Securities and Exchange Commission of Pakistan unveils roadmap for diversification of non – bank financial sector

Karachi, March 05, 2013 (PPI-OT): The Securities and Exchange Commission of Pakistan (SECP) here on Monday unveiled the ‘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 NBF sector in Pakistan.

Mr. Muhammad Ali, the SECP chairman, Governor State Bank, Commissioners, and leading professionals and businessmen from the financial sector attended the ceremony. Addressing the ceremony, Mr. Ali said that it is imperative that the SECP and the SBP should work in close cooperation for effective and seamless regulation across the financial sector in a globally integrated market.

He said that Pakistan’s financial sector is banking centric with the NBF sector accounting only 4.9% — excluding insurance sector — of the financial sector’s total assets. This dependence on the banking sector makes our financial system vulnerable to risks through lack of diversification and also restricts the scope of product innovation.

A strong NBF sector will not only promote savings by offering different asset classes to the investors, but will also provide alternative fund raising opportunities to the participants of financial system, Mr. Ali added. The report highlights that more than 70% of the assets of the financial sector are with commercial banks and only 9% are with the non – banking sector which includes non – banking finance companies (NBFCs), insurance, etc. Out of the remaining assets, around 17% are with the National Savings schemes. Keeping in view the present composition of financial sector, the report suggests some revolutionary ideas to reform the financial sector.

The suggested reforms are aimed at development of an alternate financial system by way of promoting non – bank financial (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.

In order to d evelop 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 co mmercial 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 recomme ndation is in contrast with the prevalent concept of entity based regulatory domain in our country. Other proposed reforms for mutual fund industry include distribution of mutual fund units through the stock exchanges, reduction in the annual regulatory fe e provided more than 50% 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 b y specifying the minimum criteria, etc.

Investment finance services (IFS) is being broken down and redefined as stock brokerage, investment advisory, corporate advisory, securities financing and securities underwriting services and each component of the IF S has been further defined. Flexibility has been offered to an entity to be reclassified as non – bank finance company (NBFC) to obtain either a full scope or limited scope. The suggested regime for IFS outlines a mechanism to transform existing brokerage ho uses 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. In order 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, capi tal market activities of all entities are to be regulated by the capital market regulator, i.e. the SECP and deposit taking, financing, lending activities of all the financial sector participants will be regulated by the banking sector regulator, i.e. SBP.

The NBFS reforms committee comprised of leading market professionals and senior SECP officials made an in – depth review of the whole business model and prevalent regime for this sector. A soft version of this report has been placed on the SECP’s website www.secp.gov.pk .

To facilitate interactive consultation process a web forum (http://forum.secp.gov.pk/forum.php) has been created. All stakeholders should use this forum to give their feedback on the ideas presented in the report and assist the SECP in reaching definitive conclusion for introducing a business friendly regime for the NBF sector.

For more information, contact:
Shakil Ahmad Chaudhary
Head, Internal and External Communication
Securities and Exchange Commission of Pakistan (SECP)
NIC Building, 63 Jinnah Avenue, Islamabad
Tel: +9251 921 4005 or 921 4009 (Ext. 378)
Fax: +9251 920 6459
Cell: +92302 855 2254
E-mail: shakil.chaudhary@secp.gov.pk

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