THE rising oil prices and the post-9/11 environment, coupled with the success of the industrial revolution now unfolding in major parts of Asia, have been pushing increasingly large investment flows towards Asian markets. Within last month alone six billion dollars were invested in stocks of just six Asian countries even when excluding major markets like Japan, Hong Kong and Singapore. All indications are that this rising trend is likely to continue in the future.

Although our markets have also been benefiting from the surge in liquidity of Asian markets, Pakistan is still on the periphery of these flows. Since the money is footloose in this seamless world of global finance, it would only strike deep roots here when our capital market develops the reputation as an efficient vehicle for transferring savings into investment.

So, how prepared are our institutions to turn Pakistan into a destination receiving substantial flows from the flood of investment funds going into Asian markets? The ‘environment’ in the world of investment is largely determined by the health and credibility of institutions dealing with it. What matters in the minds of investors committing large funds into any market, besides its potential for growth, is to find answers to the questions like: What guides the working of the institutions dealing with investment — the laws or the changing exigencies of individuals? And how predictable is the behaviour of the institutions in dealing with their areas of responsibilities?

For sometime now, our capital markets have been a cause for concern for many, especially since the crash last March. Funds for our capital markets are currently being generated by the many factors indicated above including the high growth rates of the domestic economy. Various reports appearing in the wake of the March crash, including the Taskforce, have indicated that a large part of the problems of March could be attributed to too much liquidity chasing too few products, specially the nexus created around Badla financing.

But even if the liquidity was not such a problem, the stimulus for additional liquidity has been injected into the market through the recommendations of the Tareen committee to lift the market spirits.

But what about our markets being open, fair and efficient instruments for transferring funds into investment in the country? One of the fundamental purposes of capital markets is to act as an efficient vehicle for flow of funds — transferring savings into investment — domestic as well as foreign. More specifically, to channel funds into the securities of more efficient industries and out of the less efficient and losing ones.

An efficient capital market is supposed to protect the investors from paying more than the fair value of stocks when buying, and also in receiving fair value when selling the stocks. The fairness of the market requires that the expectations of gains by the investors are guided by the principle of ‘Profit based on performance’ — whether actual or potential — of the companies. And the openness of the market in information, operations and accessibility is meant to give confidence to investors.

In a ‘buyers beware’ market, there cannot be too much emphasis on the continuing need for full and prompt flow of information to all as also on the public/investor education programmes run by the regulators to demystify stock market operations and enable investors to make ‘informed’ investment decisions.

How does the reality relate to these requirements? The Taskforce and other reports give ample indications about the weaknesses afflicting the market. A stock market where trading is largely restricted to people on its premises, cannot claim to be open and accessible to all investors. And a market where 90 per cent of trading value is confined to less than five per cent of its listed companies, cannot be an efficient channel for flow of funds into investment opportunities. Or do we understand that out of the nearly 700 companies listed on the exchange, there are no more than 30 entities that are rated first class enough to attract big investor interest?

Coming back to the crash of capital markets, the Taskforce has listed several abusive practices that have been taking place in the market, including insider trading, wash trading, demand and price manipulations, ghost buyers and sellers, selective relaxation of rules and many situations of conflict of interest, etc.

However the litmus test would come when these abuses are tested against the security laws of the country to see if these practices are anything more than some smart fellows exploiting loopholes of our archaic laws? It would then become clear that many of the operational abuses, talked about in various reports, have been nurtured over time by the vague generalities and loopholes embedded in our outdated security laws. These and other abusive practices have also been appearing and taking their toll of investor confidence in the earlier ‘investment’ schemes of the cooperative societies, finance companies, forex associations and others. Against the backdrop of the recent market crash, the weaknesses of the regulators have also come under the microscope. Some of their inadequacies seem to be arising out of the conflict of interest situations inherent in the structure and management of institutions.

Again, without belittling this issue, it needs to be realized that the regulators derive their strength and authority from the investment/ security laws. And it is a moot point to see how far their weaknesses are rooted in the weak, ineffective and outdated security laws of the country.

What this tells us is that any attempt to rectify the abusive operational practices and creating a fair, open and efficient security market outside the framework of security laws will be a fruitless pursuit. That is why it is so important to go back to the basics of the laws on investment again and again to continually weed out bad practices. While many developed markets keep regularly updating their security laws for this purpose — some even totally revamping them every 20-25 years — we have largely remained stuck with our outdated, inadequate and inefficient security laws since their inception 35 years ago.

Whenever the inadequacies of our security laws have nurtured abusive practices, our approach in the past has generally been to wait for a bunch of sufferers to cry foul after they have lost their shirts, and then give them some lollipops in the shape of some relief measures to calm them down without getting into the underlying causes embedded in basic laws that give rise to these abuses in the first place.

Although the regulatory issues were included among the terms of reference of the Taskforce, it has generally focused on the policy and operational issues of the market in the report it has produced, perhaps because of the limitations it has mentioned.

However, if the compass of the basic law on investment were to guide our search for solutions, it would help us understand better why repeated weakening of investor confidence has been occurring with impunity under various labels. It would also become clear that we cannot have efficient capital market operations without having efficient investment laws.

Simply put, if the markets have not been functioning well, a major part of the answer lies in the weaknesses, lapses and loopholes in the laws that govern the functioning of the markets. And when we try and update our archaic security laws, the guiding principle of such an exercise should be to define the success of the capital markets in terms larger than the success of those physically present and occupying positions of influence and authority in the bourses and related institutions. The success of the capital market must include the success and protection of the interests of third-party players, small investors, strangers and individuals and institutions that commit their resources to market operations while living and working far away from the premises of the bourses.

The standing committees of the National Assembly looking into the crash of capital market in March should help where it is most needed — in revamping and enacting an updated version of the security laws. Only then would investor protection be properly enshrined in our investment laws and the capital markets become a real engine of economic growth for the country. From the public policy perspective, as the success of the capital markets acquires wider meaning to include various stakeholders, their claim on national resources and policy support would also be justified.

A fair balance in the relationship among various market players — regulators, management, stock brokers and dealers in other kinds of investments and the investors themselves — must be guided by the compass of an updated and efficient system of security laws, and not by any lollipops of quick-fix solutions. Or else when the next bubble bursts (real estate?), the small investors might see deja vu all over again.

E-mail:smshah@alum.mit.edu

LAST week the government issued an ordinance requiring all the madressahs in the country to get themselves registered with the authorities. In line with General Musharraf’s approach of treating the clerics with kid gloves, the ordinance takes the form of an amendment to the Societies’ Registration Act, 1860.

The newly added section 21 also makes it compulsory for the seminaries to submit an annual report of their activities and their audited accounts while they are prohibited from teaching or publishing material that promotes religious and sectarian hatred and militancy.

Does the government mean business this time? In 2002 it had promulgated the Deeni Madaris (Voluntary Registration and Regulation) Ordinance which was more elaborate than the amendment proposed now. It had even provided for the establishment of a federal and four provincial madressah education boards to supervise these institutions. This law came to naught because the religious parties opposed it tooth and nail. Moreover, since registration was voluntary, the madressahs exercised their right not to register.

The other day, President Musharraf told Ahmed Rashid, the internationally known author of The Taliban, he is “deadly serious” about a crackdown on the banned extremist groups operating under another name, the closure of all publications promoting hatred, creating new syllabi for the madressahs and their registration within six months.

He explained that earlier he had failed to carry out these measures as his hands were tied down by the confrontation with India, the general elections in 2002 and political insecurity at home and abroad. Now he says he feels stronger to act.

Under the new Ordinance the registration process is expected to be completed by November. It seems a bit unlikely given the fact that it is not even known precisely how many madressahs there are in the country. The number quoted varies from 9,000 to 15,000. Besides the amendment doesn’t make many procedures very clear. Who will register them and who will regulate their working? Do the madressah education boards to be created by the previous ordinance continue to be valid? In the absence of specific provisions a lot of confusion can be anticipated. It has not even been made clear what the outcome would be if a madressah violates any of the clauses of the ordinance. Would it be shut down? All this makes it difficult to place one’s confidence in the government’s will and capability to take effective action, especially when it has for all these years patronized the religious parties because of the political dividends it could derive from them.

Since many of the madressahs are known to be fertile breeding grounds of militancy and jihad — only last week a madressah in North Waziristan was found to be imparting military training to its students — not much will be achieved if the registration process is no more than a procedural one. Two important aspects of the madressahs need to be tackled judiciously. First is their control and second is what they teach.

Until now many of the madressahs have been controlled by political parties, which have set them up, and facilitated the flow of funds for them. These institutions with a political orientation provide the ‘foot soldiers’ for the extremist groups which subscribe to the belief that jihad against non-Muslims is mandatory. Funds are no problems. According to an International Crisis Group report, the madressahs collect over Rs 70 billion a year from within the country. But more than that is generated by external financing — from foreign states, private donors and Pakistani expatriates. With their accounts never audited, it is difficult to ascertain who is exercising control over these madressahs.

According to Dr Tariq Rahman, there are five central boards of madressahs controlling the institutions academically under them. They are the Deobandi’s Wafaq ul Madaris, the Barelvi’s Tanzim ul Madaris, the Shia’s Wafaq ul Madaris, the Jamaat-i-Islami’s Rabta-tul-Madaris al-Islamia and the Ahl-i-Hadith’s Wafq-ul-Madaris-al Salafia. These institutions are quite autonomous of the government and chalk out their own curricula and pedagogic methodology.

An attempt was made by the government in 2001 to regulate the madressahs’ curricula by introducing the Pakistan Madressah Education Board Ordinance. In this context, Dr Rahman quotes a document of the government on education sector reforms, “Three model institutions were established ... Their curriculum includes subjects of English, mathematics, computer science, economics, political science, law and Pakistan studies.” But the ulema rejected this proposition.

In an excellent study of the madressahs, Dr Rahman describes the Dars-i-Nizami and how the memorizing of the canonical texts and their backward-looking nature symbolize the “stagnation and ossification” of knowledge. With Radd (refutation) being an intrinsic part of madressah education, students internalize a hatred and lack of respect for the beliefs of other sects, sub-sects, and religions.

Since they are not short of funds they can literally buy over their students who are provided boarding and lodging. Living on the premises, the students provide ample time and opportunity to be thoroughly indoctrinated.

It has been questioned if simply introducing new and modern subjects to this obscurantist syllabus would change the mindset of the students. This is a valid question because, according to Dr Rahman, many of the major madressahs have already introduced subjects like English, mathematics and general science. But what he emphasizes is that the ulema or teachers approved by them teach these subjects. “Thus the potential for secularization of these subjects, which is small in any case, is reduced to nothingness,” Dr Rahman writes in Denizens of an Alien World.

This leaves us wondering if the government will really succeed in controlling the madressahs by promulgating the new ordinance. The madressahs did not pose much of a problem for decades — the first organized madressah at Deoband was established in 1867 — and though politically their role was very negative, they remained on the sidelines. It was Ziaul Haq who brought the madressahs into the mainstream. They were provided support and financial assistance (some coming from the United States) to conduct jihad in Afghanistan against the Soviet “infidels”.

Their numbers went up by leaps and bounds. According to Muhammad Qasim Zaman, a professor at Brown University and author of the Ulama in Contemporary Islam, there were 279 madressahs in Punjab run by the Shias, the Deobandis and the Barelvis in 1971. In 1994 their number had jumped up to 2,288. Once the trend started the momentum built up even though Ziaul Haq was no more on the scene and the Soviets had withdrawn from Afghanistan. Today the number of madressahs in Pakistan are estimated to be about 10,000.

Of greater concern is the ubiquitous effect the madressahs have had on the religious culture in Pakistan. They have made their inroads into politics and, worse still, are exerting a powerful influence on education in Pakistan. While the government worries about the curricula of the madressah, it should show more concern for what is being taught in the supposedly secular schools all over the country.

Analysing language-wise the ideological contents (Pakistani nationalism, Islam and the military) of course books from Class I to Class 10, Dr Rahman found the Urdu books had 40 per cent of such contents that glorified wars and conquests by the Muslims and carried derogative references of non-Muslims, the West and so on. In fact, nearly 40 per cent of the Urdu medium school students advocated war with India in 2003. Only 47 per cent of them want the Hindus in the country to be given equal rights to jobs. Even less — 46 per cent — supported equality for the Qadianis.

With this mindset proliferating our society, simply reforming the madressahs will not be enough. A start has to be made on multiple fronts. The job of reforming the school curricula, which was started earlier but abandoned when the religious parties resisted it and raised a furore, should be undertaken again and more firmly this time.