Non-banking financial sector reforms introduced

By Kazim Alam, The Express Tribune

KARACHI: The movers and shakers of Pakistan’s capital markets huddled together on Monday at the launch of a draft report by the Non-Bank Financial (NBF) Sector Reforms Committee, which was constituted by the Securities and Exchange Commission of Pakistan (SECP) a year and a quarter ago.

The SECP has invited comments from stakeholders and the general public over the report, which contains suggestions for the development of the NBF sector, which currently constitutes only 4.9% (excluding insurance) of the country’s Rs11.6 trillion financial sector.

Pakistan’s financial sector is dominated by banks, which, according to SECP Chairman Muhammad Ali, makes it vulnerable to risks because of a lack of diversification and limits the scope of product innovation. The SECP has sought public feedback on the report in order to change the business model and regulatory regime governing the NBF sector, whose primary participants are asset management companies (AMCs), real estate investment trust (REIT) services, private equity and venture capital management services, Modaraba management services and non-banking financial services, such as brokerage services and investment advisories.

AMCs

Proposed reforms for the mutual funds industry, which represents 4.3% of banking and non-banking financial sector assets, include distribution of mutual funds units through the stock exchanges, reduction in the annual regulatory fee (provided more than 50% of a fund’s net assets are held by retail clients), and introduction of the concept of expense ratio, a measure of what it costs an investment company to operate a mutual fund.

The scope of investment advisory has also been enhanced to include management of a private pool of investments under a fund structure.

Investment finance services (IFS)

The suggested regime for the IFS consists of two business models: that the entities that do not undertake deposit-taking activities be solely regulated by the SECP, and those that undertake deposit-taking and lending activities be jointly regulated by the SECP and the State Bank of Pakistan (SBP).

The committee has also proposed that housing finance and leasing businesses, whether deposit-taking or otherwise, should fall under the domain of the SBP and not be regulated by the SECP anymore.

REITs

The committee has proposed a reduction in REIT fund size to Rs50 million. Currently, it is Rs2 billion for both rental and development schemes. Other proposed changes include reducing a REIT management company’s mandatory holding in a REIT scheme to 10% from 20%. The report also proposes that AMCs be allowed to manage REITs. Currently, REITs can be set up in federal and provincial capitals only, but the report suggests that they be allowed in more cities.

Private equity and venture capital funds

The report proposes that the minimum investment limit for investors of private equity and venture capital funds be reduced to Rs3 million from the current Rs10 million. Moreover, it is suggested that the minimum equity requirement for a fund management company be reduced to Rs20 million from the prevailing Rs30 million. The report also calls for allowing AMCs to manage private equity and venture capital funds.

Modaraba

The report states that registration, floatation, and all other business activities of Modarabas, except deposit-taking activities, should be regulated by the SECP.  Also, it has suggested that the concept of minimum equity requirements, in line with the requirements for other participants of the financial sector, should also be introduced for Modarabas. The report further says that Modarabas should be allowed to undertake real estate business activities subject to the compliance of the regulatory requirements under the REIT regulations.

Published in The Express Tribune, March 5, 2013.

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