SlideShare a Scribd company logo
Introduction

 The financial system in any country consists of a large number of
institutions, instruments and markets. Financial intermediaries range
from money lenders and commission agents to banks, insurance
companies, brokerage house, investment trusts and stock exchanges.
Financial instruments (or assets) range from coins and currency notes
to government bonds, mortgages, corporate stocks and the more
exotic derivatives of high finance. Markets dealing with the trading of
financial assets can be categorized as being either formal (as in stock
exchanges with centralized trading floors) or in formal (as in over the
counter or curb markets).

The objective of this paper is to highlight first in broad terms the role
of financial systems in economic development and then to focus on the
specific contribution that stock markets can make to the widening and
deepening of the financial sector. We then describe the evolution of
stock market in Pakistan and high lighted in particular the factors
which have the constrained effective operation of equities markets in
the country. Finally we make recommendations for enhancing the role
of stock markets.

2.             The Role Of Financial Systems In Development

2.1      Role Of Financial System

the basic role of financial systems is to engage in the process of
intermediation by mobilizing savings from a large pool of small savers
and channelizing these funds into productive investments by a
generally much smaller number of borrowers. The key to success in
intermediation rests on the ability to pool together and thereby reduce
the risks associated with individual investments.

 In the absence of financial services, an economy is relegated to
activities of subsistence or barter. This greatly limits the scope for
specialization and the achievement of economies of scale through
operation of modern, large scale technology. Also it is not possible to
separate the timings of consumption from production unless physical
inventories of goods are build up. Altogether, economies with
underdeveloped financial systems are likely to have lower incomes,
other things being equal.

 There is general recognition now that finance is the key to raising the
level of investment and savings and there by promoting the process of
economic growth. Channelizing saving to investors with more
productive uses for them enhances the income both savers and
borrowers. Without an efficient financial system, lending can be costly
and risky. Competition among financial institutions ensures that
transactions costs of intermediation are minimized, that risk is
allocated to those most willing to bear it and that the most promising
investment opportunities are discovered.

 2.2         Evolution Of Financial System

Traditionally, financial system of developing countries have been
dominated by informal finance, consisting primarily of loans from
family members or friends or money lenders. Such managements have
had the advantages of low transactions costs, responsiveness to
borrowing need frequently for emergency consumption purposes and
low rates of non-repayment. However, they have greatly limited the
scope for financial intermediation due to the largely personalized
nature of the contacts. It is clear that as economies grow, thes
arrangements need to be diversified and supplemented by the services
that only formal institutions like commercial banks and capital markets
can provide. For example by transforming the size and maturity of
financial assets, such institutions can more effectively mediate
between the many small savers and depositors who prefer liquidity
and the few large borrowers who need long term loans to finance
investment. The emergence of financial institutions not only potentially
raises the volume of savings by offering higher rates of return with
relatively lower level of risk but also changes the composition of saving
away from physical assets like land, property, jewellery, etc, towards
financial assets, which enables more productive investments to be
undertaken from the overall economy point of view. Thin increase in
financial assets is referred to as ‘financial deepening’.

 2.2       Polices In Financial Sector

In the initial stages of development of the modern, formal financial
sector most countries, including Pakistan, have chosen the path of
controlling interest rates, directing and rationing the allocation of
credit to priority sectors and using the banking system for inexpensive
funding of government activities. This has undermined the process of
financial development and led to ‘financial repression.’ Saving have
depressed and other distortion have been created, including the strong
preference for debt versus equity financing of long term investment in
the presence of regime of low interest rates. Also, this has resulted in
a degree of ‘financial distress’ due to low spreads and default in
repayment of directed loan. Simultaneously, the preferential access to
credit of the public sector has tended to ‘crowed out’ the private
sector.

 2.3        Financial Sector Reform

Recognition of these problems had led many countries, including
Pakistan, to pursue the path of financial liberalization in recent years.
There has been extensive deregulation of interest rates, concessionary
credit schemes have been phased out, government owned banks have
been privatized, terms of government borrowing have been linked
more closely to market rates and permission granted for the
establishment of new types of financial institutions (investment banks,
leasing companies, mutual funds, etc.) in the private sector and
removal of restriction on foreign portfolio investment. These reforms
promise to enhance the role of capital market in particular in the
financial system. We turn now the role of equities markets in the
process of development.

 3     The Role Of Stock Markets

The primary role of stock markets is to provide long term equity
finance for the corporate sector. Trading in equities enables
intermediation between conflicting maturity preferences of lenders and
borrowers. Stock market also potentially promote broad-basing of
ownership of financial assets and the reallocation of funds among
corporations and sectors.

 3.1        Choice Between Debt And Equity

The management decision regarding choice between debt and equity
modes of finance is contingent on a number of factors which include
risk and cost of capital. Under a private enterprise system the
prospects of individual gains are inevitably associated with the
possibilities of loss, and this hazard rests on those who have supplied
the capital. The hazard shows itself in the form of uncertainty both of
income to be received and recovery of principal invested. It is these
uncertainties that constitute risk.

If a corporate entity fails to earn a profit and continues to spend more
money than it takes in, a time will come when it will be unable to meet
its current obligations.
When that happens the company becomes insolvent or bankrupt. In
such situations all debts must be settled in full before any equity
claims can be paid.

Because of the priority of debt claims before equity claims the creditor
is ready to supply long term capital in the form of debt at a lower cost
in the form of interest. The creditor, therefore, does not demand a
proportionate share in profit. It may be pointed out here that the
position of a creditor is negotiated one as a result of a bargain
between the firm and the supplier of the funds. The decision of
accepting a particular level of risk, there fore is voluntary on both the
sides.

If we compare debt and equity securities from the point of view of
allocation of income, holders of debt securities have to be satisfied
with low and fixed incomes. These instruments also enjoy stable
market values because of lower risks. on the other hand there is lot of
variation in the income of equity security with the result that the price
performance is more volatile resulting in the higher degree of risk. In
accepting this higher level of risk, equity holder on the average expect
a higher rate of return.

The mix of debt and equity, that is, the capital structure differs from
industry to industry. Industries with stable sales performance and
stable margins (selling price-cost relationship) permit use of more
debt. On the other hand, an industry having less stable sales
performance and volatile margins may have a lower debt to equity
ratio.

Therefore, companies in stable sales industries will enjoy lower cost of
capital compared with companies in volatile sale performance
industries. Also the capital structure affects the stock market
performance of the shares of company. A company using more debt
than the industry averages may have lower share price because of
higher risk. Use of more debt may result in higher earnings per share
but they may be offset by increased risk, resulting in an adverse price
effect .

The mode of financing used is also influenced by the motivation to
keep control. A firm may avoid issuing new equity for fear of dilution of
control and, therefore, the growth requirements may be financed
through internal equity (retained profits ) only. Debit may also be used
when this source falls short of the requirement. This could result in a
firm moving away from the optimal debt to equity ratio.
3.2           Equity Markets And Development

Broadly speaking there appears to be some correlation between
indicators of development of equity market in a country and its overall
level of development, as shown in table 2.1. The table indicates that,
as of the late 1980s the equity market in Pakistan was relatively
underdeveloped. The position has improved significantly in most of the
emerging markets in developing countries, including Pakistan, in the
1990s, following the process of financial liberalization and, in
particular, due to the flow of portfolio funds from developed countries
of these emerging markets. As such, while ratios have improved the
relative standing of Pakistan has not improved dramatically.

 3.3           Constraints In Development Of Stock Markets

A number of factors have traditionally been responsible for the under
development of the equity market in Pakistan. We have already
referred to the government policy till recently of keeping interestrates
artificially low, thereby leading to a strong preference for debt versus
equity financing. Also, the tax system has increased the attractiveness
of debt and firms have remained highly leveraged in Pakistan.

                                                  Table 2.1

                     Equity Market Indicators (1987)

Per capita            Average market                      Turnover ratio

Income                      Capitalization                     (% of
average

                   (US $)                     as % of GNP
          capitalization)

Developed Countries

Japan             15760                      92
          93

U.K               10420                      80
          72

U.S.A             18530                      58
          93
Germany          14400                    21
      161

France          12790                    18
         56

Developing countries

Malaysia         1810                     58
        23

Korea          2690                     19
         111

Thailand         850                      9
        114

Mexico1830                     8                                 169

Phillipines       590                         7
          62

India            300                      6
         19

Pakistan         350                      5
        9

 In addition, there have been negative perceptions about the
operations of the stock market on the part of small investors. For a
stock market to perform its role efficiently, it must be transparent and
market based.          The average investor in Pakistan sees the
market as being dominated by insider trading, frequent conflicts of
interest and low rate of payment of dividends. There is relatively weak
regulation and supervision of companies and reliable financial
information is generally not disseminated. Further, the stock remains
very thin and only limited quantities of corporate stock are traded as
sponsors are generally unwilling to dilute their ownership.
Consequently, there is great deal of volatility in share prices, which
frequently do not reflect accurately the underlying fundamentals. The
procedures for trading the stocks also impose high costs and are
cumbersome in nature. Altogether, the role of equity markets can be
enhanced only if the stock exchanges operate efficiently in a
competitive framework.
3.3         Recent Stock Market Development

The boom witnessed during the 90’s in the stock market of Pakistan
can be attributed to a large number of factors, including, first, the
process of financial liberalization resulting in a rise and inflow of
foreign portfolio investment; second, the process of privatization and
the offering of new attractive shares; third, a greater measure of
political stability and investor confidence; fourth, improvements in the
operational efficiency of stock markets. It is of significance to note that
the two major measures of the share price index coincided with the
induction of popularly elected governments in 1990 and 1993
respectively. More recently, prices have plummeted in response to
weakening in the underlying macro economic fundamentals,
deteriorating law and order situation and exodus of foreign portfolio
capital.

The experience of the last years demonstrates that while the process
of financial liberalization and deregulation has conferred large capital
gains in terms of the increase in market capitalization (of over ten
times between 1989 and 1995), the result remain fixed. First, there
has apparently been an increase in the volatility of the stock market,
with large increase being followed by big decrease. For example, share
prices rose by as much as 48% in 1993, but have fallen since by 40%
(see table 2.2). This volatility is not only the consequence of
underlying law and order and political factors but also a reflection of
relatively short term nature of inflows of foreign portfolio funds. These
fluctuations in share prices have increased perceptions of risks and run
the danger of driving out risk averse investors from the market,
resulting in a degree of disintermediation. Second, while market
capitalization.

Table 2.2

Index Of Share Prices In Pakistan

Year             SBP general index                      percent

                 Of share prices                       Annual change

                 [1980-91=100]


1981                     93.5                                        -
1982                     100.3                                       7

1983                     131.6                                       31

1984                     182.4                                       39

1985                     176.3                                       -3

1986                     171.0                                       -3

1987                     222.7                                       30

1988                     260.6                                       17

1989                     273.3                                       5

1990                     283.5                                       4

1991                     387.7                                       37

1992                     334.0                                       -14

1993                     493.1                                       48

1994                     589.6                                       20

 has increased rapidly, only a fraction is due to listing of new shares.
At its peak in 1992, stock markets in Pakistan mobilized capital of
about Rs 12 billion through new issues. This is equivalent to only about
10 percent of private investment in Pakistan. Therefore, the role of
equities market in mobilizing funds of investment in plant and
equipment remains very limited. Further reforms are required for an
enhancement in the role of Pakistan. We turn to these in the next
section.

Based on the above, we present some recommendations for
enhancement in the role of stock markets. In the context of choice
between debit and equity we have highlighted that firms are highly
leveraged in Pakistan. It is essential that the access to debt financing
from commercial banks and DFIs be reduced by requiring these
financial institutions to target for lower debt to equity ratios of 60:40
or even 50:50. as opposed to this, appropriate regulatory changes
may be introduced so that floatation of corporate bonds directly in
stock market are encouraged, especially by multinationals and other
large corporations. Other proposals generally to the development of
better financial infrastructure for operation of stock markets. These
include strengthening of regulatory provisions and better enforcement,
improvements in information systems and mechanisms for payments,
more neutral application of fiscal policy (especially with regard to
income and wealth tax) to all types of financial instruments, higher
standards of disclosure of financial information by companies,
improvements in auditing and accounting practices and greater scope
for financial innovation within a flexible regulatory framework. We
expect that progress in these areas will enhance substantially the role
of stock markets in the economic development of Pakistan in coming
years.

More Related Content

What's hot

Capital Thinking no 4
Capital Thinking no 4Capital Thinking no 4
Capital Thinking no 4
Michael Dance
 
Journal paper 2
Journal paper 2Journal paper 2
Journal paper 2
crmbasel
 
Imk Fina Reforms
Imk Fina ReformsImk Fina Reforms
Imk Fina Reforms
Anoop Gopalakrishnan
 
Chapter 14 - Funding liquidity risk management [Compatibility Mode]
Chapter 14 - Funding liquidity risk management [Compatibility Mode]Chapter 14 - Funding liquidity risk management [Compatibility Mode]
Chapter 14 - Funding liquidity risk management [Compatibility Mode]
Quan Risk
 
Blount Senate Aging Committee Testimony Mar 2011
Blount Senate Aging Committee Testimony   Mar 2011Blount Senate Aging Committee Testimony   Mar 2011
Blount Senate Aging Committee Testimony Mar 2011
EdBlount
 
Treasury liquidity management jpm-2012
Treasury   liquidity management jpm-2012Treasury   liquidity management jpm-2012
Treasury liquidity management jpm-2012
sowmik
 
NYU Economics Research Paper (Independent Study) - Fall 2010
NYU Economics Research Paper (Independent Study) - Fall 2010NYU Economics Research Paper (Independent Study) - Fall 2010
NYU Economics Research Paper (Independent Study) - Fall 2010
jsmar16
 
Risk & Return Analysis - Bonds market in Pakistan
Risk & Return Analysis - Bonds market in PakistanRisk & Return Analysis - Bonds market in Pakistan
Risk & Return Analysis - Bonds market in Pakistan
Syed Jahanzeb Haider
 
Regulating Islamic Banking : A Malaysian Perspective
Regulating Islamic Banking : A Malaysian PerspectiveRegulating Islamic Banking : A Malaysian Perspective
Regulating Islamic Banking : A Malaysian Perspective
Lokesh Gupta
 
Measuring and Managing Liquidity Risk
Measuring and Managing Liquidity RiskMeasuring and Managing Liquidity Risk
Measuring and Managing Liquidity Risk
Danial822
 
NYU, Economics: Research Paper
NYU, Economics: Research PaperNYU, Economics: Research Paper
NYU, Economics: Research Paper
jsmar16
 
Credit allocation slide
Credit allocation slideCredit allocation slide
Credit allocation slide
Euna Choi
 
Shadow banking
Shadow banking   Shadow banking
Shadow banking
Vince Assaf
 
Chapter 24_Risk Management in Financial Institutions
Chapter 24_Risk Management in Financial InstitutionsChapter 24_Risk Management in Financial Institutions
Chapter 24_Risk Management in Financial Institutions
Rusman Mukhlis
 
Zina Sanyoura & Elvira Espejo, Obtaining Funds from New Financial Instruments...
Zina Sanyoura & Elvira Espejo, Obtaining Funds from New Financial Instruments...Zina Sanyoura & Elvira Espejo, Obtaining Funds from New Financial Instruments...
Zina Sanyoura & Elvira Espejo, Obtaining Funds from New Financial Instruments...
Microcredit Summit Campaign
 
Corporate Debt Market
Corporate Debt MarketCorporate Debt Market
Corporate Debt Market
Amit Gupta
 
11.[49 61]trends of trade credit use among quoted firms in nigeria
11.[49 61]trends of trade credit use among quoted firms in nigeria11.[49 61]trends of trade credit use among quoted firms in nigeria
11.[49 61]trends of trade credit use among quoted firms in nigeria
Alexander Decker
 
liquidity concepts, instruments and procedure
liquidity concepts, instruments and procedureliquidity concepts, instruments and procedure
liquidity concepts, instruments and procedure
Samiksha Chawla
 
National Economic Survey - Volume I - Chapter 8 Financial Fragility In The NB...
National Economic Survey - Volume I - Chapter 8 Financial Fragility In The NB...National Economic Survey - Volume I - Chapter 8 Financial Fragility In The NB...
National Economic Survey - Volume I - Chapter 8 Financial Fragility In The NB...
DVSResearchFoundatio
 
Investment Policy of Banks-B.V.Raghunandan
Investment Policy of Banks-B.V.RaghunandanInvestment Policy of Banks-B.V.Raghunandan
Investment Policy of Banks-B.V.Raghunandan
SVS College
 

What's hot (20)

Capital Thinking no 4
Capital Thinking no 4Capital Thinking no 4
Capital Thinking no 4
 
Journal paper 2
Journal paper 2Journal paper 2
Journal paper 2
 
Imk Fina Reforms
Imk Fina ReformsImk Fina Reforms
Imk Fina Reforms
 
Chapter 14 - Funding liquidity risk management [Compatibility Mode]
Chapter 14 - Funding liquidity risk management [Compatibility Mode]Chapter 14 - Funding liquidity risk management [Compatibility Mode]
Chapter 14 - Funding liquidity risk management [Compatibility Mode]
 
Blount Senate Aging Committee Testimony Mar 2011
Blount Senate Aging Committee Testimony   Mar 2011Blount Senate Aging Committee Testimony   Mar 2011
Blount Senate Aging Committee Testimony Mar 2011
 
Treasury liquidity management jpm-2012
Treasury   liquidity management jpm-2012Treasury   liquidity management jpm-2012
Treasury liquidity management jpm-2012
 
NYU Economics Research Paper (Independent Study) - Fall 2010
NYU Economics Research Paper (Independent Study) - Fall 2010NYU Economics Research Paper (Independent Study) - Fall 2010
NYU Economics Research Paper (Independent Study) - Fall 2010
 
Risk & Return Analysis - Bonds market in Pakistan
Risk & Return Analysis - Bonds market in PakistanRisk & Return Analysis - Bonds market in Pakistan
Risk & Return Analysis - Bonds market in Pakistan
 
Regulating Islamic Banking : A Malaysian Perspective
Regulating Islamic Banking : A Malaysian PerspectiveRegulating Islamic Banking : A Malaysian Perspective
Regulating Islamic Banking : A Malaysian Perspective
 
Measuring and Managing Liquidity Risk
Measuring and Managing Liquidity RiskMeasuring and Managing Liquidity Risk
Measuring and Managing Liquidity Risk
 
NYU, Economics: Research Paper
NYU, Economics: Research PaperNYU, Economics: Research Paper
NYU, Economics: Research Paper
 
Credit allocation slide
Credit allocation slideCredit allocation slide
Credit allocation slide
 
Shadow banking
Shadow banking   Shadow banking
Shadow banking
 
Chapter 24_Risk Management in Financial Institutions
Chapter 24_Risk Management in Financial InstitutionsChapter 24_Risk Management in Financial Institutions
Chapter 24_Risk Management in Financial Institutions
 
Zina Sanyoura & Elvira Espejo, Obtaining Funds from New Financial Instruments...
Zina Sanyoura & Elvira Espejo, Obtaining Funds from New Financial Instruments...Zina Sanyoura & Elvira Espejo, Obtaining Funds from New Financial Instruments...
Zina Sanyoura & Elvira Espejo, Obtaining Funds from New Financial Instruments...
 
Corporate Debt Market
Corporate Debt MarketCorporate Debt Market
Corporate Debt Market
 
11.[49 61]trends of trade credit use among quoted firms in nigeria
11.[49 61]trends of trade credit use among quoted firms in nigeria11.[49 61]trends of trade credit use among quoted firms in nigeria
11.[49 61]trends of trade credit use among quoted firms in nigeria
 
liquidity concepts, instruments and procedure
liquidity concepts, instruments and procedureliquidity concepts, instruments and procedure
liquidity concepts, instruments and procedure
 
National Economic Survey - Volume I - Chapter 8 Financial Fragility In The NB...
National Economic Survey - Volume I - Chapter 8 Financial Fragility In The NB...National Economic Survey - Volume I - Chapter 8 Financial Fragility In The NB...
National Economic Survey - Volume I - Chapter 8 Financial Fragility In The NB...
 
Investment Policy of Banks-B.V.Raghunandan
Investment Policy of Banks-B.V.RaghunandanInvestment Policy of Banks-B.V.Raghunandan
Investment Policy of Banks-B.V.Raghunandan
 

Similar to Introduction

Topic 8_Money and Financial Markets (1).pdf
Topic 8_Money and Financial Markets (1).pdfTopic 8_Money and Financial Markets (1).pdf
Topic 8_Money and Financial Markets (1).pdf
amalik32
 
FMICh1.pptx
FMICh1.pptxFMICh1.pptx
FMICh1.pptx
Ashantilidu
 
Finance for Economists courswrok
Finance for Economists courswrokFinance for Economists courswrok
Finance for Economists courswrok
James Stewart
 
Getting your property financed
Getting your property financedGetting your property financed
Getting your property financed
KevinArnoldSVN
 
Mf0016 assignment
Mf0016 assignmentMf0016 assignment
Mf0016 assignment
Ankit Sachdev
 
VESTIGATION OF DYNAMIC INVOLVED IN DETERMINATION OF CAPITAL STRUCTURE OF KARU...
VESTIGATION OF DYNAMIC INVOLVED IN DETERMINATION OF CAPITAL STRUCTURE OF KARU...VESTIGATION OF DYNAMIC INVOLVED IN DETERMINATION OF CAPITAL STRUCTURE OF KARU...
VESTIGATION OF DYNAMIC INVOLVED IN DETERMINATION OF CAPITAL STRUCTURE OF KARU...
IAEME Publication
 
Financial Institutions Management A Risk Management Approach 8th Edition
Financial Institutions Management A Risk Management Approach 8th EditionFinancial Institutions Management A Risk Management Approach 8th Edition
Financial Institutions Management A Risk Management Approach 8th Edition
YouNet Co
 
Julian itemba assignment.pdf
Julian itemba assignment.pdfJulian itemba assignment.pdf
Julian itemba assignment.pdf
SALIMSHARIFU
 
Getting Your Property Financed
Getting Your Property FinancedGetting Your Property Financed
Getting Your Property Financed
Walt Arnold, CCIM, SIOR
 
ASSIGNMENT4g [Name of the Student][Name of t.docx
ASSIGNMENT4g [Name of the Student][Name of t.docxASSIGNMENT4g [Name of the Student][Name of t.docx
ASSIGNMENT4g [Name of the Student][Name of t.docx
edmondpburgess27164
 
Financial-System-Group-1.pptx
Financial-System-Group-1.pptxFinancial-System-Group-1.pptx
Financial-System-Group-1.pptx
MirdenHatdog
 
ASSIGNMENT3g [Name of the Student][Name of t.docx
ASSIGNMENT3g [Name of the Student][Name of t.docxASSIGNMENT3g [Name of the Student][Name of t.docx
ASSIGNMENT3g [Name of the Student][Name of t.docx
edmondpburgess27164
 
Financial intermediaries
Financial intermediariesFinancial intermediaries
Financial intermediaries
Venesha Juvanan
 
financial status.com ndasbjd as d ansd nas dna
financial status.com ndasbjd as d ansd nas dnafinancial status.com ndasbjd as d ansd nas dna
financial status.com ndasbjd as d ansd nas dna
loganzeck02
 
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docx
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docxWeek-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docx
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docx
alanfhall8953
 
Fi module book
Fi module bookFi module book
Fi module book
Comsats Islamabad
 
IE Business School
IE Business SchoolIE Business School
IE Business School
Chandni Kundra
 
Mercer Capital's Investment Management Industry Newsletter | Q2 2023 | Focus:...
Mercer Capital's Investment Management Industry Newsletter | Q2 2023 | Focus:...Mercer Capital's Investment Management Industry Newsletter | Q2 2023 | Focus:...
Mercer Capital's Investment Management Industry Newsletter | Q2 2023 | Focus:...
Mercer Capital
 
MSME Financing - Alternative Financing Instruments - Part - 14
MSME Financing - Alternative Financing Instruments - Part - 14MSME Financing - Alternative Financing Instruments - Part - 14
MSME Financing - Alternative Financing Instruments - Part - 14
Resurgent India
 
Revisiting A Panicked Securitization Market
Revisiting A Panicked Securitization MarketRevisiting A Panicked Securitization Market
Revisiting A Panicked Securitization Market
IOSR Journals
 

Similar to Introduction (20)

Topic 8_Money and Financial Markets (1).pdf
Topic 8_Money and Financial Markets (1).pdfTopic 8_Money and Financial Markets (1).pdf
Topic 8_Money and Financial Markets (1).pdf
 
FMICh1.pptx
FMICh1.pptxFMICh1.pptx
FMICh1.pptx
 
Finance for Economists courswrok
Finance for Economists courswrokFinance for Economists courswrok
Finance for Economists courswrok
 
Getting your property financed
Getting your property financedGetting your property financed
Getting your property financed
 
Mf0016 assignment
Mf0016 assignmentMf0016 assignment
Mf0016 assignment
 
VESTIGATION OF DYNAMIC INVOLVED IN DETERMINATION OF CAPITAL STRUCTURE OF KARU...
VESTIGATION OF DYNAMIC INVOLVED IN DETERMINATION OF CAPITAL STRUCTURE OF KARU...VESTIGATION OF DYNAMIC INVOLVED IN DETERMINATION OF CAPITAL STRUCTURE OF KARU...
VESTIGATION OF DYNAMIC INVOLVED IN DETERMINATION OF CAPITAL STRUCTURE OF KARU...
 
Financial Institutions Management A Risk Management Approach 8th Edition
Financial Institutions Management A Risk Management Approach 8th EditionFinancial Institutions Management A Risk Management Approach 8th Edition
Financial Institutions Management A Risk Management Approach 8th Edition
 
Julian itemba assignment.pdf
Julian itemba assignment.pdfJulian itemba assignment.pdf
Julian itemba assignment.pdf
 
Getting Your Property Financed
Getting Your Property FinancedGetting Your Property Financed
Getting Your Property Financed
 
ASSIGNMENT4g [Name of the Student][Name of t.docx
ASSIGNMENT4g [Name of the Student][Name of t.docxASSIGNMENT4g [Name of the Student][Name of t.docx
ASSIGNMENT4g [Name of the Student][Name of t.docx
 
Financial-System-Group-1.pptx
Financial-System-Group-1.pptxFinancial-System-Group-1.pptx
Financial-System-Group-1.pptx
 
ASSIGNMENT3g [Name of the Student][Name of t.docx
ASSIGNMENT3g [Name of the Student][Name of t.docxASSIGNMENT3g [Name of the Student][Name of t.docx
ASSIGNMENT3g [Name of the Student][Name of t.docx
 
Financial intermediaries
Financial intermediariesFinancial intermediaries
Financial intermediaries
 
financial status.com ndasbjd as d ansd nas dna
financial status.com ndasbjd as d ansd nas dnafinancial status.com ndasbjd as d ansd nas dna
financial status.com ndasbjd as d ansd nas dna
 
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docx
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docxWeek-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docx
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docx
 
Fi module book
Fi module bookFi module book
Fi module book
 
IE Business School
IE Business SchoolIE Business School
IE Business School
 
Mercer Capital's Investment Management Industry Newsletter | Q2 2023 | Focus:...
Mercer Capital's Investment Management Industry Newsletter | Q2 2023 | Focus:...Mercer Capital's Investment Management Industry Newsletter | Q2 2023 | Focus:...
Mercer Capital's Investment Management Industry Newsletter | Q2 2023 | Focus:...
 
MSME Financing - Alternative Financing Instruments - Part - 14
MSME Financing - Alternative Financing Instruments - Part - 14MSME Financing - Alternative Financing Instruments - Part - 14
MSME Financing - Alternative Financing Instruments - Part - 14
 
Revisiting A Panicked Securitization Market
Revisiting A Panicked Securitization MarketRevisiting A Panicked Securitization Market
Revisiting A Panicked Securitization Market
 

More from Ali Kamran

Training and development
Training and developmentTraining and development
Training and development
Ali Kamran
 
Teacher
Teacher Teacher
Teacher
Ali Kamran
 
Style textile
Style textileStyle textile
Style textile
Ali Kamran
 
Sme's
Sme'sSme's
Sme's
Ali Kamran
 
Section 1 back ground (2)
Section 1 back ground (2)Section 1 back ground (2)
Section 1 back ground (2)
Ali Kamran
 
Research
ResearchResearch
Research
Ali Kamran
 
Ptcl
PtclPtcl
Pso
PsoPso
Pizza hut presentation
Pizza hut presentationPizza hut presentation
Pizza hut presentation
Ali Kamran
 
Pia1
Pia1Pia1
Wah nobel ltd.
Wah nobel ltd.Wah nobel ltd.
Wah nobel ltd.
Ali Kamran
 
Paktel
PaktelPaktel
Paktel
Ali Kamran
 
Paktel
PaktelPaktel
Paktel
Ali Kamran
 
Outsourceing
OutsourceingOutsourceing
Outsourceing
Ali Kamran
 
Nestle
NestleNestle
Nestle
Ali Kamran
 
Motorola
MotorolaMotorola
Motorola
Ali Kamran
 
Mobilink
MobilinkMobilink
Mobilink
Ali Kamran
 
Marriott
MarriottMarriott
Marriott
Ali Kamran
 
Marriot questioinnaire
Marriot questioinnaireMarriot questioinnaire
Marriot questioinnaire
Ali Kamran
 
Management report..furguson
Management report..furgusonManagement report..furguson
Management report..furguson
Ali Kamran
 

More from Ali Kamran (20)

Training and development
Training and developmentTraining and development
Training and development
 
Teacher
Teacher Teacher
Teacher
 
Style textile
Style textileStyle textile
Style textile
 
Sme's
Sme'sSme's
Sme's
 
Section 1 back ground (2)
Section 1 back ground (2)Section 1 back ground (2)
Section 1 back ground (2)
 
Research
ResearchResearch
Research
 
Ptcl
PtclPtcl
Ptcl
 
Pso
PsoPso
Pso
 
Pizza hut presentation
Pizza hut presentationPizza hut presentation
Pizza hut presentation
 
Pia1
Pia1Pia1
Pia1
 
Wah nobel ltd.
Wah nobel ltd.Wah nobel ltd.
Wah nobel ltd.
 
Paktel
PaktelPaktel
Paktel
 
Paktel
PaktelPaktel
Paktel
 
Outsourceing
OutsourceingOutsourceing
Outsourceing
 
Nestle
NestleNestle
Nestle
 
Motorola
MotorolaMotorola
Motorola
 
Mobilink
MobilinkMobilink
Mobilink
 
Marriott
MarriottMarriott
Marriott
 
Marriot questioinnaire
Marriot questioinnaireMarriot questioinnaire
Marriot questioinnaire
 
Management report..furguson
Management report..furgusonManagement report..furguson
Management report..furguson
 

Recently uploaded

Industrial Tech SW: Category Renewal and Creation
Industrial Tech SW:  Category Renewal and CreationIndustrial Tech SW:  Category Renewal and Creation
Industrial Tech SW: Category Renewal and Creation
Christian Dahlen
 
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel ChartSatta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
➒➌➎➏➑➐➋➑➐➐Dpboss Matka Guessing Satta Matka Kalyan Chart Indian Matka
 
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
SOFTTECHHUB
 
Chapter 7 Final business management sciences .ppt
Chapter 7 Final business management sciences .pptChapter 7 Final business management sciences .ppt
Chapter 7 Final business management sciences .ppt
ssuser567e2d
 
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
Zodiac Signs and Food Preferences_ What Your Sign Says About Your TasteZodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
my Pandit
 
BeMetals Investor Presentation_June 1, 2024.pdf
BeMetals Investor Presentation_June 1, 2024.pdfBeMetals Investor Presentation_June 1, 2024.pdf
BeMetals Investor Presentation_June 1, 2024.pdf
DerekIwanaka1
 
Exploring Patterns of Connection with Social Dreaming
Exploring Patterns of Connection with Social DreamingExploring Patterns of Connection with Social Dreaming
Exploring Patterns of Connection with Social Dreaming
Nicola Wreford-Howard
 
In the Adani-Hindenburg case, what is SEBI investigating.pptx
In the Adani-Hindenburg case, what is SEBI investigating.pptxIn the Adani-Hindenburg case, what is SEBI investigating.pptx
In the Adani-Hindenburg case, what is SEBI investigating.pptx
Adani case
 
The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...
Adam Smith
 
LA HUG - Video Testimonials with Chynna Morgan - June 2024
LA HUG - Video Testimonials with Chynna Morgan - June 2024LA HUG - Video Testimonials with Chynna Morgan - June 2024
LA HUG - Video Testimonials with Chynna Morgan - June 2024
Lital Barkan
 
Digital Transformation and IT Strategy Toolkit and Templates
Digital Transformation and IT Strategy Toolkit and TemplatesDigital Transformation and IT Strategy Toolkit and Templates
Digital Transformation and IT Strategy Toolkit and Templates
Aurelien Domont, MBA
 
Authentically Social Presented by Corey Perlman
Authentically Social Presented by Corey PerlmanAuthentically Social Presented by Corey Perlman
Authentically Social Presented by Corey Perlman
Corey Perlman, Social Media Speaker and Consultant
 
3 Simple Steps To Buy Verified Payoneer Account In 2024
3 Simple Steps To Buy Verified Payoneer Account In 20243 Simple Steps To Buy Verified Payoneer Account In 2024
3 Simple Steps To Buy Verified Payoneer Account In 2024
SEOSMMEARTH
 
Evgen Osmak: Methods of key project parameters estimation: from the shaman-in...
Evgen Osmak: Methods of key project parameters estimation: from the shaman-in...Evgen Osmak: Methods of key project parameters estimation: from the shaman-in...
Evgen Osmak: Methods of key project parameters estimation: from the shaman-in...
Lviv Startup Club
 
amptalk_RecruitingDeck_english_2024.06.05
amptalk_RecruitingDeck_english_2024.06.05amptalk_RecruitingDeck_english_2024.06.05
amptalk_RecruitingDeck_english_2024.06.05
marketing317746
 
-- June 2024 is National Volunteer Month --
-- June 2024 is National Volunteer Month ---- June 2024 is National Volunteer Month --
-- June 2024 is National Volunteer Month --
NZSG
 
The effects of customers service quality and online reviews on customer loyal...
The effects of customers service quality and online reviews on customer loyal...The effects of customers service quality and online reviews on customer loyal...
The effects of customers service quality and online reviews on customer loyal...
balatucanapplelovely
 
Training my puppy and implementation in this story
Training my puppy and implementation in this storyTraining my puppy and implementation in this story
Training my puppy and implementation in this story
WilliamRodrigues148
 
Best practices for project execution and delivery
Best practices for project execution and deliveryBest practices for project execution and delivery
Best practices for project execution and delivery
CLIVE MINCHIN
 
Recruiting in the Digital Age: A Social Media Masterclass
Recruiting in the Digital Age: A Social Media MasterclassRecruiting in the Digital Age: A Social Media Masterclass
Recruiting in the Digital Age: A Social Media Masterclass
LuanWise
 

Recently uploaded (20)

Industrial Tech SW: Category Renewal and Creation
Industrial Tech SW:  Category Renewal and CreationIndustrial Tech SW:  Category Renewal and Creation
Industrial Tech SW: Category Renewal and Creation
 
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel ChartSatta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
Satta Matka Dpboss Matka Guessing Kalyan Chart Indian Matka Kalyan panel Chart
 
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
 
Chapter 7 Final business management sciences .ppt
Chapter 7 Final business management sciences .pptChapter 7 Final business management sciences .ppt
Chapter 7 Final business management sciences .ppt
 
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
Zodiac Signs and Food Preferences_ What Your Sign Says About Your TasteZodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
 
BeMetals Investor Presentation_June 1, 2024.pdf
BeMetals Investor Presentation_June 1, 2024.pdfBeMetals Investor Presentation_June 1, 2024.pdf
BeMetals Investor Presentation_June 1, 2024.pdf
 
Exploring Patterns of Connection with Social Dreaming
Exploring Patterns of Connection with Social DreamingExploring Patterns of Connection with Social Dreaming
Exploring Patterns of Connection with Social Dreaming
 
In the Adani-Hindenburg case, what is SEBI investigating.pptx
In the Adani-Hindenburg case, what is SEBI investigating.pptxIn the Adani-Hindenburg case, what is SEBI investigating.pptx
In the Adani-Hindenburg case, what is SEBI investigating.pptx
 
The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...
 
LA HUG - Video Testimonials with Chynna Morgan - June 2024
LA HUG - Video Testimonials with Chynna Morgan - June 2024LA HUG - Video Testimonials with Chynna Morgan - June 2024
LA HUG - Video Testimonials with Chynna Morgan - June 2024
 
Digital Transformation and IT Strategy Toolkit and Templates
Digital Transformation and IT Strategy Toolkit and TemplatesDigital Transformation and IT Strategy Toolkit and Templates
Digital Transformation and IT Strategy Toolkit and Templates
 
Authentically Social Presented by Corey Perlman
Authentically Social Presented by Corey PerlmanAuthentically Social Presented by Corey Perlman
Authentically Social Presented by Corey Perlman
 
3 Simple Steps To Buy Verified Payoneer Account In 2024
3 Simple Steps To Buy Verified Payoneer Account In 20243 Simple Steps To Buy Verified Payoneer Account In 2024
3 Simple Steps To Buy Verified Payoneer Account In 2024
 
Evgen Osmak: Methods of key project parameters estimation: from the shaman-in...
Evgen Osmak: Methods of key project parameters estimation: from the shaman-in...Evgen Osmak: Methods of key project parameters estimation: from the shaman-in...
Evgen Osmak: Methods of key project parameters estimation: from the shaman-in...
 
amptalk_RecruitingDeck_english_2024.06.05
amptalk_RecruitingDeck_english_2024.06.05amptalk_RecruitingDeck_english_2024.06.05
amptalk_RecruitingDeck_english_2024.06.05
 
-- June 2024 is National Volunteer Month --
-- June 2024 is National Volunteer Month ---- June 2024 is National Volunteer Month --
-- June 2024 is National Volunteer Month --
 
The effects of customers service quality and online reviews on customer loyal...
The effects of customers service quality and online reviews on customer loyal...The effects of customers service quality and online reviews on customer loyal...
The effects of customers service quality and online reviews on customer loyal...
 
Training my puppy and implementation in this story
Training my puppy and implementation in this storyTraining my puppy and implementation in this story
Training my puppy and implementation in this story
 
Best practices for project execution and delivery
Best practices for project execution and deliveryBest practices for project execution and delivery
Best practices for project execution and delivery
 
Recruiting in the Digital Age: A Social Media Masterclass
Recruiting in the Digital Age: A Social Media MasterclassRecruiting in the Digital Age: A Social Media Masterclass
Recruiting in the Digital Age: A Social Media Masterclass
 

Introduction

  • 1. Introduction The financial system in any country consists of a large number of institutions, instruments and markets. Financial intermediaries range from money lenders and commission agents to banks, insurance companies, brokerage house, investment trusts and stock exchanges. Financial instruments (or assets) range from coins and currency notes to government bonds, mortgages, corporate stocks and the more exotic derivatives of high finance. Markets dealing with the trading of financial assets can be categorized as being either formal (as in stock exchanges with centralized trading floors) or in formal (as in over the counter or curb markets). The objective of this paper is to highlight first in broad terms the role of financial systems in economic development and then to focus on the specific contribution that stock markets can make to the widening and deepening of the financial sector. We then describe the evolution of stock market in Pakistan and high lighted in particular the factors which have the constrained effective operation of equities markets in the country. Finally we make recommendations for enhancing the role of stock markets. 2. The Role Of Financial Systems In Development 2.1 Role Of Financial System the basic role of financial systems is to engage in the process of intermediation by mobilizing savings from a large pool of small savers and channelizing these funds into productive investments by a generally much smaller number of borrowers. The key to success in intermediation rests on the ability to pool together and thereby reduce the risks associated with individual investments. In the absence of financial services, an economy is relegated to activities of subsistence or barter. This greatly limits the scope for specialization and the achievement of economies of scale through operation of modern, large scale technology. Also it is not possible to separate the timings of consumption from production unless physical inventories of goods are build up. Altogether, economies with underdeveloped financial systems are likely to have lower incomes, other things being equal. There is general recognition now that finance is the key to raising the level of investment and savings and there by promoting the process of
  • 2. economic growth. Channelizing saving to investors with more productive uses for them enhances the income both savers and borrowers. Without an efficient financial system, lending can be costly and risky. Competition among financial institutions ensures that transactions costs of intermediation are minimized, that risk is allocated to those most willing to bear it and that the most promising investment opportunities are discovered. 2.2 Evolution Of Financial System Traditionally, financial system of developing countries have been dominated by informal finance, consisting primarily of loans from family members or friends or money lenders. Such managements have had the advantages of low transactions costs, responsiveness to borrowing need frequently for emergency consumption purposes and low rates of non-repayment. However, they have greatly limited the scope for financial intermediation due to the largely personalized nature of the contacts. It is clear that as economies grow, thes arrangements need to be diversified and supplemented by the services that only formal institutions like commercial banks and capital markets can provide. For example by transforming the size and maturity of financial assets, such institutions can more effectively mediate between the many small savers and depositors who prefer liquidity and the few large borrowers who need long term loans to finance investment. The emergence of financial institutions not only potentially raises the volume of savings by offering higher rates of return with relatively lower level of risk but also changes the composition of saving away from physical assets like land, property, jewellery, etc, towards financial assets, which enables more productive investments to be undertaken from the overall economy point of view. Thin increase in financial assets is referred to as ‘financial deepening’. 2.2 Polices In Financial Sector In the initial stages of development of the modern, formal financial sector most countries, including Pakistan, have chosen the path of controlling interest rates, directing and rationing the allocation of credit to priority sectors and using the banking system for inexpensive funding of government activities. This has undermined the process of financial development and led to ‘financial repression.’ Saving have depressed and other distortion have been created, including the strong preference for debt versus equity financing of long term investment in the presence of regime of low interest rates. Also, this has resulted in a degree of ‘financial distress’ due to low spreads and default in
  • 3. repayment of directed loan. Simultaneously, the preferential access to credit of the public sector has tended to ‘crowed out’ the private sector. 2.3 Financial Sector Reform Recognition of these problems had led many countries, including Pakistan, to pursue the path of financial liberalization in recent years. There has been extensive deregulation of interest rates, concessionary credit schemes have been phased out, government owned banks have been privatized, terms of government borrowing have been linked more closely to market rates and permission granted for the establishment of new types of financial institutions (investment banks, leasing companies, mutual funds, etc.) in the private sector and removal of restriction on foreign portfolio investment. These reforms promise to enhance the role of capital market in particular in the financial system. We turn now the role of equities markets in the process of development. 3 The Role Of Stock Markets The primary role of stock markets is to provide long term equity finance for the corporate sector. Trading in equities enables intermediation between conflicting maturity preferences of lenders and borrowers. Stock market also potentially promote broad-basing of ownership of financial assets and the reallocation of funds among corporations and sectors. 3.1 Choice Between Debt And Equity The management decision regarding choice between debt and equity modes of finance is contingent on a number of factors which include risk and cost of capital. Under a private enterprise system the prospects of individual gains are inevitably associated with the possibilities of loss, and this hazard rests on those who have supplied the capital. The hazard shows itself in the form of uncertainty both of income to be received and recovery of principal invested. It is these uncertainties that constitute risk. If a corporate entity fails to earn a profit and continues to spend more money than it takes in, a time will come when it will be unable to meet its current obligations.
  • 4. When that happens the company becomes insolvent or bankrupt. In such situations all debts must be settled in full before any equity claims can be paid. Because of the priority of debt claims before equity claims the creditor is ready to supply long term capital in the form of debt at a lower cost in the form of interest. The creditor, therefore, does not demand a proportionate share in profit. It may be pointed out here that the position of a creditor is negotiated one as a result of a bargain between the firm and the supplier of the funds. The decision of accepting a particular level of risk, there fore is voluntary on both the sides. If we compare debt and equity securities from the point of view of allocation of income, holders of debt securities have to be satisfied with low and fixed incomes. These instruments also enjoy stable market values because of lower risks. on the other hand there is lot of variation in the income of equity security with the result that the price performance is more volatile resulting in the higher degree of risk. In accepting this higher level of risk, equity holder on the average expect a higher rate of return. The mix of debt and equity, that is, the capital structure differs from industry to industry. Industries with stable sales performance and stable margins (selling price-cost relationship) permit use of more debt. On the other hand, an industry having less stable sales performance and volatile margins may have a lower debt to equity ratio. Therefore, companies in stable sales industries will enjoy lower cost of capital compared with companies in volatile sale performance industries. Also the capital structure affects the stock market performance of the shares of company. A company using more debt than the industry averages may have lower share price because of higher risk. Use of more debt may result in higher earnings per share but they may be offset by increased risk, resulting in an adverse price effect . The mode of financing used is also influenced by the motivation to keep control. A firm may avoid issuing new equity for fear of dilution of control and, therefore, the growth requirements may be financed through internal equity (retained profits ) only. Debit may also be used when this source falls short of the requirement. This could result in a firm moving away from the optimal debt to equity ratio.
  • 5. 3.2 Equity Markets And Development Broadly speaking there appears to be some correlation between indicators of development of equity market in a country and its overall level of development, as shown in table 2.1. The table indicates that, as of the late 1980s the equity market in Pakistan was relatively underdeveloped. The position has improved significantly in most of the emerging markets in developing countries, including Pakistan, in the 1990s, following the process of financial liberalization and, in particular, due to the flow of portfolio funds from developed countries of these emerging markets. As such, while ratios have improved the relative standing of Pakistan has not improved dramatically. 3.3 Constraints In Development Of Stock Markets A number of factors have traditionally been responsible for the under development of the equity market in Pakistan. We have already referred to the government policy till recently of keeping interestrates artificially low, thereby leading to a strong preference for debt versus equity financing. Also, the tax system has increased the attractiveness of debt and firms have remained highly leveraged in Pakistan. Table 2.1 Equity Market Indicators (1987) Per capita Average market Turnover ratio Income Capitalization (% of average (US $) as % of GNP capitalization) Developed Countries Japan 15760 92 93 U.K 10420 80 72 U.S.A 18530 58 93
  • 6. Germany 14400 21 161 France 12790 18 56 Developing countries Malaysia 1810 58 23 Korea 2690 19 111 Thailand 850 9 114 Mexico1830 8 169 Phillipines 590 7 62 India 300 6 19 Pakistan 350 5 9 In addition, there have been negative perceptions about the operations of the stock market on the part of small investors. For a stock market to perform its role efficiently, it must be transparent and market based. The average investor in Pakistan sees the market as being dominated by insider trading, frequent conflicts of interest and low rate of payment of dividends. There is relatively weak regulation and supervision of companies and reliable financial information is generally not disseminated. Further, the stock remains very thin and only limited quantities of corporate stock are traded as sponsors are generally unwilling to dilute their ownership. Consequently, there is great deal of volatility in share prices, which frequently do not reflect accurately the underlying fundamentals. The procedures for trading the stocks also impose high costs and are cumbersome in nature. Altogether, the role of equity markets can be enhanced only if the stock exchanges operate efficiently in a competitive framework.
  • 7. 3.3 Recent Stock Market Development The boom witnessed during the 90’s in the stock market of Pakistan can be attributed to a large number of factors, including, first, the process of financial liberalization resulting in a rise and inflow of foreign portfolio investment; second, the process of privatization and the offering of new attractive shares; third, a greater measure of political stability and investor confidence; fourth, improvements in the operational efficiency of stock markets. It is of significance to note that the two major measures of the share price index coincided with the induction of popularly elected governments in 1990 and 1993 respectively. More recently, prices have plummeted in response to weakening in the underlying macro economic fundamentals, deteriorating law and order situation and exodus of foreign portfolio capital. The experience of the last years demonstrates that while the process of financial liberalization and deregulation has conferred large capital gains in terms of the increase in market capitalization (of over ten times between 1989 and 1995), the result remain fixed. First, there has apparently been an increase in the volatility of the stock market, with large increase being followed by big decrease. For example, share prices rose by as much as 48% in 1993, but have fallen since by 40% (see table 2.2). This volatility is not only the consequence of underlying law and order and political factors but also a reflection of relatively short term nature of inflows of foreign portfolio funds. These fluctuations in share prices have increased perceptions of risks and run the danger of driving out risk averse investors from the market, resulting in a degree of disintermediation. Second, while market capitalization. Table 2.2 Index Of Share Prices In Pakistan Year SBP general index percent Of share prices Annual change [1980-91=100] 1981 93.5 -
  • 8. 1982 100.3 7 1983 131.6 31 1984 182.4 39 1985 176.3 -3 1986 171.0 -3 1987 222.7 30 1988 260.6 17 1989 273.3 5 1990 283.5 4 1991 387.7 37 1992 334.0 -14 1993 493.1 48 1994 589.6 20 has increased rapidly, only a fraction is due to listing of new shares. At its peak in 1992, stock markets in Pakistan mobilized capital of about Rs 12 billion through new issues. This is equivalent to only about 10 percent of private investment in Pakistan. Therefore, the role of equities market in mobilizing funds of investment in plant and equipment remains very limited. Further reforms are required for an enhancement in the role of Pakistan. We turn to these in the next section. Based on the above, we present some recommendations for enhancement in the role of stock markets. In the context of choice between debit and equity we have highlighted that firms are highly leveraged in Pakistan. It is essential that the access to debt financing from commercial banks and DFIs be reduced by requiring these financial institutions to target for lower debt to equity ratios of 60:40 or even 50:50. as opposed to this, appropriate regulatory changes may be introduced so that floatation of corporate bonds directly in stock market are encouraged, especially by multinationals and other
  • 9. large corporations. Other proposals generally to the development of better financial infrastructure for operation of stock markets. These include strengthening of regulatory provisions and better enforcement, improvements in information systems and mechanisms for payments, more neutral application of fiscal policy (especially with regard to income and wealth tax) to all types of financial instruments, higher standards of disclosure of financial information by companies, improvements in auditing and accounting practices and greater scope for financial innovation within a flexible regulatory framework. We expect that progress in these areas will enhance substantially the role of stock markets in the economic development of Pakistan in coming years.