The document outlines a course on non-banking financial institutions (NBFIs) in Pakistan. It covers an introduction to financial institutions and their role in economic development. It then discusses the scope and governance of NBFIs in Pakistan, performance reviews of NBFIs, and the regulatory framework. Specific NBFIs that will be covered include mutual funds, development finance institutions, leasing companies, investment banks, modaraba companies, and others.

1. NON BANKING FINANCIAL
INSTITUTIONS
Mohammad Yousaf Bhatti
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2. Course Outline
 Introduction
 Financial Institutions
 Role of Financial Institutions in economic development
 Scope of NBFI’S and NBIFC’S in Pakistan
 Governance of NBFI’S in Pakistan
 Performance review of Non‐Banking Institutions in
Pakistan
 SECP as a Regulatory body of NBFC’S
 Regulatory Frame work Companies Ordinance 1984
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3. Course Outline (Cont…)
Mutual Funds
DFI’S
Investment Finance Companies
Leasing
House Building Finance Corporation
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4. Non Banking Financial Institutions
Definition
An establishment that focuses on dealing with financial transactions such
as investment, loans and deposits. Conventionally financial
institutions are composed of organizations such as Banks, DFI’s,
Leasing Companies, Insurance Companies, Investment Banks and
Modaraba Companies.
In financial economics a financial institution is an institution that
provides services for its clients or members. Probably the most
important financial service provided by financial institutions is
acting as financial intermediaries.
Almost everyone has deal with a financial institution on regular basis.
Every thing from depositing money to taking out loans and exchange
currencies must be done through financial institutions.
Since all people depend on services provided by financial institutions, it is
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imperative that they must be regulated by the Federal Government.

5. Non Banking Financial Institutions
Types
A. Development Finance Institutions
B. Leasing Companies
C. Investment Banks
D. Modaraba Companies
E. Discount & Guarantee Houses
F. House Finance Companies
G. Venture Capital Companies
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6. Non Banking Financial Institutions
A. Development Finance Institutions
 1 Equity Participation Fund
 2 Investment Corporation of Pakistan
 3 National Investment Trust Ltd.
 4 Pakistan Kuwait Investment Company (Pvt) Ltd.
 5 Pakistan Industrial Credit & Investment Corporation Ltd.
 6 Pak‐Libya Holding Co. (Pvt) Ltd.
 7 Saudi Pak Industrial and Agricultural Investment Co.(Pvt) Ltd.
 8 Pak Oman Investment Co.Pvt.Ltd
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7. Non Banking Financial Institutions
B. Leasing Companies
 1 Asian Leasing Corporation Ltd.,
 2 Askari Leasing Company Ltd.
 3 Capital Assets Leasing Corporation Ltd.
 4 Crescent Leasing Corporation Ltd.
 5 Dawood Leasing Company Ltd.
 6 English Leasing Ltd.
 7 First Leasing Corporation Ltd.
 8 Grays Leasing Ltd.
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8. Non Banking Financial Institutions
C. Investment Banks
 1 Asset Investment Bank Ltd.
 2 Atlas Investment Bank Ltd.
 3 Crescent Slandered Investment Bank Ltd.
 4 Escorts Investment Bank Ltd.
 5 Fidelity Investment Bank Ltd.
 6 First International Investment Bank Ltd.
 7 Islamic Investment Bank Ltd.
 8 Jahangir Siddiqui Investment Bank Ltd.
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9. Non Banking Financial Institutions
D. Modaraba Companies
 1 Al‐Zamin Leasing Modaraba
 2 B.F.Modaraba
 3 B.R.R.International Modaraba
 4 Financial Link Modaraba
 5 First Allied Bank Modaraba
 6 First Alnoor Modaraba
 7 First Constellation Modaraba
 8 First Elite Capital Modaraba
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10. Non Banking Financial Institutions
E. Discount & Guarantee Houses
1. First Credit & Discount Corporation (Pvt) Ltd.
2.First Prudential Discount & Guarantee House Ltd.
3.National Discounting Services Ltd.
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11. Non Banking Financial Institutions
F. House Finance Companies
1. Citibank Housing Finance Company Ltd.
2.House Building Finance Corporation
3.International Housing Finance Ltd
G. Venture Capital Companies
1. Pakistan Venture Capital Ltd.
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12. Importance Of Mobilization Of Deposits In Banking System
or
Role Of Commercial Banks In Economic Development
• Banking business can broadly be defined as mobilization of deposits
for onward lending in an economy for a better & faster rate of economic
growth
• To receive deposits is one of the basic functions of all commercial
banks.
• Borrowing funds from outside sources is all the more vital for banks
because the entire banking system is based on it.
• The borrowed Capital of a bank is much greater than its own Capital.
• Bank’s borrowing is mostly in the form of deposits. Commercial banks
do not receive these deposits for safe keeping purposes only, but they
accept deposits as debts.
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13. Importance Of Mobilization Of Deposits In Banking System
or
Role Of Commercial Banks In Economic Development
• When the bank receives the deposits as a debtor it becomes
the owner of it. It may therefore use it as it deems
appropriate.
• Those deposits are lent out to different parties.
• The borrowing needs are to be met , prudently so as to
ensure that in the net analysis it does not become counter
productive for the bank.
• Therefore it is imperative that while financing average cost
of deposits and average return on reinvestment of deposits
are always kept in view.
•
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14. Importance Of Mobilization Of Deposits In Banking System
or
Role Of Commercial Banks In Economic Development
• The larger the difference between the rate at which these
deposits are borrowed and the rate at which these are lent
out , the greater will be the profit margin of the bank.
• Moreover, the larger the deposits the larger will be the
funds available for investment and larger the funds lent out
the greater will be the profit margin for the bank.
• It is because of this inter‐related relationship that deposits
are referred to as the life blood of a bank.
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15. Importance Of Mobilization Of Deposits In Banking System
or
Role Of Commercial Banks In Economic Development
– However in deposit mobilization a prudent banker should always
follow a policy of deposit mix for better profitability.
– Therefore the strategy should be
– Deposit‐ mix with a standard rate of return to depositors.
– Lower the return payable better is the deposit‐mix adjustment .
– Qualitative deposit rather than quantitative deposit.
– Preference for cost free or lower return payable deposit.
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16. Role of Financial Institutions in Economic
Development
 Modern Day Role
 Banking system and the Financial Institutions play very significant role in
the economy. First and foremost is in the form of catering to the need of
credit for all the sections of society. The modern economies in the world
have developed primarily by making best use of the credit availability in
their systems. An efficient banking system must cater to the needs of high
end investors by making available high amounts of capital for big projects
in the industrial, infrastructure and service sectors. At the same time, the
medium and small ventures must also have credit available to them for new
investment and expansion of the existing units. Rural sector in a country
like Pakistan can grow only if cheaper credit is available to the farmers for
their short and medium term needs.
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17. Role of Financial Institutions in Economic
Development
 Credit availability for infrastructure sector is also extremely
important. The success of any financial system can be
measured by finding out the availability of reliable and
adequate credit for infrastructure projects
 The banks and the financial institutions also cater to
another important need of the society i.e. mopping up
small savings at reasonable rates with several options. The
common man has the option to park his savings under a
few alternatives, including the small savings schemes
introduced by the government from time to time and in
bank deposits in the form of savings deposits and time
deposits. Another option is to invest in the stocks or
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mutual funds.
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18. Role of Financial Institutions in Economic
Development
 In addition to the above traditional role, the banks and the financial
institutions also perform certain new‐age functions which could not
be thought of a couple of decades ago. The facility of internet
banking enables a consumer to access and operate his bank account
without actually visiting the bank premises. The facility of ATMs
and the credit/debit cards has revolutionized the choices available
with the customers. The banks also serve as alternative gateways for
making payments on account of income tax and online payment of
various bills like the telephone, electricity and tax. The bank
customers can also invest their funds in various stocks or mutual
funds straight from their bank accounts. In the modern day
economy, where people have no time to make these payments by
standing in queue, the service provided by the banks is
commendable.
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19. Role of Financial Institutions in Economic
Development
 While the commercial banks cater to the banking needs of the people
in the cities and towns, there is another category of banks that looks
after the credit and banking needs of the people living in the rural
areas, particularly the farmers. These banks, along with the cooperative
banks, take care of the farmer‐specific needs of credit and other
banking facilities.
 Banks today are free to determine their interest rates within the given
limits prescribed by SBP. It is now easier for the banks to open new
branches. But the banking sector reforms are still not complete.
 Banks and financial intuitions have played major role in the economic
development of the country and most of the credit‐ related schemes of
the government to uplift the poorer and the under‐privileged sections
have been implemented through the banking sector. The role of the
banks has been important, but it is going to be even more important in
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the future.
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20. Regulatory Developments
DFI’s/ IB’s are regulated by SBP. NBFC’s, Mutual Funds and Modarabas
are regulated by SECP.
Over the last many years the non‐bank financial sector has carved out a
place for itself in Pakistan financial market, even though a large
portion of financial assets continue to be managed by commercial
banks.
The regulatory requirement in Pakistan has strengthened over time with
increased comprehensiveness in Prudential Regulations and improved
standards of corporate governance.
In November 2008 the SECP implemented some measures to revamp the
regulatory frame work for the non banking finance companies, the
concept of which was introduced in 2002 when the regulatory
responsibility of these financial institutions was transferred to SECP
from SBP.
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21. Regulatory Developments
Keeping in view the dynamics of the broad financial sector in which the
NBFCs operate SECP amended the non banking finance companies
rules 2003 in addition to issuing the non banking finance companies &
notified regulations 2007.
Notified Entities:‐A company or a class of companies or corporate body or
trust or person as notified by the federal government. These entities
are engaged in business not covered under section 282A(a).
While the emended rules are based on SECP’s experience with the NBFC
sector since 2002. The new NBFCs regulations incorporate SECPs
enhanced powers as laid down in the finance act 2007. The new
regulation specifies the requisite parameters for the formation of
various types of NBFCs and address all operational aspects & issues for
NBFCs & their notified entities .
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22. Regulatory Developments
Notably all the previously issued Prudential Regulations for NBFCs have
been merged into these regulations.
In August 2009 SECP issued a revised version of the 2007 Regulations in
the form of Non Banking Finance Companies and Notified Entities
Regulations 2008 to clarify the certain legal interpretations of the
2007 Regulations and address market related operational issues.
Consequently the new regulatory framework now consists of NBFCs Rules
2003(amended ) and Non Banking Finance Companies and Notified
Entities Regulations 2008.
The main concern of the new regulations is to enable NBFCs to increase
equity capital significantly and to expand the deposit resource
mobilization capability of the NBFCs
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23. Regulatory Developments
Another major cause of concern far NBFCs commercial viability stems
from the limited source for resource mobilization. The extensive
reliance on credit lines from banks & other financial institutions has
continued to pose problems for NBFCs in terms of the high cost of
funding. While some NBFCs are allowed to raise retail deposits in the
form of Certificates of Investments ( CoIs), the amount so raised is
generally not sufficient for them to finance their business activities &
expand their operations. As a result NBFCs continue to operate at a
disadvantage in comparison with the banking sector which has access
to relatively low cost funds.
The 2008 Regulations allow NBFCs offering leasing, housing finance and
investment finance services to raise deposits from CoIs with tenors of
30 days & above as opposed to the previous restriction on the
minimum tenor of deposits to be of 3 months.
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24. Operating Environment
A public limited company engaged in the business of asset management,
investment finance, leasing, housing finance, venture capital
investment, discounting and investment advisory or a combination of
these services, is categorized as an NBFC. For each financial service
that an NBFC provides, it needs a separate license from the SECP. Prior
to the issuance of the 2008 Regulations , any business entity which
compiled with the progressively tiered capital requirements for each
type of business (adding up to Rs 835 million for all types of NBFC
licenses) could undertake all businesses allowed under the NBFC
framework. The new regulatory framework, however, has created
necessary firewalls between investment advisory & asset management
services on one hand and leasing, housing finance , discounting &
investment finance services on the other.
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25. Operating Environment
This essentially means that companies which undertake the business of
asset management & investment advisory cannot at the same time
offer leasing, discounting, housing finance, investment finance
services or venture capital investment simply by complying with the
minimum capital requirements. In a way, this measure is a
contravention of the universal banking model of financial services
provided under the NBFC framework, but is essentially intended to
minimize the functional overlapping that often leads to conflict of
interest within the NBFC sector. An additional requirement in the
new regulations is that an NBFC engaged in a combination of leasing,
investment finance and housing finance services, needs to invest at
least 20 per cent of its assets in each such form of business.
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26. Operating Environment
Another important change in the regulations is the amendment criteria
for the classification of non performing loans applicable until Ist July
2010, where the classification criteria has been made more stringent
(severe) by the elimination of the OAEM category, with direct
classification into sub – standard loans after an overdue period of 90
days.
New requirements, applicable from 1st July 2011 distinguish between
short, medium and long term financial facilities, along with increased
provisioning requirements.
Time Based Classification Provisioning
‐ Substandard after 90 Days 25%
‐ Doubtful ‐ do ‐ 180 Days 50%
‐ Loss ‐ do ‐ One Year 100%
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27. Non – Banking Financial Institutions
Non ‐ Banking Finance Companies + Others
( i ) Investment Finance Services (viii) M0darabas
( ii) Leasing (ix ) Mutual Funds
( iii) Housing Finance Services (x ) Development Finance
(iv ) Venture Capital Investment Institutions
( v ) Discounting Services
( vi) Investment Advisory Services
(vii) Asset Management Services
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28. Performance Review NBFI’s
Table: Assets of NBFIs
Growth rates and share in percent
FY04 FY05 FY06 FY07 FY08 FY09
Assets (Rs. Billion) 318.1 393.7 462.3 567 585.6 470.1
Growth rate 22.7 23.8 17.4 22.7 3.3 -19.7
Share in Assets
Mutual Funds 32.4 34.6 38.3 55.3 58.5 47.9
DFIs* 29.8 27.4 25.3 16.8 14.5 24.2
Leasing 14.1 13.6 13.8 11.3 11.0 11.9
Investment Finance 11.2 13 11.8 7.9 7.4 6.6
Modarabas 5.7 5.5 5.2 4.6 5.1 4.9
Housing Finance* 6.1 4.7 4.3 3.1 3.1 4.0
Venture Capital 0.3 0.3 0.7 0.7 0.3 0.5
Discounting 0.4 0.4 0.4 0.2 0.0 0.0
*Assets of HBFC, a DFI engaged in providing housing finance, have been included in the Housing
Finance category
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29. Performance Review NBFI’s
As is clear from the above data the assets of NBFIs after increasing
during FY07‐FY08 declined by 19.7% by the end of FY09.
The relative position of various NBFIs is also given in the above
table.
Mutual funds lead the sector with share 47.9%. Their share also
after increasing during FY07‐FY08 declined to 47.9% by the end
of FY09. Similarly shares of investment finance companies and
modaraba companies have also reduced to 6.6% and 4.9%
respectively. On the other hand shares of investment finance
companies which had been previously declining improved to
24.2% in FY09, while those of leasing companies and venture
capital companies also improved during the year.
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30. Performance Review NBFI’s
Notably mutual funds represents the only sub category which
has recorded remarkable growth year after year.
The above data also reflects that NBFIs faced a rather
difficult operating environment in FY09. Struggling to
remain commercially viable even in normal circumstances
these financial institutions were particularly hit hard by
the slow down in the economy and associated
deterioration in the macro economic indicators.
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31. Performance Review NBFI’s
The composition of NBFI’s sectors at the end of FY10 is as given below.
Discount Houses 0
Venture Capitals 3
HFCs 1
DFIs 8
IFCs 8
Leasing 9
Modarabas 26
Mutual Funds 121
Total 176
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32. Performance Review NBFI’s
As SECP allows each NBFC to hold multiple licenses 72
NBFCs hold 78 licenses for providing various financial
services as permissible under the NBFCs rules.
During FY10 SECP granted 19 new licenses all of which were
for conducting asset management services through
mutual funds while no new license was granted for any
other business category.
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33. Investment Finance Companies
The role of Investment Finance Companies (IFCs) as a viable
component of the domestic financial sector has been rather debatable.
In their traditional role, investment banks render services such as
investment advisory, corporate restructuring, mergers and
acquisitions, equity and debt financing, etc. In doing so, investment
banks offer an altogether different array of financial services in
comparison with the commercial banking industry. However, IFCs in
Pakistan have generally not been able to carve out a position for
themselves, and over time they have shown a preference for business
activities similar to those undertaken by commercial banks, with a
distinct competitive disadvantage in terms of access to low cost funds.
(array – a large group of people or services, carve out – to make/obtain
a place through skillful business activities)
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34. Investment Finance Companies
Being unable to generate sufficient fee‐based income from
advisory services, or interest‐based income from financing long‐
term projects in the economy, several investment banks have
opted to merge with commercial banks over the years, and there
are now very few dedicated players in this area. It is essential for
these institutions to re‐examine their operational strategy in
order to optimize (to be hopeful and think about the good part)
on their potential strengths if they are to sustain commercial
viability.
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35. Investment Finance Companies
• In FY09 there were 8 operative IFCs, with a share of 6.6 percent in the
aggregate assets of NBFCs.
• An assessment of IFCs funding base indicates that these institutions
have a significant reliance on borrowings from other financial
institutions . The other main constituent of IFCs’ liabilities are
Certificates of Investments (CoIs). IFCs relied more on
investments rather than advances in expanding their asset base.
These various factors have impinged on (to have an effect on
something) IFCs profitability position in FY09.
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36. Investment Finance Companies
• Going forward, the 8 operative IFCs need to realign their
business strategies with the financing needs of the economy,
foremost of which is infrastructure financing, which generally
has a long gestation period. Notably, investment banking arms
of leading commercial banks have taken the lead in financing
infrastructure projects, while IFCs have taken a back seat and
have relied more on generating income from investments. Both
the SECP and market participants need to devise a sustainable
business model for IFCs if these specialized institutions are to
remain commercially viable in an increasingly competitive
financial sector.
• (infrastructure – the basic structure on which an organization is
built and which makes it able to work, gestation period – period
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of growth or development) 36

37. Investment Finance Companies
Some Operative IFCs
1‐ Pakistan Kuwait Investment Company (Pvt) Limited.
2‐ Pak Brunai Investment Company.
3‐ JS Global Capital.
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38. Leasing
Ijarah (Leasing) Ijarah is defined as an agreement by which a person
(lessee) obtains the use of an asset from another (lessor) for a given
period of time in return for a mutually agreed rent, terms and conditions.
The ownership of the leased asset is transferred to the lessee after the
payment of the lease amount.
Since the inception of the first leasing company in 1984, the leasing sector
has played a prominent role in the financial sector. However competitive
pressures from the banking industry have had a significant impact on its
size over the years, such that the number of operating leasing companies
has reduced from 12 in FY08 to 10 in FY09.
Encouragingly, the leasing sector continues to expand its asset base with a
clear focus on lease finance which forms 75 percent of total assets at end‐
FY09. Notably, the leasing business is concentrated in the top 4
companies in the sector.
In FY09, profitability of the sector detriorated due to high financial 38
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expenses and provisioning cost.

39. Venture Capital Investment
Venture Capital (VC) investment typically refers to capital provided for
start‐up businesses with potential for high growth. Due to the high
risk nature of their investments, venture capital companies require a
commensurate rate of return, along with some measure of control over
the management and strategic orientation of the investee company.
Venture capitalists usually exit from the project after a relatively short
period of time i.e. 3 to 7 years, when the equity is either sold back to
the client company or offered on the stock‐exchange.
• VC business in Pakistan has essentially remained limited in scope
despite the enabling regulatory framework provided by the SECP
which has set forth the rules and requirements for VC investments in
the NBFCs Rules.
• (commensurate – correct and suitable amount compared to something
else)
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40. Venture Capital Investment
Some of the impediments in the growth of the VC industry in Pakistan were:
(1) Complex legal framework, (2) Lack of appropriate tax incentives, (3)
Limited exit options, (4) Restrictions on institutional investors to participate
in venture capital funds, (5) Unavailability of data on foreign funds’
participation in local firms and (6) Inadequate institutional support.
• Keeping in view the significant growth potential of in emerging economies
like Pakistan, SECP issued the “The Private Equity and Venture Capital Fund
Regulations, 2008” (PE&VCF Regulations) in August 2008. However, despite
the enabling regulatory framework provided by the SECP, Venture Capital
(VC) industry is developing rather gradually. At end‐FY09, there were 3
operative VC companies which accounted for a mere 0.4 percent of aggregate
assets of the non‐bank financial sector.
• (impede – to slow down or cause problems for the advancement or completion
of something)
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41. Modarabas
Modaraba means a business in which a person paticipates with his money and another
with his efforts and skills or both.
The person who provides money is called owner or Modarib and the person who
utilises is called Aamal.
Banks and financial institutions are not authorized to float a Modaraba. Only such
companies which are registered as a Modarabs company can do so.
The amount of return on funds invested in Modarabe is not fixed nor predetermined.
The amount of profit or loss depends upon the operational results of the company.
The concept of ‘Modaraba’ started during the 1980s with the promulgation of the
‘Modaraba Companies and Modaraba (floatation & Control) Ordinance’ in 1980
(the Modaraba Ordinance) that provided a statutory framework for sharia‐
compliant business opportunities in the country. In term of number of companies,
the modaraba sector is the second largest sector after mutual funds with 26
modaraba companies; however the size of the modaraba sector, in term of its share
in total NBFI assets is relatively small at 4.9 percent at end‐FY09.
(promulgate – to announce publicly)
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42. Modarabas
Major funding source of modaraba companies include floatation of modaraba in
the form of equity, and financing facilities from banks and other financial
institutions in the form of various Islamic financing arrangements. These funds are
largely utilized in the three financing agreements, namely Musharika, Murabaha
and Ijarah, which were approved by the Religious Board in the early 1990s; in
addition to that these funds are also utilized for investing in shares of sharia‐
compliant listed companies.
Over the period, in order to promote the modaraba sector, SECP has introduced
various policy initiatives. Earlier in FY08, to provide diversification, SECP approved
new financing modes which were approved by the Religious Board. Additionally, a
conceptual framework for the issuance of Sukuks by modaraba companies, with a
tenor of 90 to 365 days, was also approved. Both these initiatives were primarily
aimed at providing an enabling environment for modaraba companies to enhance
their outreach, foster product diversification and ensure sustainable growth.
The Sukuk is a financial instrument which generates an income for the holder of the
instrument similar to trust certificates. The instrument (Sukuk) is also known as
Islamic Bond.
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43. Modarabas
Relative size of each modaraba company – in terms of shares in total assets and total
equity ‐ clearly indicates that the modaraba sector has suffered from widespread
fragmentation in the form of a large number of small and weak entities, with limited
market share. Although the concentration indicators have shown some sign of
improvement in FY09 but this was mainly due to the merger of Al‐Zamin Leasing
Modaraba which was the third largest modaraba in term of assets size. Consequently,
share of top 10 modarabas in the total assets and total equity of the sector have reduced
to 83.3 percent and 74.9 percent, respectively in FY09.
Musharika Financing Under the mode of Musharika a Bank/ Financial Institution
participates by providing finance on the basis of profit and loss sharing. It may be
defined as a temporary and restricted type of partnership.
A certain amount of profit as determined mutually is paid to the customer – entrepreneur as
management fee. The profit left after payment of management fee may be shared in any
pre‐ agreed proportion specified in the Musharika Agreement.
Murabaha Is defined as ‘a sale of goods by a person to another under an arrangement
whereby the seller is obliged to disclose to the buyer the cost of goods sold and an agreed
margin of profit included in the sale price of goods to be sold, either on cash or on a
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deferred payment basis’. 43

44. Modarabas
This is the form designed specially to finance trade and working capital needs. In this form
the bank provides finance for the purchase of goods, imports and raw material. Since
the customer makes the payment at a later date Murabaha is also called ‘Bai Muwajjal’.
Ijarah (Leasing) Ijarah is defined as an agreement by which a person (lessee) obtains the
use of an asset from another (lessor) for a given period of time in return for a mutually
agreed rent, terms and conditions. The ownership of the leased asset is transferred to
the lessee after the payment of the lease amount.
All types of business organizations can obtain financing facility by lease financing.
During FY09, modaraba sector’s financial position remained stressed due to the weak
macroeconomic environment and competition from the banking sector. Asset base of
modaraba companies declined by 22.1 percent in FY09, after registering average growth
of around 19 percent in the previous four years. Notably, modarabas are relatively less
dependent on borrowings as their primary source of funding, and tend to mobilize
deposits in the form of certificates of investment.
Going forward, with the objective of enhancing the modaraba sector’s performance,
profitability and future growth, SECP is planning to conduct the first exhaustive review
of the Modaraba Ordinance of 1980 and underlying Modaraba Rules. Similarly,
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amendments in Prudential Regulations for Modarabas are also in process. 44

45. Housing Finance
Housing finance services offered in Pakistan are still at an evolutionary
stage due to both demand and supply side factors. House Finance is a
long term finance.
Mortgage finance in the domestic financial system is being offered by the
Housing Building Finance Corporation Limited (HBFC), banks and
NBFCs licensed to offer housing finance facilities. While banks are still
relatively new in this area, they have emerged as a major provider of
housing finance largely due to access to low cost funds and better
outreach. They provide two third of housing loans in a typical year.
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46. Housing Finance
Mortgage finance is generally extended for three purposes i.e.
construction, outright purchases and renovation. During CY09, as a
result of slowdown in economic activities, mortgage loans for
construction and outright purchases grew by only 3.4 percent and 6
percent respectively, as compared to 12.5 percent and 29 percent
respectively in CY08, whereas loans for renovation depicted negative
growth of 19 percent, as against significant growth of 57 percent in
CY08.
Key performance indicators of HFCs reflect improvement in the overall
performance of HFCs during FY09, compared to FY08. The share of
investments in total assets improved to 19.1 percent in FY09, compared
to 13.4 percent in the previous year, mainly due to a growth of 44.3
percent in investments. As a result of the increase in investments
coupled with the 4.4 percent growth in housing finance, the share of
earning assets in total assets improved to 92 percent in FY09, from
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84 2 percent in FY08

47. Development Finance Institutions
The 7 Development Finance Institutions (DFIs)17 operating in Pakistan18
are all joint ventures between the Government of Pakistan with
Governments of Saudi Arabia, Iran, Brunei, Kuwait, Libya, China and
Oman. Both Pak‐China Investment Company and Pak‐Iran
Investment Company are relatively newer DFIs, having started their
operations as recently as CY08. These DFIs operate under the broad
objective of facilitating investment in the country and improving bi‐
lateral relations.
In CY09, despite the slow economic activities in the country, aggregate
assets of DFIs grew by 33.7 percent to Rs. 113.8 billion, as against
negative growths in the previous two years. This growth was largely
broad based where almost all DFIs showed significant improvement in
their assets (average growth 45 percent) in CY09.
IMPGCC 47

48. Development Finance Institutions
Assets composition of DFIs indicates that while DFIs have made efforts
to expand their loan book, as evident by the steady rise in the share of
advances since CY07, investments have grown more significantly at
62.3 percent. Consequently, the share of investments in total assets has
risen to 51.5 percent in CY09, from 42.4 percent during.
Data on DFIs’ investment portfolio by category indicates significant
changes in their investment preferences: like banks, DFIs are diverting
their loanable pool of fund towards risk‐free investment avenues i.e.
government securities.
IMPGCC 48

49. Development Finance Institutions
During CY09, composition of DFIs’ funding base exhibited substantial
improvement in their deposit base, which grew substantially by 207 percent to
Rs.18 billion, compared to negative growth of 50 percent in CY08.
The key asset quality indicators deteriorated slightly during CY09, due to which
DFIs set aside significant provisioning as is evident in the increase in the
provisions to NPLs ratio to 76.2 percent in CY09, compared to 64 percent in
CY08. Profitability indicators, on the other hand, remained stressed in CY09
mainly due to the rise in provisioning expenses by 56 percent to Rs.5.7 billion.
Mutual fund industry in Pakistan witnessed an era of rapid growth since FY02
with an average growth rate of about 57 percent for the period FY02‐FY08. Net
Assets reached the highest ever level of about Rs. 425 billion in April FY08
when the stock market was at its peak. However, the rapid decline of the
market in FY09 had an adverse impact on the mutual funds sector. Net assets
of the mutual funds industry reduced to Rs. 211.9 billion by end‐ FY09.
IMPGCC
49

50. Mutual Funds
Mutual funds constituted around 48 percent of total NBFIs’ assets at end‐
FY09.
On the supply‐side, with a large number of funds on offer, professional
asset management companies provide advice to the uninitiated
investor to choose the most optimal option in line with his risk‐return
preferences. However, the investor also needs to be able to make his
own assessment based on the available information
Developments in the regulatory and operating environment indicate a
strong potential for the mutual funds sector to continue its growth
momentum . However, the challenges faced by the sector need to be
addressed expeditiously.
IMPGCC 50

51. Mutual Funds
Some, significant challenges for the mutual funds industry are:
(1) Restrictions on institutional investors, such as provident and pension funds to
invest in mutual funds.
(2) Availability of national savings schemes for institutional investors.
(3) inadequate mobilization of investments from retail investors due to lack of
financial literacy in the country, lack of depth in the domestic securities
market that constraints investment decisions.
(4) The need to introduce stringent fit and proper test for fund managers and
intermediaries, including their sales force.
(5) The need to implement international best practices across the sector and
improve fund governance, transparency and disclosure.
(6) Limited institutional capacity to act as trustees of funds.
51

52. History of Development Financial
Institutions National
Most of the developing countries have established DFI’s to guide,
select, promote and finance trade, commerce and industry. In
Pakistan various sectors of economy have developed i.e.
manufacturers, commerce, agriculture and small business. At
present there are a good number of DFI’s engaged in the above
mentioned sectors of economy. Most of them were established
as the country progressed.
They are generally government owned institutions established
under a specially promulgated law. ADBP & IDBP are well
known development banks, other examples may include
PICIC, ZTBL etc.
However in 1972 ten key industries of the country were
nationalized & because of the structural changes in the
economy due to the nationalization of these major industries
the need for creation of a specialized lending institution to
cater to the needs of the industrial units in the public sector
was found necessary. 52

53. History of Development Financial
Institutions National
As a result in 1973 NDFC was established. Besides three companies
were incorporated as a result of economic co‐operation with
Muslim countries.
Of late leasing companies have entered the field. These companies
are rather less rigid over debt / equity ratios of the applicants
and so suitable to weak enterprises which come forward with
propositions considered non‐bankable by others.
Insurance sector also invests its life funds in shares / securities.
Among other agencies two types of organizations can be
identified.
‐Corporations floating mutual funds & trading in equities in the
Stock Exchange with a view to develop the capital market.The
suitable example is that of Investment Corporation of Pakistan.
Moreover in this category are the organizations like National
Investment Trust which mobilizes savings of common men
through sale of certificates i.e. NIT units & invests funds so
53
mobilized in corporate sector.

54. History of DFI’s : National
‐The other group is that of investment companies established with joint
collaboration of Pakistan & foreign governments or private investors.
The best example is the Saudi‐ Pak Industrial & Agricultural
Investment Co. It provides finances for the industrial & agricultural
sectors, promotes and accelerates industrial investment.
Names of the DFI’s and main areas of their specialization are given
below
1949‐ Pakistan Industrial Finance Corporation (PIFCO)
Local financing of only established units (functioned up to 1961)
1951‐ Agricultural Development Bank of Pakistan (ADBP)
Financial facilities for the development and modernization of
agriculture including forestry, fishery, animal husbandry, poultry and
dairy farming.
1952‐ House Building Finance Corporation (HBFC)
To provide financial aid to individuals and cooperative housing 54
societies for construction or purchase of residential houses in urban

55. History of DFI’s : National
1957‐ Pakistan Industrial Credit and Investment Corporation (PICIC)
Foreign and local currency loans to medium/large units both existing
and new in the private sector. Now functioning as commercial bank
since 2002.
1961‐ Industrial Development Bank of Pakistan (IDBP)
Foreign and local currency loans to small and medium units in the
private sector. The bank took over assets and liabilities of PIFCO.
1962‐ National Investment Trust (NIT)
The mobilization of savings of the people through the sale of its units
and to invest the funds so raised in shares and debentures of sound
and productive enterprises.
1966‐ Investment Corporation of Pakistan (ICP)
Financial assistance to public limited companies by under writing the
public issue of their shares and debentures. It also provide bridge‐
finance through consortia
55

56. History of DFI’s : National
1970‐ Equity Participation Fund (EPF)
Accelerating the growth of small and medium size industrial units in
the private sector in less developed areas.
1972‐ Small Business Finance Corporation (SBFC)
Assisting persons having technical know‐how but meager financial
resources. Now amalgamated in SME Bank Ltd.
1973‐ National Development Finance Corporation (NDFC)
Financing industry in the public sector also private sector companies
for purchase of local machinery from public sector units
1978‐ Pakistan Libya Holding Company Ltd (PLHC)
Local and foreign loans
1979‐ Pak Kuwait Investment Corporation (PKIC)
Direct equity investment loans etc.
1979‐ Bankers Equity Ltd (BEL)
All types of assistance promotion concepts of unified package and one
56
window financing

57. History of DFI’s : National
1984‐ Saudi Pak Industrial Corporation Ltd. (SAPICO)
Local and Foreign loans
1984‐ Regional Development Finance Corporation (RDFC)
Financing in less developed areas
1984‐ National Development Leasing Corporation (NDLC)
Joint venture of NDFC/ Habib group / IFC for leasing
operations
1998‐ Small and Medium Enterprise Development Authority
(SMEDA)
Provider and facilitator of support services to SME’s besides
conducting research for identification of problems faced by
SME’s.
2002‐ SME Bank Ltd
Established in January 2002 through the amalgamation of SBFC
and RDFC to meet the financial needs of SME’s. 57

58. History of DFI’s : International
The history & the factors which necessitated the creation &
establishment of the international financial institutions are as
given below
‐ The poor and under‐ developed countries readily accepted aid
as they needed resources for economic development
‐ Above all they had to import machinery & equipment along
with technology for their industrial growth. So the need for
economic resources of countries devasted by mass destruction
during the Second World War compelled the establishment of
international monetary and financial institutions
‐ The economic and financial experts of the allied nations
recognized the necessity of relief and physical reconstruction of
economies immediately after the Second World War was over.
58

59. History of DFI’s : International
‐ Accordingly post‐war monetary & financial plans began to be
considered and as a result of Bretton Woods Conference of July 1944
two complementary international financial institutions came into
existence. The International Monetary Fund (IMF) being the first
while the International Bank for Reconstruction & Development
(IBRD) popularly known as the world bank was the second.
1945‐ International Monetary Fund (IMF)
Established on 27th December 1945, started its operations from May
1946 as a result of Bretton Woods Agreement to promote
international monetary cooperation and expansion of trade. To
promote exchange stability and maintain orderly exchange
arrangements and avoid exchange depreciations.
1945‐ International Bank for Reconstruction and Development (IBRD)
The bank was setup under the Bretton Wood Agreement in Dec‐1945
for two purposes. To help finance the rebuilding of war devasted
areas and to aid in the advancement of less developed countries.
IBRD is popularly known as World Bank.
59

60. History of DFI’s : International
1956‐ International Finance Corporation (IFC)
The activities of the World Bank did not cover all the needs of
development financing therefore in July 1956 IFC came into being as
an affiliate of the World Bank
1960‐ International Development Association (IDA)
Established in 1960 as a separate legal entity with its own financial
resources but it is also closely associated with the world bank. The
aims of IDA are to promote economic development and to increase
the productivity and thus raise the standard of living in the less
developed areas of the world.
1966‐ Asian Development Bank (ADB)
ADB was established in Dec‐1966 with its headquarters in Manila
(Philippines). The bank aims to raise funds from private and public
sources and it provides financial and technical assistance for
development purposes in the Asian region.
60

61. History of DFI’s : International
1975‐ The Islamic Development Bank (IDB)
The conference of finance ministers of Muslim countries held at
Jeddah in Dec‐1973 issued a Declaration of Intent and the IDB
was subsequently established and commenced operations in
Oct‐1975. the bank aims at fostering the economic
development and social progress of member countries
1998‐ Multilateral Investment Guarantee Agency (MIGA)
This agency was established in 1998 as an affiliate of the World
Bank but it is legally and financially separate from the World
Bank. Its main object is to encourage the flow of investment for
productive purposes among its member countries specially the
developing countries
61

62. Types of Financial Services Available in
Pakistan Through DFI’s
From a modest beginning in 1949 the DFI’s in Pakistan
have now considerably enlarged areas of their
operations. They offer a wide variety of finances and
services and have contributed a lot towards
industrial progress in the country.
Types of financial services available through DFI’s are as
given below
62

63. Types of Financial Services Available in
Pakistan Through DFI’s
1. They mobilize domestic savings
2. They also raise deposits and thereby arrange their own line of
financing
3. For this purpose attractive saving and investment schemes are
introduced keeping in view local conditions and saving habits
4. These include fixed deposits, monthly income schemes,
floatation of mutual funds, opening and maintenance of
investment accounts
5. They pursue policies conducive to mobilization of primary
savings and their application to priority development sectors
6. They identify, promote and develop new projects and
investment proposals particularly in the under developed
regions to achieve balanced growth
63

64. Types of Financial Services Available in
Pakistan Through DFI’s
7. They also provide consultancy services to the new comers in the
industrial fields
8. In the field of agriculture production and development loans are
extended
9. Small and large farmers financing is undertaken for purchase of
seed, fertilizer, agriculture machinery
10. They also finance agricultural processing activities i.e. establishment
of dairies, fruit juices industry, fruit and vegetable preservation and
packing.
11. Development and modernization of agriculture including forestry,
fishery, animal husbandry, poultry and dairy farming
12. Finances are also provided for marketing of agricultural products,
agro‐ processing activities and agri‐ business
13. They provide finance to cottage and small scale industries including
clinics and small hospitals in the private sector
14. They also provide short, medium and long term credit to small
traders, transporters and professionals 64

65. Types of Financial Services Available in
Pakistan Through DFI’s
15. They extend foreign and local currency loans for the establishment
of new industries as well as for the balancing, modernization and
expansion of existing industries
16. They also extend necessary financial assistance for import of plant
and machinery, erection and installation thereof
17. These loans also cover assistance for the purchase of land,
construction of factory building and to meet the working capital
requirements
18. The DFI’s are like partners in business. They would share financing
of an enterprise right from the beginning till end when it actually
goes in production
19. After disbursement of loan projects are regularly visited by technical
personnel and DFI’s participation in key decisions is ensured
through appointing one or two directors on the board of the
companies
20. They keep a constant watch over the financial health of their project
to ensure uninterrupted operations
65

66. Types of Financial Services Available in
Pakistan Through DFI’s
21. If the project does not function as planed they may extend further
loan for modification of the design or diversification of the product
line
22. DFIs insist that their clients should install good financial and
internal audit systems. The companies are required to supply
information on management and operational performance on
quarterly basis
23. Each DFI ensure that its project contribute towards improvement in
the countries foreign exchange position either through export
earnings or import substitutions
24. A number of other factors are considered while approving projects.
These factors include creation of job opportunities, value added and
further investment generated
25. They also help rehabilitate units which become sick due to the loss
of market changes or machinery becoming old and obsolete with
the passage of time 66

67. Types of Financial Services Available in
Pakistan Through DFI’s
26. They provide financial aid to individuals and cooperative housing
societies for construction or purchase of residential houses in urban
areas
27. They continue to search for new concepts and new dimensions in
development financing
28. They assist in broadening the base of industrial ownership in the
country and thereby develop the stock market
29. They make direct equity investment in their projects, under‐ right
public issue of shares besides buying and selling of shares in the
stock market
30. They form syndicates or consortiums for co‐financing of the
projects, specially the large ones
31. They provide repayment guarantee in case of direct foreign loans as
well as any sort of assurance sort by the foreign lender
32. They provide micro‐economic foundation for the macro‐economic
policies and targets of Federal Government
67

68. Types of Financial Services Available in
Pakistan Through DFI’s
33. They also advise and assist foreign investors in locating
suitable investment opportunities locally
34. They also provide guidance to local entrepreneurs to obtain
suitable foreign investment for their enterprises
35. They also undertake administering and supervision of the
direct loans from international financial institutions abroad
36. They also provide leasing and insurance services
37. RDFC has been set up to promote investment in less
developed areas of Pakistan i.e. NWFP & Baluchistan
38. ICP and NIT mainly function to promote equity investment.
39. The organizations working with foreign collaboration go for
equity participation, take up long term PTC’s and provide
bridge loans
40. They complement the work of commercial banks i.e. credit to
formers and industrial investors 68

69. Sources of Funds for DFI’s
The DFI’s are initially launched with funds provided by
government and in some cases by multilateral agencies like the
World Bank. But the DFI’s are expected to meet subsequent
fund requirement through mobilization of domestic resources
and contracting direct foreign loans. Various schemes are
floated by DFI’s for attracting public deposit and investment.
Many DFI’s mobilize domestic saving for channelizing them to
industrial projects. For this purpose attractive savings and
investment schemes are introduced keeping in view local
conditions and saving habits. These includes fixed deposit,
monthly income schemes, floatation of mutual funds, opening
and maintenance of investment accounts.
69

70. Sources of Funds for DFI’s
The sources of generation of funds vary depending upon the
nature and area of activity of the institution which are covered
/ mentioned in detail while discussing the individual role of
these DFI’s. However the same may be summarized as given
below
‐ General public through deposits
‐ Borrowing from Federal Govt.
‐ Borrowing from SBP secured by guarantee of Federal Govt.
‐ Public issue of Shares and Debentures
‐ Foreign lending institutions
‐ Asian Development Bank
‐ World Bank
‐ Islamic Development Bank 70