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Development of capital market.

(Keynote address at the Seminar on Convertible Bonds, Organised by ADB and CresBank)

It is indeed a matter of great privilege for me to be present on the occasion of the inauguration of the seminar being organised by the Asian Development Bank in collaboration with the CresBank. The primary purpose of which is to throw light on issues relating to the convertible bonds but which is likely to touch much broader issues of capital market development. I may start by thanking Mr. I.H. Hanfi, Governor State Bank of Pakistan, who graciously agreed to inaugurate the seminar and Mr. In Yong Chung, Vice president, Asian Development Bank, who has flown from Mania to grace the occasion. Their presence here symbolises in no uncertain terms the commitment of our Central Bank to the development of the capital market in the country and the active and positive support which we have received and are continuing to receive from Asian Development Bank in this area as well as in many other areas of national development. We are thankful to ADB for having selected Pakistan as one of the countries in which a seminar on the subject is being held and hope that Pakistan would continue to figure prominently in the ADB programmes for the development of capital markets. Holding of such seminars has a special significance as it enables interaction of experts from a number of countries with a large number of professionals in the host country. We are particularly happy that CresBank, which is one of the investment banks, has joined hands with ADB in organising this seminar.

Here, I must recount briefly the contribution which has been made by ADB in helping development of capital market in Pakistan, on healthy lines. In recent years, two notable studies have been financed by ADB; one, on the Development of Secondary Market or Fixed Income Securities and the other, on Securities Market Institutions. The policy dialogue on Industrial Sector Loan also helped in bringing out some critical issues in the regulatory framework for the market.

This seminar is being held in Pakistan at a time when the country has already undergone the first phase of economic and financial sector reforms which have removed a number of age-old controls and substantially liberalised economic environment. These reforms have been particularly significant in the areas of sanctioning of industrial projects, exchange control and financial intermediation. Now there is practically no control on establishment of new industries. Exchange control regime has been liberalized and in addition to privatization of two commercial banks, ten new commercial banks have been allowed to operate in the private sector. The process of economic liberalisation has been strengthened by the progress made towards privatization.

There are two policy decisions taken in the recent years which have special significance for the development of capital market in the country. The first relate to the borrowing by the government on market rates through Federal Investment Bonds and Treasury Bills which over the years should replace the system of quantitative credit control and administered interest rate structure. The new system has also helped in the development of primary and secondary market in government securities which consist of banks, financial policy decision taken in February last year relates to the opening of our market to foreign nationals and expatriate Pakistanis.

These reforms and the liberalization of economic environment have not only lent buoyance but also bouyance about qualitative change in our security market. The market capitalization which was around Rs. 53 billion (approx. US$ 2 billion) on 1st January, 1991 went up to Rs. 195 billion (approx US$ 8 billion) on 1st January, 1992. State Bank Index of share prices with base year of 1980 which was 307.85 on the first day of 1991 touched 749.41 on 1st January of this year. The turnover of shares has significantly increased from an average of 1 billion for the past few years to 2-3 million. More than sixty companies were listed in 1991 which is the highest number for a particularly year. It is estimated that the number of Investors have increased substantially during the last year. I am happy to note that a number of persons who partook this phenomenon are present in this hall to-day.

The veritable explosion in our securities market has had a marked impact on the institutional development of the market in many respects. Two brokerage houses have been established and more are likely to follow. Now there is a much greater emphasis on research and financial reporting. Permission has been given to a number of applicants for providing investment advisory services under the Investment Advisers and Investment Companies Rules. Two discount houses are in place.

While the changing scenario of financial sector and the securities market is encouraging, a number of challenges thrown by the new situation are still to be addressed effectively. Transactions need to be made more transparent and trading mechanism is to become more efficient and this makes computerisation of stock exchanges an imminent necessity through adoption of right policies.

One area which needs to be given special attention is introduction of innovative financial instruments conforming to our legal frame-work which could cater to preferences of different categories of investors. Since 1984, we have had only one class of shares. Unfortunately, companies have not used redeemable capital instruments allowed by the Companies Ordinance, 1984 for the purposes of raising capital from the market. A Committee has already identified some impeding factors and it is hoped that greater use of Participation Term Certificates would help deepen our market.

We are going to hear from the distinguished speakers in the seminar, experiences of some of the countries in the use of convertible bonds. It would be useful for us to hear these experiences, not because it may be possible for us to entirely replicate these experiences but because these experiences underline the importance of adaptation of financial instruments to local environment and needs. The discussions could also stimulate thought process for devising financial instruments which meet the requirements of Islamic Sharia. The Seminar is essentially a forum for familiarising ourselves and understanding an instrument which in its various forms has been used by a number of countries to the great advantage of all the participants in the capital market.
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Title Annotation:Shamim Ahmed Khan
Publication:Economic Review
Article Type:Transcript
Date:Jan 1, 1992
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