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No incentive for saving

Published on 6th Jan, Edition 1, 2014


Pakistan is among world’s those countries which have the lowest savings to GDP ratio, which is mainly because of poor purchasing power. Nearly one-third of total population lives below poverty line. Over the last ten years the gap between rich and poor has widened. Thanks to money whitening policies introduced with regular interval that encourages people to conceal their income. There exists huge undocumented economy and its estimates vary from one-third to three times of the documented economy. Since the successive governments have been introducing money whitening schemes, people are encouraged not to declare their real income. This on one hand deprives the government from revenue but more importantly, Pakistan is placed in the category of least developed country because of the paltry per capita income.

It is often said that there are limited investment options available in the country but it is also a fact that people have got tons of ill-gotten money. This is evident from the financial scams taking place with regular interval. The last mega financial scam was in early nineties, which was created by the sponsors of investment companies. However, this time people have been ripped off in the name of Islam by groups offering Modaraba facility. It must be remembered that none of the Modaraba companies operating under the ambient of Securities and Exchange Commission of Pakistan (SECP) was involved in this scam.
Historically, small savers have been keeping their money as term deposits with commercial banks. According to some financial sector analysts bulk of the deposits are of less than one year tenor. It seems people don’t wish to tie their funds for longer duration. Knowing that the SBP has not only fixed floor rate but has also raised it recently. However, there is pressure on the central bank to withdraw this condition. All those who are concerned with their life savings keep the money in the bank, despite poor rate of return. In the recent past, the average spear earned by commercial banks hovered around 7.5 per cent but banks never thought about increasing rate of return.

Huge deposits are also made in various schemes offered by National Savings Schemes. These schemes have been focus of those who want to ensure security of their investment but also wish to earn return higher than those offered by commercial banks. Though there has been a deceleration in growth in investment in various schemes, these remain attractive for retired people and widows. Over the year there has been a suggestion that the schemes offered often compete with investment in bourses as well as bank deposits. In the past there was an effort to cut down rate of return offered by schemes. However, the move has meet vehement opposition by old people.

It may be said that Pakistan stock markets is often termed one of the best performing markets. Lately, the market has recorded persistent and substantial growth and benchmark index is hovering above 25,000 point. Some experts say that it may be true that Pakistan is one of the best performing market but it is mainly driven by the foreign investors, who own more than 30% stake. It is expected if government enlists some of the good performing public sector enterprises and also offer share of these entities to general public not only free float will increase but more investment flow to the bourses. Some of the experts say that by end 2014 KSE-100 Index may cross 29,000 levels. However, it is heavily dependent on government policies, direction for key micro indicators and government’s ability to maintain peace in the country and resolution of energy crisis.


Some of the experts say that the size of listed capital is still too small, bulk of daily trading volume pertains to less than two dozen companies. One of the suggestions to increase quantum of listed capital is to facilitate listing of more companies. Experts say that tax rate applicable on public limited companies should be reduced substantially to encourage entrepreneurs to enlist their ventures on local bourses. At present the difference in tax rate applicable on private and public limited companies is nominal, which encourages people not to list their entities on stock exchanges.

Pakistani bourses are predominantly skewed towards equities. Size of debt instrument market is still very small. It is partly because most of the companies have borrowed heavily from the commercial banks and issue of bonds and term finance certificates does not look economic. However, there is a tendency if Pakistan to opt for bank borrowing rather than issue of debt instruments.

Mutual funds are also considered good for making investment, partly because now a diversified range of funds is available and partly because of Shariah compliant funds. While the overall size assets under the management of asset management companies is around Rs400 billion, Al Meezan Asset management alone manages assets worth around Rs50 billion. There has been substantial growth in size of Shariah compliant mutual funds after the flotation of Sovereign Ijara Sukuk by the government of Pakistan. Sukuk flotation helped not only in mopping money, but also encouraged Islamic banks to invest in the Sukuk for statutory liquidity reserves purpose. While conventional banks invest heavily in interest bearing government securities for meeting statutory reserve requirement Islamic banks are not allowed to invest in interest bearing government papers i.e. T-Bills and PIBs.

While stock exchanges have been operating in Pakistan more nearly half a century, Pakistan Mercantile Exchange (PMEX) has commenced operation in 2007. At present it offers various products for trading/investment but bulk of the business is confined to gold, silver, crude oil and rice. It has recently introduced Milli Tola Gold, which enables an ordinary person to buy, sell and invest in gold in the multiples of Rs50. It s expected that small savers will be able to buy guaranteed pure gold though an exchange licensed by Securities and Exchange Commission of Pakistan (SECP).


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