SECP unveils roadmap for diversification of non-bank financial sector

The Securities and Exchange Commission of Pakistan (SECP) on Monday unveiled a document titled ‘Report of Non-Bank Financial Sector’ (NBFS) Reforms Committee’ for public feedback.
Prepared by senior SECP officials and leading market professionals, the report contains proposed reforms for the development of the non-bank financial (NBF) sector in Pakistan.
SECP Chairman Muhammad Ali, commissioners and leading professionals and businessmen from the financial sector attended the ceremony.
Addressing the ceremony, Ali said it was imperative that the SECP and the State Bank of Pakistan (SBP) work in close cooperation for effective and seamless regulation across the financial sector in a globally integrated market.
He said Pakistan’s financial sector was bank-centric with NBF sector accounting only 4.9 percent (excluding insurance sector) of the financial sector’s total assets. This dependence on the banking sector, he said, made the country’s financial system vulnerable to risks through lack of diversification and also restricted the scope of product innovation.
A strong NBF sector would not only promote savings by offering different asset classes to investors, but will also provide alternative fund raising opportunities to participants of the financial system, Ali added. The report highlighted that more than 70 percent of assets of the financial sector were with commercial banks and only nine percent were with the non-banking sector, including non-banking finance companies (NBFCs), insurance companies, etc.
Out of the remaining assets, around 17 percent are with the national savings schemes. Keeping in view the present composition of the financial sector, the report suggests some revolutionary ideas to reform it. The suggested reforms are aimed at development of an alternate financial system by way of promoting NBF sector.
It is imperative to diversify the inherent systemic risk and provide different asset classes to promote savings as well as cater to the specific needs of participants through product innovation, the report said. To develop the NBF Sector, in line with international best practices, the report proposes implementation of the concept of activity based regulatory regime in Pakistan.
In terms of the proposed regime, capital market activities of all entities including that of commercial banks and DFIs are to be regulated by the capital market regulator (CMR), i.e., SECP and deposit taking/financing/lending activities of all the financial sector participants would be regulated by the banking regulator (BR), i.e., SBP. This recommendation is in contrast with the prevalent concept of entity based regulatory
domain in Pakistan.
Other proposed reforms for the mutual fund industry include distribution of mutual fund units through stock exchanges, reduction in the annual regulatory fee provided more than 50 percent of a funds’ net assets are held by retail clients, introduction of concept of expense ratio, introduction of multiple classes of units based on the investment amount, improving the skill set of key personnel such as fund managers by specifying a minimum criteria among others.
Investment finance services are broken down and redefined as stock brokerage, investment advisory, corporate advisory, securities financing and securities underwriting services and each component has been further defined. Flexibility has been offered to an entity to be reclassified as non-bank finance company to obtain either a full scope or limited scope. The suggested regime for IFS outlines a mechanism to transform existing brokerage houses as NBFCs to become part of NBF sector. The inclusion of brokerage services in NBF sector is expected to open up a new era of licensed activities for brokers including advisory and other ancillary services.
To facilitate the launch of the real estate investment trusts (REITs) in Pakistan, the committee has proposed a reduction in REIT fund size to address the issue of
capital constraints and allow launching of medium-size REIT projects having better potential for growth and return.
In order to develop non-banking financial services, the committee, in line with best international practices has proposed the implementation of the concept of activity based regulatory regime in Pakistan for cluster one entities. In terms of the proposed regime, capital market activities of all entities are to be regulated by the SECP and deposit taking, financing and lending activities of all financial sector participants will be regulated by the SBP.

While the overall assets of the country’s financial sector increased from Rs 5.202 trillion in 2005 to Rs 11.107 trillion in 2011, the share of the financial sector in terms of GDP is very low at 57.4 percent, said State Bank of Pakistan (SBP) Governor Yaseen Anwar while addressing the SECP Conference on Non-Bank Financial Institutions (NBFI) on Monday.
“The low financial sector to GDP ratio and NBFIs declining share in financial sector assets clearly underscores the need for financial sector development and diversification of financial sector assets to attract investors with different return expectations and risk appetite and channelise financial resources for the economic development of the country,” he said.
The “shadow banking system” was defined as the system of credit intermediation that involves entities and activities outside the regular banking system, he said, adding the emergence of the term reflected recognition of the increased importance of entities and activities structured outside the regular banking system that perform bank-like functions.
Anwar said the financial system in Pakistan was yet to grow to its full potential and play a more meaningful role in the economic development of the country.
“We definitely need to add to its diversification and depth,” he said.
NBFIs can play a meaningful role in this pursuit, he said, adding that in light of the global financial crises, we are better informed about the various risks that NBFIs/shadow banking carries with it. “As regulators we need to remain vigilant to ensure that those risks are mitigated without inhibiting sustainable non-banking financing models,” he said.
The SBP governor briefly outlined four major constraints that the NBFI sector in Pakistan faced.
Although there had been an increasing effort by NBFIs to broaden the range of their business activities and product base, thereby diversifying their revenue streams, the sector was yet to make a breakthrough in this regard, said Anwar.
Second, the sector was fragmented and each NBFI is trying to create its niche market in pursuit of establishing a sustainable revenue stream, he said. In this regard, most companies are concentrating on financial advisory and other fee-based income segments. “Unfortunately, the sector is yet to capitalise on the huge opportunities offered by previously relatively untapped areas like SMEs, consumer, and agriculture segments to enhance avenues for fund deployment,” he said.
Thirdly, Anwar said, the sector needed to develop and diversify sources of funding for sustainable growth. This would require a shift from traditional sources for lending to clients.
The NBFIs needed to develop capital market instruments to pool funds from a diverse set of investors to ensure certainty to the source and cost of funding, he added.
Fourth, he said, there was a need to strengthen the oversight and regulation of NBFIs to reduce the risks emanating from “shadow banking”.
As observed by Financial Stability Board (FSB), the objective of this exercise should be to ensure that shadow banking was subject to appropriate oversight and regulation to address bank-like risks to financial stability emerging outside the regular banking system while not inhibiting sustainable non-bank financing models that do not pose such risks, said Anwar.

Pakistan has enough leverage making it optional for cash-strapped Islamabad to opt for the much-speculated-upon fresh IMF bailout package, said Anwar.
“Most of the articles contributed (recently) in local newspapers are misleading,” Anwar told
reporters on the sidelines of the SECP conference.
“Yes, we are engaged with the IMF, but it is our decision to go for a loan package when the time is right,” he added. Time, the SBP governor believes, is not ripe for asking the international lender for a fresh bailout package as economic challenges in the country are “manageable”.
“This does not mean things are perfect. But the challenges we are facing are manageable,” he said. Asked about the possible impact of the ever-worsening law and order situation in the country, the governor said it would take its toll on the country in terms of offshore investment.
As for local investors, bankers, experts and other market participants, they were well aware of the resilience of Pakistan’s economy, especially the banking system, he said.
“Those who know our markets know our banking system is very resilient and that our fundamentals
are strong,” he said in response
to a question.
Illustrating his claim, Anwar said not even a single bank had failed during the last five years,
unlike the 1990s when several banks had defaulted.
If analysed against the backdrop of country’s Balance of Payment (BOP) situation, which mostly pushes economic managers towards the IMF, the tall claims made
by the SBP governor seem to carry some weight.
According to official data, Pakistan’s dollar reserves stood at $ 13.185 billion till February 22. Of the total, $ 8.227 billion belong to the central bank. A week earlier, till February 15, the country possessed $ 13.058 billion, of which $ 8.141 billion were held by the SBP.
“We still have enough reserves,” is the statement the government officials, including the SBP governor, have been making when asked if the country had enough of the greenback to repay the half-paid loan it had secured in 2008
from the IMF under a stand-by arrangement (SBA).
According to the central bank, from July 2012 to February 26 this year, Pakistan has “successfully” repaid $ 3.232 billion to the IMF under the SBA. The balance amount to be cleared until September 2015 stands at SDR 3.239 billion.
The next, 11th, installment worth SDR 258.4 million is due to
be paid in May.
The economic managers have been repetitive in reminding the inquisitive media that all the IMF repayments have been budgeted and, therefore, pose no risk to stability on a macroeconomic level.
What can be more comforting is that the country’s BOP list, despite all odds, lies in the green zone.
According to the central bank, during the first seven months of the current fiscal year, the country’s current account witnessed a surplus of $ 62 million against a huge deficit of $ 2.79 billion that the country had braced in last year’s corresponding period.
Major stimulus, according to SBP, was the trade gap which narrowed down during the review period to $ 8.77 billion against FY12’s $ 9.41 billion with exports growing to $ 14.17 billion from $14.04 billion and imports remaining subdued at $ 22.94 billion compared to $ 23.46 billion of last year.
The resumed inflows from the United States on account of Coalition Support Fund (CSF) happen to be another positive for the country’s current account surplus.
Since August last year, the country’s CSF receipts have been counted at $ 1.86 billion, of which $ 1.18 billion were reimbursed in August and $ 688 million in December.
Another relieving head for the economic managers is the ever-burgeoning worker remittances that during July-Jan FY13 amounted to $ 8.207 billion compared to $ 7.436 billion of FY12.