The financial sector has broken yet another new ground. It has started venturing into new fields, as cost of finance declines and huge liquidity is available with banks and other financial sector institutions.
Encouragingly for the economy, new, foreign-based companies also plan launching new funds and capital market business in Pakistan. Just consider the latest launch of the trend-setting venture capital, for instance. All the stakeholders— the financiers, the capital market regulators, the borrowers, and above all banker-turned-Finance Minister Shaukat Aziz are highly upbeat about venture capital as the new mode of business finance in Pakistan.
Still new in Pakistan, it is piloted by the just-launched TMT-PKIC Incubation Fund. It has financing by the Pakistan Kuwait Investment Company (PKIC), and several others. It is a Rs250 million fund, out of which Rs63 million have just been provided to five entrepreneurs. Investors that have joined hands in forming the fund, besides the PKIC and the TMT Ventures, include the Habib Bank Ltd, the National Investment Trust, the SME Bank and the AKD Securities. The fund has an 8-year life span. Its objective is to finance start-up and early stage companies in high growth telecom, technology and media.
The event takes place in an environment that the finance minister Aziz describes as “robust,” on the back of a 30 per cent growth of the financial sector. “This rate of growth is a precedent in a robust economy alone,” he said.
Why is this happening? The need to go into new fields, adopt new modes and develop new and innovative financial products arose as a result of the continued sluggishness in credit take-off by the private sector investors. Although the economy has begun to look up a bit, after years of stagnation and shrinkage, there still are not many takers for credit. It led to huge piles of liquidity that worried all profit-conscious banks, including foreign-based banks. The situation, in turn, led to the present push for innovation. Venture capital (VC) is a product of such an environment, plus the fact that this mode is favoured by imaginative and younger entrepreneurs who are ready to undertake risk and have the capability to go for new products and services that are in tune with the present IT age. It will be used by creative entrepreneurs going into non-conventional fields, and have the skill for fund management.
What else has added to the liquidity? Over months, the State Bank of Pakistan (SBP) has brought down its benchmark discount rate, at one time from 14 to 7.5 per cent on November 19, 2002. In the meanwhile, the government’s budgetary deficit narrowed down as Islamabad’s debt servicing liability declined. It meant, the government’s borrowing from the banks to meet its budgetary deficit declined, too. In view of this, the SBP drastically cut the six month Treasury Bill (TB) rate from a high of 13 per cent down to 1.654 per cent as of this week. The yield on the government’s long-term Pakistan Investment Bonds (PIBs), down to from 14.0 to 4.0 per cent as of now.
The SBP and the capital market are now taking to new paths to commercial bankers and financiers to deploy their liquidity in order to earn a decent profit margin, that has drastically gone down as TBs and PIBs are no longer as lucrative as these were until only months ago. The yields from these traditionally secure modes of investment in government papers are no longer going to improve, in the foreseeable future.
In future, there is going to be focus on consumer finance, mortgage and housing finance, leasing, as well as a strong emphasis on providing credit to small and medium enterprises (SMEs) as they contribute greatly to the economy as these are labour intensive, can be established with a comparatively small amount of capital and can turn out innovative products that are specific to various classes and groups of population, besides style-conscious importers abroad.
Islamabad on its part is giving a high priority to growth, by ensuring consistent policies, taxation reforms leading to reduction in number and rates of taxes, as well as making the Central Board of Revenue (CBR) more taxpayer friendly.
While the private financiers turn to VC, they are also cautioning the borrowers about doing their own part correctly. “venture capital is all about people. To be successful, a VC has to balance financial discipline with entrepreneurial dynamism. VC is not an easy money, but the most expensive form of financing. In order to obtain VC financing, the entrepreneur has to accept a rigorous discipline of how to use scarce capital,” says Ali Ansari, chairman of the TMT Ventures. “WE have created start-up culture at our incubator Cyberport. Everyone is welcome to visit us and see how the magic of VC works,” he adds.
The managing director, PKIC, Zaigham M. Rizvi, says, his company “strongly believes that supporting VC through entities like the TMT Ventures is the right step towards attaining real growth of the information technology sector and its contribution to the economy, once the demand of IT-enabled services is accelerated.
The Security and Exchange Commission of Pakistan (SECP), the government regulator of the capital market, bourses and non-bank financial institutions, is upbeat, too, over the future prospects of venture capital. But, it recommends more incentives for this mode of financing. It has, since 1999, been asking the government to promote venture capital.SECP Chairman Abdul Rahman Qureshi, recommends, “a tax exemption of at least 10 years, from the date of commencement of business of a company or fund, is required to boost investment in venture capital industry. However, the government has, so for, given tax exemption only for seven years, effective June 2000 to June 2007.
The stakeholders point out, the global experience indicates, appropriate fiscal measures must be taken for enhancing development of venture capital, that ultimately promotes economic growth. This is particularly so because the financial market requires new investment avenues that attract the potential investors.
The SECP, and other capital market stakeholders, also are of the view, since VC business is highly risky, “exit doors” should be provided in case any such company finds it difficult to continue in business. VC companies should have the option to wind up, by deploying the existing arrangements like initial public offering, acquisitions, management sell-out or mergers.
Appropriate fiscal incentives are necessary to make venture capital a vibrant sector of the economy. Within the legal framne-work, the SECP has offered help to redress any procedural or practical difficulties. This framework has been provided in the venture capital companies and funds Rules 2001. The SECP also have laid down stiff criteria to ensure that the management team of VC companies should have high professional qualifications and skills and should be known for financial and personal integrity.
The SECP has explicitly told the VC companies that it will ensure that business ethics are adhered to and investors’ interests are fully safequarded. Short of any direct intervention into the affairs of the VC companies, the regulator will deeply monitor the VC industry through a specific reporting system, it has involved.
New faces and institutions, meanwhile, seem set to appear on the financial market horizon in the country. Business sources report that three foreign funds are likely to be launched in Pakistan in the next few months.
The Jeddah-based IICG reportedly plans to launch a Rs 250 million open-ended mutual fund, in cooperation with its Pakistani partner, Faysal Bank. IICG, an associate company of Bahrain’s Shamil Bank, will have 60 per cent shares in the fund. It will go into provident and pensions funds as well as retail business. Its sponsors feel that, efficiently managed, the Fund can offer investors a good rate of yield. It may also go into Riba-free products in order to enlarge its business scope.
The Hong Kong-based Crosby Securities that was already in business in brokerage and investment banking in Pakistan until five years ago, when it pulled out, is planning a come back. A head fund will be brought to Pakistan by Crosby Asset Management Company, to go into hedge funds, options, margin financing and mutual fund operations.
A leading brokerage house of Pakistan, AMZ Securities also plans to become partner with a foreign fund to introduce an open-ended mutual fund. The new ventures and the new fields money takes to,will be worth watching, as their success will encourage more such endeavours to oil the wheels of this stagnant economy.