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Crash of 1992 - modarabas - junk stocks.

A Pundit with Pothis and Zaichas is not required to predict what is going to happen to the modarabas by end of 1992 or before. It can be seen quite clearly without the aid of crystal ball. Bulls are rampaging the stock markets these days in Pakistan and the days of China in these shops appear to be numbered. With Investment Companies evaporated in thin air, the news items about Co-operatives Scam Cooling down, the money is being sucked by the whirl wind of stock markets with other shares and securities flying and fledgling modarabas fluttering.

Americans are very much familiar with the term junk bonds. The bonds which have low rating. The sponsors who are new in the market usually participate in this market without having an established track record of performance, which are mostly supposed to be used in financing corporate buy-outs. This phenomenon in hummed form is the product of seventies, when investors were lured by Public Relation Departments of Investment firms like Dresiel, Burnham, Lambert who handle bulk of these instruments. These bonds are rated at the lowest BB being of speculative nature carrying 3 to 5 per cent more rate of return than rate prevalent in the current market.

Junk bonds in America, have been favourite field for fraudulent activities and a few white collared criminal like Miachel Milken and Ivan Bovesky have been jailed for their foul deeds in junk bond operations. The Modarabas which one may term as junk stock have a number of similarities with junk bonds. Mostly the sponsors of modarabas are fresh entrants in the Capital Market besides a minuscule number of better known angles. The track record of most of the sponsors is not very well established, in a sphere which deep down is speculative in nature.

But the Modarabas and junk bonds also contain one very important dissimilarity with each other. While American Stock market is very well set-up and works under the effective supervision of Exchange and securities commission, and rules and regulations evolved over a period of time. The stock market in Pakistan is still in its infancy, where naturally the insiders are having field days. Moreover, whereas Junk Bond in hands of fallen angles and operators of buy-outs do have positive application, for junk stock in Pakistan very few such productive opportunities exist. Hence the chances of Scams and frauds are plenteous.

Modarabas have been allowed in the name of religion as one of the Islamic modes of financing and like a few other things done in this disguise carry numerous loopholes and infirmities which can wreak havoc on the entire financial system and stock market which is mostly controlled by sharpers looking for quick bucks.

Our national objective is the improvement of the quality of the life of the nation as a whole, which is possible through rapid industrialization. For this purpose the path of free market economy has been chosen, being in vogue these days. Free market economy aiming at rapid industrialization underlines the need for capital base in the form of healthy money market, so that the industrial projects and other related productive activities are adequately funded and do not starve for lack of required nourishment.

Modaraba systems as a mode of financing, appears to be very sound and reasonable on the face of it. One person has money, while the other has expertise to plan, develop and run a project. They both come together and a modaraba is formed to serve the economy happily everafter. But unfortunately things are not as simple as that. Financing although a very important factor in the economic activities does require productive economic activities to succeed and to make desired contribution in this sphere.

Of late in the financial sector of our country, there have been mushroom growth of financial institutions like Foreign commercial banks, Investment banks, Leasing companies newly licensed and privatized commercial banks and to top it all Modarabas have surfaced rather overabundantly. It is now imperative that industrial and productive economic activities should have also grown proportionally. Otherwise there is bound to be imbalanced growth leaving little room for absorption of capital and resulting in constipated state of affairs, if one may say so. Eventually it will lead to depression in the economy which is the least what this stage of development can afford.

Looking back, it is observed that there had been some expansion in the financial sector during sixties and to some extent in seventies. But as the productive economic activities were also moving upward, there had been no imbalance and things continue to run smoothly excepting a few small mishaps, which are inevitable in free market economy.

But since eighties the disproportion in financial sector and productive economic activities has creeped in. While the industrialization and productive activities did grow, their pace was far slower than the pace of growth in financial sector. This disproportion or rather distorted growth has gained tremendous speed these days. The stock market is on heat, its peculiar smell and suggestive call is attracting all and sundry to know it in biblical sense. Just go to a branch of any bank, which deals in the issuance of new shares. You will see the share lovers almost everywhere. Not to speak of customers who have opened accounts, in hundreds of names to fulfil the requirements of the rules for putting up applications for new issues, but most of the staff of the financial institutions from peons to managers is also having affaire damour when it comes to company visits by investors and analysts.

This is a new phenomenon in Pakistan, and is probably one of the more tangible pieces of evidence (apart from that offered by Pakistani stock brokers roaming around Hong Kong and London), of the fact that Pakistan has so to speak "arrived". I know that a few Pakistani companies are looking at a visit a week at least from research analysts, all asking very serious questions, and taking up valuable time. I sometimes like to tell a story to Pakistani companies who are facing this invasion, and I think some of you may have heard it before, but Toyota Motor Company in Japan receives over 100 financial analysts a week, and over 500 visitors a week to its factory sites and head office buildings in Japan.

Well I suppose that there must be some cost to opening up ones markets, and this is one such cost. However, seriously, such visits are a permanent feature, and more and more foreign investors will be visiting Pakistan, and more and more requests for factory visits will be made. Such visits, when conducted properly, not only spread the good news, but help you in understanding the thought process of foreign investors. Over time, some of the recent investors who have invested in specific companies will build up a whole portfolio and their visits, as shareholders, will serve a different purpose. All in all, this is one trend that has emerged as a result of the opening of the markets, and another area where deliberate care must be taken in ensuring that Pakistan maintains its good lead. After all, happy shareholders make good shareholders. Well, I am coming to the end of my allocated time.

I have chosen as you can see to spend my few minutes talking about some important basics which have to be addressed early on, and which can sometimes be overlooked in the euphoria of the general opening. I would like to finish however by underlining my own personal, and Citicorp's corporate optimism as far as Pakistan is concerned. We do see Pakistani companies tapping global markets and issuing convertible bonds, depository receipts, and other instruments. We see the constituency of investors both domestically and internationally expanding, and offering for the first time in Pakistan's history, relatively cheap capital for the expansion in industrial output that we also see occurring. We see Non resident Pakistanis becoming involved in the primary and secondary markets, and we see a number of Pakistani corporations becoming, inshallah, household names across the world.

We also in the short term see the launch of more country funds, and the launching of international IPO's from the Karachi Stock Exchange. I would like to end by thanking you for your attention, and wishing all of you continuing success and prosperity in 1992. I look forward particularly to seeing Mr. Shameem Ahmed Khan and the office of the CLA and CCI continuing to providing enlightened regulation which allows us to participate in the exciting events we all anticipate.
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Author:Chouhdry, Maher Elahi
Publication:Economic Review
Date:Jan 1, 1992
Words:1425
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