Importance of Bond Market Development in Pakistan
The Importance of Bond Market Development
Since the Asian crisis, considerable attention has been paid to the role of corporate bond markets in overall. Crises like the Asian one gave following lessons:
Foreign exchange exposures can be devastating
Foreign capital flows can be volatile
The risk of liquidity and maturity mismatches can be very acute and is a source of systemic risk
These risks can be mitigated through the development of financial sector and this goes hand in hand with the need for substantial mobilization of local savings, with key role for the local debt market and local stock market
Emergence of fixed income markets is the recent feature predominantly spread onward 1970 period. It is a market falling in between equity market and bank finance. So it suits to that class of investors/borrowers who either are not considered high risk taking investors/borrowers or act under relatively safe parameters within bank finance.
Development of zero coupon instruments and later innovations have paved the way for development of a market which is quite complex as compared to bank and equity finance markets, however it provides new heights to the investors as well as issuers to match their requirements.
Development of local bond market provides:
Diversification of financial sector into equity, debt and bank financing
Effective allocation of capital competition in financial sector
Supports infrastructure development, privatization, securitization, and the rise of new institutional investors requiring long term assets to match long term liabilities
Reduces the currency, interest rate and funding exposures risks
Allows more efficient allocation of savings by reducing banks role that also reduces the element of political interference
Allows borrowers to use capital that is tailored to their assets and operations
Provides retail and institutional investors with several high quality and liquid domestic saving vehicles
Since the Asian crisis, considerable attention has been paid to the role of corporate bond markets in overall. Crises like the Asian one gave following lessons:
Foreign exchange exposures can be devastating
Foreign capital flows can be volatile
The risk of liquidity and maturity mismatches can be very acute and is a source of systemic risk
These risks can be mitigated through the development of financial sector and this goes hand in hand with the need for substantial mobilization of local savings, with key role for the local debt market and local stock market
Emergence of fixed income markets is the recent feature predominantly spread onward 1970 period. It is a market falling in between equity market and bank finance. So it suits to that class of investors/borrowers who either are not considered high risk taking investors/borrowers or act under relatively safe parameters within bank finance.
Development of zero coupon instruments and later innovations have paved the way for development of a market which is quite complex as compared to bank and equity finance markets, however it provides new heights to the investors as well as issuers to match their requirements.
Development of local bond market provides:
Diversification of financial sector into equity, debt and bank financing
Effective allocation of capital competition in financial sector
Supports infrastructure development, privatization, securitization, and the rise of new institutional investors requiring long term assets to match long term liabilities
Reduces the currency, interest rate and funding exposures risks
Allows more efficient allocation of savings by reducing banks role that also reduces the element of political interference
Allows borrowers to use capital that is tailored to their assets and operations
Provides retail and institutional investors with several high quality and liquid domestic saving vehicles
References: 1. Farhan Hameed, “Fostering a corporate bond market in Pakistan” October 2006 2. Muhammad Arif, “Developing Bond market in Pakistan”, paper written for IInd SPB Conference on Fixed income markets and emerging market economies, December 2006 3. Ishrat Hussian, “Pakistan’s Financial Sector; a Roadmap for 2005-2010”, SBP 4. Marshall Mays, “The importance of domestic institutional investors in Pakistan’s developing bond market”, EAAL, December 2006 5. Muhammad Arif, “Structuring Asian Bond market form Demand Side; case study of Pakistan” March 2004