- How introducing technology in Pakistan’s stock markets can lead to more growth opportunities
If we compare a country with almost same GDP as Pakistan such as the Philippines, we will find that the number of individual investors there is more than double i.e. 600,000
Pakistanis are the third largest investor in the real estate market of Dubai. If they can invest in Dubai, they can invest in local financial market as well
The capital market of any country is a barometer of economic stability or instability of its economy. Capital market is a vehicle which collects capital from the places where it is in surplus and carries as well as distributes at the places that are short of capital. Capital market plays a crucial role in mobilising and channelising the savings for most productive investment activities. This is especially important for a country like Pakistan where savings rate is just 13 percent of GDP whereas in India, it is 31.9 percent and in Bangladesh it is 29.7 percent. If the capital market of an economy is efficient, it provides a wider range of opportunities to local and foreign investors.
Despite one of the best performing markets in Asia for the last year, Pakistan Stock Exchange faces many acute problems. One of them is mistrust. Often Pakistan’s stock market is plagued by stories of investors being deprived of their hard earned money. Due to this mistrust, many subsequent problems arise. The first one among them is low level of investor participation. In total, there are only 250,000 investors in Pakistan Stock Exchange who primarily belong to three major urban cities of Pakistan. If we compare a country with almost same GDP as Pakistan such as Philippines, we will find that the number of individual investors there is more than double i.e. 600,000. If you will talk to any common man in Pakistan they will equate stock market with gambling. Unfortunately, this perception prevails due to investor fraud stories, stock manipulation, and risk volatility.
The second implication of investor mistrust is low market capitalisation. The total market cap of Pakistan Stock Exchange is $89 billion while Philippines Stock Exchange has a market cap of $230.3 billion but both countries have roughly the same GDP. This investor mistrust also means that investor’s money is put to other less productive resources e.g. property, etc. which ultimately translates into a slowdown in economic growth. Due to this mistrust, less than 50pc percent of the national savings are channelised towards the financial sector while the rest are channelised towards real estate and other informal sectors of the economy. It also means that companies have less capital from people to expand their businesses. Another major implication is less number of IPO’s which means the businesses will continue to believe in non – transparent and inefficient practices as family enterprises.During fiscal year 2015 – 16, only six new companies listed themselves at Pakistan Stock Exchange.
The main reason of investor mistrust is less efficiency, too much human handling and low level of automation. And one of the main reasons why PSE was not able to stop these frauds was that it does not have a robust and efficient market surveillance system of global standards in place to curb such kind of incidents. Everywhere in the world, stock markets are being automated fully to every possible extent for avoiding such human errors and mishandling.
In order to build up investor confidence which is the key for increased financial participation by common people in the financial markets, Pakistan should automate its stock exchange to the fullest possible extent where even a minor anomaly can be traced and no influential person can alter the system in its favour. The good news is that home grown IT companies such as InfoTech are doing capital market automation projects for the stock exchanges of emerging markets in Africa and Asia. They have specialty products developed for the capital markets and the broker houses keeping in view all of their needs and complexities. Learning from the experience of these companies, we can invite them to implement their robust and efficient systems at home as well.
The complete capital market automation will have the following benefits. Firstly, it will improve the efficiency of our capital markets to bring in more capital inflow. Secondly, it will build investor trust in capital markets. Such systems also allow for real time cloud based trading so that the investors can see from their own account that what is being traded and what is not, and individual investors can also operate their accounts sitting from anywhere in the world. Thirdly, these systems have inbuilt capacities to bring efficiency and transparency in conducting the IPO through book building process by automating it from end to end. This makes the issuance of an IPO completely transparent. Fourthly, they have a special Market Surveillance System in place which can detect any anomaly or suspicious activity in real time and can save billions of investor’s rupees. Another important problem which advanced level automation solves is the transition to advanced forms of financial products such as derivatives.
These companies also have state of the art specialty products for trading houses to conduct efficient trading. One such solution named as Marlin by InfoTech won P@sha ICT awards in 2016. It eliminates the need of investing in infrastructure and investing in multiple software renewals. It is basically a specialty cloud based system through which you can focus on business promotions and innovation rather than worrying about technology management. You get the latest security infrastructure, can save money by choosing to pay as you go i.e. a flexible subscription payment, a flexible licensing model according to one’s need and regular updates for best performance. This also allows deeper penetration of capital markets through innovative mobile trading platforms.
Keeping in view the needs of the economy, CPEC and investors, it is imperative to introduce such advanced level automation in the market so that the financial market can grow, investor confidence can be build up and individual investors can invest their hard earned money in the local financial market without any fear of losing it. Pakistan Stock Exchange’s 40pc shares have been sold to a consortium consisting of Chinese financial institutions. This year, the director of PSX would be appointed by them and they have ambitious plans of turning the Pakistan Stock Market into an international giant. Chinese exchanges are amongst the largest in the world in terms of market capitalisation and turnover. With a diverse product offering, experience with management of successful securities and derivatives exchanges, the Consortium’s potential for contribution towards growth of the Pakistani capital market is significant. That potential for contribution by this consortium can only be turned into a reality if we have robust and efficient automation systems in place, both at PSX and in trading houses.
Pakistanis are the third largest investor in the real estate market of Dubai. If they can invest in Dubai, they can invest in local financial market as well, provided they are given trust with advanced market automation which will bring transparency and efficiency.
