by Azhar Bukhari
Textile industry, kicking the bucket
Long-hours power outage, PKR decline trashing investment in textile sector
Share in total exports continues to fall off
Azhar Bukhari
The prolonging power crisis and significant decline in PKR against the US dollar, have smashed the investment in textile sector, as the share of textile exports in the total exports of the country has decreased to 50.2 percent from 62.6 percent.
A decade before, the textile export was at 80 percent of the total exports of the country. Despite enjoying subsidies worth over Rs 25 billion, the share of textile exports in the total exports of the country is continued to decrease.
According to a research study, more than 300 big and small textile and spinning units have been closed or merged after the martyred of former Prime Minister Benazir Bhutto. The industry has not been able to reap the benefits arising out of the depreciation of the rupee by 30 percent, and textile exports have registered a negative growth of 7.2 percent in the 3rd quarter of current fiscal year.
But on the other, when the food crisis is hitting the world’s major economies, here in Pakistan, without any government support, the share of non-textile exports have increased to 49.6 percent from 37.4 percent. The share of non-textile exports in the total exports of the country have increased to $2.730 billion in the Jan-March 2009.
Due to the unending power crisis, the local textile sector has not been able to develop its capacities and product development and meet international challenges.
The reliance of the local textile sector on textile quotas, duty drawback, refund and rebate culture has had a negative impact and its inefficiencies have exposed its capacity in the post-quota era.
In Pakistan, the textile sector commonly uses the locally produced cotton, yarn and raw materials and relies less on imports, but even than it has not been able to increase its exports at par with the last fiscal year. Experts in the government also argue that utility prices like gas, electricity and petroleum products have increased and are having a negative impact on all export-oriented industries.
The rupee witnessed a downslide soon after the Pakistan People’s Party-led government took charge of the affairs of the country. It depreciated from Rs 62 a dollar to Rs 80 a dollar during the last few months leaving export-oriented industries with no option to import or buy imported raw materials at higher costs.
In the recent past, the country’s exports have been witnessing marginal growth and imports have been registering sky rocketing increase, which has created balance of payment problems for the country. Availability of locally produced industrial raw materials would be the key to enhance country’s exports in future as the overall inflation and depreciation of rupee and rising power tariff would be limiting growth in exports.
The continued high prices of cotton yarn may cause a setback to the ongoing progress in the investment tempo of extensive-scale modernization replacement and expansion in the value-added section of the textile industry.
It is estimated that the export of one kg. of cotton yarn earns $2.70 as against which the similar quantity of cotton yarn/polyester fibre would earn $7.50 if exported after conversion into a value-added product. In order to achieve the best results on the textile front, it would be advisable that quotas may be imposed for the export cotton yarn so that the commodity could be made comfortably available to the value-added industry.
The demand for textiles in the world is around $21 trillion, which is likely to be increased by 6.5% in 2010. China is the leading Textile exporter of the world's total exports of US$ 500 billion in 2007. Country wise major market shasres of the textile exporting countries are: China: $ 55 billion, Hong Kong:$ 38 billion, Korea: $ 35 billion, Taiwan:$ 16 billion, Indonesia:$ 9 billion.
Though Pakistan has emerged as one of the major cotton textile product suppliers in the world market with a share of world yarn trade of about 30% and cotton fabric about 8%, having total export of $ 7.4 billion which accounts for only 1.2% of the over all share. Out of this Cotton fabric is 0.02%, Made-ups is 0.18% and Garments is 0.15%.
This is mainly due to the laxity towards the promotion of value added sector. Pakistan should learn a lesson from Bangladesh, which, by importing yarn and fabrics from Pakistan and other countries, has increased the export volume of Textiles made ups. If we desire to achieve the target of Textile Exports as envisaged in Textile Vision 2009, we will have to promote Value added sector in Textiles.
Role of textile industry in national economy
Textile products are a basic human requirement next only to food. This industrial sector in Pakistan has been playing a pivotal role in the national economy. Its share in the economy, in terms of GDP, exports, employment, foreign exchange earnings, investment and contribution to the value added industry; make it the single largest determinant of the growth in manufacturing sector. Textile share of over all manufacturing activity is 41%, export earning is 50.2%, value addition is 7% of GDP and as a provider of employment 32%.
In spite of the government's efforts to diversify exports as well as industrial base, the textile sector remains the backbone of industrial activity in the country.
Bottlenecks & deregulation strategy for investment
1. Poor infrastructure
2. Delay in sales tax refund causing serious cash flow / liquidity problem to the industry.
3. Pakistan's bad image portraited by the international media.
4. Adverse travelling advice by the foreign countries to their citizens discouraging travel to Pakistan.
5. Pakistan to sign international agreements, providing protection to intellectual property rights and international arbitration agreements.
6. Non-availability of good quality soft water for the textile industry.
7. Arrangements to provide Insurance guarantees to U.S. investors on their investment in Pakistan
The Explorers...
Tuesday, July 7, 2009
Cost overrun, a setback for construction sector
Cost overrun, a setback for construction sector
Azhar Bukhari
Cost overrun is a very frequent phenomenon in country’s construction sector and is almost associated with all projects of construction industry. A research study has revealed that 9 out of 10 projects had overrun.
World commodity prices for basic materials, the current state of the local economy, the quality of materials and poor supply and demand have contributed to dramatic price fluctuations in the sector.
At the time when masses are facing sever power crisis and ever increasing inflation rate, it is a pipe dream for common men to buy a house for their families.
In big cities like Lahore, Faisalabad, Karachi, Quetta etc, a large population is residing at rent making the cities very congested place. To overcome the shortage of housing units, the town planning and management departments, without following the rules, have granted licenses for establishing housing schemes to every Tom, Dick and Harry, which have made the situation more critical.
It is learnt that 80 out of 100 housing schemes are either fake or hide the facts. However, all the field is not barren, as few developers like Eden Developers, Lake City, Bahria Town, Urban Developers, TajMahal Marketing and Wocland International are still providing low-cost housing units both in cash and installments. Busy in metro life, a common man prefer to buy a unit in housing scheme to save time and money as well.
In Pakistan, construction sector is an important sector although not working to its fullest potential but still of prime significance to the country. Growth in this sector is critical for growth in national income as it is among the largest sectors that generates employment within the country as well as a key driver for economic development of Pakistan. Like many other developing countries, Pakistan is also facing critical project management related issues among which cost overrun is quite prominent.
A research study has indicated that the majority of cost overrun factors (88%) lie in medium severity impact zone, signifying that major attention needs to be given to these factors as they collectively cause considerable cost overrun. It is evident from the findings that both internal and external aspects of business setting are present as the prime contributors to cost overruns.
According to the study, the major cost overrun factors were fluctuation in prices of raw materials, unstable cost of manufactured materials, high cost of machineries, poor project (site) management, incorrect/ inappropriate methods of cost estimation, additional work, improper planning, and unsupportive government policies.
Cost has its proven importance as the prime factor for project success. A completed project may not be regarded as a successful endeavor until and unless it satisfies the cost limitations applied to it.
Management Factors
Some cost overruns are unavoidable because they cannot be reasonably prevented, such as those due to unanticipated events, however overruns due to design plan or project management problems are avoidable because they could have reasonably been foreseen and prevented. The project control procedure can help management identify its current position related to a future position.
Majority of constructors are small players who have weak financial positions, out-dated labour-intensive technology and poor organizational structures.
It is need of the hour to encourage investment in the real estate sector and facilitate the developers like Eden, Wocland, Bahria Town, TajMahal, Urban Developers etc which are establishing modern housing schemes with all basic facilities for a common man.
Approximate construction material prices in Lahore market
during April 2009
Construction including material per square ft Rs 1250 to 1500
Labour cost without material per square ft Rs 150 to 200
Electricity & Plumbing per square ft Rs 10 each
Cement bag Rs 325
Stone crush Rs 40 per square ft
Sand Truck Rs 12,000
Bathroom Tiles Rs 300 to 1200 per square meter
Marble Rs 20 to 80 per square ft
Bricks Rs 3600 to 4000 per 1000
Approximate covered area for single storey house
5 Marla 1125 square ft
10 Marla 1800 square ft
1 Kanal 3200-3600
Azhar Bukhari
Cost overrun is a very frequent phenomenon in country’s construction sector and is almost associated with all projects of construction industry. A research study has revealed that 9 out of 10 projects had overrun.
World commodity prices for basic materials, the current state of the local economy, the quality of materials and poor supply and demand have contributed to dramatic price fluctuations in the sector.
At the time when masses are facing sever power crisis and ever increasing inflation rate, it is a pipe dream for common men to buy a house for their families.
In big cities like Lahore, Faisalabad, Karachi, Quetta etc, a large population is residing at rent making the cities very congested place. To overcome the shortage of housing units, the town planning and management departments, without following the rules, have granted licenses for establishing housing schemes to every Tom, Dick and Harry, which have made the situation more critical.
It is learnt that 80 out of 100 housing schemes are either fake or hide the facts. However, all the field is not barren, as few developers like Eden Developers, Lake City, Bahria Town, Urban Developers, TajMahal Marketing and Wocland International are still providing low-cost housing units both in cash and installments. Busy in metro life, a common man prefer to buy a unit in housing scheme to save time and money as well.
In Pakistan, construction sector is an important sector although not working to its fullest potential but still of prime significance to the country. Growth in this sector is critical for growth in national income as it is among the largest sectors that generates employment within the country as well as a key driver for economic development of Pakistan. Like many other developing countries, Pakistan is also facing critical project management related issues among which cost overrun is quite prominent.
A research study has indicated that the majority of cost overrun factors (88%) lie in medium severity impact zone, signifying that major attention needs to be given to these factors as they collectively cause considerable cost overrun. It is evident from the findings that both internal and external aspects of business setting are present as the prime contributors to cost overruns.
According to the study, the major cost overrun factors were fluctuation in prices of raw materials, unstable cost of manufactured materials, high cost of machineries, poor project (site) management, incorrect/ inappropriate methods of cost estimation, additional work, improper planning, and unsupportive government policies.
Cost has its proven importance as the prime factor for project success. A completed project may not be regarded as a successful endeavor until and unless it satisfies the cost limitations applied to it.
Management Factors
Some cost overruns are unavoidable because they cannot be reasonably prevented, such as those due to unanticipated events, however overruns due to design plan or project management problems are avoidable because they could have reasonably been foreseen and prevented. The project control procedure can help management identify its current position related to a future position.
Majority of constructors are small players who have weak financial positions, out-dated labour-intensive technology and poor organizational structures.
It is need of the hour to encourage investment in the real estate sector and facilitate the developers like Eden, Wocland, Bahria Town, TajMahal, Urban Developers etc which are establishing modern housing schemes with all basic facilities for a common man.
Approximate construction material prices in Lahore market
during April 2009
Construction including material per square ft Rs 1250 to 1500
Labour cost without material per square ft Rs 150 to 200
Electricity & Plumbing per square ft Rs 10 each
Cement bag Rs 325
Stone crush Rs 40 per square ft
Sand Truck Rs 12,000
Bathroom Tiles Rs 300 to 1200 per square meter
Marble Rs 20 to 80 per square ft
Bricks Rs 3600 to 4000 per 1000
Approximate covered area for single storey house
5 Marla 1125 square ft
10 Marla 1800 square ft
1 Kanal 3200-3600
LSM continues to decline ahead weak demand, heavy load-shedding
LSM continues to decline ahead weak demand, heavy load-shedding
Azhar Bukhari
The Large Scale Manufacturing (LSM) has recorded negative growth throughout fiscal year 2008-09, which is the longest period in production fall continuously.
Moreover, 21.2 percent (YoY) decline in the month of May 2009 is the highest ever fall in LSM production.
Weakness in domestic demand, worsening power shortages, structural problems and deterioration in law & order situation are some important factors responsible for the decline in LSM production.
According to the data released by the State Bank of Pakistan Large Scale Manufacturing registered negative growth of 7.7 percent during Jul-May FY09 compared with a 5.0 percent rise in the corresponding period of FY08. The persistent disappointing performance is a reflection of various adverse domestic and external developments.
However, this continuous fall in manufacturing sector has more domestic factors than the affects of global recession.
In particular, automobiles industry witnessed sharp slide mainly due to high cost of consumer financing continued upward prices of cars, tight liquidity position of the banks as well as risk averse behaviour after facing substantial Non Performing Loans (NPLs) in consumer finance.
Further, slow income growth and high inflation impaired consumers’ ability to spare funds for purchasing durables. While higher cost of consumer financing was an important reason for softer demand for household electronics, weaker demand for transformers and electric meters by the power distribution companies resulted in a poor performance by this industry.
Growth in cement production though helped contain free fall of LSM growth, weakened in recent months. Cement production rose by 4.8 percent during Jul- May FY09, the lowest growth in the last six years. A sustained double-digit growth in cement production was achieved by addition in production capacity and exploitation of export markets.
The impact of global recession on domestic LSM is most visible in the textile industry. Growth in textile industry fell by 0.1 percent over the same period last year. Textile sector was badly hit by power shortages and weak external demand. Both cotton yarn and cloth industries, which have the largest shares in the textile sector, posted negative growth of 0.27 percent and 0.33 percent respectively during Jul-Mar FY09.
With respect to exports promotion measures All Pakistan Textile Mills Association has proposed the federal government to make duty and tax remission schemes workable, easy to operate and manageable. It has also stressed on industry friendly anti-dumping laws with raw material relating provisions i.e. competing interests should be balanced.
On market access, the APTMA has stressed on trade diplomacy, image building of the country and compensation to the industry for losses being made out of present distort image.
Consequently, Pakistan Industrial and Traders Associations Front (PIAF) has also decried the six to eight hours suspension of electricity supply to Independent Feeders of Large Scale Manufacturing Units saying that it would hit the exports hard.
Talking to The Post, Chairman PIAF, Irfan Qaiser Sheikh said that the duration of suspension of electricity should be minimized to help Large Scale Manufacturing units that are major foreign exchange earners for the country.
The PIAF chairman maintained that there is a dire need to implement innovative ideas for the economic revival of the country at this point in time when the economic activity is already at its lowest ebb. He said that the government should intervene to avoid prolonged economic slow down that is bound to give birth ills like poverty and unemployment.
Sheikh said that the Large Scale Manufacturing units need facilitation as they are supplementing the government efforts aimed at economic prosperity but it seems that some circles are hell-bent to defame the government. He said that the electricity is one of the basic raw materials for the industry and the repeated increases in its prices even without proper consultation of business doing people are badly affecting the over all production.
Similarly, electronics sector is not only going through weak demand created by financing gap and increased prices of products, but also due to frequent power outages.
People are forced to spend on alternate power supply equipment (UPS and generators) to streamline electricity supply, which do not support a number of household electronic appliances.
As global textile demand declined, quantum of yarn exports shrank by 7.8 percent over the same period last year, and the average export unit value of yarn fell by 8.7 percent. Similarly, export unit value of cotton fabric dropped by 1.0 percent in this period. The combined impact of domestic and external factors has resulted in closure of about 20 percent spinning mills in the country.
In contrast to a declining trend in overall manufacturing activity, fertilizer production posted a significant growth of 20.7 percent in last 12 months after a dismal performance during the preceding two years.
In addition, a slower pace of decline in international prices of phosphatic rock (major input for DAP) squeezed the margins of the firm. While, current production of both phosphatic and nitrogenous fertilizer are insufficient to meet local demand, with the completion of plants by Fatima Fertilizer and Engro, shortage of urea is expected to turn into a surplus during FY11.
However, DAP shortage will continue due to lack of raw material in the country and large investment required to setup a new plant.
Similarly automobiles industry is facing significant contraction in demand (except for tractors where domestic production is low). In particular, jeeps & cars subsector is the worst hit by the sluggish demand due to three factors: continued increase in prices, (2) rise in cost of financing, as well as (3) lower availability of institutional financing given risk averse policy of banking sector amid increasing NPLs and liquidity problems with the banks.
Azhar Bukhari
The Large Scale Manufacturing (LSM) has recorded negative growth throughout fiscal year 2008-09, which is the longest period in production fall continuously.
Moreover, 21.2 percent (YoY) decline in the month of May 2009 is the highest ever fall in LSM production.
Weakness in domestic demand, worsening power shortages, structural problems and deterioration in law & order situation are some important factors responsible for the decline in LSM production.
According to the data released by the State Bank of Pakistan Large Scale Manufacturing registered negative growth of 7.7 percent during Jul-May FY09 compared with a 5.0 percent rise in the corresponding period of FY08. The persistent disappointing performance is a reflection of various adverse domestic and external developments.
However, this continuous fall in manufacturing sector has more domestic factors than the affects of global recession.
In particular, automobiles industry witnessed sharp slide mainly due to high cost of consumer financing continued upward prices of cars, tight liquidity position of the banks as well as risk averse behaviour after facing substantial Non Performing Loans (NPLs) in consumer finance.
Further, slow income growth and high inflation impaired consumers’ ability to spare funds for purchasing durables. While higher cost of consumer financing was an important reason for softer demand for household electronics, weaker demand for transformers and electric meters by the power distribution companies resulted in a poor performance by this industry.
Growth in cement production though helped contain free fall of LSM growth, weakened in recent months. Cement production rose by 4.8 percent during Jul- May FY09, the lowest growth in the last six years. A sustained double-digit growth in cement production was achieved by addition in production capacity and exploitation of export markets.
The impact of global recession on domestic LSM is most visible in the textile industry. Growth in textile industry fell by 0.1 percent over the same period last year. Textile sector was badly hit by power shortages and weak external demand. Both cotton yarn and cloth industries, which have the largest shares in the textile sector, posted negative growth of 0.27 percent and 0.33 percent respectively during Jul-Mar FY09.
With respect to exports promotion measures All Pakistan Textile Mills Association has proposed the federal government to make duty and tax remission schemes workable, easy to operate and manageable. It has also stressed on industry friendly anti-dumping laws with raw material relating provisions i.e. competing interests should be balanced.
On market access, the APTMA has stressed on trade diplomacy, image building of the country and compensation to the industry for losses being made out of present distort image.
Consequently, Pakistan Industrial and Traders Associations Front (PIAF) has also decried the six to eight hours suspension of electricity supply to Independent Feeders of Large Scale Manufacturing Units saying that it would hit the exports hard.
Talking to The Post, Chairman PIAF, Irfan Qaiser Sheikh said that the duration of suspension of electricity should be minimized to help Large Scale Manufacturing units that are major foreign exchange earners for the country.
The PIAF chairman maintained that there is a dire need to implement innovative ideas for the economic revival of the country at this point in time when the economic activity is already at its lowest ebb. He said that the government should intervene to avoid prolonged economic slow down that is bound to give birth ills like poverty and unemployment.
Sheikh said that the Large Scale Manufacturing units need facilitation as they are supplementing the government efforts aimed at economic prosperity but it seems that some circles are hell-bent to defame the government. He said that the electricity is one of the basic raw materials for the industry and the repeated increases in its prices even without proper consultation of business doing people are badly affecting the over all production.
Similarly, electronics sector is not only going through weak demand created by financing gap and increased prices of products, but also due to frequent power outages.
People are forced to spend on alternate power supply equipment (UPS and generators) to streamline electricity supply, which do not support a number of household electronic appliances.
As global textile demand declined, quantum of yarn exports shrank by 7.8 percent over the same period last year, and the average export unit value of yarn fell by 8.7 percent. Similarly, export unit value of cotton fabric dropped by 1.0 percent in this period. The combined impact of domestic and external factors has resulted in closure of about 20 percent spinning mills in the country.
In contrast to a declining trend in overall manufacturing activity, fertilizer production posted a significant growth of 20.7 percent in last 12 months after a dismal performance during the preceding two years.
In addition, a slower pace of decline in international prices of phosphatic rock (major input for DAP) squeezed the margins of the firm. While, current production of both phosphatic and nitrogenous fertilizer are insufficient to meet local demand, with the completion of plants by Fatima Fertilizer and Engro, shortage of urea is expected to turn into a surplus during FY11.
However, DAP shortage will continue due to lack of raw material in the country and large investment required to setup a new plant.
Similarly automobiles industry is facing significant contraction in demand (except for tractors where domestic production is low). In particular, jeeps & cars subsector is the worst hit by the sluggish demand due to three factors: continued increase in prices, (2) rise in cost of financing, as well as (3) lower availability of institutional financing given risk averse policy of banking sector amid increasing NPLs and liquidity problems with the banks.
Scope for Islamic banking seen
Scope for Islamic banking seen
Financial soundness, solvency of Islamic banks remained strong despite global financial crisis
Azhar Bukhari
The promotion of Islamic banking and finance is the need of the hour.
Islamic finance is a system based on strong economic and social considerations, envisaging equitable distribution of rewards and risks among the stakeholders.
However, it is very encouraging that the Islamic finance is being practised by Muslims as well as a few non-Muslim countries. The United Kingdom had taken significant initiatives in the development of Islamic finance by adopting an open door policy.
The investors from Middle East, Far East and UK have shown keen interest in the establishment of Islamic banks in Pakistan. The total assets of Islamic banks in Pakistan are increased to Rs340 billion. There are 170 branches of six licenced Islamic banks and more than 13 commercial banks are also offering Islamic banking services.
Moreover, the financial soundness and solvency of the domestic Islamic banks remained strong despite constraints and global financial crisis as the total assets of the industry increased to Rs 340 billion during the third quarter of FY 2008-09.
From 01 January to June 2009, the deposits of the Islamic banks surged to Rs 140 billion, financing and investments mounted to Rs 176.4 respectively while the number of full-fledged Islamic bank branches including stand-alone branches of conventional banks extended to 341 as of end-FY 08-09.
A detailed performance review on Islamic banking revealed that Islamic banking in Pakistan has grown rapidly in the last few years. Keeping in view the small size of the industry and its evolutionary nature, the growth achieved so far has been impressive and has persistently outpaced its conventional counterparts.
The consistently high average growth rate is attributed to the entry of four new players in the market in FY07 and FY08. At present there are six Islamic Banks (IBs) operating in Pakistan with 238 branches.
Though the performance in terms of growth of assets is impressive, it has not translated into a proportionate increase in profitability as reflected in the ROA and ROE for Islamic banks. At 0.6 and 3.3 percent for CY07 respectively, these ratios for Islamic banks are below the overall banking sector average.
Notably, these indicators do not portray the actual picture due to the entry of four new banks in the market which started operations as recently as CY06 and 156 CY07, and are still in the process of establishing their business, expanding their deposit base and enhancing the scope of their operations.
It would normally take a new bank 3-4 years to become profitable and start operating efficiently, i.e. once the start-up costs and the expenditure on the development of management systems and related infrastructure, start to yield results.
This shows a higher ROA (2.6 percent) and ROE (16.3 percent) in CY05, when there were only 2 dedicated Islamic banks operating in the industry. Both indicators declined sharply in the subsequent year (with a marginal improvement in CY07) simply due to the enhanced capital and asset base effect: the new banks contributed a significant amount to the total capital and asset base of the Islamic banking industry, but the earnings are still largely concentrated in the two previously established banks in the sector. Both ROA and ROE for the industry are expected to increase in coming years, as the new banks establish themselves on a sound footing. That said the current strains on the macroeconomic environment might exacerbate this process.
A Brief History
Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at a low ebb, in the late 19th century. The main banks in the home countries of the imperial powers established local branches in the capitals of the subject countries and they catered mainly to the import export requirements of the foreign businesses. The local trading community avoided the “foreign” banks both for nationalistic as well as religious reasons. However, as time went on it became difficult to engage in trade and other activities without making use of commercial banks.
With the passage of time, however, and other socio-economic forces demanding more involvement in national economic and financial activities, avoiding the interaction with the banks became impossible. As countries became independent the need to engage in banking activities became unavoidable and urgent. Governments, businesses and individuals began to transact business with the banks, with or without liking it. This state of affairs drew the attention and concern of Muslim intellectuals. The story of interest-free or Islamic banking begins here. Interest-free banking seems to be of very recent origin.
Financial soundness, solvency of Islamic banks remained strong despite global financial crisis
Azhar Bukhari
The promotion of Islamic banking and finance is the need of the hour.
Islamic finance is a system based on strong economic and social considerations, envisaging equitable distribution of rewards and risks among the stakeholders.
However, it is very encouraging that the Islamic finance is being practised by Muslims as well as a few non-Muslim countries. The United Kingdom had taken significant initiatives in the development of Islamic finance by adopting an open door policy.
The investors from Middle East, Far East and UK have shown keen interest in the establishment of Islamic banks in Pakistan. The total assets of Islamic banks in Pakistan are increased to Rs340 billion. There are 170 branches of six licenced Islamic banks and more than 13 commercial banks are also offering Islamic banking services.
Moreover, the financial soundness and solvency of the domestic Islamic banks remained strong despite constraints and global financial crisis as the total assets of the industry increased to Rs 340 billion during the third quarter of FY 2008-09.
From 01 January to June 2009, the deposits of the Islamic banks surged to Rs 140 billion, financing and investments mounted to Rs 176.4 respectively while the number of full-fledged Islamic bank branches including stand-alone branches of conventional banks extended to 341 as of end-FY 08-09.
A detailed performance review on Islamic banking revealed that Islamic banking in Pakistan has grown rapidly in the last few years. Keeping in view the small size of the industry and its evolutionary nature, the growth achieved so far has been impressive and has persistently outpaced its conventional counterparts.
The consistently high average growth rate is attributed to the entry of four new players in the market in FY07 and FY08. At present there are six Islamic Banks (IBs) operating in Pakistan with 238 branches.
Though the performance in terms of growth of assets is impressive, it has not translated into a proportionate increase in profitability as reflected in the ROA and ROE for Islamic banks. At 0.6 and 3.3 percent for CY07 respectively, these ratios for Islamic banks are below the overall banking sector average.
Notably, these indicators do not portray the actual picture due to the entry of four new banks in the market which started operations as recently as CY06 and 156 CY07, and are still in the process of establishing their business, expanding their deposit base and enhancing the scope of their operations.
It would normally take a new bank 3-4 years to become profitable and start operating efficiently, i.e. once the start-up costs and the expenditure on the development of management systems and related infrastructure, start to yield results.
This shows a higher ROA (2.6 percent) and ROE (16.3 percent) in CY05, when there were only 2 dedicated Islamic banks operating in the industry. Both indicators declined sharply in the subsequent year (with a marginal improvement in CY07) simply due to the enhanced capital and asset base effect: the new banks contributed a significant amount to the total capital and asset base of the Islamic banking industry, but the earnings are still largely concentrated in the two previously established banks in the sector. Both ROA and ROE for the industry are expected to increase in coming years, as the new banks establish themselves on a sound footing. That said the current strains on the macroeconomic environment might exacerbate this process.
A Brief History
Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at a low ebb, in the late 19th century. The main banks in the home countries of the imperial powers established local branches in the capitals of the subject countries and they catered mainly to the import export requirements of the foreign businesses. The local trading community avoided the “foreign” banks both for nationalistic as well as religious reasons. However, as time went on it became difficult to engage in trade and other activities without making use of commercial banks.
With the passage of time, however, and other socio-economic forces demanding more involvement in national economic and financial activities, avoiding the interaction with the banks became impossible. As countries became independent the need to engage in banking activities became unavoidable and urgent. Governments, businesses and individuals began to transact business with the banks, with or without liking it. This state of affairs drew the attention and concern of Muslim intellectuals. The story of interest-free or Islamic banking begins here. Interest-free banking seems to be of very recent origin.
Renewable energy: only way to survive
Renewable energy: only way to survive
Azhar Bukhari
Summer has brought terrible news regarding energy availability and access to ordinary Pakistanis. While most Pakistanis have been aware for a while that their country faces long term energy shortages, they had not expected the problem to be as acute and severe as it demonstrated itself to be this summer.
There is a severe energy shortage in Pakistan, particularly in the urban areas, and most parts of the country are experiencing heavy load sheddings, i.e. periods with no electric power, designed to distribute load and conserve energy. Karachi, the major port city and industrial hub, is experiencing nearly 110 degree weather with 10-12 hours of load shedding a day in some parts.
The situation has turned bleak, and even the more skeptical are re-assessing their opinion on renewable, distributed, and localized energy generation for Pakistan major population centers.
When it comes to Pakistan, an entire gambit of renewable energy sources can be considered plausible. Solar (PV and concentrator PV/thermal) and (onshore-off-shore) wind appear to make most sense, primarily given the geography and climatic conditions as well as the maturity of the technology worldwide, but biofuels, coal-to-gas and coal to-liquid fuels, biowaste to syn-gas, tydal power and small hydro are all valid technologies to be researched and looked into. The biggest impediments, of course, remain rather similar to many other developing countries: lack of technological resources, lack of government incentives and support, mistrust of the financial sector for long term financing, inadequate infrastructure. It is no wonder that even when utility industry was deregulated, the only thing the population learned about the process was how contracts were awarded to foreign firms without proper financial due diligence.
India is fast gaining serious experience in renewable energy production not only for domestic consumption but also to become an international player in this area. India today has an installed capacity of over 6.27 GW of wind power.
As renewable energy technologies are getting better traction in the world, prices per KwH are coming down. Wind energy is now almost competitive with natural gas derived electricity, and solar is not that far behind as well. Germany and Spain have made huge inroads in both these sectors. But pakistan will be left behind if it doesn’t quickly start climbing the experience curve.
Technologies for renewable energy industry, from wind turbines to solar panels to power electronics and enzymes for cellulosic biofuel synthesis are being researched and implemented at pilot scale in countries whose problems are not too dissimilar to ours. While renewables will not provide the full answer to Pakistan’s energy crisis in the short term, a strong and committed push will set the right foot forward for the country’s future.
There are certainly individuals and organizations, researchers, policy-analysts, and entrepreneurs that are very interested in participating in the energy future of Pakistan. But the government will need to systematically remove blockages that have kept the real geniuses away from this industry. Financing/investing, funding, tax/rebate incentives, infrastructure upgrade, and energy buy-back contracts from independent energy providers on the national grid are among some of the things that government can do to promote energy entrepreneurship.
The wind energy projects in Pakistan have been run into snags and delays for more than a year following the government’s apathy in providing the assured subsidies to the higher tariff against the conventional gas/oil-fired power plants, a root cause hampering physical progress.
Wind power projects of total 100 mw capacity are being established, on BOOT (Build, Own, Operate and Transfer) basis, at Keti Bandar and Gharo in Sindh.
Pakistan has recently indicated its commitment to renewable energy sources, but realising these in practice could still be a long way off.
Pakistan is blessed with an abundance of renewable energy potential, but so far this remains unharnessed except for a few large hydroelectric projects.
The country, historically an energy importer, is facing serious energy shortages while global fossil fuel prices continue their upward spiral. The effects on the economy are marked: interruptions in energy supply to industry, for instance, have hit the country’s exports hard.
Many now believe that Pakistan needs to initiate a transition towards greater use of renewable energy as an indigenous, clean and abundant resource.
Azhar Bukhari
Summer has brought terrible news regarding energy availability and access to ordinary Pakistanis. While most Pakistanis have been aware for a while that their country faces long term energy shortages, they had not expected the problem to be as acute and severe as it demonstrated itself to be this summer.
There is a severe energy shortage in Pakistan, particularly in the urban areas, and most parts of the country are experiencing heavy load sheddings, i.e. periods with no electric power, designed to distribute load and conserve energy. Karachi, the major port city and industrial hub, is experiencing nearly 110 degree weather with 10-12 hours of load shedding a day in some parts.
The situation has turned bleak, and even the more skeptical are re-assessing their opinion on renewable, distributed, and localized energy generation for Pakistan major population centers.
When it comes to Pakistan, an entire gambit of renewable energy sources can be considered plausible. Solar (PV and concentrator PV/thermal) and (onshore-off-shore) wind appear to make most sense, primarily given the geography and climatic conditions as well as the maturity of the technology worldwide, but biofuels, coal-to-gas and coal to-liquid fuels, biowaste to syn-gas, tydal power and small hydro are all valid technologies to be researched and looked into. The biggest impediments, of course, remain rather similar to many other developing countries: lack of technological resources, lack of government incentives and support, mistrust of the financial sector for long term financing, inadequate infrastructure. It is no wonder that even when utility industry was deregulated, the only thing the population learned about the process was how contracts were awarded to foreign firms without proper financial due diligence.
India is fast gaining serious experience in renewable energy production not only for domestic consumption but also to become an international player in this area. India today has an installed capacity of over 6.27 GW of wind power.
As renewable energy technologies are getting better traction in the world, prices per KwH are coming down. Wind energy is now almost competitive with natural gas derived electricity, and solar is not that far behind as well. Germany and Spain have made huge inroads in both these sectors. But pakistan will be left behind if it doesn’t quickly start climbing the experience curve.
Technologies for renewable energy industry, from wind turbines to solar panels to power electronics and enzymes for cellulosic biofuel synthesis are being researched and implemented at pilot scale in countries whose problems are not too dissimilar to ours. While renewables will not provide the full answer to Pakistan’s energy crisis in the short term, a strong and committed push will set the right foot forward for the country’s future.
There are certainly individuals and organizations, researchers, policy-analysts, and entrepreneurs that are very interested in participating in the energy future of Pakistan. But the government will need to systematically remove blockages that have kept the real geniuses away from this industry. Financing/investing, funding, tax/rebate incentives, infrastructure upgrade, and energy buy-back contracts from independent energy providers on the national grid are among some of the things that government can do to promote energy entrepreneurship.
The wind energy projects in Pakistan have been run into snags and delays for more than a year following the government’s apathy in providing the assured subsidies to the higher tariff against the conventional gas/oil-fired power plants, a root cause hampering physical progress.
Wind power projects of total 100 mw capacity are being established, on BOOT (Build, Own, Operate and Transfer) basis, at Keti Bandar and Gharo in Sindh.
Pakistan has recently indicated its commitment to renewable energy sources, but realising these in practice could still be a long way off.
Pakistan is blessed with an abundance of renewable energy potential, but so far this remains unharnessed except for a few large hydroelectric projects.
The country, historically an energy importer, is facing serious energy shortages while global fossil fuel prices continue their upward spiral. The effects on the economy are marked: interruptions in energy supply to industry, for instance, have hit the country’s exports hard.
Many now believe that Pakistan needs to initiate a transition towards greater use of renewable energy as an indigenous, clean and abundant resource.
Solar Panels
Solar panels;
A way out of power crisis
Azhar Bukhari
CAN sunny Pakistan deal with its crippling energy crisis?
In fact, Pakistan is an exceptionally sunny country. If 0.25% of Balochistan was covered with solar panels with an efficiency of 20%, enough electricity would be generated to cover all of Pakistani demand.
Photo-voltaic solar power panels are often used for local and distributed power generation capability, such as on rooftops of homes and buildings. It is generally on-grid but it can be off-grid for remote places. Unlike the solar panel's relying on photo-voltaic cells, solar thermal power is centrally generated from thousands of curved mirrors in the desert focusing sun's light on to water pipes to generate superheated steam which is then used to generate electricity.
Solar energy makes much sense for Pakistan for several reasons, firstly, 70% of the population lives in 50,000 villages that are very far away from the national grid, according to a report by the Solar Energy Research Center (SERC). Besides, the country's creaky and outdated electricity infrastructure loses over 30 percent of generated power in transit, more than seven times the losses of a well-run system, according to the Asian Development Bank and the World Bank; and a lack of spare high-voltage grid capacity limits the transmission of power from hydroelectric plants in the north to make up for shortfalls in the south. Connecting these villages to the national grid would be very costly, thus giving each house a solar panel would be cost efficient and would empower people both economically and socially.
Pakistan has reported practical examples of the use of solar energy as seen in some villages of Pakistan where each house has been provided with a solar panel that’s sufficient to run an electric fan and two energy saving bulbs. Prior to this arrangement, the whole village used to be plunged in darkness at night. In Narian Khorian, a village about 50 kilometers from Islamabad, 100 solar panels have been installed by a local firm, free of cost, to promote the use of solar energy. With these panels, the residents of 100 households are enjoying light and fan facilities. This would not have happened for decades as the supply of electricity from the national grid would be difficult and costly due to the mountainous terrain.
In addition to renewable energy from the sun, Pakistan is also fortunate to have something many other countries do not, which are high wind speeds near major centers. Near Islamabad, the wind speed is anywhere from 6.2 to 7.4 meters per second (between 13.8 and 16.5 miles per hour). Near Karachi, the range is between 6.2 and 6.9 (between 13.8 and 15.4 miles per hour). In addition to Karachi and Islamabad, there are other areas in Pakistan that receive a significant amount of wind.
In only the Balochistan and Sindh provinces, sufficient wind exists to power every coastal village in the country. There also exists a corridor between Gharo and Keti Bandar that alone could produce between 40,000 and 50,000 megawatts of electricity, about twice the current installed capacity in Pakistan, says Mirian Katz who has studied and written about alternative energy potential in South Asia.
In recent years, the government has completed several projects to demonstrate that wind energy is viable in the country. In Mirpur Sakro, 85 micro turbines have been installed to power 356 homes. In Kund Malir, 40 turbines have been installed, which power 111 homes. The Alternative Energy Development Board (AEDB) has also acquired 18,000 acres for the installation of more wind turbines.
The village of Ghulam Muhammad Goth, north of Karachi with population of 800, about 10 km from the national power grid, now receives power from a small windfarm consisting of 18 wind turbines each capable of generating 500 watts of electricity. Installed by the state-run Pakistan Council for Renewable Energy and Technologies (PCRET), the farm produces enough to power for each home to have two low-energy bulbs, a fan and, most importantly, a television set.
In addition to high wind speeds near major centers as well as the Gharo and Keti Bandar corridor, Pakistan is also very fortunate to have many rivers and lakes. Wind turbines that are situated in or near water enjoy an uninterrupted flow of wind, which virtually guarantees that power will be available all the time. Within towns and cities, wind speeds can often change quickly due to the presence of buildings and other structures, which can damage wind turbines. In addition, many people do not wish for turbines to be sited near cities because of noise, though these problems are often exaggerated. Wind turbines make less noise than an office and people comfortably carry on conversations while standing near them.
As Pakistan grapples with its crippling Energy Crisis, it is important for the country to take advantage of its precious natural resources such as the high winds and the bright sunshine, and bio-fuels as byproducts of its sizable sugar-making industry. Such a strategy will lead to lower costs of generation by reducing the need to import oil. It'll also help reduce carbon emissions, a major environmental concern.
A way out of power crisis
Azhar Bukhari
CAN sunny Pakistan deal with its crippling energy crisis?
In fact, Pakistan is an exceptionally sunny country. If 0.25% of Balochistan was covered with solar panels with an efficiency of 20%, enough electricity would be generated to cover all of Pakistani demand.
Photo-voltaic solar power panels are often used for local and distributed power generation capability, such as on rooftops of homes and buildings. It is generally on-grid but it can be off-grid for remote places. Unlike the solar panel's relying on photo-voltaic cells, solar thermal power is centrally generated from thousands of curved mirrors in the desert focusing sun's light on to water pipes to generate superheated steam which is then used to generate electricity.
Solar energy makes much sense for Pakistan for several reasons, firstly, 70% of the population lives in 50,000 villages that are very far away from the national grid, according to a report by the Solar Energy Research Center (SERC). Besides, the country's creaky and outdated electricity infrastructure loses over 30 percent of generated power in transit, more than seven times the losses of a well-run system, according to the Asian Development Bank and the World Bank; and a lack of spare high-voltage grid capacity limits the transmission of power from hydroelectric plants in the north to make up for shortfalls in the south. Connecting these villages to the national grid would be very costly, thus giving each house a solar panel would be cost efficient and would empower people both economically and socially.
Pakistan has reported practical examples of the use of solar energy as seen in some villages of Pakistan where each house has been provided with a solar panel that’s sufficient to run an electric fan and two energy saving bulbs. Prior to this arrangement, the whole village used to be plunged in darkness at night. In Narian Khorian, a village about 50 kilometers from Islamabad, 100 solar panels have been installed by a local firm, free of cost, to promote the use of solar energy. With these panels, the residents of 100 households are enjoying light and fan facilities. This would not have happened for decades as the supply of electricity from the national grid would be difficult and costly due to the mountainous terrain.
In addition to renewable energy from the sun, Pakistan is also fortunate to have something many other countries do not, which are high wind speeds near major centers. Near Islamabad, the wind speed is anywhere from 6.2 to 7.4 meters per second (between 13.8 and 16.5 miles per hour). Near Karachi, the range is between 6.2 and 6.9 (between 13.8 and 15.4 miles per hour). In addition to Karachi and Islamabad, there are other areas in Pakistan that receive a significant amount of wind.
In only the Balochistan and Sindh provinces, sufficient wind exists to power every coastal village in the country. There also exists a corridor between Gharo and Keti Bandar that alone could produce between 40,000 and 50,000 megawatts of electricity, about twice the current installed capacity in Pakistan, says Mirian Katz who has studied and written about alternative energy potential in South Asia.
In recent years, the government has completed several projects to demonstrate that wind energy is viable in the country. In Mirpur Sakro, 85 micro turbines have been installed to power 356 homes. In Kund Malir, 40 turbines have been installed, which power 111 homes. The Alternative Energy Development Board (AEDB) has also acquired 18,000 acres for the installation of more wind turbines.
The village of Ghulam Muhammad Goth, north of Karachi with population of 800, about 10 km from the national power grid, now receives power from a small windfarm consisting of 18 wind turbines each capable of generating 500 watts of electricity. Installed by the state-run Pakistan Council for Renewable Energy and Technologies (PCRET), the farm produces enough to power for each home to have two low-energy bulbs, a fan and, most importantly, a television set.
In addition to high wind speeds near major centers as well as the Gharo and Keti Bandar corridor, Pakistan is also very fortunate to have many rivers and lakes. Wind turbines that are situated in or near water enjoy an uninterrupted flow of wind, which virtually guarantees that power will be available all the time. Within towns and cities, wind speeds can often change quickly due to the presence of buildings and other structures, which can damage wind turbines. In addition, many people do not wish for turbines to be sited near cities because of noise, though these problems are often exaggerated. Wind turbines make less noise than an office and people comfortably carry on conversations while standing near them.
As Pakistan grapples with its crippling Energy Crisis, it is important for the country to take advantage of its precious natural resources such as the high winds and the bright sunshine, and bio-fuels as byproducts of its sizable sugar-making industry. Such a strategy will lead to lower costs of generation by reducing the need to import oil. It'll also help reduce carbon emissions, a major environmental concern.
UBL Liquidity Plus Fund
UBL Liquidity Plus Fund;
A step towards prosperity
Farooq Ahmed, Head of UBL Retail Sales, discusses options to get rid of crisis
Says NPLs of banking system to stabilize soon
Azhar Bukhari
United Bank Ltd (UBL) has launched UBL Liquidity Plus Fund (UBLPF) as a money market fund to provide investors with tailored and need based investment solutions. The fund has a unique feature where a same day redemption can be honoured, subject to the fulfillment of certain conditions.
This was the upshot of the dialogue took place with UBL Head of Retail Sales, Farooq Ahmed here at its office.
“In continuation of our vision we are committed to provide our investors innovative, low cost investment solutions with safety of principal and liquidity as primary ingredients. Therefore the tradition continues and we are launching our new product UBLPF it’s a true money market fund”, Farooq maintained.
As far as the target audience goes, this product caters to the needs of individuals, SME’s and a large scale of corporate’s who are looking for low risk, liquidity, capital preservation and competitive but better market returns, he said.
Farooq revealed that minimum investment amount in UBLPF is as low as Rs 5,000 and there is no holding period which means an investor can liquidate his investment at any time and can completely take advantage of the Same Day Redemption Facility that the fund provides.
UBLPF is ideal for investors looking for placement of their savings or idol cash for less those 90 days (short-term) while they decide on their long-term financial decision, he added.
“UBLPF will try to provide its investors with competitive tax free returns which vary with money market but would generally be higher than bank deposits” Farooq said.
He maintained that UBL aim to be the first choice investment solution provider, renowned for quality, added value and innovative service at an affordable cost to its investors.
Therefore there are no charges in UBLPF, which means no charges are applied at the time of investment or withdrawal, he said.
Faroqq elaborated that the fund would be investing mostly in a combination of Government Securities and Tenor/PLS Placements with a minimum AA rated banks. The weighted average time for the maturity of fund assets will not exceed 90 days and the maximum time for the maturity of any single asset at the time of placement will not exceed six months.
Farooq said that the fund would mostly target investors looking at liquidity management solutions and who wanted to earn competitive after-tax returns on their surplus funds.
The portfolio would comprise mostly of an exposure to short-dated Treasury Bills which are also very liquid instruments from the entry / exit perspective. A certain part of the portfolio will be placed in other avenues such as reverse repos (against eligible Government Securities), tenor placements with high rated commercial banks and DFIs, he said adding that it would also be active in short tenor (overnight) placements with banks and DFIs, as and when opportunities of earning a spread over traditional bank account rates arise.
However, he maintained that the fund would be a low risk fund and would be providing quick liquidity to clients. Since the minimum credit rating of the underlying asset classes is quite high and weighted average time to maturity of the assets cannot exceed 90 days, the interest rate risk is somewhat mitigated, he added. He said that other risks such as the Re-investment Rate Risk, Credit Risk, Price Risk and Government Regulation Risk exist that are there in all investment avenues.
UBL Head of Retail Sales, Farooq Ahmed said that the allowable asset classes for this fund are relatively limited as compared to an income fund, which is for investors with a long-term holding period in mind. Investment in CFS and spread transactions would be prohibited in such a money market scheme (by regulation). The fund strategy would therefore be very different as investments would be made in shorter tenor assets as opposed to an income scheme, where the fund manager can invest in longer tenor assets, he added.
This is also evident from the allowable maximum weighted average maturity of four years permitted under the SECP categorisation for income schemes. The minimum rating criterion for income schemes is also more relaxed when compared to money market schemes where a minimum AA rating is required for entities with whom funds are being placed (generally, as placements are made with higher rated entities, the rate of return declines), said Farooq .
Responding to a question regarding current financial crisis, Farooq said that Non Performing Loans (NPLs) of country’s banking system are expected to stabilize with the improvement in macroeconomic fundamentals as the recent macroeconomic pressures, which eventually led to a slowdown in economic growth in FY09, indicate that the increase in NPLs of the banking system is as largely of a cyclical nature.
“The sensitivity analysis undertaken at SBP suggests that the banking sector is well placed to withstand credit risk shocks of a modest nature,” he said and added that the provisioning coverage ratio of around 70 percent at end March 2009 also showed a prudent and proactive approach towards credit risk management.
He said that in response to the emerging dynamics in the macro-financial environment, SBP had rationalized the Minimum Capital Requirement (MCR) and the time period in which it was to be implemented, thus providing the much required breathing space to the banking industry in this difficult macroeconomic environment.
“Pakistan is currently standing at a juncture where long-term investment in infrastructure is crucially needed to facilitate the process of economic growth,” he said.
Referring to sustainability of the banking sector, he observed that banks in Pakistan had been able to withstand the headwinds from the weakening macroeconomic fundamentals since FY07. “Now that the economy is poised for a remarkable turnaround, the banking sector has an even greater role to play in supporting the real sector by meeting its financing needs,” Farooq said.
A step towards prosperity
Farooq Ahmed, Head of UBL Retail Sales, discusses options to get rid of crisis
Says NPLs of banking system to stabilize soon
Azhar Bukhari
United Bank Ltd (UBL) has launched UBL Liquidity Plus Fund (UBLPF) as a money market fund to provide investors with tailored and need based investment solutions. The fund has a unique feature where a same day redemption can be honoured, subject to the fulfillment of certain conditions.
This was the upshot of the dialogue took place with UBL Head of Retail Sales, Farooq Ahmed here at its office.
“In continuation of our vision we are committed to provide our investors innovative, low cost investment solutions with safety of principal and liquidity as primary ingredients. Therefore the tradition continues and we are launching our new product UBLPF it’s a true money market fund”, Farooq maintained.
As far as the target audience goes, this product caters to the needs of individuals, SME’s and a large scale of corporate’s who are looking for low risk, liquidity, capital preservation and competitive but better market returns, he said.
Farooq revealed that minimum investment amount in UBLPF is as low as Rs 5,000 and there is no holding period which means an investor can liquidate his investment at any time and can completely take advantage of the Same Day Redemption Facility that the fund provides.
UBLPF is ideal for investors looking for placement of their savings or idol cash for less those 90 days (short-term) while they decide on their long-term financial decision, he added.
“UBLPF will try to provide its investors with competitive tax free returns which vary with money market but would generally be higher than bank deposits” Farooq said.
He maintained that UBL aim to be the first choice investment solution provider, renowned for quality, added value and innovative service at an affordable cost to its investors.
Therefore there are no charges in UBLPF, which means no charges are applied at the time of investment or withdrawal, he said.
Faroqq elaborated that the fund would be investing mostly in a combination of Government Securities and Tenor/PLS Placements with a minimum AA rated banks. The weighted average time for the maturity of fund assets will not exceed 90 days and the maximum time for the maturity of any single asset at the time of placement will not exceed six months.
Farooq said that the fund would mostly target investors looking at liquidity management solutions and who wanted to earn competitive after-tax returns on their surplus funds.
The portfolio would comprise mostly of an exposure to short-dated Treasury Bills which are also very liquid instruments from the entry / exit perspective. A certain part of the portfolio will be placed in other avenues such as reverse repos (against eligible Government Securities), tenor placements with high rated commercial banks and DFIs, he said adding that it would also be active in short tenor (overnight) placements with banks and DFIs, as and when opportunities of earning a spread over traditional bank account rates arise.
However, he maintained that the fund would be a low risk fund and would be providing quick liquidity to clients. Since the minimum credit rating of the underlying asset classes is quite high and weighted average time to maturity of the assets cannot exceed 90 days, the interest rate risk is somewhat mitigated, he added. He said that other risks such as the Re-investment Rate Risk, Credit Risk, Price Risk and Government Regulation Risk exist that are there in all investment avenues.
UBL Head of Retail Sales, Farooq Ahmed said that the allowable asset classes for this fund are relatively limited as compared to an income fund, which is for investors with a long-term holding period in mind. Investment in CFS and spread transactions would be prohibited in such a money market scheme (by regulation). The fund strategy would therefore be very different as investments would be made in shorter tenor assets as opposed to an income scheme, where the fund manager can invest in longer tenor assets, he added.
This is also evident from the allowable maximum weighted average maturity of four years permitted under the SECP categorisation for income schemes. The minimum rating criterion for income schemes is also more relaxed when compared to money market schemes where a minimum AA rating is required for entities with whom funds are being placed (generally, as placements are made with higher rated entities, the rate of return declines), said Farooq .
Responding to a question regarding current financial crisis, Farooq said that Non Performing Loans (NPLs) of country’s banking system are expected to stabilize with the improvement in macroeconomic fundamentals as the recent macroeconomic pressures, which eventually led to a slowdown in economic growth in FY09, indicate that the increase in NPLs of the banking system is as largely of a cyclical nature.
“The sensitivity analysis undertaken at SBP suggests that the banking sector is well placed to withstand credit risk shocks of a modest nature,” he said and added that the provisioning coverage ratio of around 70 percent at end March 2009 also showed a prudent and proactive approach towards credit risk management.
He said that in response to the emerging dynamics in the macro-financial environment, SBP had rationalized the Minimum Capital Requirement (MCR) and the time period in which it was to be implemented, thus providing the much required breathing space to the banking industry in this difficult macroeconomic environment.
“Pakistan is currently standing at a juncture where long-term investment in infrastructure is crucially needed to facilitate the process of economic growth,” he said.
Referring to sustainability of the banking sector, he observed that banks in Pakistan had been able to withstand the headwinds from the weakening macroeconomic fundamentals since FY07. “Now that the economy is poised for a remarkable turnaround, the banking sector has an even greater role to play in supporting the real sector by meeting its financing needs,” Farooq said.
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