KARACHI, Oct 16: "It is a wake-up for all of us to begin looking after the interest of the vast majority of small savers and mobilize and utilize their funds in much better way than we have done so far."

This is the advice State Bank Governor Dr Ishrat Husain gave to banks and other financial institutions at the 54th annual general meeting of the Institute of Bankers Pakistan last week.

Unveiling a financial sector roadmap for 2005-2010, the SBP chief asked bankers to keep innovative products for deposit mobilization on top of the agenda for the next five years.

"It is a serious weakness that we cannot afford anymore," he said while criticizing the myopic one-sided approach of the banking industry which has neglected 28 million savers and depositors.

Increased national savings are needed to fund the next five-year development plan (2005-2010) starting from next June. Much bigger volume of investment would be required to push the economic growth rate from six plus per cent to the targeted eight per cent. Incidentally, small savings also provide bulk of the deposits to enable banking industry to perform its core function of intermediation.

Innovative vehicles for mobilization of small savings are designed to further develop the capital market and access the international markets for meeting external financial needs.

There is immense scope for such products in a narrow and shallow financial market. The State Bank recognizes that there is a mismatch between the growing institutional appetite for long-term investment products and the demand for long gestation mortgage, infrastructure, real estate and project financing. This gap can be filled by private equity and venture capital funds, private pension funds, provident funds and insurance companies. Foreign investors can be invited to invest in these instruments.

Though the move corresponds to global practices, experience in some countries show that it carries quite a few risks. It is widely recognized that capital markets have become very divorced from the economic fundamentals. Lacking self-discipline, financial markets are quite often triggered by speculative fever. People making easy money through speculative activity in stocks, currency, real estate, gold, etc., do not have much appetite for productive investment. Small savers, who get negative returns on their deposits, cannot look forward for a good deal. Then there are risks involved in business cycles which tend to work more against the individual investors than institutional interests. All rules of business are formulated by the regulators in consultation with the industry with no reference to consumers.

Another issue is as to how and where these mutual funds would be invested. Mortgage financing is not picking up because of critical shortage of land and the abnormal rise in their prices. Very few new shares have been floated on stock exchanges. There is not much room for a steep rise for stock prices and huge capital gains. The problem on the supply needs (more listing of stocks and more land for housing) to be resolved first so that the funds mobilized can be placed in productive pursuits.

Though the State Bank is a vigilant regulator, it cannot intervene prematurely on anecdotal evidence and it takes time to collect sufficient material to act when much of the damage is done. A recent example is misuse of loans for purchase of lands. Smart speculators know well how to evade the regulators. The only option is that the government should encourage consumer activism.