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Submitted by:

Marya Qureshi

Mohammad Arish Paracha

Muhammad Bilal Saeed

Nausheen Shahid

BBA 5 ʹ 2

Submitted to:

Ms. Tahira Marium Jaffery

Submitted on:

December 30, 2009





We offer our thanks to Ms. Tahira Marium Jaffery, whose encouragement, guidance and
support at all levels enabled us to develop an understanding of the subject.

Lastly, we offer our regards and blessings to all of those who contributed data over the internet
and made them publically available.

Nausheen Shahid

Marya Qureshi

Mohammad Arish Paracha

Muhammad Bilal Saeed









Trends 8


Defense Saving Certificates 10

Special Saving Certificates 10

Bahbood Saving Certificates 10

Pensioner͛s Benefit Account 10

Trends 10



Overall investment in Mutual funds 15

Growth in Mutual Funds in Pakistan 16

Trends in the Mutual Funds Industry 17



Voluntary Pension System (VPS) 21

General Provident Fund 22




National Savings represent a key determinant of long-term investment prospects of a country,
and play a crucial role in the economic growth and development of an economy. Pakistan has
generally been classified among those counties which are characterized by a low savings rate:
the highest ever savings rate of 21.3 percent in FY72 is still much lower than its regional
counterparts with a similar level of income. Various factors, such as the continued budgetary
deficit sustained by the government sector, consumption-oriented behavior of the household
sector, high inflation since FY05 which has reduced the real rate of return on savings, and
limited availability of long term savings options and instruments are some of the major
contributory factors towards this trend. The existing savings instruments, other than deposits of
the banking sector, such as mutual funds, pension funds etc. are still evolving and have not yet
generated sufficient resources to meet the domestic investment needs.

Financial savings, a component of national savings, continues to be small, in addition to varying

considerably from years to year. Specifically, while the average national savings rate during
FY00-08 was 17.5 percent, the average financial savings rate was only 6.6 percent. The
components of financial savings indicate that deposits of the scheduled banks constituted 54.5
percent of financial savings during FY00-08, followed by funds mobilized through national
savings schemes, cash balances of the private sector (currency in circulation) and funds
mobilized by the NBFIs. These components of the financial savings clearly reflect the dominance
of the banking system in the overall financial sector.1




 c Vc
While Asia is awash with liquidity which finances the developed world͛s financial imbalances,
Pakistan continues to be amongst the low savers.

The highest national savings rate of 21.4% in the history of Pakistan2 is much lower than other
regional countries at the same income level. As investment activities in the economy are
financed by domestic and external savings (in the form of foreign exchange inflows), the low
savings rate has strong implications for continued economic growth, especially in the long run.
While this low savings rate reflects the consumption preference of economic agents, the role of
an incentive mechanism for savings offered by the financial sector can be hardly over-

The graph is evident that savings rate has been on the downslide since 2003, while inching up
marginally in 2007. The low savings rate has negative implications for the sustainability of the
current strong economic growth. Recent data shows a consistent gap between financial &
domestic savings is also a cause of concern with regard to financial stability. Pakistan is
categorized among the emerging economies of Asia due to its improved economic
fundamentals, but savings rate is visibly lower as compared to other emerging economies.

Taking into account data from FY60 onwards



A recent study shows that of the total turnover in the equity market 85% is at KSE, 14% at LSE
and 1% at ISE. Till now 671 companies are registered in KSE and at the end of 2007 the market
capitalization was 49% of the total GDP of Pakistan. In 02 Pakistan was reported to be the best
performing market according to the US magazine BUSINESS WEEK. Furthermore according to
turnover ratio Pakistan͛s market was ranked first in 2003 and third in 2006.

There was a drop in listed companies and market capitalization in 2002 basically due to the
implementation of corporate governance in 2002.

Since 2001 onwards the market has experienced continuous growth, the KSE 100 index has
increased from 1,521 in 2000 to 12,370 in 2003, an increase of 713%, while the market
capitalization has increased from Rs. 392 billion to Rs. 3,604 billion for the same time period, an
increase of 819%. The listed capital on the other hand has increased from Rs. 236.4 billion in
2000 to Rs. 535.5 billion in 2007. Turnover of shares has gone up from 48 billion in 2000 to 105
billion shares in 2006 while the daily turnover has increased from 202 million shares in 2001 to
320 billion shares in 2006. The portfolio invest also has show an incredible increase from -$140
million in 2001 to $1,819 million in 2007.

Many factors have contributed to the bullish nature of the market since the last seven years
(i.e. 2000 to 2007)

? Improved macroeconomic condition

? Low interest
? Excess liquidity
? Better regulation and control in the market
? Speedy privatization process example NRL and PTCL
? Foreign investors to repatriate their funds without any restriction


? Rescheduling of foreign debts and prepayments of expensive loans
? Lower inflation
? Sound fiscal and monetary policy

In April 2008 KSE achieved a major milestone when KSE-100 index crossed the level of 15000
for the first time in the history peaking at 15737.32 showing a 7.8% increase in the year making
it the best performer among the major emerging market. However, this was short lived as the
market took a bearish trend soon after.

LSE also has shown significant increase in performance 2005 onwards, the turnover increased
from 5.6 billion shares to 11.9 billion shares in 2007 while the total paid up capital has
increased from 469.5 billion in 06 to 491.4 billion in 07. The index on the other hand decreased
from 4379.4 point in 06 to 4249.3 points in 07. The market capitalization has shown an increase
from Rs2693.3 billion to Rs.2948.2 billion for the same time period.



›V c

Figure 5clearly shows that deposits held by the scheduled banks constitute around 60 percent
of financial savings. Specifically, the share of deposits in financial wealth has steadily increased
from 48.8 percent in FY00 to 58.7 percent by end FY08. This increase primarily reflects the
strong performance of the banking sector over the same period. Compared to strong deposit
growth during FY03-07, there is visible slow down in deposit growth during FY08. The share of
financial savings mobilized by the scheduled bank declined to 58.7 percent by end FY08
compared with 60.4 percent in FY07.3

? An increase in deposits was seen from 2000 to 2003 mainly due to:
V? An increased of inflow of home remittances
V? Increasing income due to surge in economic activities

? A small decline was seen during 2003:

V? Higher retirement and low disbursement rate.

? An encouraging development during the year 2003 was a further decline in net NPLs of
the banking sector by Rs 2 billion to Rs 232.6 billion.

? The deposit rates offered by banks have risen by 47 basis points from 3.72 percent in
January, 2007 to 4.19 percent mainly due to stiff competition offered by National Saving



? Bank deposits have shown a downward trend from 2007-08 this is largely attributable
V? Slow down in overall economic activities
V? Increase in nominal consumption on account of strong inflationary pressures.
V? The increased extent of negative real deposit rates (despite the introduction of
minimum floor on deposits 5 percent in June 2008) on account of high
inflationary pressures.




2000 2001 2002 2003 2004 2005 2006 2007 2008



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Central Directorate of National Savings (CDNS) is an attached department of the Finance
Division which performs deposit bank functions by selling government securities through a
network of 368 savings centers, spread all over the country. There are about 3.6 million
investors in National Saving Schemes (NSS); some of the following are popular schemes


These were introduced by the government in 1996 and are available for in the range of Rs. 500
ʹ 1,000,000. The maturity period of these certificates is 10 and they can be liquidated anytime
after a month. Zakat is collected once at the time of actual encashment, these certificates can
also be transferred from person to person and place to place on request of the purchasers. The
certificates are available at National Savings Centers, Pakistan Post Offices, Scheduled Banks
and the State Bank of Pakistan, also at HBL & UBL in UAE.

"!    ! 

These were introduced in 1990 and are available in the same denomination as the defense
certificates with a maturity period of 3 years. The profit is paid biannually and is subjected to
10% withholding tax. They are available at the same places as the defense certificates.

› #    ! 

These certificates were introduced for senior citizens and widows and have maturity of 10
years. The profit payment is made on monthly basis and is exempted from Zakat and
withholding tax. These certificates are available at National saving centers only.

$ › V!!%

This scheme has been introduced for the retirees of federal and provincial government, armed
forces and autonomous bodies. The profit is paid monthly and is tax and Zakat exempted. They
are available only at National saving centers only.

The year 05-06 saw an increase by Rs. 8.8 billion as compared to a net decline of Rs. 39.4 billion
in 04-05 in national saving certificates. The retirements made in the year were as follows

? Rs.57.7 billion in Special saving certificates

? Rs.15.7 billion in regular income certificates
? Rs.7.6 billion in defense saving certificates

Net accruals on the other hand increased for the following

? Rs.59.6 billion for bahood saving



? Rs.16.4 billion for pensioners benefit accounts

Net accruals with the NSS increased by Rs. 44.6 billion during July-March 2006-07 as compared
to an increase of Rs. 7.0 billion in the same period last year. Net accruals of Special Saving
Certificates increased by Rs. 3.7 billion during July-March 2006-07 as against a huge decline of
Rs. 45.3 billion in the same period last year. Net accruals of Saving Accounts and Special Saving
Accounts also showed increase of Rs. 1.8 billion and Rs. 3.2 billion respectively as against their
decline of Rs. 5.6 billion and Rs. 0.9 billion respectively, in the same period last year. Bahbood
Saving Certificates and Pensioners Benefit Accounts continued to show positive growth as net
accruals of these two popular saving schemes accumulated by Rs. 48.2 billion during the first
nine months of the current fiscal year. Higher investment with the NSS resulted partly due to
institutional participations, which was allowed since 1st October 2006 and partly due to higher
rates of returns on various savings schemes compared to the previous years.

 c  ›  



2000 2001 2002 2003 2004 2005 2006 2007 2008

In the year 07 the government keeping in view the interest rate trends made the following
changes in nominal rates of return

? Increase from 9.46% to 10.03% for defense saving certificates

? Increase from 8.6% to 9.17% for special saving certificates
? Increase from 0.5% to 0.6% for saving accounts
? Increase from 11.04% to 11.52% for Bahbood certificates and pensioners benefit


Following these changes the real deposits rates became positive for all except saving accounts
and prize bonds. From 05-07 the weighted average real deposit rate remained positive in the
NSS showing a good return for the investors.

In October 09 the public and private saving due to NSS reached the highest level since Aug FY10
of 73.11% increase. The volume of national saving in the current grew to Rs.18.718 billion and
the government collected Rs.25.601 billion in comparison to Rs.6.89 billion collected previous
year while total saving amounted to Rs.88.515 billion.

During a single month of October 2009 the following amount were collected on different

? Rs. 1.136 billion on Defence Saving certificate

? Rs. 5.441 billion on Regular income certificates
? Rs. 5.639 billion on Special saving certificates
? Rs. 3.042 billion on Prize bonds

The improvement in saving rate in 2009 after a decline in 08 was minimal, remaining well below
the average of 17.7% for the period FY00-FY07. The saving rate rose from 13.4 in the previous
year to 14.3% in FY09 due to a relative fiscal consolidation as public savings increased to 1.2pc
of GDP in FY09 as against dis-savings of 1.8% during FY08. The deterioration in saving rate for
public and private sector continued for a second consecutive year declining to 13.2% of GDP
which is the lowest level since FY99.

The decline according to SBP in private saving occurred due to:

? Steep drop in real estate and equity prices

? Negative real interest rates on saving instruments
? Increase in real private consumption expenditure by 5.2% in FY09

Also the saving aspect of GDP declined for the third consecutive year in FY09 showing that the
increase in national saving is just because of the remittances. Low saving has many adverse
effects, decreases the availability of loans and restricts the growth on sustainable basis.

The average national saving of Pakistan has remained for the period FY60-FY09 has remained
very than the other Asian countries at 15.01% of GDP. SBP has identified the following as
reason to low level of saving in Pakistan:

? Low income,
? Low level of financial inclusion,


? Saving in kind,
? High propensity to consume,
? Avoidance of interest-based financial system due to religious beliefs
? Culture of conspicuous consumption

It has become imperative to increase domestic saving as the concerns of SBP regarding the drop
in capital flow to developing countries is likely to further decrease in the coming years.
Therefore for countries like Pakistan which are marcoeconomically unstable will not be able to
take loans at low rates hence it is necessary to establish a strong saving institutions along with
establishment of efficient secondary debt market to increase participants in Governments
debts and offer range of returns on saving.4



 ›Vc cV cV c

? Financial savings through NBFC͛s have seen a rise since 2002.The share has risen from
2.18% to 5.2% in 2008. This tremendous rise is because of the buoyant growth in mutual
fund industry.
? However the NBFC͛s deposits drops to 0.02% only in 2008. The reasons for this are as
V? There has been a phenomenal rise in the mutual fund industry since 2007 which
was because of the robust performance of the equity and money markets. High
profits were reported in the mutual fund industry since 2007 and this added 20 new
mutual funds into this industry.
V? Moreover constant decline in NBFC͛s deposits is largely because of number of
factors which include
ð? Ongoing mergers and acquisition of NBFC͛s with the commercial bank.
ð? Weak resource mobilization activities in presence of credit line
ð? Higher interest rates
ð? Stiff completion from commercial banks




2000 2001 2002 2003 2004 2005 2006 2007 2008




V  c Vc
Mutual fund industry started in Pakistan in 1960͛s with two state owned funds, National
Investment Trust (NIT) and Investment Corporation of Pakistan (ICP). The industry has
witnessed an impressive growth rate both in numbers and volumes particularly since 2003.
Though the size of the industry remains small at 4.4% of total financial sector assets and form a
small part of the GDP its significant contribution and growth potential as an important
constituent of the financial sector is irrefutable. Mutual funds provide a direct completion to
bank deposits and National Saving Schemes.5

  &  %%  %'





2002 2003 2004 2005 2006 2007 2008 Q1-2009


Performance of Non-Bank Finance Sector
Source: Performance Review of Non-Bank Finance Sector Chapter 10


(#  %%  %   ) ?
The growth in mutual funds in Pakistan is attributed to

? Liberalization of the sector

? Economic growth and macro-economic stability that attracted investors
? Increased liquidity with the institutional investors
? A buoyant stock market that provided mutual funds with good returns in form of capital

Another reason why the industry has grown and attracted the savers is because of the variety
of funds that are being offered to the savers. By the close of year 2008 it showed that:
















  # %%  % c%*

? Since banks are not passing on the benefits more and more of investors are now turning
to the mutual fund industry. The growth in various types of categories of funds shows
that investors are now aware of different modes of investment options.7
? In 2001 the industry witnessed a negative trend. The reasons were:8
V? High dependency ratio
V? Financial repression
V? Unpredictable returns on savings
V? Low and fluctuating growth rates of per capita income
V? Poor investment climate
? Growth in seen from 2002 to 2003.There are two reasons for this positive trend
V? First being that private sector was allowed to set up fund and transfer of ICP-
managed close fund which boosted the size and number of funds which
increased the efficiency and the quality management of fund.

Assessing the Mutual Fund Industry Pakistan and the Gulf Economist March 17-23, 2008


V? Secondly in 2003 Pakistan͛s equity market was one of the best performing equity
markets in the world and the Index broke it all time high record to reach as high
as 3402.5points.9
? Moreover a tremendous growth is seen from 2006 to 2007.The reason for the growth
was that during this time period SECP removed the condition of having mandatory
foreign affiliation for asset management companies. This helped lower barriers to entry
and many new fund managers came in resulting in the rise in 2007.
? However in 2008, since equity fund dominated the industry growth in NAV and this fund
is directly related to the performance of stock market, the stock market crash in 2008
shows negative trend for this.



Like most developing countries, Pakistan has weak provisioning for pensions. People largely rely
on the next generation to provide for them after retirement. Most governmental jobs are
covered by unfunded pensions ʹ i.e. current employees will be paid pensions by taxing the next
generations. Some private sector employees and the organized sector labor are covered by
funded pensions. Funds are primarily invested in government bonds, which will be repaid by
the next generation. A very large section of the population has no pension provisioning and
thus they are totally dependent on the joint family support system. The only organization to
allow for portability of pension rights is EOBI. Another aspect to pensions is that most pension
savings and incomes in Pakistan are tax free, but some long-term savings which can be used
towards retirement by individuals are entitled to tax deferral.

The scope for saving and pensions͛ schemes needs to be enlarged to the untapped private
sector. This will serve to increase post retirement cash flows for individuals and will be an
instrument for mobilizing long-term savings.

Currently, schemes in the public sector include:

? Civil Services Pension Schemes

? General Provident Fund (GPF)
? Gratuity Scheme

Whereas schemes in the private sector consist of:

? Employees Old Age Benefit Institution (EOBI)

? Provident Fund Schemes
? Gratuity Schemes
? Pension (Superannuation) Schemes
? Voluntary Pension System (VPS)

Private pension funds had a remarkable upsurge across the developed and emerging countries
during last decade. In Pakistan currently, pension schemes exist primarily in the government
sector, which operate on the defined-benefit (unfunded/pay as you go basis) system, while
such schemes are available on a limited basis in the private sector. The public sector pension
schemes entail huge fiscal costs, and give rise to sustainability issues for the government. The
pension schemes in private sector exist in the form of gratuity and provident funds offered by
various employers. This form of savings is used by the employees usually to either pay off their
liabilities or for other consumption purposes when they switch jobs. The possibility of
bankruptcy of the firm and dependency on the same employer under a defined benefits
pension scheme makes the gains attainment more risky. Thus, most of the self employed and


private sector retirees, not covered by private & government schemes, rely on the joint-family
system which allows them to live with their children even when they don͛t have retirement
savings. However, considering the cultural shift and rising life expectancy, the current system
doesn͛t seem feasible in the long run for Pakistan.10

    "   #


›  11

 31 46 63
  19 23 31

 50 68 94

   "   # 






The Rationale, Implementation Challenges and Status of Pakistan͛s Pension Reforms by Yawar Zia, Additional
Finance Secretary (Regulation), Ministry of Finance



Government pension schemes (especially military) are extremely generous, relative to

government pay, coupled with benefits such as free medical benefits. A large cost for this is
being paid by the rest of the country including the very poor. More importantly there is a large
deferred and unaccounted for liability being passed on to future generations in the form of
Government Pension Schemes. So a Private Pension Scheme by the name of EOBI (Employees͛
Old-age Benefit Institution) was established in 1976, with the core objective of providing
monetary benefits as pension to the workers of private industrial and commercial
establishments across the country.12

The cost of pension has increased sharply from Rs.14.6 billion in 1993-94 to about Rs. 40 billion
in year 2002-03, as more and more workers are retiring and the number of pensioners is rising.
According to figures in year 2003, there were two pensioners for every three workers than
workers. Pension spending now consumes more than one tenth of the tax revenues.13

% *  *& +,

VPS is a relatively new induction to the pension framework in Pakistan. It͛s a scheme that
provides an opportunity for individuals who have no retirement benefits to save for retirement
in a tax efficient way. It͛s mainly designed to target self-employed individuals and workers
without occupational pension plans. An individual can open a pension savings account with
registered VPS pension fund manager if their employer does not provide any occupational
pension plan. At the age of 60 or earlier (in case a individual develops disabilities), the individual
can withdraw 25% of the amount in 'individual pension account', while the remaining amount
buys an annuity contract from a life insurance company of the individual͛s choice. All other
withdrawals would be subject to deduction of withholding tax and other conditions laid down
in the Income Tax Ordinance.

Assessing the Economic Well-Being of Elderly Persons in South Asia by S Irudaya Rajan


Under VPS, asset management companies and life insurance companies, duly licensed by SECP,
would be authorized to offer and manage 'Pension Fund Schemes' (PFSs). Such entities shall be
referred to as 'Licensed Pension Fund Managers'. Life insurance companies would also be
authorized to offer 'Annuity Plans' under the system.14

The Securities and Exchange Commission of Pakistan (SECP) has drafted the 'Voluntary Pension
System Rules 2004' for governing the introduction of the VPS in Pakistan.


General Provident fund is the pensions saving scheme of the Government of Pakistan. All
employees have to pay a certain amount of money from their monthly pay towards saving for
their retirement. Contribution to the general provident fund was made compulsory in 1925.




2000 2001 2002 2003 2004 2005 2006 2007 2008

General Provident Funds have witnessed a steady increase through the years, but it faced a
decline from 2006 to 2008. This was due to a steep decline of 390 bps in savings rate in 2008 as
compared to 2007. This decline is largely attributed to slowdown in economic activities
(achieving lower then targeted GDP growth of 5.8 percent in 2008) and higher inflationary
pressures. The prolonged political transition, energy crises and worsening law and order
situation also led to lower savings rate.