ISLAMABAD, 7 April 2003 — Are investors and business taking to new financing modes? The answer, analysis of the financial sector and the capital market confirms, is “yes.” Noticeably its coming about at a time when the State Bank of Pakistan (SBP), the central bank, has eased the monetary policy and banks have accumulated piles of liquidity. All banks, including state-owned and private, as well as foreign-based, are beset with these problems, as credit offtake by private business and industry has not picked up, a great deal.

It is also true that a major slashing of the lending rates that has taken place in the last few months, has gone to the benefit of potential blue-chip and corporate borrowers, as well as financially sound projects. But, interest rates for the small fries are still close to 10 percent. Financial analysts feel that its the small, and new borrowers, the banks should have gone after. But, strange are the ways of Pakistanis bankers who are not accustomed to “market” credit or innovate with new instruments and products.

The latest favorite mode seems to be the Term Finance Certificates (TFCs). These are being more often floated than ever before. TFC’s also are the instruments that are being heavily oversubscribed as investors shift their sights and gears away from the traditional instruments and financial sources. A vast variety of borrowers — ranging from leasing companies to textiles mills — have floated TFCs in just these past weeks. The trend gets strengthened, and goes on, almost continuously.

The first nine months of the current fiscal 2003, have seen 18 TFCs collecting Rs.9.5 billion. This fiscal started at an upbeat note for TFCs. In the first quarter eight TFCs were offered for a total amount of Rs.4.6 billion.

The second quarter saw the number of TFCs decline to only three with an amount of Rs.2.2 billion. But, the number, once again, rose to seven in the just-ended third quarter with an amount of Rs.2.66 billion. These seven issues have ‘A’ category rating, and were oversubscribed. Their coupon rate is in a 11 to 12 percent range, concurrent to their tenor, that market analysts describe as “healthy.” The capital market records indicate that an average Rs.5 billion were raised annually in the last three years that have seen a total of 22 TFCs coming into the market.

The trend comes in the wake of spiraling stock market scrips as only weeks ago the benchmark Karachi Stock Exchange KSE-100 index rose beyond 2,900 although it later started moving in the 2,500-2,700 range.

As of this week, the overall value of the listed TFCs is Rs.28 billion. The total amount until Dec. 31, 2002 was Rs.25 billion. Will the TFC boom go on? The market trends indicate that it most probably will, barring a financial miracle that opens up newer fields. Financial market analysts estimate that there still is a very big demand gap and the TFCs can absorb a lot more investment in the prevailing capital market scenario.

In the weeks to come, several other borrowers are planning to issue TFCs. Market sources point out that these are likely to include more leasing companies, textile mills, as well as Ittehad Chemicals.

The textile sector was the key borrower through TFCs in the third quarter when three textile and spinning mills — Gulshan, Paramount and Gulistan — launched the certificates for Rs.1.0 billion. They were followed by leasing companies, also three in number, and included Paramount, Security, and KASB, with a combined Rs.824 million intake.

Textile units were prominent in TFC borrowing in the third quarter, but leasing companies have generally dominated the scene for these certificates. Quetta Textiles had launched TFCs in October, Union Bank and Abu-Dhabi- based Bank Al-Falah in December, 2002.

One reason for leasing companies being in the fore is heavy recourse by general consumers and institutions to acquire autos, equipment and capital good on leasing. That, in turn, has pushed the demand for autos rapidly.

The auto-makers are reporting more than doubling their sales and output, with long lists of orders still to be filled. A number of TFCs issued so for, were floating rate instruments, but a majority of these also included coupon ceilings and floors to protect issuers and investors, respectively. “However, in the event, the collapse in interest rates have rendered the ceiling redundant — practically all floating rate bonds have hit their floors, providing ample opportunity for investors to book capital gains,” SBP says. Most TFCs were anchored to either the discount rate or the five-year Pakistan Investment Bonds (PIBs).

The current financial sector developments are linked to gradual easing of the monetary policy by SBP, over the past several months. It has continued to slash the benchmark discount rate, at one time, from 14 percent that declined to 9.0 percent until Nov. 17, 2002. It was further cut to 7.5 percent effective Nov. 18, 2002.

Over the last two years, the yield on 10-year PIBs is down from 14 to 4 percent. The six-month Treasury Bills (TBs) are down from a high of 13 percent to 2.2 percent.