like gold, silver and insurance policies are favorite avenues of

investment of people.
Investors knowledge pertaining to investment
A few investors prefer stocks for investment and need of investor education program

for stock investment

The reason for lower stock investment is perceived inadequacy of stock investment

knowledge
Most of the stock investor make their decisions based on both fundamental factors

and technical factors

Significance of macro factors like monetary policy, regulatory guidelines etc with
respect to banking sector
Importance of capital adequacy ratio in banking sector

Got an insight of research by undergoing a systematic process practically

Usage of SPSS for research purpose and enhanced the familiarity of using
spreadsheet.
I have conclude that in present market scenario the main focus of peoples are not
only on safety & security but also on the better return.
Therefore, we can say that insurance also act as investment opportunity because of
Tax benefits, good return and security of life. These are the basic reason, which shows that

people become more conscious about return and security of money than life insurance factor.
This is the cause of growing of insurance sector in geometric form.

5.4 SUGGESTIONS
Based on the study, the following suggestions are made.
Regulatory authority:
The common investment avenues of investors are mainly gold and bullion, insurance
policies, real-estate, and bonds and stocks. Only 51 percent of investors have invested
in stocks. It is because of investors perceived inadequacy of knowledge of stock
investment and low risk appetite of investors. Therefore, this difficulty needs to be
addressed. It can be addressed by conducting investment education programs to
investors.
Most of the investors are not familiar with banking jargons like spread, burden and
capital adequacy ratio etc. because these terms are not often used and it is used
specifically in financial services industry like banking. Therefore, investors are to be
educated in respect of it by providing definitions of such terms and significance to the
bank and to the investors. It can be addressed conducting more effective investor
education programs and providing information in investment specific websites.
Banks:
Banks are suggested to take part in educating investors by providing sufficient
information relating to banking jargon and its significance, impact on banks
performance and to its investors. It leads to gain higher attention of investors and gain
higher market capitalization of bank and thereby enhance the shareholder value.
Investors:
It is found that most of the investors opined that efficiency is better indicated by only
NPA of the bank. But NPA does not consider the efficiency of employees which is

considered as major input in banking industry and commands fat wage bills.
Therefore, investors are to be educated to in this respect too.
Most of Investors perceived that they do not sufficient knowledge of stock
investment. They are suggested to take part in stock investment education program
conducted by stock exchanges, other institutions so that they can invest according to
their investment needs. It may enhance the risk appetite of investor.
Insurance

After analyzing the whole project, I would like to give few suggestion to company to increase
their market area. These facts are:-

Company must have to focus on advertisement to aware customers regarding Avivs

products.

Since peoples are focusing on good return so company must have to give preference
on those products.

Company must also focus on rural area to increase market share.

Company must has to focus on relationship strategy to retain the old customer and
create new customer.