Pakistan Stock Exchange (PSX) achieved a major milestone in enabling and developing a vibrant trading platform for debt securities like treasury bills, Pakistan Investment Bonds (PIBs) and Sukuk ahead of a likely massive debt-based fundraising by the government for low-cost housing, construction and other projects.
PSX signed an agreement with Bank Alfalah on Tuesday. The latter became the first commercial bank designated as a market-maker for debt securities, meaning the bank would multiply trading activities in debt securities through provision of liquidity by continuously quoting buying and selling prices for the listed debt instruments to help investors actively trade securities.
“Banks are having almost no liquidity to finance (trillions of rupees worth of) housing and construction projects in Pakistan. Development of the second debt market (at PSX) will allow insurance companies, pension funds and mutual funds to offer long-term financing for housing and construction projects,” Bank Alfalah President and CEO Atif Bajwa said while speaking at the agreement signing ceremony at the PSX.
The debt-based financing through competitive bidding at the stock market allows the fund raiser to acquire funds at cheaper rates than those at which banks usually offer negotiated loans.
For example, the government raised debt worth Rs200 billion through the Pakistan Energy Sukuk-II at a rate 10 basis points lower than the six-month Kibor at the PSX in May.
On the contrary, it earlier raised a similar amount of debt under the negotiated Pakistan Energy Sukuk-I at an interest rate of Kibor plus 80 basis points.
“The secondary debt securities’ market in the developed world is in several equity markets,” PSX CEO Farrukh H Khan said, adding that the introduction of the market-maker for debt securities would open new investment opportunities for traders at the bourse.
“We are in negotiations with other financial institutions which are interested in becoming market-makers for debt securities,” he said without naming any financial institution.
The development of debt market will create an enabling environment for the entire economic system. “The size of mortgage financing is larger than the gross domestic product (GDP) in many developed countries. The development of the secondary debt market (at PSX) will prove worthwhile for the economy and increase chances of growth in economic activities,” Bajwa said.
“Growth of the debt market is a strategic objective of the PSX and critical for the economic growth of Pakistan,” the PSX CEO said.
There are around 550 companies listed at the PSX including around 25 debt securities. They are worth Rs7.47 trillion. If the size of debt securities increases to 10-20% of equity securities in future, this will increase market capitalisation by billions of rupees or over a trillion rupees.
Responding to a question as to what would be the difference between the debt securities being traded before and after the introduction of market-maker, Bank Alfalah Treasury and Capital Markets Group Head Ali Sultan said the availability of liquidity by the market-maker would multiply trading volumes in the debt market.
“At present, volumes remain low, if someone wants to sell debt securities, there are no buyers most of the time and vice versa,” he said.
The market-maker will initially provide liquidity for the government-backed debt instruments. Later, it will do the same for securities of the private sector.
PSX had been striving for developing the debt market for several years. Earlier, the Securities and Exchange Commission of Pakistan (SECP) amended a law that allowed commercial banks to offer services as the market-maker.
The introduction of the market-maker will usher in a new chapter in the growth of debt market, thereby ensuring a deep, liquid and transparent secondary debt market in Pakistan. “This will benefit both (bond) issuers and investors,” the PSX CEO stated.
The move would further develop Pakistan’s debt market to regional and international levels, he highlighted.
At present, the domestic market is primarily focused on bank loans for financing requirements. This needs to be complemented by capital market instruments as an alternative and effective financing medium, the bank CEO said.
“Corporate sector should be encouraged to tap capital markets so that borrowers can diversify their sources of funding while investors have multiple options for investment,” he said.
Published in The Express Tribune, November 18th, 2020.
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