FIM - Savings

8/7/2019 FIM - Savings

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INSTRUMENTS AVAILABLE FOR

FINANCIAL SAVINGS IN THE ECONOMY

OF PAKISTAN Trends 2000 to 2008

Financial Institutions and Markets

Submitted by:

Marya Qureshi

Mohammad Arish Paracha

Muhammad Bilal Saeed

Nausheen Shahid

BBA 5 2

Submitted to:

Ms. Tahira Marium Jaffery

Submitted on:

December 30, 2009


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Instruments Available for Financial Savings in the Economy of Pakistan

Trends 2000 to 2008 2

ACKNOWLEDGEMENT

We offer our thanks to Ms. Tahira Marium Jaffery, whose encouragement, guidance andsupport at all levels enabled us to develop an understanding of the subject.

Lastly, we offer our regards and blessings to all of those who contributed data over the internet

and made them publically available.

Nausheen Shahid

Marya Qureshi

Mohammad Arish Paracha

Muhammad Bilal Saeed


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Trends 2000 to 2008 3

Table of Contents

INTRODUCTION 4

TRENDS IN SAVINGS 5

EQUITY 6

BANK DEPOSITS 8

Trends 8

NATIONAL SAVING CERTIFICATES 10

Defense Saving Certificates 10

Special Saving Certificates 10

Bahbood Saving Certificates 10

Pensioners Benefit Account 10

Trends 10

NON BANKING FINANCIAL INSTITUTIONS 14

MUTUAL FUNDS IN PAKISTAN 15

Overall investment in Mutual funds 15

Growth in Mutual Funds in Pakistan 16

Trends in the Mutual Funds Industry 17

PENSION FUNDS 19

EOBI 21

Voluntary Pension System (VPS) 21

General Provident Fund 22


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Trends 2000 to 2008 4

INTRODUCTION

National Savings represent a key determinant of long-term investment prospects of a country,

and play a crucial role in the economic growth and development of an economy. Pakistan has

generally been classified among those counties which are characterized by a low savings rate:the highest ever savings rate of 21.3 percent in FY72 is still much lower than its regional

counterparts with a similar level of income. Various factors, such as the continued budgetary

deficit sustained by the government sector, consumption-oriented behavior of the household

sector, high inflation since FY05 which has reduced the real rate of return on savings, and

limited availability of long term savings options and instruments are some of the major

contributory factors towards this trend. The existing savings instruments, other than deposits of

the banking sector, such as mutual funds, pension funds etc. are still evolving and have not yetgenerated sufficient resources to meet the domestic investment needs.

Financial savings, a component of national savings, continues to be small, in addition to varying

considerably from years to year. Specifically, while the average national savings rate during

FY00-08 was 17.5 percent, the average financial savings rate was only 6.6 percent. The

components of financial savings indicate that deposits of the scheduled banks constituted 54.5

percent of financial savings during FY00-08, followed by funds mobilized through national

savings schemes, cash balances of the private sector (currency in circulation) and funds

mobilized by the NBFIs. These components of the financial savings clearly reflect the dominance

of the banking system in the overall financial sector.1

1http://www.sbp.org.pk/FSR/2008/PDF/Special%20Section%20Trends%20in%20Financial%20Savings.pdf


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Trends 2000 to 2008 5

TRENDS IN SAVINGS

While Asia is awash with liquidity which finances the developed worlds financial imbalances,

Pakistan continues to be amongst the low savers.

The highest national savings rate of 21.4% in the history of Pakistan

2

is much lower than otherregional countries at the same income level. As investment activities in the economy are

financed by domestic and external savings (in the form of foreign exchange inflows), the low

savings rate has strong implications for continued economic growth, especially in the long run.

While this low savings rate reflects the consumption preference of economic agents, the role of

an incentive mechanism for savings offered by the financial sector can be hardly over-

emphasized.

The graph is evident that savings rate has been on the downslide since 2003, while inching up

marginally in 2007. The low savings rate has negative implications for the sustainability of the

current strong economic growth. Recent data shows a consistent gap between financial &

domestic savings is also a cause of concern with regard to financial stability. Pakistan is

categorized among the emerging economies of Asia due to its improved economic

fundamentals, but savings rate is visibly lower as compared to other emerging economies.

2Taking into account data from FY60 onwards


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Trends 2000 to 2008 6

EQUITY

A recent study shows that of the total turnover in the equity market 85% is at KSE, 14% at LSE

and 1% at ISE. Till now 671 companies are registered in KSE and at the end of 2007 the market

capitalization was 49% of the total GDP of Pakistan. In 02 Pakistan was reported to be the best

performing market according to the US magazine BUSINESS WEEK. Furthermore according toturnover ratio Pakistans market was ranked first in 2003 and third in 2006.

There was a drop in listed companies and market capitalization in 2002 basically due to the

implementation of corporate governance in 2002.

Since 2001 onwards the market has experienced continuous growth, the KSE 100 index has

increased from 1,521 in 2000 to 12,370 in 2003, an increase of 713%, while the marketcapitalization has increased from Rs. 392 billion to Rs. 3,604 billion for the same time period, an

increase of 819%. The listed capital on the other hand has increased from Rs. 236.4 billion in

2000 to Rs. 535.5 billion in 2007. Turnover of shares has gone up from 48 billion in 2000 to 105

billion shares in 2006 while the daily turnover has increased from 202 million shares in 2001 to

320 billion shares in 2006. The portfolio invest also has show an incredible increase from -$140

million in 2001 to $1,819 million in 2007.

Many factors have contributed to the bullish nature of the market since the last seven years

(i.e. 2000 to 2007)

Improved macroeconomic condition Low interest Excess liquidity Better regulation and control in the market Speedy privatization process example NRL and PTCL Foreign investors to repatriate their funds without any restriction


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Trends 2000 to 2008 7

Rescheduling of foreign debts and prepayments of expensive loans Lower inflation Sound fiscal and monetary policy

In April 2008 KSE achieved a major milestone when KSE-100 index crossed the level of 15000

for the first time in the history peaking at 15737.32 showing a 7.8% increase in the year making

it the best performer among the major emerging market. However, this was short lived as the

market took a bearish trend soon after.

LSE also has shown significant increase in performance 2005 onwards, the turnover increased

from 5.6 billion shares to 11.9 billion shares in 2007 while the total paid up capital has

increased from 469.5 billion in 06 to 491.4 billion in 07. The index on the other hand decreased

from 4379.4 point in 06 to 4249.3 points in 07. The market capitalization has shown an increase

from Rs2693.3 billion to Rs.2948.2 billion for the same time period.


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Trends 2000 to 2008 8

BANK DEPOSITS

Figure 5clearly shows that deposits held by the scheduled banks constitute around 60 percent

of financial savings. Specifically, the share of deposits in financial wealth has steadily increased

from 48.8 percent in FY00 to 58.7 percent by end FY08. This increase primarily reflects the

strong performance of the banking sector over the same period. Compared to strong depositgrowth during FY03-07, there is visible slow down in deposit growth during FY08. The share of

financial savings mobilized by the scheduled bank declined to 58.7 percent by end FY08

compared with 60.4 percent in FY07.3

Trends

An increase in deposits was seen from 2000 to 2003 mainly due to: An increased of inflow of home remittances Increasing income due to surge in economic activities

A small decline was seen during 2003: Higher retirement and low disbursement rate.

An encouraging development during the year 2003 was a further decline in net NPLs ofthe banking sector by Rs 2 billion to Rs 232.6 billion.

The deposit rates offered by banks have risen by 47 basis points from 3.72 percent inJanuary, 2007 to 4.19 percent mainly due to stiff competition offered by National Saving

Schemes.

3http://www.sbp.org.pk/FSR/2008/PDF/Special%20Section%20Trends%20in%20Financial%20Savings.pdf


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Trends 2000 to 2008 9

Bank deposits have shown a downward trend from 2007-08 this is largely attributableto:

Slow down in overall economic activities Increase in nominal consumption on account of strong inflationary pressures. The increased extent of negative real deposit rates (despite the introduction of

minimum floor on deposits 5 percent in June 2008) on account of high

inflationary pressures.

11351264

1411

1671

1975

2405

2772

33103436

2000 2001 2002 2003 2004 2005 2006 2007 2008

Bank Deposits (Billion Rupees)


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Trends 2000 to 2008 10

NATIONAL SAVING CERTIFICATES

Central Directorate of National Savings (CDNS) is an attached department of the Finance

Division which performs deposit bank functions by selling government securities through a

network of 368 savings centers, spread all over the country. There are about 3.6 million

investors in National Saving Schemes (NSS); some of the following are popular schemesavailable:

Defense Saving Certificates

These were introduced by the government in 1996 and are available for in the range of Rs. 500

1,000,000. The maturity period of these certificates is 10 and they can be liquidated anytime

after a month. Zakat is collected once at the time of actual encashment, these certificates can

also be transferred from person to person and place to place on request of the purchasers. The

certificates are available at National Savings Centers, Pakistan Post Offices, Scheduled Banks

and the State Bank of Pakistan, also at HBL & UBL in UAE.

Special Saving Certificates

These were introduced in 1990 and are available in the same denomination as the defense

certificates with a maturity period of 3 years. The profit is paid biannually and is subjected to

10% withholding tax. They are available at the same places as the defense certificates.

Bahbood Saving Certificates

These certificates were introduced for senior citizens and widows and have maturity of 10

years. The profit payment is made on monthly basis and is exempted from Zakat and

withholding tax. These certificates are available at National saving centers only.

Pensioners Benefit Account

This scheme has been introduced for the retirees of federal and provincial government, armed

forces and autonomous bodies. The profit is paid monthly and is tax and Zakat exempted. They

are available only at National saving centers only.

Trends

The year 05-06 saw an increase by Rs. 8.8 billion as compared to a net decline of Rs. 39.4 billion

in 04-05 in national saving certificates. The retirements made in the year were as follows

Rs.57.7 billion in Special saving certificates Rs.15.7 billion in regular income certificates Rs.7.6 billion in defense saving certificates

Net accruals on the other hand increased for the following

Rs.59.6 billion for bahood saving


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Trends 2000 to 2008 11

Rs.16.4 billion for pensioners benefit accountsNet accruals with the NSS increased by Rs. 44.6 billion during July-March 2006-07 as compared

to an increase of Rs. 7.0 billion in the same period last year. Net accruals of Special Saving

Certificates increased by Rs. 3.7 billion during July-March 2006-07 as against a huge decline ofRs. 45.3 billion in the same period last year. Net accruals of Saving Accounts and Special Saving

Accounts also showed increase of Rs. 1.8 billion and Rs. 3.2 billion respectively as against their

decline of Rs. 5.6 billion and Rs. 0.9 billion respectively, in the same period last year. Bahbood

Saving Certificates and Pensioners Benefit Accounts continued to show positive growth as net

accruals of these two popular saving schemes accumulated by Rs. 48.2 billion during the first

nine months of the current fiscal year. Higher investment with the NSS resulted partly due to

institutional participations, which was allowed since 1st October 2006 and partly due to higher

rates of returns on various savings schemes compared to the previous years.

In the year 07 the government keeping in view the interest rate trends made the following

changes in nominal rates of return

Increase from 9.46% to 10.03% for defense saving certificates Increase from 8.6% to 9.17% for special saving certificates Increase from 0.5% to 0.6% for saving accounts Increase from 11.04% to 11.52% for Bahbood certificates and pensioners benefit

715762

847

982 984940 934

1000

1091

2000 2001 2002 2003 2004 2005 2006 2007 2008

NSS - Investments (Billion Rupees)


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Trends 2000 to 2008 12

Following these changes the real deposits rates became positive for all except saving accounts

and prize bonds. From 05-07 the weighted average real deposit rate remained positive in the

NSS showing a good return for the investors.

In October 09 the public and private saving due to NSS reached the highest level since Aug FY10

of 73.11% increase. The volume of national saving in the current grew to Rs.18.718 billion and

the government collected Rs.25.601 billion in comparison to Rs.6.89 billion collected previous

year while total saving amounted to Rs.88.515 billion.

During a single month of October 2009 the following amount were collected on different

schemes

Rs. 1.136 billion on Defence Saving certificate Rs. 5.441 billion on Regular income certificates Rs. 5.639 billion on Special saving certificates Rs. 3.042 billion on Prize bonds

The improvement in saving rate in 2009 after a decline in 08 was minimal, remaining well below

the average of 17.7% for the period FY00-FY07. The saving rate rose from 13.4 in the previous

year to 14.3% in FY09 due to a relative fiscal consolidation as public savings increased to 1.2pc

of GDP in FY09 as against dis-savings of 1.8% during FY08. The deterioration in saving rate for

public and private sector continued for a second consecutive year declining to 13.2% of GDP

which is the lowest level since FY99.

The decline according to SBP in private saving occurred due to:

Steep drop in real estate and equity prices Negative real interest rates on saving instruments Increase in real private consumption expenditure by 5.2% in FY09

Also the saving aspect of GDP declined for the third consecutive year in FY09 showing that the

increase in national saving is just because of the remittances. Low saving has many adverse

effects, decreases the availability of loans and restricts the growth on sustainable basis.

The average national saving of Pakistan has remained for the period FY60-FY09 has remained

very than the other Asian countries at 15.01% of GDP. SBP has identified the following as

reason to low level of saving in Pakistan:

Low income, Low level of financial inclusion,


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Trends 2000 to 2008 13

Saving in kind, High propensity to consume, Avoidance of interest-based financial system due to religious beliefs Culture of conspicuous consumption

It has become imperative to increase domestic saving as the concerns of SBP regarding the drop

in capital flow to developing countries is likely to further decrease in the coming years.

Therefore for countries like Pakistan which are marcoeconomically unstable will not be able to

take loans at low rates hence it is necessary to establish a strong saving institutions along with

establishment of efficient secondary debt market to increase participants in Governments

debts and offer range of returns on saving.4

4http://www.sbp.org.pk/publications/fsa-2001-2002/Chapter%205.pdf


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Trends 2000 to 2008 14

NON BANKING FINANCIAL INSTITUTIONS

Financial savings through NBFCs have seen a rise since 2002.The share has risen from2.18% to 5.2% in 2008. This tremendous rise is because of the buoyant growth in mutual

fund industry.

However the NBFCs deposits drops to 0.02% only in 2008. The reasons for this are asfollow:

There has been a phenomenal rise in the mutual fund industry since 2007 whichwas because of the robust performance of the equity and money markets. High

profits were reported in the mutual fund industry since 2007 and this added 20 new

mutual funds into this industry.

Moreover constant decline in NBFCs deposits is largely because of number offactors which include

y Ongoing mergers and acquisition of NBFCs with the commercial bank.y Weak resource mobilization activities in presence of credit liney Higher interest ratesy Stiff completion from commercial banks

91

80

41 40

47 48

61

10

1

2000 2001 2002 2003 2004 2005 2006 2007 2008

Accumulated Saving (Billion Rupees)


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Trends 2000 to 2008 15

MUTUAL FUNDS IN PAKISTAN

Mutual fund industry started in Pakistan in 1960s with two state owned funds, National

Investment Trust (NIT) and Investment Corporation of Pakistan (ICP). The industry has

witnessed an impressive growth rate both in numbers and volumes particularly since 2003.

Though the size of the industry remains small at 4.4% of total financial sector assets and form asmall part of the GDP its significant contribution and growth potential as an important

constituent of the financial sector is irrefutable. Mutual funds provide a direct completion to

bank deposits and National Saving Schemes.5

Overall investment in Mutual funds6

5Performance of Non-Bank Finance Sector

6Source: Performance Review of Non-Bank Finance Sector Chapter 10

24.8

51.6

93.7

125.8

159.9

289.11

330

273

2002 2003 2004 2005 2006 2007 2008 Q1-2009

Amount in Billion Rupees


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Trends 2000 to 2008 16

Growth in Mutual Funds in PakistanThe growth in mutual funds in Pakistan is attributed to

Liberalization of the sector

Economic growth and macro-economic stability that attracted investors Increased liquidity with the institutional investors A buoyant stock market that provided mutual funds with good returns in form of capital

gain

Another reason why the industry has grown and attracted the savers is because of the variety

of funds that are being offered to the savers. By the close of year 2008 it showed that:

Equity funds

42%

Income funds25%

Money marketfunds

17%

Balanced funds

7%

Islamic funds

8%

Funds of fund

1%

Tracker funds

0%


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Trends 2000 to 2008 17

Trends in the Mutual Funds Industry

Since banks are not passing on the benefits more and more of investors are now turningto the mutual fund industry. The growth in various types of categories of funds shows

that investors are now aware of different modes of investment options.7

In 2001 the industry witnessed a negative trend. The reasons were:8 High dependency ratio Financial repression Unpredictable returns on savings Low and fluctuating growth rates of per capita income Poor investment climate

Growth in seen from 2002 to 2003.There are two reasons for this positive trend First being that private sector was allowed to set up fund and transfer of ICP-

managed close fund which boosted the size and number of funds which

increased the efficiency and the quality management of fund.

7Assessing the Mutual Fund Industry Pakistan and the Gulf Economist March 17-23, 2008

8Source: http://www.issi.org.pk/journal/2002_files/no_1/article/6a.htm

107.2

-5.9

56.7

132.1

88.1

21.6

31.2

103.1

11.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

Growth in % ofMutual Funds


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Trends 2000 to 2008 18

Secondly in 2003 Pakistans equity market was one of the best performing equitymarkets in the world and the Index broke it all time high record to reach as high

as 3402.5points.9

Moreover a tremendous growth is seen from 2006 to 2007.The reason for the growthwas that during this time period SECP removed the condition of having mandatoryforeign affiliation for asset management companies. This helped lower barriers to entry

and many new fund managers came in resulting in the rise in 2007.

However in 2008, since equity fund dominated the industry growth in NAV and this fundis directly related to the performance of stock market, the stock market crash in 2008

shows negative trend for this.

9Source: http://www.paksearch.com/Government/SBP/SBP_Annual/2002-03/Capital%20Market.htm


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Trends 2000 to 2008 19

PENSION FUNDS

Like most developing countries, Pakistan has weak provisioning for pensions. People largely rely

on the next generation to provide for them after retirement. Most governmental jobs are

covered by unfunded pensions i.e. current employees will be paid pensions by taxing the next

generations. Some private sector employees and the organized sector labor are covered byfunded pensions. Funds are primarily invested in government bonds, which will be repaid by

the next generation. A very large section of the population has no pension provisioning and

thus they are totally dependent on the joint family support system. The only organization to

allow for portability of pension rights is EOBI. Another aspect to pensions is that most pension

savings and incomes in Pakistan are tax free, but some long-term savings which can be used

towards retirement by individuals are entitled to tax deferral.

The scope for saving and pensions schemes needs to be enlarged to the untapped private

sector. This will serve to increase post retirement cash flows for individuals and will be an

instrument for mobilizing long-term savings.

Currently, schemes in the public sector include:

Civil Services Pension Schemes General Provident Fund (GPF) Gratuity Scheme

Whereas schemes in the private sector consist of:

Employees Old Age Benefit Institution (EOBI) Provident Fund Schemes Gratuity Schemes Pension (Superannuation) Schemes Voluntary Pension System (VPS)

Private pension funds had a remarkable upsurge across the developed and emerging countries

during last decade. In Pakistan currently, pension schemes exist primarily in the government

sector, which operate on the defined-benefit (unfunded/pay as you go basis) system, while

such schemes are available on a limited basis in the private sector. The public sector pensionschemes entail huge fiscal costs, and give rise to sustainability issues for the government. The

pension schemes in private sector exist in the form of gratuity and provident funds offered by

various employers. This form of savings is used by the employees usually to either pay off their

liabilities or for other consumption purposes when they switch jobs. The possibility of

bankruptcy of the firm and dependency on the same employer under a defined benefits

pension scheme makes the gains attainment more risky. Thus, most of the self employed and


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Trends 2000 to 2008 20

private sector retirees, not covered by private & government schemes, rely on the joint-family

system which allows them to live with their children even when they dont have retirement

savings. However, considering the cultural shift and rising life expectancy, the current system

doesnt seem feasible in the long run for Pakistan.10

Government Employees Pension Scheme Payments (Pak Rs.Billion)11

2001-02 2006-07 2011-12 (Projected)

Federal 31 46 63

Provinces 19 23 31

Total 50 68 94

10http://www.sbp.org.pk/fsr/2006/English/Financial%20Savings.pdf

11The Rationale, Implementation Challenges and Status of Pakistans Pension Reforms by Yawar Zia, Additional

Finance Secretary (Regulation), Ministry of Finance

31

46

63

1923

31

50

68

94

2001-02 2006-07 2011-12 (Projected)

Governments Pension Scheme Payments (Pak Rs.Billion)

Federal Provinces Total


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Trends 2000 to 2008 21

EOBI

Government pension schemes (especially military) are extremely generous, relative to

government pay, coupled with benefits such as free medical benefits. A large cost for this is

being paid by the rest of the country including the very poor. More importantly there is a large

deferred and unaccounted for liability being passed on to future generations in the form of

Government Pension Schemes. So a Private Pension Scheme by the name of EOBI (Employees

Old-age Benefit Institution) was established in 1976, with the core objective of providing

monetary benefits as pension to the workers of private industrial and commercial

establishments across the country.12

The cost of pension has increased sharply from Rs.14.6 billion in 1993-94 to about Rs. 40 billion

in year 2002-03, as more and more workers are retiring and the number of pensioners is rising.

According to figures in year 2003, there were two pensioners for every three workers than

workers. Pension spending now consumes more than one tenth of the tax revenues.13

Voluntary Pension System (VPS)

VPS is a relatively new induction to the pension framework in Pakistan. Its a scheme that

provides an opportunity for individuals who have no retirement benefits to save for retirement

in a tax efficient way. Its mainly designed to target self-employed individuals and workers

without occupational pension plans. An individual can open a pension savings account with

registered VPS pension fund manager if their employer does not provide any occupational

pension plan. At the age of 60 or earlier (in case a individual develops disabilities), the individual

can withdraw 25% of the amount in 'individual pension account', while the remaining amount

buys an annuity contract from a life insurance company of the individuals choice. All otherwithdrawals would be subject to deduction of withholding tax and other conditions laid down

in the Income Tax Ordinance.

12Assessing the Economic Well-Being of Elderly Persons in South Asia by S Irudaya Rajan

13http://www.secp.gov.pk/Events/pdf/MuhammadRaziq.pdf


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Trends 2000 to 2008 22

Under VPS, asset management companies and life insurance companies, duly licensed by SECP,

would be authorized to offer and manage 'Pension Fund Schemes' (PFSs). Such entities shall be

referred to as 'Licensed Pension Fund Managers'. Life insurance companies would also be

authorized to offer 'Annuity Plans' under the system.14

The Securities and Exchange Commission of Pakistan (SECP) has drafted the 'Voluntary Pension

System Rules 2004' for governing the introduction of the VPS in Pakistan.

General ProvidentFund

General Provident fund is the pensions saving scheme of the Government of Pakistan. All

employees have to pay a certain amount of money from their monthly pay towards saving for

their retirement. Contribution to the general provident fund was made compulsory in 1925.

General Provident Funds have witnessed a steady increase through the years, but it faced a

decline from 2006 to 2008. This was due to a steep decline of 390 bps in savings rate in 2008 as

compared to 2007. This decline is largely attributed to slowdown in economic activities

(achieving lower then targeted GDP growth of 5.8 percent in 2008) and higher inflationary

pressures. The prolonged political transition, energy crises and worsening law and order

situation also led to lower savings rate.

14http://www.brecorder.com/index.php?id=83383&currPageNo=20&query=&search=&term=&supDate=2009-11-25

19 18 1920

22 22

44 43 43

2000 2001 2002 2003 2004 2005 2006 2007 2008

GP Fund (Billion Rupees)

FIM - Savings

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