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Mohammad Yousaf Bhatti IMPGCC
NON BANKING FINANCIAL INSTITUTIONS
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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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Course Outline (Cont…) Mutual Funds DFI’S Investment Finance Companies Leasing House Building Finance Corporation
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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 imperative that they must be regulated by the Federal Government.
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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 IMPGCC 5 IMPGCC 5
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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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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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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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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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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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. IMPGCC 11 IMPGCC 11
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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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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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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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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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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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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 mutual funds. IMPGCC 17
Role of Financial Institutions in Economic Development
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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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Role of Financial Institutions in Economic Development
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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 the future. IMPGCC 19
Role of Financial Institutions in Economic Development
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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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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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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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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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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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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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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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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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Performance Review NBFI’s
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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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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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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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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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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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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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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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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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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 of growth or development) IMPGCC 36
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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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 expenses and provisioning cost.
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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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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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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) IMPGCC 41
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. IMPGCC 42
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 deferred payment basis’.
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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, amendments in Prudential Regulations for Modarabas are also in process. IMPGCC 44
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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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 84 2 percent in FY08
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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.
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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.
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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.
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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.
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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.
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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.
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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 mobilized in corporate sector.
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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
societies for construction or purchase of residential houses in urban
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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
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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
window financing
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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.
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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