Dear Friends,

“Whats in a name? That which we call a rose by any other name would smell as sweet” – Romeo & Juliet 

Shakespeare was wrong. Names matter.  

Last week I was talking to a fund manager from Singapore and I mentioned to him that until 2008 Pakistan Stock Exchange (then called Karachi Stock Exchange) used to have daily traded volumes of around $500m. I told him that currently there is no leverage available in the market for share financing. This is why the daily traded volumes have shrunk by more than 90% to less than $50m.

Pakistani banks are not too keen to lend in general. They don’t need to, given the high returns on government bonds. As a result, most of the volumes on PSX are cash volumes. He had a great suggestion.

He suggested that based on the experience of regional markets, especially in the crypto-exchange eco-system, there should be a peer to peer (P2P) fund, which could solve this market failure. Savers could invest in a pooled fund, which then could provide loans to borrowers to fund their purchase of stocks.

While this sounded like a wonderful innovation and a neat solution, the dilemma is that this is very similar to the financing product which was popular in Pakistan, called “Badla”. Badla was phased out in 2008 by the regulator. They wanted banks to provide loans. A desire which remains a wish.

Liquidity is critical for any stock market. Most global investors cannot invest in illiquid stocks due to their risk management requirements. Out of the 580 odd listed companies, fewer than 14 stocks in Pakistan have greater than $1m of daily traded volumes, which is considered to be the minimum investible threshold for global investors. Liquidity also drives the earnings for the capital market infrastructure provides; the brokers, the exchange, and the clearing and settlement systems. The whole sector has shrunk ever since leverage was pulled out. 

High liquidity used to be a major strength of Pakistani’s capital market. In fact, in 2005, Spencer White, the Asian Strategist of Merrill Lynch highlighted this high liquidity in his initiation report, which drove the market rally between 2005-2008. He wrote that the daily traded volumes on KSE were greater than many East Asian markets combined. KASB was the local partner of Merrill in those times. Spencer, and later his colleagues had Pakistan as their top pick in the Asia. 

That is of course history. A side note on the mention of history – VCAST has published a couple of videos on the history of KASB Group (click here ) which might be interesting for some. 

Before attempting to sleep tonight, I saw a recording of a recent Webinar on Pakistan Capital markets organized by Pakistan Institute of Development Economics (PIDE) – a state backed think tank and university. One of the speakers, Mr. Khalid Mirza – identified phasing out of badla financing as a policy mishap which shrunk equities market in Pakistan. He observed that perhaps the regulator didn’t like the word, “badla”. It sounded too local, too negative. He said perhaps it sounds similar to “hawala” which was a traditional way of cross border money transfer, which was deemed to have lose KYC and AML controls. While my musings are mere humble opinions, Mirza’s assessments matter. He was the Chairman of SEC Pakistan, the founding Chairman of Competition Commission and prior to that spent many decades as a financial specialist at the World Bank Group. Until last week he was the Chair of SECP’s Policy Board and he now teaches at LUMS. 

Watching his talk ended my attempt to sleep before waking up for Sehri (it is the month of Ramadan, which means I need to get up at dawn (3:30am) for my last chance to eat and drink before sun set (8:40pm)). 

Mr. Mirza has a valid point. I also blame the name. It is interesting that he drew parallel with another financial product with a local name “hawala”. Hawala was the standard way used by immigrants to send remittances back home prior to 911. Stricter compliance controls have led to phasing out of hawala. However, that is not the end of it. The primary claim to fame of Transferwise, a fintech Unicorn and darling of the UK fintech scene, was peer to peer matching of remittances in the sender and recipients corridor. So for example, if I was sending £100 to someone in Pakistan, they would match it with someone who wants to send PkR20,000 to the UK. The net settlement will be zero and no money will actually cross borders. This was hailed as a major financial innovation and the genius of the founders (click here for an The Telegraph’s coverage of this). The FT quoted me on a story on TransferWise back in 2014 (click here) – yes I am missing the happy days of covering European tech. 

Peer to peer matching of currency transfer was previously called hawala.

Names matter 🙂

 I hope and pray that you and your families stay safe and healthy. If you haven’t heard it yet, here is the link to a motivational song by 21 The Band, which we published as a tribute to the resilience, courage and humanity of Pakistani nation in the times of crisis (click here and enjoy). 

I am, yours truly,
Ali Farid Khwaja


* This is not research material and there is no investment recommendation in this blog. These are my personal views and do not represent the views of KASB Research team. 
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Pakistan Macro Blog: Whats in a name?

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