By Jabir, Rafique
Economic Review , Vol. 22, No. 6
Role of Karachi Stock Exchange in Capital Formation
The role of Karachi Stock Exchange in capital formation has been thrown in bold relief by the recent boom during which many new records have been established. Last month (April) an unprecedented turnover of 82 lakh shares in a day's session against the previous daily average of 10 lakh bears an eloquent testimony to the interest that has recently been generated in share business. The KSE's price index also touched an all-time high at 1764. All this goes to prove that the stock exchange is playing a vital role in capital formation. Market capitalisation has increased from Rs. 21 billion in 1985 to Rs. 70 billion at present. This is 100 per cent more that the listed capital of Rs. 29.5 billion.
Though the Karachi Stock Exchange had a modest beginning in 1948, today it has come of age boasting of more than 414 listed companies. The investment activity has gained momentum in the wake of introduction of a number of leasing and modaraba companies which are playing a major role in making the stock market buoyant. With these companies offering loans for industrial establishments, the pace of industrialisation has been accelerated in the country. Besides, the dependence of sponsors of new projects on banks and DFIs has decreased because of the positive response of the general public to their offerings and growing interest in share business. More and more entrepreneurs have started depending more and more on the share market for mobilisation of funds.
The investment banks, modarabas and leasing companies have particularly been instrumental in giving a big fillip to investment activity on the share market. They have come into existence at a time when the economy is trying to absorb the impact of the barrage of economic and financial reforms. These institutions plus DFIs have been the principal buyers of stocks in the share market.
Rumours are afloat that foreign investors have entered the market after the radical financial reforms, particularly foreign exchange liberalisation. There is also report that there has been diversion of the investments in the stock market from the real estate market which is going through a slump. Non-resident Pakistanis working in the Gulf and Saudi Arabia are also understood to have transferred their savings to Pakistan after the Gulf crisis to be ploughed in shares.
The stock exchange has thus turned the corner and is well poised to play an even greater role in industrialisation of the country. The liberal incentives provided in new industrial and export policies have created a congenial atmosphere for vigorous investment activity. A climate conducive to foreign investment has also been created. Hence the outlook of the share market is quite bright. In fact, one of the biggest share markets in the region is now in the making. The reasons are not far to seek. The present government's policy of allowing free movement of foreign exchange has started paying dividends. A large amount of money belonging to overseas Pakistanis and foreign investors representing major financial houses of Europe and the Gulf, is coming to Pakistan through indirect channels. This runs into billions of rupees.
The upsurge in investment activity is largely attributable to the fact that the shares quoted on Karachi Stock Exchange ensure higher yield. The average yield across the board at the KSE is 9 per cent which is so far the highest as compared to other neighbouring countries despite the fact the only 50 per cent of the companies listed on the stock exchange are paying dividend. In case of top 25 companies, the average yield across the board is over 20 per cent, while in India the yield is only 2.2 per cent. Elsewhere in the world, it is less than 9 per cent.
Moreover, being a developing economy, the stock market in Pakistan has a vast scope for expansion which in fact is the main feature of attraction for the foreign investors who see a lot of potential in the market as compared to markets in Europe which are now at the point of saturation. …