Non-deposit-taking, non-listed NBFCs: SECP exploring possibility of introducing regulatory regime

The Securities and Exchange Commission of Pakistan (SECP) is exploring possibility of introducing an appropriate regulatory regime for non-deposit-taking and non-listed NBFCs and ensuring that only licensed entities should be engaged in investment banking activities.
According to Annual Report-2011 issued by the SECP, the SECP is committed to reviving the investment banking sector and necessary amendments were made to the regulatory framework to allow investment banks to undertake brokerage business from their own platform instead of forming a separate company. The objective was to encourage investment banks to focus on providing non-fund based services, to play a crucial role in the capital market, to promote corporate brokerage houses culture and to address the corporate governance issues in the brokerage industry. The SECP is currently exploring the possibility of introducing an appropriate regulatory regime for non-deposit-taking and non-listed NBFCs and ensuring that only licensed entities should be engaged in investment banking activities.
The report said that the investment banks are an integral component of the Pakistani financial infrastructure. Pakistan's corporate sector has a perennial need for services such as investment advisory, corporate restructuring, distressed assets acquisition and disposal, merger and acquisitions, equity and debt financing.
The need for these services will further intensify with the economy and the financial markets maturing further and thus offers bright prospects for investment banks proficient in these areas. Therefore, the investment banking sector should refocus the current strategy of imitating commercial banks and instead develop competitive advantages in specialised areas where commercial banks lack these capabilities.
The SECP's report added that the investment banking started to take roots in Pakistan in the second half of the 1980s. A broad range of business services was envisaged that included money and capital market activities, project financing, corporate financial services, and operations in call and money market. At present, there are only seven functional investment banks operating in Pakistan as compared to 13 in 2005.
Significant reasons for the downfall of investment banking sector are: Firstly, small capital bases with limited ability to absorb significant shocks. Secondly, focus on quasi banking activities. Thirdly, maturity mismatch in their assets and liabilities. Fourthly, failure to develop competencies for delivering non-fund based services. Fifth, lack of relevant expertise and acumen. Sixth, failure to develop stable source of long-term funds. Seventh, high cost of funds is also one of the reasons for the downfall of investment banking sector. Eight, limited capacity to expand outreach is also one of the reasons for downfall of investment banking sector. Ninthly, the rise of universal banking is also one of the reasons for the downfall of investment banking sector. Ninthly, commercial banks are increasingly taking up the activities, which were once the exclusive domain of investment banks, report added.