FINANCIAL INSTITUTIONS

Submitted to: Sir Sharique Ayubi

Submitted by: Sandesh Kumar

ID: 10716

Section : A

Assignment topic: Pakistan Bond Market

Date: 09/02/11

PAKISTAN BOND MARKET

Of late, the Pakistan economy has been growing at a steady rate. Starting at a low level of development, the equity market in Pakistan has registered phenomenal growth in terms of the size of the market and institutional development but the fixed income securities market has not developed as quickly. At around 15 percent of GDP, Pakistan's savings rate is one of the lowest among developing Asian economies.

The bond market in Pakistan covers debt and debt like securities issued by the government, statutory corporations and corporate entities. As of June 30, 1995, the size of the Pakistani bond market was approximately Rs. 811.3 billion, the equivalent to US$ 26.2 billion or about 43% of the country's GDP. While this may seem a fairly large amount, its size largely reflects the cumulative effects of financing Pakistan's continuing budget deficits, as government securities are auctioned, they have not yet emerged as effective benchmarks.

The market for the bonds of statutory corporations and corporate entities is at an early stage of development, but its prospects appear promising. These institutions have a genuine need to issue more debt instruments, given their desire to secure term financing, the limited availability of alternative funds, and their large capital expenditure needs. Moreover, there is a ready market for these bonds, given their relatively attractive yields and a large and growing pool of investible funds. There is clearly potential for growth.

There are various views on why the development has been so slow and unable to keep pace with the development of the stock market. There appears to be a consensus that potential bond market institutions in the country have suffered from a lack of expertise, capital and trained staff. Perhaps it is understandable that institution building does not take place overnight, and that it requires a careful strategy and long term commitment on the part of the government as well as the market participants.

There is widespread agreement among the government and private sector participants that Pakistan needs a viable bond market in order to mobilise private savings efficiently for long term investments. Moreover, the government and the financial community have recently taken important

steps to foster capital market development. While this support is important, even crucial, there are a number of areas requiring greater attention in order for a robust bond market to develop.

Jahangir Siddiqui recently pointed out several anomalies which have been hampering the growth of the bond market in Pakistan. He said that the Short term Federal Bond which was introduced in 1996 has a structure which creates several problems in secondary market trading for outright purchases as it is not possible to quote a specific bid for a particular auction since each instrument carries a different profit payment and as a consequence the vibrant secondary market for T-bills where the average daily volume was between Rs. 200 to 500 million has ceased since their introduction.

He also said that on the corporate bond front, one of the biggest problems regarding their marketability is that Term Finance Certificates (TFCs) are not included as approved investments in the Statutory Liquidity Requirement (SLR) of commercial banks and SLR of NBFIs. This is surprising because NIT units which are similar to these certificates but have not been rated by an approved credit rating agency are approved investments for maintenance of SLR.

Nasir Bukhari has also on occasion outlined several issues which are of paramount importance if the Pakistan bond market is to be developed. He has stressed on increased awareness, especially in the retail sector and the introduction of issues of blue chip companies which already enjoy a wider recognition and investor confidence. He also said that at present TFCs are in direct competition with National Saving Schemes (NSS) and Short Term Federal Bonds (STFB) and said that distortions related to tax and Zakat should be removed to provide a level playing field.