FINANCIAL wizards may not get warm support from stakeholders when they move to introduce new financial products to develop debt market and reduce liquidity gaps.

The second quarterly report of the State Bank of Pakistan has suggested broadening the reach of the financial services. It stated: ‘There is a dire need to develop financial sector and to increase intermediation, which is essential to raise rate of savings and sustained growth in the economy.’

‘It does not only require focusing on increasing financial outreach in rural and far-flung areas, but also the development of long-term debt market, investment plans for pension funds, revitalisation of mutual fund industry, and corporate bond markets are also necessary for efficient allocation of resources.’

In the midst of the global financial turmoil, the new financial products would not inspire the business confidence. The financial sector of highly developed economies mismanaged risks and misallocated resources which led to global financial meltdown with devastating consequences. Even the rich in the West, having lost ten trillion dollars or 25 per cent of their wealth, are wary in dealing with professional bankers

The governments of US and the leading European nations have injected billions of dollars to salvage their economies but the end of the crisis is not yet in sight. The growth rate has plummeted exposing giant corporate entities and marginalising the vulnerable segments.

Commenting on the crisis, eminent conomist Joseph E Stiglitz was reported to have said: ‘In recent years, financial markets created a rich man’s casino, in which well-off players could take trillion dollar bets against each other. I am among those who believe that consenting adults should be allowed great freedom in what they do—as long as they don’t harm others. But there’s the rub. These high-rollers weren’t just gambling their own money. They were gambling other people’s money. They were putting at risk the entire financial system—indeed, our entire economic system. And now we are all paying the price.’

In Pakistan, the financial reforms of 1990s did improve the system. It was one of the fastest growing sectors during the 2004-07 growth phase. The high profit prospects lured many foreign banks to start operations. The banks were making large profits because they were allowed unusually high spread and less because of better management or innovative ideas.

There were indications that banks colluded to avoid competition and squeeze captive market. They paid negative real returns to depositors as low as up to 2.5 per cent when the inflation was running at double digits. They charged as high as 18 per cent or more from borrowers to rake high profits.

The banks concentrated in cities. According to the SBP data, the total number of account holders hover around 25 million in a population of about 170 million people.

‘It would not be easy to sell even dependable safe products because of the trust deficit. The depth and breadth of the current global crisis trashed the manicured image of polished bankers. What happened in the US dented the trust on banks as credible institutions serving the economy,’ said an expert talking to Dawn who wished not to be named.

The local businessmen were skeptical of bankers’ skills and their orientation. They felt introduction of more complex financial products in the market where 80 per cent of the population does not even have an account in any bank was not a great idea.

‘I see no fun in aping the West. Our institutions should be designed to respond to our local needs. The challenge facing the country is to improve the competitiveness of the local outfits by bringing down the cost of doing business. Introduction of high risk costlier modes to raise capital does not make sense at this juncture,’ Tariq Saeed, President Saarc Chamber of Commerce and Industry told Dawn.

‘We need not follow others blindly. The West is paying the price of letting speculation push risky financial management beyond limits,’ Sultan Chawla, President Federation of Pakistan Chamber of Commerce and Industry told Dawn over telephone.

‘We need stability and business friendly long-term economic policies. We need productive investment avenues. The conventional safe banking can fulfill our capital requirements if managed prudently’, he said. He, however, favoured development of capital market in a measured and transparent manner so that investor has an option of mobilising resources from there.’

‘Even today people with fat savings are looking around for a dependable investment options. If the country is really starved of liquidity who are these people who moved capital to Dubai for investment in real estate two years back and now looking at Malaysia and other Far Eastern countries to park their monies,’ a market watcher asked.

‘The elite of the country is richer than they are understood to be. Besides there are lenders outside the formal economy willing to lend on a short-term to big players at competitive rates. My plea is that the country is bereft of innovative ideas to build on its generic resources and not capital,’ he said elaborating.

‘The mobilisation of resources is a problem for low net worth individuals who need it for consumption, housing or farming. The secondary debt market would not serve them anyways,’ he added.

Sakib Sheerani, chief economist at Royal Bank of Scotland (RBS), favoured diversification of funding sources for benefit of the corporate sector. ‘It is about time to develop bond market and other financial tools to provide businesses options to raise capital for expansion and modernisation of their businesses,’ he commented.

It would be naïve to wait for the whole country to get banked before exploring new products and innovative options in the financial sector. This is an age of knowledge economy and innovative ideas are more valuable than physical resources. No pools of resources are not good enough on their own. They need to be treated with innovative ideas to harness them in the interest of the people.

‘If dependable supervisory structures could be put in place there seems to be no harm in experimenting with new financial products. Let the market pass or fail the initiative,’ concluded the expert.