Capital markets are the avenues for capital creation and growth. Capital markets owe their origin to Dutch society of the 16th century. The basic function of brokers in the Dutch economy was the same as of the capital market institutions today the world over. Capital markets are used for channelization of stagnant wealth for financing new businesses and providing liquidity along with safety to the owners of the capital assets.
Capital markets in south Asia inherit their legacy from the business-class traders of the pre-partition Indian subcontinent, mainly concentrated in the north-centre of undivided India where the then capitalists used to lend money and earn interest. That was a very crude form of capital market without any formal institutionalization. Capital markets then were more a source of exploitation than a driver of economic productivity.
After the Bretton Woods system came into beinfg, the world powers started championing the cause of capital market institutions. Today, the corporatization of business and the requisite vibrancy of capital markets are the determinants of growth and economic vitality.
Coming to Pakistan, the capital market here witnessed a giant leap in the early 2000s whereby the Securities and Exchange Commission of Pakistan (SECP), Karachi Stock Exchange (now Pakistan Stock Exchange), Central Depository Company (CDC) and State Bank of Pakistan (SBP) were revamped. More so, the Federal Board of Revenue (FBR, then CBR) was reformed to a greater extent. All these changes with economic stability and foreign exchange sustainability led to affluence in the capital market. The corporatization of businesses increased manifold.
As a matter of fact, the key milestones in achieving true capital market vibrancy are given, that is, ease of trading, swift financial settlements (sale, purchase and exchange of scrips, shares, bonds, debentures, units, and such like), increased number of secure financial transactions, online settlements, real time pricing and linkages with local and international financial institutions. In Pakistan, all these parameters were positive in the early 2000s. Unfortunately, despite advancement in technology and real time computing, our country has not achieved sustainable growth in capital markets. A major step in the direction was the establishment of Pakistan Stock Exchange and virtual linking of all exchanges in Pakistan. However, much more needs to be done.
High quality research into market mechanics, streamlining of processes and information sharing in order to produce informed decision making are essential for capital market growth which will ultimately result in multiplied economic activity, higher investments, higher documented transactions, service revenue, credit enhancement and increased market capitalization.
The international organization of Securities Commissions also prescribes best practices for capital markets world over, which must be adhered to by our country in order to be more vibrant and attractive to foreign investors.
Here, the e-services platforms of SECP deserve commendation as they have simplified the processes of incorporation, fee payments, filing requirements and such like, making them very easy and inexpensive with minimal human intervention. Recently, the SECP has also been successful in launching Pakistan’s new corporate registry, “eZfile,” which is a more sophisticated and user-friendly online portal designed for company and LLP registration and post-incorporation filings.
Moreover, the promulgation of Companies act 2017 has also been a step in the right direction which removed certain anomalies in the Companies Ordinance 1984. The promulgation of Limited Liability Partnership (LLP) Act 2017 was also reflective of a thorough effort by the policy makers to enhance documentation of the economy. Many partnerships in the country were operating but these were outside the regulatory domain of SECP. Through the LLP Act, LLPs are now also a part of the documented corporate environment.
The next important factor is to ensure real-time linkage of the capital market with financial institutions and banks. In today’s digitized world, transfer of funds is made through some clicks on the digital screen. Here we must appreciate the introduction of e-pay platforms and digital banking by telecom companies and banks. However, much more is required to integrate the international financial institutions and banks to the capital markets of Pakistan so that the globally recognized standards of transparency and source verification of funds are complied with.
We must acknowledge that the increase in interest rates in Pakistan has decreased the risk appetite of the investors over time. Accordingly, the investors have remained distant from the capital market. Moreover, owing to the forex crunch, the foreign investors also have been apprehensive of investment because their returns in the form of dividends are hard to be remitted outside Pakistan in view of the stringent control on the outflows of dollars. Therefore, a coordinated and concentrated effort is needed to revive the confidence of capital markets.
In purely the context of Pakistan’s economy, the capital market should aim at driving economic growth by acting as a catalyst of financing the Small and Medium Enterprises (SMEs) and cottage industries, leading to increased productivity and employment generation.
High quality research into market mechanics, streamlining of processes and information sharing in order to produce informed decision making are essential for capital market growth which will ultimately result in multiplied economic activity, higher investments, higher documented transactions, service revenue, credit enhancement and increased market capitalization.
