5478

Study Guide
NON-BANKING FINANCIAL
INSTITUTIONS IN PAKISTAN
BS (ACCOUNTING & FINANCE)
Course Code: 5478 Units: 1–9
DEPARTMENT OF COMMERCE
ALLAMA IQBAL OPEN UNIVERSITY
ISLAMABAD
(All Rights Reserved with the Publisher)
First Edition ...................................... 2023
Price .................................................. Rs.
Typeset by ......................................... M. Hameed Zahid
Printing Incharge ............................... Dr. Sarmad Iqbal
Printer ............................................... AIOU-Printing Press, Islamabad.
Publisher ........................................... Allama Iqbal Open University, H-8, Islamabad
ii
COURSE TEAM
Chairman: Prof. Dr. S. M. Amir Shah
Course Coordinator: Mr. Moazzam Ali
Writers: Mr. Moazzam Ali
Reviewers: Prof. Dr. S. M. Amir Shah
Layout: Mr. Hameed Zahid
Editor: Mr. Fazal Karim
iii
INTRODUCTION
The growth and innovation in the finance industry is bringing new changes in the
structure and tools of the financial institutions. A wide variety of new forms of
financial institutions are being developed to meet the needs of entrepreneurs and
new investors’ class. Gone are the days when only banks were the financial option
for the investors and depositors. A full-fledged new industry of financial
institutions has been developed to meet the needs of the modern economy which is
called the Non-Banking Financial Institutions whose objectives are to facilitate the
investors and the businesses in the financial markets.
This book has been designed for the graduate level students to educate them on the
working and importance of the Non-Banking Financial Institutions in Pakistan
(NBFIs). These NBFIs include mutual funds, leasing companies, investment
finance companies, pension funds, insurance companies, private equity funds,
venture capital funds, housing finance companies, modarabas, stock exchanges,
investment advisory companies etc. Presently, these NBFIs are expanding their
operations and have huge capital at their disposal to invest in the suitable schemes.
In this book, I have tried to explain the complex concepts of the NBFIs in simple
language to facilitate the learning level of students. Each unit includes real life
examples and end of unit exercises have been designed to provide practical learning
to the students. Special importance has been given to the regulatory aspects and all
the important rules and regulations related to the NBFIs applicable in Pakistan have
been compiled in this book.
Errors and omissions are expected as the journey for intellectual work never ends.
Kindly email such discrepancies and errors to avoid them in upcoming editions.
Moazzam Ali Tarar

Assistant Professor
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CONTENTS
Page #
Introduction ....................................................................................................... iv
Unit–1: Introduction to NBFIs ........................................................................ 1
Unit–2: Regulatory Framework of NBFCs ..................................................... 15
Unit–3: Securities & Exchange Commission of Pakistan ............................... 47
Unit–4: Mutual Funds ..................................................................................... 63
Unit–5: Modarbas............................................................................................ 81
Unit–6: Leasing Companies ............................................................................ 119
Unit–7: Investment Finance Companies & Home Finance Companies .......... 135
Unit–8: Pension Funds, Private Equality and Venture Capital Funds ............ 153
Unit–9: Insurance Companies ......................................................................... 165
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Unit–1
INTRODUCTION TO NON-BANKING
FINANCIAL INSTITUTIONS (NBFIS)
Written by: Mr. Moazzam Ali

Reviewed by: Prof. Dr. Syed Muhammad Amir Shah
1
CONTENTS
Page #
Introduction ....................................................................................................... 3
Objectives ......................................................................................................... 3
1.1 Introduction to Financial Institutions ....................................................... 4
1.2 Financial Markets..................................................................................... 6
1.3 Role of Financial Institutions in Financial Markets ................................ 8
1.4 Introduction to NBFIs .............................................................................. 9
1.5 Role of NBFIs in Economic Development .............................................. 11
Self-Assessment Questions ............................................................................... 13
Further Readings ............................................................................................... 14
2
INTRODUCTION
This unit introduces the basic concepts of financial institutions and markets of the
financial system. The financial institutions include both banking and non-banking
bodies. This course deals with the working of non-banking financial institutions.
The role and functions of financial institutions in an economy are explained along
with the types of non-banking financial institutions.
OBJECTIVES
After reading this unit, you will be able;
i. to describe the functions of financial markets
ii. to introduce the types of financial institutions
iii. to explain the role of financial institutions
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1.1 Introduction to Financial Institutions
The financial institutions are the integral part of the modern economy. Generally, a
financial institution is an organization that collects funds from the depositors and
invests these funds in the various businesses for profitable ventures. In this way,
the financial institutions perform the crucial task of financial intermediation that
aims to connect the depositors with the investors. Thus the financial institution
works as the facilitator for the enhancement of savings and investment in an
economy. Without strong savings and investments, the economic performance of a
nation suffers badly as the shortage of necessary funds affects industrial and
commercial growth.
In modern capitalists’ economies, the financial institutions have become a key

player in the overall structure of the economy. The quantity of funds provided to
the businesses through banks determines the rate of economic growth in a country.
The financial institutions funds business operations, expansion, and asset
acquisitions to fulfill the entrepreneurial needs. There are many ways to classify the
financial institutions as per their functions, operations, markets and customers.
However, a general classification through which we can understand the role of
financial institutions in the economy is to categorize them into two broader
operational areas: banks and non-banking financial institutions.
Banks
The most widely recognized form of financial institutions is banks which operate
in every modern economy. A bank is a type of financial institution that accepts
deposits from the customers and lends funds to the individuals, businesses and the
government. The bank compensates depositors with an interest rate on their
deposits and charges interest on the loans it provides to the borrowers. The
difference of these two interest rates is the profit of the bank. In this way the
important function of credit creation is performed that has become the base of
businesses growth in the modern economy. Apart from this deposit taking and
lending activities, the banks also perform various other functions for their
customers. These include facilitation in import-export transactions, facility of
lockers, utility bills collection, tax collection on behalf of government etc. There
are many types of banks operating in various countries of the world. A brief
description of them is given below:
i. Commercial Banks work to facilitate industrial and commercial sectors of
economy in the form of loans and other support services and also deals with
individual investors and depositors.
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ii. Central Banks are the regulators of the whole banking sector in an economy
that aim to bring stability in the money supply and the inflation by developing
and implementing suitable rules and regulations.
iii. Investment Banks target large businesses to facilitate them in raising long
term funds for business expansion and growth.
iv. Specialized Banks operate to cater the specific set of customers or achieve
some particular objectives. These banks include savings banks, women
specific banks, farmers’ banks etc.
v. Micro-Finance Banks are emerging phenomena in developing countries that
aims to provide small scale loans to the poor in order to enhance their
economic conditions.
vi. Development Banks are established to provide funds to the particular
developmental needs of agriculture, industry or service sector of an economy.
Non-Banking Financial Institutions

The non-banking financial institutions are those organizations that have no banking
license but still operate in financial markets to perform some useful services for the
individuals and businesses. Within NBFIs, two broader categories have emerged
over the years; deposit taking and non-deposit taking. The deposit taking NBFIs
are allowed to take deposits from the general public and manage them as per their
investment objectives to generate suitable returns. These NBFIs are granted license
to collect deposits from the customers and include asset management companies,
insurance companies, brokerage firms etc. the second category of NBFIs provides
useful financial services to their customers and includes leasing companies,
investment advisory firms, mortgage companies, stock exchange, venture capital
funds etc. A brief description of some of these NBFIs is given below:
i. Mutual Funds are operated by the asset management companies that accept
deposits from customers and invest them in various ways to generate
attractive returns.
ii. Leasing firms provide useful plants, machineries, vehicles to their customers
on installment basis to enhance the capital formation in a country.
iii. Insurance companies accept funds from their customers with a promise to
cover their losses in case of various events i.e. fire, floods, and accidents.
iv. Stock Exchange aims to provide a platform to the investors to buy shares of
various companies in order to secure their rights on companies’ profits.
v. Real Estate Finance Companies provide houses and other real estate assets
to the general public on installment basis with a view to enhance real estate
ownerships.
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1.2 Financial Markets
In capitalism, markets offer a mechanism to trade goods and services among the
buyers and sellers at an agreed price. There are many types of markets in an
economy; fruit markets, cloth markets, commodity markets, auto markets etc. The
financial market is also a kind of market that coordinates the activities of all other
markets. The financial market is a mechanism to trade financial assets among the
buyers and sellers at a mutually agreed price. The working in financial market is
carried on by the financial institutions, as mentioned above, to facilitate the buyers
and sellers of the financial assets. In order to understand the financial markets, we
need to look briefly at the nature of the financial assets and their qualities to know
the actual working of the financial markets:
i. Shares are the certificates usually bought on a stock exchange that represent
the claim of ownership in a company. The shareholders are entitled to claim
of profit called dividend and they can sale their shares at any time to earn a
capital gain.
ii. Bonds are the certificates through which investors provide funds to the
businesses at an interest rate for a specific period. The bonds are issued by
companies as an alternate of shares if they are not willing to share their
ownership of business.
iii. Investment Certificates are the term-specific investment tools that offer a
periodic return to their holders and are generally issued by the financial
institutions to finance a specific project.
iv. Commercial papers are short term investment instruments redeemable at
maturity and are purchased by the buyers in order to provide funds to the
businesses at an interest rate.
v. Prize Bonds are financial assets of a fixed value that offer a chance to win a
prize in a lottery. These bonds are redeemable at their original value in case
of non-winning a prize.
vi. Futures are the financial assets that derive their value from an underlying
asset whose price is agreed at present and settlement is made in future.
vii. Treasury Bills are the investment tolls offered by the government for short
term financing requirements that carry an interest rate and are redeemable on
maturity.
viii. Trade Notes represent the short term outstanding amounts payable to the
creditors by a business. These notes can be discounted by the creditors though
banks before maturity or can be used for mutual settlement with another party.
ix. E-Certificates are offered by the modern online form of businesses for
investing funds in their projects. These certificates carry an explicit interest
rate or ownership share claim.
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x. Units are the investment tools offered by a mutual fund or another investment
scheme that carry the rights of a unit holder to participate in the profits and
gains of an investment scheme.
xi. Cheque is a modern banking tool that is used to settle outstanding liabilities
through bank accounts. Generally, cheques are not traded but used to clear the
loans and payable amounts.
After going through the various types financial assets, now, we are in a position to
understand the working of financial markets. These financial markets can be
understood in several different ways as highlighted below:
i. Classification by Nature of Claim:
a. Debt market is a market where debt instruments like bonds, debentures,
term finance certificates are traded among the buyers and sellers.
b. Equity market is a market where the equity instruments like common
shares, preferred shares etc. are traded among the investors.
ii. Classification by Maturity of Claim.

a. Money market is a market for trading the short term financial assets
like trade notes, commercial papers, treasury bills etc. in an economy.
b. Capital market is a market where the long term maturity bearing financial
assets like shares, bonds, certificates are traded among investors.
iii. Classification by Seasoning of Claim.

a. Primary market is a market where a financial asset is offered first time
for trading in the financial system.
b. Secondary market is a market where the trading of financial asset is
carried on after its launching in the primary market.
iv. Classification by Delivery:

a. Cash or spot market is financial market where the financial assets are
traded on spot without involving any reference to future price or delivery.
b. Derivative market is a market that involves the trading of financial
assets whose delivery is expected in future.
v. Classification by Product Type:

a. Commodity market is a type of financial market in which the future
contracts for metals, oil, gas and crops are bought & sold by the investors.
b. Forex market is a financial market that involves the trading of different
currencies of the world in order to earn profit.
c. Equity market is a market where the shares are bought and sold in order
to earn capital gains and dividends.
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The working of these financial markets is governed by the securities regulators in
various countries that set the rule for trading of these financial assets. These
regulations are designed in order to bring stability and growth in the financial
markets. Generally, the financial markets provide three broader benefits to the
investors in an economy:
i. Interactions of buyers and sellers determines price of financial assets in the
financial markets. This price discovery mechanism is necessary for the
efficient working of the financial markets where the investors base their
decisions on the information available in the market.
ii. Provides a mechanism to sell the financial assets to meet the liquidity or
cash requirements of a business. The absence of a mechanism to sell a
financial asset creates hurdles in the efficient functioning of the market as the
funds remained blocked in a particular type of asset.
iii. Reduces transactions costs as the individuals may have to incur substantial
search and information costs to know the willing buyers and the price they
are willing to pay. The financial markets provide a ready-reference to the
value of a financial asset.
1.3 Role of Financial Institutions in Financial Markets
i. Mobilization of Savings:
The financial institutions offer attractive rate of returns that encourages the
individual and institutional investors to handover their savings to the financial
institutions. The promise of future returns and the security of funds invested
encourage the investors to open their accounts with the financial institutions.
ii. Allocation of Funds:

The funds collected by the financial institutions are not kept in lockers rather a
careful study of the profitable businesses is made and funds are allocated to
generate the higher returns for the investors. This allocation of funds by the
financial institutions provides liquidity to the industrial and commercial sector and
helps them make decisions to buy new machineries and plants.
iii. Development of Investment Avenues:

The financial institutions employ market researchers who keep a vigilant eye on the
emerging trends in the various sectors of economy. The industrial sector where the
shortage of funds may create operational issues is timely highlighted by the
financial institutions and suitable financing strategy is devised to meet the demands
of the market.
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iv. Coordinating Investors with Savors:
The role of financial intermediation is crucial in a modern economy as the economic
growth is dependent on the level of savings and investment in an economy. The
financial institutions play this role by collecting funds from the investors and
disburse these funds to the entrepreneurs to meet various business needs.
v. Risk Management:
The financial institutions help individuals and businesses to manage their various
personal and corporate interests. For example, the insurance companies collects
premium from their customers and promises to compensate in the event of loss.
Similarly, the other financial institutions, after comprehensive market research,
allocate funds to the most productive sector of the economy.
vi. Facilitating Trading of Financial Assets:

The financial assets are frequently traded in the financial markets by the investors
in order to obtain profits. The presence of financial institutions like stock exchange
is necessary to facilitate the trading of shares, bonds, certificates etc. among the
buyers and sellers.
vii. Provision of Liquidity:

The financial institutions provide short-term funds to the different sectors of
economy to meet their operational needs. This function of injecting funds to the
businesses encourages the buyers and sellers in various markets to provide goods
and services on short term credit without worrying about the shortage of funds.
viii. Efficient Funds Utilization:

The financial institutions lend money to the deserving clients based on their credit
history and repayment capacity. Additionally, the funds provided by the financial
institutions carry an interest rate along with a limited period for repayment. This
structure of investment puts a lot of pressure on the borrowers to efficiently utilize
these funds in order to make timely interest payments and return the original
amount of loan.
1.4 Introduction to NBFIs

The NBFIs play a vital role in the development of savings and investment in an
economy. The investors are attracted towards NBFIs due to their multiple
investment schemes. These investment schemes are operated by different kinds of
NBFIs whose shape and structure depends on the type of license it has been granted
by the regulator. Some of these NBFIs are allowed to take public deposits in their
investment schemes and manage their investment portfolios accordingly while
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others are permitted only to provide useful supporting financial services. A brief
look into the different forms of NBFIs is presented below:
i. Mutual Funds are the investment schemes offered by the asset management
companies to encourage investors to invest their funds in various types of
financial assets; equity, debt, commodities, forex etc. The investors deposit
their funds in the various types of mutual funds plans and the fund managers
invest their funds in various profitable ventures. A periodic return is shared
with the investors based on their type of investment plan. The investors are
also allowed to encash their funds as per their requirements. The mutual funds
charge various fees to investors to manage their funds.
ii. Leasing companies provide high-valued assets like plants, machinery,
buildings, vehicles etc. on installments basis to the businesses and general
consumers. Generally, a new plant or machinery has higher purchase price
and businesses have to arrange the funds at higher costs from banks. The
leasing companies provide an alternative source of financing the asset and the
repayment is received in installments with profit margin from the customers.
iii. Insurance companies offer investment schemes to the businesses and
general public to manage their risks by payment of premium and promising
to compensate in the event of losses. The insurance companies are generally
categorized into life and non-life sectors. In life insurance sector the insurance
companies focus on the individuals with promises to compensate the heirs in
case of death. In non-life insurance, the emphasis is on compensating the
businesses and individuals for losses in property, marine, health, accidents,
fire etc.
iv. Stock Exchange is a platform that enables the trading of financial assets i.e.
shares, bonds, certificates etc. among the buyers and seller for profit motives.
The stock exchange offers an opportunity to the investors to buy the shares of
an emerging firm and be entitled to the dividend and capital gain.
Additionally, an investor can sell his/her shares to the buyers at any time to
receive the invested funds back.
v. Real Estate Finance Companies or mortgage companies attempt to provide
housing facilities to their customers by offering home ownerships through
payment of total price of the house on installment basis. The real estate
finance companies are designed to provide house facilities to the general
public to provide an alternate of availing housing facilities on rental basis.
This type of NBFIs aims to increase home ownerships as the buying of homes
involves huge funds.
vi. Pension Funds are managed by the asset management companies that offer
a regular saving and investment tool to receive accumulative amounts
(principal plus profits) in the old age. The investment concept behind the
working of pension funds is the accumulation of small periodic contribution
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over a long period of time to provide an attractive return in the old age. These
pension funds provide an attractive investment avenue to the private investors
and general public.
vii. Private Equity Funds are designed for wealthy investors who put their funds
in a joint fund structured to finance a debt-burdened business firm to revive
its operations. Another form of the private equity funds are generally used for
acquiring various businesses which are sold to other investors after some
restructuring. The investors of private equity funds carefully look for
profitable opportunities in the market and receive their profits after reshaping
the acquired business.
viii. Venture Capital Funds are designed to provide early stage financing to the
business start-ups generally in technology and scientific sectors on ownership
or revenue sharing basis. These funds are provided to the aspiring
entrepreneurs who have strong business ideas and execution plans but lack
funds to materialize their products. The investors in venture capital funds
often wait for the growth of business to receive suitable returns on their
investments.
ix. Investment Finance Companies provides capital market facilitation to the
businesses who want to raise the long term funds by offering shares or bonds.
These companies conduct market research to estimate the interest of potential
investors in the shares of a company. The offering of shares and bonds in the
financial markets is designed by the investment finance companies to
generate maximum capital from the market by creating mass awareness.
x. Investment Advisory Companies provides technical advice to their business
clients for investing in capital markets. These advisory companies provide
technical advice for different merger, acquisitions and consolidation decisions
by conducting the market research for their clients. Similarly, the disinvestment
and other useful financial decisions are guided by the professional advice of
these companies.
xi. Brokerage Houses work as the agent in the capital markets by connecting
buyers and seller of the financial assets against a fee. The brokerage houses
invite investors to open their accounts with them and invest in companies’
shares and bonds in the capital markets. The brokerage houses also advise
their clients for making investment decisions in the capital markets.
1.5 Role of NBFIs in Economic Development
i. Encouragement of Savings:
The NBFIs, being a key part of the overall financial system, provides a window of
opportunity to the individual and institutional investors to deposit their funds in the
relevant NBFIs which, in turn, invest these amounts into the profitable ventures.
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The presence of NBFIs brings competition in the overall financial markets with the
banks and attractive profit opportunities emerge for the ordinary investors by
offering multiple investment schemes.
ii. Investment of Funds:

The funds collected by the NBFIs are invested in stock exchange, government
certificates, business projects etc. that result in deriving higher profits for the
owners of these funds. Similarly, the investment strategy followed by the NBFIs is
based on careful risk management that limits the losses for the depositors and
investors.
iii. Infrastructural Development:

The funds collected by the NBFIs may be used in developing different
infrastructural projects of the government on sharing basis. The governments in
developing countries frequently face the shortage of funds for developmental
purposes. The NBFIs may fill this shortage by investing their collected amounts on
suitable terms and conditions.
iv. Business Expansion:

The business expansion projects require huge funds for acquiring more machinery,
plants, buildings and land. These funds may be provided by the NBFIs on
competitive terms as compared to the banks where the options for long term
financing are limited.
v. Employment Generation:
The presence of NBFIs in the financial markets provides an additional forum to the
investors to put their surplus funds into the various investment schemes. These
additional funds available for investments are utilized by the aspiring businesses to
enhance their production capacities that may provide more employment for the
general public.
vi. Capital Formation:

Without the funds injected by the NBFIs, the available options for long term
investment are limited to banks that are traditionally more inclined towards short-
term and medium term financing. The surplus savings invested in NBFIs schemes
by the individuals and institutions add the overall funds available for investment in
the country.
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SELF-ASSESSMENT QUESTIONS
1. Short Questions:
i. What are the financial institutions?
ii. What are the financial markets?
iii. How do you define a NBFI?
iv. What is financial intermediation?
2. Long Questions:
i. Explain the functions of financial institutions in detail.
ii. Explain in detail the functions of the financial markets.
iii. Briefly highlight the types of NBFIs to understand their working.
iv. Discuss in detail the role of the NBFIs in the economic development of
a country.
3. Opinion Question:
How NBFIs can replace banks in the financial markets? Further, in your
view, how NBFIs can address the issues of funds shortages for Pakistani
businesses and government.
4. Practical:
Explore the various types of financial institutions in your city and fill this
chart:
Operational
Name of Financial
Structure Products Address
Institution
(Bank or NBFI)
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INDUSTRY OVERVIEW:
FURTHER READINGS
A suggestive list of further readings is provided herewith:
1. Financial Markets and Institutions by Anthony Saunders
2. Financial Institution Management by Helen P. Lange
3. Financial Institutions and Markets by Meir G. Kohn
4. Financial Markets and Institutions by Frederic Mishkin and Stanley G Eakins
5. Fundamentals of financial institutions management by Marcia Millon Cornett
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Unit–2
REGULATORY
FRAMEWORK OF NBFCS

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CONTENTS
Page #
Introduction ....................................................................................................... 17
Objectives ......................................................................................................... 17
2.1 Historical Background of NBFCs in Pakistan Regulations ..................... 18
2.2 Companies Act 2017 and NBFCs ............................................................ 19
2.3 NBFCs Rules (Establishment and Regulations) 2003 ............................. 21
2.4 NBFCs & NEs Regulations 2008 ............................................................ 23
2.5 Overview of NBFC Sector in Pakistan .................................................... 24
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INTRODUCTION
This unit deals with the regulatory framework for the Non-Banking Financial
Companies (NBFCs) in Pakistan. Since the regulatory framework has the
fundamental role in defining the scope of activities of a NBFC, its requirements
and key parameters are discussed here as per the applicable legal framework. Every
NBFC in Pakistan is required to follow these regulatory guidelines and ensure its
compliance.
OBJECTIVES
After studying the unit, you will be able;
i. to describe the regulatory requirements for NBFCs in Pakistan
ii. to understand the Companies Act 2017 requirements for NBFCs in Pakistan
iii. to explain the requirements of NBFCs rules 2003 and NBFCs regulations 2008
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2.1 Historical Background of NBFCs Regulations
The working of a financial system involves the interplay between financial
institutions and their customers in the financial markets. This interaction needs to
be monitored in order to bring stability in the financial markets so that the trust of
individuals can be built in the dealing of financial assets. The various laws are
enacted and subsequent regulations are built by the regulating bodies with the
support of the government to check the deviations from the standard principles and
the operating procedures.
This logic of bringing stability in the markets and discouraging volatility is the basic
building block for developing and implementing strong financial laws. The financial
sector of Pakistan is regulated by two important regulators: State Bank of Pakistan is
responsible for the regulations of the banking sector and the Securities & Exchange
Commission of Pakistan (SECP) is largely regulating the Non-Banking Financial
Companies (NBFCs). Both of these institutions work as regulator with the
collaboration of the Federal Ministry of Finance of the Government of Pakistan for
developing suitable regulations and supervisory mechanism.
The NBFCs in Pakistan are established under as a company under the Section 282
of the Companies ordinance 1984. This section has been adopted by the Companies
Act 2017 for dealing with the establishment and other matters of the NBFCs. For
the procedural aspects of NBFCs, two sets of regulations have been prepared: Non-
Banking Finance Companies Rules (Establishment and Regulations) 2003 that
deals with the establishment of the NBFCs and the Non-Banking Finance
Companies & Notified Entities Regulations 2008 that prescribe the operational
regulatory guidelines for the NBFCs. In this chapter, we will study briefly the
components of all these three main set of regulatory framework. However, there
are some industry specific regulations as well for the different kinds of NBFCs
which are briefly discussed below:
i. Mutual Funds were started in Pakistan in 1962 with the establishment of
National Investment Trust (NIT) as a government owned mutual fund. Later,
in 1966, the Investment Corporation of Pakistan also offered various
investment schemes through close ended mutual funds. In 1995, Pakistan
introduced the asset management companies rules. Presently, the NBFCs
Rules 2003 and the NBFCs & NEs Regulations 2008 are the regulatory tools
for the mutual funds industry.
ii. Insurance Companies were earlier formed under the Insurance Act 1938.
Presently, these insurance companies are regulated in Pakistan by the SECP
through the Insurance Ordinance 2000 and the Insurance Companies
Regulations 2001.
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iii. Leasing companies were started in Pakistan with the establishment of the
National Development leasing Corporation Limited in 1985 as a public sector
entity. To encourage private sector participation, Leasing Companies Rules
were notified in 1989. Initially, the control of leasing companies was with the
State Bank of Pakistan which was later on transferred to the SECP with the
introduction of Leasing Companies Rules 1996. Presently, the leasing
companies are regulated through NBFCs Rules 2003 and the NBFC & NEs
regulations 2008 by the SECP.
iv. Modarba are regulated by the SECP through Modarba Companies & Modarba
(Floatation & Control) Ordinance 1980 and the Modarba Companies and
Modarbas Rules 1981.
v. Venture Capital & Private Equity funds were introduced in 1995 through
Venture Capital Companies and Fund Managers Rules 1995 to encourage
private investors. Later on these regulations were amended in 2001 and
presently VC & PEs are regulated by the SECP through 2008 regulations.
Presently, the Private Equity Regulation 2015 is applied to govern the private
equity funds and the venture capital funds.
vi. House Finance House Building Finance Corporation (HBFC) was first house
finance company formed in Pakistan in 1952. Later on, in 2008, the Real Estate
Investment Trust (REITs) Regulations 2008 were developed to encourage
investment in the real estate sector. HBFC has been converted into a company
limited by shares in 2007. The house finance companies are regulated through
the NBFCs Rules 2003 and the NBFCs & NEs Regulations 2008.
vii. Investment Finance Services are regulated through the NBFCs Rules 2003
and the NBFCs & NEs Regulations 2008.
2.2 Companies Act 2017 and NBFCs

Every company working in Pakistan is required to be registered with the SECP.
The SECP is a corporate regulator that grants the registration certificate to the
companies and monitors their operations. The NBFCs are also required to be
registered with the SECP. The corporate law for the registration and operations of
the companies presently enforced in Pakistan is the Companies Act 2017 that has
replaced the earlier law, the Companies Ordinance 1984. The key provisions of the
Companies Act 2017 related to NBFCs have been adopted from the old Companies
Ordinance 1984 through section 282. This section highlights the powers of the
regulator (SECP) in the context of the NBFCs. A brief description of the Section
282 has been given below:
i. Application of Section: Section 282 A
This section is applicable to the licensed NBFCs to carry out business as investment
finance services, leasing, venture capital investments, housing finance services,
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discounting services, asset management services and any other similar types of
business.
ii. Power to make rules: Section 282 B

The Federal Govt. of Pakistan is empowered to make rules for the establishment
and operations of the NBFCs working in Pakistan. The Federal Govt. can exercise
this power through the SECP for regulating the NBFCs.
iii. Incorporation of NBFCs: Section 282 C

All NBFCs are required to obtain license from the SECP before incorporation. After
incorporation, all NBFCs are required to maintain minimum paid up capital as
required by the rules for the commencement of business.
iv. Registration of Notified Entities: Section 282

The government of Pakistan can declare any type of organization (company, trust,
body corporate etc.) as the notified entity in the official Gazette. Resultantly, these
entities will also follow the NBFCs rules and regulations as applicable.
v. Power to issue directions: Section 282 D

The SECP being the regulator of the NBFCs is empowered to issue directions to
the NBFCs in public interest or in the general interest of shareholders or to secure
the proper management of the NBFC.
vi. Power to remove directors, CEO, others: Section 282 E

The SECP is empowered to remove the directors or other officers of a NBFC in the
public interest or managing the NBFC in a good manner. Such removal process will
follow a proper process after duly hearing the concerned person and the resulting
causal vacancy is also filled by the SECP.
vii. Power to supersede Board of Directors: Section 282 F

The SECP may in certain circumstances supersede the Board of Directors of a
NBFC on the ground of detrimental to the interests of shareholders or NBFC or for
any other reasons to be specified by the SECP.
viii. Power to require to furnish information: Section 282 G

The SECP may require any business related information from the NBFCs in any
form by notice in writing with a limited compliance time. All the concerned officers
are required to provide true and fair information to the SECP without omitting any
material facts.
20
ix. Special audit: Section 282 H
The SECP is also empowered to order a special audit of a NBFC and appoint auditor
to carry out detailed examination of the financial records of the entity. On the
completion of audit report, the SECP may direct the NBFC to do or abstain from
doing certain transactions or activities.
x. Inquiry by the commission: Section 282 I

The SECP may order an inquiry into the affairs of a NBFC or its officers. The SECP
will appoint the persons responsible for conducting the inquiry and submitting the
report within the specified time.
xi. Penalty for non-compliance: Section 282 J

A NBFC or its officer shall be punished for non-compliance with the provisions of
this law. This penalty may be upto Rs. 5 million and in some cases the license of
the NBFC may also be revoked. A NBFC may file an appeal against the imposition
of this penalty.
xii. Penalty for making false statements: Section 282 K

Similarly, all officers of a NBFC may be punished in the form of penalty of upto
Rs. 100,000 or with imprisonment for a maximum one year for making false
statements in any document, accounts, report etc.
xiii. Procedure for amalgamation of NBFCs: Section 282 L

If two or more NBFCs want to amalgamate with each other than this scheme of
amalgamation needs to be approved by the shareholders of all NBFCs concerned
and the SECP as well.
xiv. Punishment and adjudication of fine or penalty: Section 282 M

A fine or punishment can be imposed on any NBFC or its officer by the authorized
officer of the SECP after completing the due process of law.
xv. Rehabilitation of NBFCs and Notified Entities: Section 282 N

The Finance Act 2007 has empowered the SECP for designing and approving the
rehabilitation scheme for the NBFCs in order to revive their operations.
2.3 Non-Banking Finance Companies Rules (Establishment and

Regulations) 2003
The NBFCs Rules (Establishment & Regulations) 2003 are designed by the SECP
in order to provide legal requirements for establishing a NBFC in Pakistan. These
rules describe the eligibility criteria to establish a NBFC, permission to form a
21
NBFC, procedure and conditions for the grant of license, conditions applicable for
the commencement of operations by a NBFC, opening of bank accounts, insurance
coverage and exchange risk fluctuations. A brief description of all these matters is
given below: (The detailed rules are available on the website of the SECP).
i. Eligibility Criteria to Form a NBFC:
A NBFC can be established on fulfilling the fit and proper criteria laid down by the
SECP for each of its promoters, officer, proposed directors, and chairman of Board
of Directors. Additionally, they are required to comply all the terms and conditions
as specified by the government in the official Gazette.
ii. Permission to form a NBFC:

To from a NBFC in Pakistan, any person can submit an application on the
prescribed to the SECP for permission. The SECP after thoroughly evaluating the
application may grant permission to form a NBFC as per the applicable terms and
conditions.
iii. Conditions for grant of license:

A NBFC is required to apply for the license for each type of its business operations
to the SECP. The SECP will issue the license after observing all the relevant
conditions for the grant of such license i.e. fulfilling the minimum equity
requirements, paying the relevant fees etc.
iv. Commencement of Operations by a NBFC:

A NBFC can commence its operations after registration and getting the required
license from the SECP. The SECP may specify some additional conditions for the
commencement of operations.
v. Conditions applicable to a NBFC:

A NBFC will have to observe several legal formalities in order to ensure smooth
operations i.e. appointment of internal and external auditor, hiring a compliance
officer, records all transactions, hold regular meetings of board of directors, appoint
independent directors, submit periodic reports to the SECP and the shareholders etc.
vi. Monitoring Fee:

The NBFC working as deposit taking body is required to pay the annual prescribed
monitoring fee within three months after the close of financial year to the SECP.
vii. Opening of Bank Account:

The opening of bank accounts and other accounts with a NBFC is required to be
approved by the board of directors. These account opening decisions need to be
recorded and communicated to the SECP within fourteen days.
22
viii. Insurance Coverage:
A NBFC is required to maintain an insurance coverage for the financial security of
its clients and depositors to manage the risk exposure in case of fraud or negligence.
This insurance cover will help the NBFC in case of unforeseen liquidity
requirements.
ix. Exchange risk management:

A NBFC is also required to manage its foreign currency risk exposure for all its
commitments and obligations that require the use of foreign currencies. For this
purpose, suitable foreign exchange risk management policy should be adopted.
2.4 Non-Banking Finance Companies & Notified Entities

Regulations 2008
The above mentioned NBFCs Rules 2003 deal with the legal guidance on the
establishment of the NBFCs in Pakistan. The NBFC & NEs Regulations 2008 are
discussed to provide the legal framework regarding the operational aspects of the
NBFCs. These regulations provide in detail the various operational requirements
like the minimum equity requirements, code of conduct, internal audit, procedure
for approval of directors, limits of liabilities, deposit taking procedures etc. These
regulations have specified various requirements for the different set of NBFCs;
asset management companies, leasing companies, investment finance companies,
house finance companies etc. The complete set of these regulations can be accessed
from the website of the SECP. A brief description of the general requirements
applicable to all types of NBFCs is discussed below:
i. Minimum equity requirements:

The NBFCs are required to meet the minimum equity requirements at all times as
prescribed by the SECP. In case of any deficiency in meeting the minimum equity
requirement, a maximum period of six months is granted to fill the shortages.
ii. Limit on aggregate liabilities of a NBFC:

The aggregate liabilities of NBFC shall not exceed from the prescribed levels;
seven times of minimum equity in case of initial two years of operations and ten
times in the later periods. Same is the case of contingent liabilities which shall not
exceed the seven times of minimum equity at any time.
iii. Internal audit function:

All NBFCs are required to have an internal audit function to ensure the compliance
with the rules, regulations and the laws. This internal audit may be performed by
23
creating an internal audit department or it may be outsources. In both situations, the
internal audit will be supervised by the audit committee of the board of directors.
iv. Submission of information by the NBFC:

All NBFCs are required to submit to the SECP the periodic information in the form
of reports, financial statements, and relevant data in the prescribed formats within
required time.
v. Code of Conduct:
All NBFCs are required to obtain and retain the membership of approved
associations related to the business of the NBFCs. The membership of such bodies
also requires the compliance with the code of conduct by the NBFCs.
vi. Prevention of NBFC from money laundering and other illegal trades:
Under these regulations, the NBFCs are required to design suitable system to
prevent the money laundering and other illegal activities. The NBFCs are required
to obtain reasonable assurance for accepting funds as investment in their
businesses. The maximum limit to accept investment in cash is Rs. 50,000.
vii. Procedure for prior approval of directors and CEO:

The NBFCs are required to obtain the prior approval of the appointment of directors
within 10 days before the scheduled meeting of the directors with all the required
documents. Similarly, in case of removal of CEO, the SECP must be informed by
the NBFC within one month.
viii. Fees applicable to an NBFC:

All NBFCs are required to pay the prescribed fee mentioned in the Second Schedule
of these regulations within the stipulated time.
2.5 Overview of NBFC Sector in Pakistan

The financial sector of Pakistan is composed of several distinct sub-sectors each
with its own field of operations and regulatory frameworks.
i. Banking Sector consists of scheduled banks operating throughout Pakistan
and regulated by the State Bank of Pakistan.
ii. Non-Banking Financial Sector consists of leasing companies, investment
finance companies, asset management companies, house finance companies,
private equity & venture capital companies, pension funds, modarbas, real
estate investment trust, stock exchange, commodity exchange and investment
24
advisory firms. These NBFIs are regulated by the SECP to ensure their
smooth functioning in the financial markets.
iii. Development Finance Institutions are the development-focused financial
bodies established with the collaboration of foreign governments or
multilateral bodies. The DFIs are regulated by the State Bank of Pakistan.
iv. National Savings Centers are regulated by the Federal Ministry of Finance,
Govt. of Pakistan with an objective to offer different savings schemes to the
general public.
Source: NBFCs Reform Committee Report 2012
1. Short Questions:
v. What are the regulations?
vi. What is SECP?
vii. What is minimum equity?
viii. Why NBFIs need regulatory approval?
2. Long Questions:
i. Explain in detail the regulatory framework for the NBFCs in Pakistan.
ii. Explain the main points of the section 282 of the Companies Ordinance
1984.
iii. Briefly highlight the key points of the NBFCs Rules 2003.
iv. Discuss in brief the general points of the NBFC & NEs Regulations
2008
25
Some experts say the NBFIs regulations are a hurdle in their growth and
expansion. What is your opinion? Should these regulations need reforms and
up-dation? Explain with reasons.
Practical:
Carefully study the NBFIs rules and regulations and fill this chart accordingly:
Applicable
Name of
Laws, Rules Minimum Conditions Appointment Applicable
Financial
and Equity for License of Directors Fee
Institution
Regulations
Mutual Funds
Modarabas
Leasing
Investment
Finance
Company
Pension Fund
Private Equity
Funds
Insurance
Companies
Development
Finance
Institution
26
Source: SECP Annual Report 2017
Source: NBFC Sector Reform Committee Report 2012
27
FURTHER READINGS
NBFCs Reform Committee Report 2012
SECP Annual Report (latest) available on www.secp.gov.pk
Economic Survey of Pakistan (Latest) available on www.finance.gov.pk
State of Economy Annual Report, State Bank of Pakistan (Latest) available on

www.sbp.gov.pk
28
This section will the legal points of the NBFIs issued by the SECP:
THE NON-BANKING FINANCE COMPANIES

(ESTABLISHMENT AND REGULATION) RULES, 2003
CHAPTER - I
1. Short title and commencement. (1) These rules may be called the Non-
Banking Finance Companies (Establishment and Regulation) Rules, 2003.
(2) They shall come into force at once.
2. Definitions. (1) In these Rules, unless there is anything repugnant in the

subject or context,
(iii) “asset management services” mean the business of providing services]1 for
management of collective investment schemes;
(iv) “assets” mean properties of all kinds tangible or intangible, including shares,
units, certificates, securities, deposits, right and bonus shares, cash, bank
balances, profits, dividends, fees, commissions, all receivables, claims,
derivatives contract, licences, privileges, accrued or accruing or contingent”;
(v) “associated companies” means associated companies and associated
undertakings as defined in sub-section (2) of section 2 of the Ordinance;
(vi) “brokerage business” means the services being provided by a broker
registered under the Brokers and Agents Registration Rules, 2001;
(vii) “central depository company” means central depository as defined under the
Securities and Exchange Ordinance, 1969 (XVII of 1969);
(ix) “closed-end fund” means an investment company or a closed-end scheme;
[(x) “closed end scheme” means a collective investment scheme having a specified
period of maturity which does not continuously offer its certificates for sale
to investors and entitles the holder of certificates, to receive, proportionate
share of the net assets of the closed end scheme:
Provided that existing closed end scheme shall be classified as closed end
scheme until revoked or converted into open end scheme for the purpose of
these rules,”
(xi) “close relative” includes spouse, lineal ascendants and descendants and
brothers and sisters;
29
(xii) “collective investment scheme” means any arrangement whose sole purpose
is the collective investment of funds in a portfolio of securities, or other
financial assets for profits, income or other returns, and where the
participants, who have pooled in the funds, do not have any day to day control
over the management of the scheme, whether or not they have the right to be
consulted or to give direction in respect of such management:
Provided that the following shall not be considered as a Collective Investment

Scheme for the purpose of these rules:-
(i) employee welfare trusts or gratuity trusts or employees provident funds or
employees pension funds setup for the benefit of employees by companies;
and
(ii) any such pool of funds which is separately regulated by the Commission or
which is already established under any specific law;]3
(xiii) “Commission" means the Securities and Exchange Commission of Pakistan
established under the Securities and Exchange Commission of Pakistan Act,
1997(XLII of 1997);
(xiv) “company” means a company as defined under the Companies Ordinance,
l984 (XLVII of l984);
(xv) “connected person" in relation to an NBFC or a [notified entity]4, means,-
(a) any person or trust beneficially owning, directly or indirectly, ten
percent or more of capital of the NBFC or the [notified entity]5;
(b) any person able to exercise, directly or indirectly, ten percent or more
of the total voting power in that NBFC or the [notified entity]6;
(c) a [notified entity]7 being managed by an NBFC;
(d) the NBFC managing a [notified entity]8;
[(da) notified entities being managed by the same NBFC;]9
(e) a trustee or custodian of the [notified entity]10;
(f) any person or trust controlled by a person who or which meets the
descriptions given in sub-clause (a) to (e);
(g) any member of the group of which that person, or trust forms part; and
(h) any director or officer of that NBFC or the investment company being
managed by that NBFC or of any of their connected persons as specified
in sub-clauses (a) to (g);
(xvii)“custodian” includes a bank licensed under the Banking Companies

Ordinance, 1962 (LVII of 1962) or a trust company which is a subsidiary of
such bank or a central depository company approved by the Commission or
30
an NBFC carrying out investment finance services provided it has been
approved by the Commission to act as custodian or such other company as
may be approved by the Commission to act as custodian;
(xviia) “discounting services” means the business of discounting of financial

instruments on conventional or Islamic basis
(xviib) “deposit” means any deposit of money with, or any money borrowed or
raised by an NBFC, but shall not include, -
(a) redeemable capital issued under section 120 of the Ordinance;
(b) finance obtained from a financial institution;
(c) advance, application or subscription money for shares in the NBFC;
(d) cash margin or security deposit received in respect of finance provided
by NBFC;
(e) subordinated loans; and
(f) finance obtained from major shareholders, sponsors, and associated
companies:
Provided that the Commission shall be the final authority to determine, by an

order in writing, whether any money deposited, raised or borrowed falls under
the definition of deposit or otherwise;
[(xix) “equity” includes paid up ordinary share cap ital, preference shares which are
compulsorily convertible into ordinary shares, general reserves, statutory
reserves, balance in share premium account, reserve for issue of bonus shares,
subordinated loans and unappropriated profits, excluding accumulated losses.
Explanation.-
(i) Surplus on revaluation of fixed assets as described in section 235 of the
Ordinance, treasury stocks, intangible assets, deferred tax reserves, and
surplus on revaluation of investments shall not be included in the equity.
(ii) A loan may be classified as subordinated loan if it complies with the following
conditions:-
(a) subordinated loan can be raised from any person, preferably from the
sponsors;
(b) rate of profit on subordinated loan, if any shall be decided by NBFC
subject to the clearance of the Commission;
(c) neither the interest nor the principal shall be paid even at maturity if
such payment would result in non-compliance with the equity or capital
adequacy requirements;
31
(d) subordinated loan shall be un-secured and sub-ordinate to all other
indebtedness including deposits;
(e) subordinated loan shall be in the form of cash or liquid assets only;
(f) auditor certificate evidencing injection of funds into NBFC as
subordinated loan;
(g) minimum tenor of subordinated loan shall be specifically mentioned; and
(h) prior approval of the Commission is required for repayment of
subordinated loan.
(iii) For the purpose of calculating minimum equity requirements for licensing
purposes, the exposure of an NBFC in its subsidiaries and strategic
investments shall be deducted from equity:
Provided that the equity investment in subsidiary and strategic investment shall be
taken at cost.;
[(xx) “finance" means provision of,-
(i) any accommodation or facility on the basis of participation in profit and loss,
musharika or modaraba basis, mark-up or mark-down in price, hire-purchase,
lease, rent-sharing, bills of exchange, promissory notes or other instruments
with or without buy-back arrangement by a seller, participation term
certificate, musharika or modaraba certificate, term finance certificate;
(ii) guarantees, indemnities, letters of credit or any other financial engagement,
issued or undertaken on behalf of a person, with a corresponding obligation
of that person;
(iii) a loan, advance, discounting services to any person;
(iv) micro financing including any form of finance such as leases advances,
consumer loans, housing finance;
(v) a financial facility or accommodation provided on the basis of Islamic mode
of financing; and
(vi) any other form of financial facility provided to a person;]15
(xxa) “financial services company” for the purpose s of these rules, means a
financial institution incorporated in Pakistan or outside Pakistan, insurance
company, broker i.e. of stock market or money market or commodities
market; a company which is primarily involved in distribution of securities,
insurance products and units or certificates of a notified entity, and any other
company as notified by the Commission in the official Gazette
32
(xxi) "form" means the forms annexed to the rules;
[(xxia) “forms of business” means following forms of business as notified in the
official Gazette by the Federal Government or any other form of business
which the Federal Government may, by notification in the official Gazette
specify from time to time, namely:-
(a) asset management services;
(b) discounting services;
(c) housing finance services;
(d) investment advisory services;
(e) investment finance services;
(f) leasing;
(g) pension fund scheme business;
(h) private equity and venture capital fund management services;
(i) REIT management services; and
(j) venture capital investment;
[(xxiaa)“fund management NBFC” means an NBFC licenced by the Commission

to undertake Asset Management Services or REIT Management Services or
Pension Fund Scheme Business or Private Equity and Venture Capital Fund
Management Services or Investment Advisory Services or any combination
thereof
(xxib) “group” means persons, whether natural or legal, if one of them or his close
relatives, in case of a natural person, or, its subsidiary or associated company,
if it is a legal person, have control or hold [direct or indirect]19 substantial
ownership interest or have power to exercise significant influence over the
other. For the purpose of this clause the expression-
(a) subsidiary shall have the same meaning as defined in sub-section (2) of
section 3 of the Ordinance;
(b) control shall have the same meaning as defined [Securities Act, 2015
(III of 2015)
(c) substantial ownership means beneficial shareholding of ten percent by
a person or by close relative; and
(d) “significant influence” refers to the managemen t control of the
company or the ability to participate in financial [operational and risk
management]21 policies, either exercised by representation on the
Board of Directors, through partnership or by statute or by agreement in
the policy making process;
(xxiii) “housing finance services” means the busin ess of providing consumer or
commercial Finance on conventional or Islamic basis to a person for the
33
purchase or construction of house or apartment or for purchase of land and
construction thereupon including the facilities availed for the purpose of
making improvements in house or apartment;
(xxiiia) “independent director” shall have the sam e meaning as assigned to it in

regulation 35 of the Listing Regulations of Karachi Stock Exchange;
(xxv) “investment advisory services” means the serv ices provided for, managing
discretionary or non-discretionary portfolios for both individual and
institutional clients and include the business of advising others as to the value
of securities or as to the advisability of investing in, purchasing or selling of
securities, for remuneration;
(xxvi) “investment company” means a company registe red with the
Commission under the Ordinance in accordance with such criteria as may be
specified by the Commission by notification in the official Gazette;
[(xxviii) “investment finance services” means the b usiness of providing finance on
conventional or Islamic basis;
(xxix) “leasing” means the business of providing fi nance on operating lease
or finance lease or Ijarah basis;
(xxxii) “major shareholder” means a person who, ind ividually or in concert
with his family or as part of a group, holds ten percent or more shares having
voting rights of the paid-up capital of the company;
(xxxiii) “lending NBFC” means an NBFC licenced by the Commission to
undertake leasing or housing finance services or investment finance services
or discounting services;
(xxxiiia) “NBFC” means a non-banking finance compan y which includes company
licenced by the Commission to carry out any one or more forms of business
as specified in clause (a) of section 282A of the Ordinance;]25
(xxxiv) “non-bank micro finance company” means a n on-deposit taking NBFC
primarily engaged in the business of Micro Financing as specified by the
Commission from time to time;]26
[(xxxvii) “Open End Scheme” means a collective Inve stment Scheme which offers
units for sale based on net asset value on continuous basis without specifying
any duration for redemption and which entitles the holder of such units on
demand to receive his proportionate share of the net assets of the scheme less
any applicable charges on redemption or revocation;
34
(xxxviii)“Ordinance” means the Companies Ordinance, l984 (XLVII of l984);
(xxxvix)"person" includes an individual, a Hindu undivided family, a firm, an
association or body of individuals whether incorporated or not, a company
and every other legal person;
(xxix) “leasing” includes financial services provi ded on operating lease or finance
lease basis, in accordance with (in accordance with applicable International
Accounting Standards) or any other admissible mode determined by the
Commission from time to time;” vide SRO 1002 (I)/2015 dated October 15,
2015
(xxxixa) “promoter or sponsor” means a person who h as made an application to
the Commission to form an NBFC under rule 4 and has contributed initial
capital in the proposed company or a person who replaces him;”
[(xxxixb) “Private Fund” means an arrangement which has the purpose of pooling
funds from one or more Eligible Investors for investment in a portfolio of
securities or other financial assets for profit, income or other returns and
where participants of the funds, neither have day to day control over the
management of fund property, nor the right to give directions in respect of
such management and which is established and operated by private fund
management company:
Provided that for the purpose of these rules following shall not classify as a
private fund:
(i) collective investment schemes regulated under the Non-Banking
Finance Companies and Notified Entities Regulations, 2008;
(ii) employee welfare trusts or gratuity trusts or employees provident fund
or employee pension fund setup for the benefit of employees by
companies; and
(iii) any such pool of funds which is separately regulated by the Commission
or which is already established under any other specific law.
(xxxixc) “private fund management company” means co mpany licenced by the

Commission to provide private equity and venture capital fund management
services;
(xxxixd) “private equity and venture capital fund management services” means
services provided for management of private funds;]28
(xl) “records” mean all documentary and electronic materials created, generated,
sent,
35
communicated, received or stored, regardless of physical form or
characteristics;
(xli) “regulations” means the regulations made by the Commission in exercise of

its powers under Part VIIIA of the Ordinance;
(xlii) “Schedule” means the schedule to these rules;
[(xliia) “securities broker” means a trading right entitlement certificate holder or

“TRE” certificate holder who, by way of business,
(a) makes or offers to make with any person or induces or attempts to
induce any person to enter into or to offer to enter into, any agreement
for or with a view to buying, selling, exchanging or subscribing for,
securities; or
(b) solicits or accepts any order for or otherwise trading in, or effects
transactions in, securities for clients or on its own account;”
[(xliib) “strategic investment” means an investment which an NBFC makes with

the intention to hold it for a period of minimum 5 years and is more than 10%
of its equity;
(xliv)“trust” means a trust established by a deed under the provisions of the Trusts
Act, 1882 (II of 1882);
[(xlv) “trustee” means a company appointed as a tru stee of a notified entity as per
the rules and regulations made under Part VIII A of the Ordinance;
(2) Words and expressions used but not defined in these rules shall have the same
meaning as assigned to them in the Ordinance or the [Securities Act, 2015 (III
of 2015) or Rules and Regulations made thereunder
3. Eligibility criteria for the establishment of a NBFC. A NBFC may be

established, if each of its promoters, proposed directors, chief executive and
chairman of the Board of Directors fulfills the terms and conditions mentioned in
the fit and proper criteria as may be specified by the Commission by notification in
the official Gazette and complies with the requirements of the Ordinance, these
rules and the regulations made under the Ordinance.
4. Permission to form a NBFC:

(1) A person desirous of forming a NBFC [to undertake any form of business]33
shall make an application to the Commission as set out in Form-1 providing
36
information, as given in Annexure thereto, along with all the relevant
documents and receipt evidencing the payment of non-refundable processing
fee as may be specified by the Commission by notification in the official
Gazette.
(2) The Commission, if it is satisfied that the person seeking permission to form
the NBFC [to undertake any form of business]34 has fulfilled the criteria in
terms of rule 3 and the regulations, may permit by an order in writing [ ]35 to
establish a NBFC.
(3) The permission granted under sub-rule (2) shall be valid for a period of six
months unless extended for a maximum period of further three months under
special circumstances, on the application of the promoters made before the
expiry of initial six months.
During the validity of this permission, the promoters shall get the NBFC
incorporated and submit an application to the Commission for grant of licence, after
fulfilling all the conditions specified in these rules.
5. Conditions for Grant of Licence.-

[(1) An NBFC or any other company subject to eligibility in terms of schedule I
shall make separate applications to the Commission for grant of licence for
carrying out each form of business. The said application shall be submitted to
the Commission in Form-II along with a non-refundable processing fee as
may be specified by the Commission by notification in the official Gazette
for each licence.
(2) A fund management NBFC shall not be eligible for seeking licence for any
form of business allowed to lending NBFC and a lending NBFC shall not be
eligible for seeking licence for any form of business allowed to fund
management NBFC.
(3) An NBFC or any other company may apply to the Commission for grant of
licence subject to eligibility criteria given in Schedule I.
(4) The Commission may issue a licence for asset management services to
manage only closed end fund. Licence granted to an NBFC for investment
finance services shall be valid for undertaking leasing, housing finance
services and discounting services and such an NBFC shall not be required to
obtain separate licences for each form of business i-e., leasing, housing
finance services and discounting services specified in these rules.
37
(5) Every other person engaged in any form of business shall within a period of
six months of coming into force of these rules apply in writing to the
Commission, for grant of a licence along with a non-refundable processing
fee as specified by the Commission by notification in the official Gazette.]37
(2) An NBFC seeking licence for undertaking investment advisory or asset
management services or both shall not be eligible for seeking licence for any
other form of business.
(ii) All existing NBFCs licensed to provide investment advisory services that are
managing closed-end funds shall, within six months of the coming into effect
of this provision, apply for an asset management services licence to manage
closed-end funds.
(3) An NBFC licenced to carry out asset management services shall be eligible,
subject to the criteria as may be specified by notification in the official
Gazette, to undertake pension fund scheme business as specified by the
Federal Government to be a form of business in terms of section 282A of the
Ordinance.
(4) An NBFC seeking licence for undertaking investment finance services or
leasing or housing finance services or discounting services or all of the said
forms of business shall not be eligible for seeking licence for any other form
of business.
(5) Every other person engaged in any form of business shall within a period of
six months of coming into force of these rules apply in writing to the
Commission, for grant of a licence along with a non-refundable processing
fee as specified by the Commission by notification in the official Gazette.
(6) The Commission shall, after making necessary inquiries and after obtaining
such further information, as it may consider necessary, and if it is satisfied
that each of its promoters, directors, chief executive and chairman of the
Board of Directors fulfills the terms and conditions mentioned in the fit and
proper criteria, grant licence as per Form-III for one or more forms of
businesses subject to compliance of all or any of following conditions: -
(a) the company fulfills the eligibility criteria given in Schedule I;
(b) the company is not part of a group of companies already holding a
licence, under these rules, for the same form of business;
(c) the company meets minimum equity requirements or any other
requirement in lieu of minimum equity requirement as may be
prescribed by the Commission for specific form of business or class of
38
companies by notification in the official Gazette, in respect of each form
of business;
(d) the company has allotted at least twenty-five percent of the paid-up
share capital to the promoters;
(e) the company’s promoters or majority shareholders and directors have
deposited their shares with Central Depository Company of Pakistan
Limited in an account marked as blocked and such shares shall not be
sold or transferred without prior approval of the Commission and shall
be kept unencumbered:
Provided that directors holding qualifying shares, maximum up to 2 per

cent of the total share capital shall be exempt from this requirement;
(f) the company’s promoters or majority shareholders and directors have

given an undertaking that they shall not enter into any agreement for
sale or transfer of their shares in any manner without prior approval of
the Commission;
Provided that directors holding qualifying shares, up to maximum up to 2 per

cent of the total share capital shall be exempt from this requirement;
(g) the company appoints its chief executive who does not hold such office
in any other company except for an investment company being managed
by the said company, provided that prior approval of the Commission
has been obtained in this regard;
(h) the company shall not make any change in the Memorandum of
Association, other than increase in the authorized share capital, without
prior approval of the Commission;
(i) the company shall comply with the conditions as set out in these rules,
the regulations or any direction given by the Commission;
(j) the company shall furnish evidence to the satisfaction of the
Commission that the personnel employed by it for executive positions,
research or other related functions possess sufficient educational
qualifications and professional experience to undertake the proposed
form of business:
Provided that a new company shall furnish the evidence within 90 days
of grant of licence;
(k) the company obtaining licences for multiple forms of business or any
company undertaking any form of business as an ancillary activity must
39
have, other than chief executive, at least one person responsible for
heading each licenced form of business;
(l) the company incorporated as NBFC in accordance with criteria
mentioned in rule 4 shall not undertake any other activity except the
licenced activity; and
(m) the company, its promoters and major shareholders, its chief executive
and its directors shall furnish separate undertakings to the Commission
that they shall comply in letter and spirit with the requirements of the
Ordinance, these rules, the regulations made under the Ordinance and
the directions issued by the Commission:
Provided that the Commission may, impose additional conditions or

grant time to the company for compliance with any of the above
conditions as it deems appropriate:
Provided further that the Commission may further extend the time
granted to the company for compliance.
(7) Without prejudice to the conditions prescribed under sub-rule (6) above, the
Commission may, while granting licence, impose such additional conditions,
as it may deem necessary.
[(7a) If a company fails to commence business within the period as specified by the
Commission while issuing licence, the licence shall be deemed to be
cancelled unless the specified period is extended by the Commission on the
application made by the company.]39
(8) The licence granted [ ]40shall be valid for three years41 from the date of its
issuance and shall be renewable upon expiry of the said period by making an
application at least one month prior to the expiry as set out in Form IV along
with payment of a fee as specified by the Commission by notification in the
official Gazette.
(9) The Commission may, after making such inquiry and after obtaining such
further information, as it may consider necessary, renew the licence[ ]42, for
three years43 in Form V on such conditions, as it may deem necessary:
Provided that till such time that the licence is renewed, the existing licence
shall be deemed valid for the purposes of these rules and the regulations
unless the company fails to apply as specified in sub-rule (8) and fulfill all the
requirements to the satisfaction of the Commission for the [renewal]44 of a
licence: Provided further that if the company fails to apply within the
40
stipulated time period and fulfills all the requirements to the satisfaction of
the Commission its licence shall stand cancelled and the Commission may
initiate further proceedings to give effect to the cancellation.
(10) Without prejudice to the terms and conditions prescribed in rule 7, the
Commission may, subsequent to the grant or renewal of licence, impose any
other condition as it may deem necessary in the public interest.
7. Conditions applicable to a NBFC. (1) A NBFC shall,

(a) maintain such books of accounts and other records, as prescribed under the
Ordinance, as shall depict a true and fair view of its state of affairs, including,
__
(i) journals, cash books and other records of original entry forming the
basis of entry in any ledger;
(ii) ledgers (or other comparable record) reflecting assets, liabilities, income
and expenses along with all supporting documents or records;
(iii) ledgers (or other comparable record) showing securities in the portfolio;
(iv) record of transactions with banks;
(v) record of the meetings of the board of directors and all relevant
committees including the audit committee, credit committee and
investment committee; and
(vi) original record of all reports, analysis and memoranda containing
investment advice distributed;
(b) maintain such books of accounts and other records, as prescribed under
the Ordinance, to depict a true and fair view of its state of affairs for a
period of not less than ten years;
(ba) ensure that its statutory auditors are from the approved list of auditors
circulated by the Commission;
(c) appoint an individual, having minimum three years’ experience, as its
financial or chief accounting officer who is-
(i) a chartered accountant; or
(ii) a cost and management accountant; or
(iii) a member of a recognized foreign accountancy organization; or
(iv) a person having master’s degree in commerce or business
administration with specialization in finance,
[Provided that a non-deposit taking and unlisted lending NBFC may
designate another officer as its financial or chief accounting officer;
(ca) appoint [as internal auditor
(i) a person having minimum three years’ relevant experience who is-
(a) a chartered accountant; or
(b) a cost and management accountant; or
(c) a certificated internal auditor; or
41
(d) a certified information system auditor; or
(e) a member of recognized foreign accountancy organization; or
(f) an individual having master degree in commerce or business
administration with specialization in finance; or
(ii) a chartered accountancy firm having satisfactory Quality Control
Review (QCR) and not being the statutory auditors to whom this
function is outsourced
[Provided that the internal auditor shall report directly to the board of
directors or the audit committee of the board of the NBFC
(cb) appoint a person as compliance officer to ensure reporting to the
Commission of status of compliance with the existing regulatory
framework by the NBFC:
Provided that a non-deposit taking and unlisted Lending NBFC may
designate another officer as its compliance officer;
(cc) appoint such executives who shall fulfill the terms and conditions
mentioned in the fit and proper criteria specified by the Commission by
notification in the official Gazette;
[(cd) appoint the directors in accordance with Schedule I, provided that the
Commission shall be the final authority to determine the status of a director
as independent or otherwise;
(i) at least one third of its directors who shall be independent directors; and
(d) prepare its accounts in conformity with the International Accounting
Standards notified under sub-section (3) of section 234 of the Ordinance
and technical releases issued by Institute of Chartered Accountants of
Pakistan from time to time;
[(da) furnish to the Commission its quarterly and annual financial statements in
accordance with Schedule I
(g) follow directions issued to protect NBFCs against their involvement in
money laundering activities, terrorist financing and other unlawful trades;
(h) [obtain rating in accordance with Schedule-I as and when it becomes
eligible for rating as per the rating criteria of a rating agency registered with
the Commission, and such rating shall be updated at least once every
financial year:
Provided that the NBFC shall within one year of the decrease in its rating
from the grade specified by the Commission by notification in the official
Gazette, obtain a fresh rating and during the period that its rating is below
the grade so specified, the NBFC may be allowed by the Commission to
continue its operations on such conditions as are deemed appropriate by the
Commission;
publish the rating in its annual report and quarterly reports, annual and
quarterly reports of the collective investment schemes managed by it, if
42
applicable, and any advertisement and brochures in relation to promotion
of its business and
(j) acquire and maintain membership of the relevant association and follow
the code of conduct specified by the said association approved by the
Commission.”;
Provided that at least two of its directors, excluding the chief executive
officer, shall have relevant experience of at least five years at a senior
management level in the financial sector;
(e) separately disclose in relevant notes to its quarterly and annual accounts all
those facilities and exposures whose carrying value exceeds twenty
percent of its equity;” vide SRO 1002(I)/2015 dated October 15, 2015
(2) A NBFC shall not,

(a) appoint as directors persons who hold such office in any other NBFC licensed
for the same form of business.
Provided that this clause shall not apply to the nominees of the Federal or
Provincial Governments on the board of any NBFC or, any exception
specified by the Commission;
(aa) appoint or change its chief executive or any of its directors subject to
fulfillment of the fit and proper criteria and prior approval of the Commission
provided that the Commission may refuse appointment of any person
Explanation.- This clause shall not apply to a director nominated by the
Federal Government or Provincial Governments;
[(b) enter into premises leasing or renting, and sale or purchase of any kind with
their directors, officers, employees or their close relatives or any person acting
on their behalf or such persons who either individually or in concert with
family members beneficially own 10% or more of the equity of the NBFC:
Provided that this restriction shall not apply to such NBFCs that have a policy
to this effect duly approved by their board of directors:
Provided further that in case of any sale and purchase to the directors the prior
approval in writing of the board, excluding the participation of the beneficiary
directors, is required;
(ba) hold or make investment in a subsidiary other than that which is a financial
services company:
Provided that an NBFC may make strategic investments in financial services
company with the approval of the Commission;]63
43
[(c) form, sell or transfer ownership of shares in subsidiary or associated
company, merge with, acquire or takeover any other company unless it has
obtained prior approval of the Commission in writing to such formation or
sale or transfer;
[(ca) sell strategic investment unless it has obtained prior approval of the
Commission in writing to such sale;
(cb) merge with, acquire or takeover any other company unless it has obtained
prior approval of the Commission in writing to such scheme of merger,
acquisition or takeover;
(f) remove any of its records or documents relating to its business from Pakistan
to a place outside Pakistan without the prior permission of the Commission;
[(h) make aggregate investment in shares of unlisted company in excess of twenty
percent of its equity. Investment in unlisted company shall be approved in a
board meeting after carefully analyzing the merits and financial impact of the
investment and recording the decision in detail in minutes of the meeting and
such decisions shall be communicated to the Commission within fourteen
days of the board meeting along with copy of the minutes:
Provided that the NBFC shall not own shares of any one unlisted company in
excess of ten per cent of its own equity or of the issued capital of that
company, whichever is less:
Provided further that investment by an NBFC out of its surplus equity (i.e.
over and above the required minimum equity requirements) in unlisted shares
of its subsidiaries or any other financial services company
Provided that the NBFC shall not have a common director or officer or
employee with the broker;” vide SRO 1002(I)/2015 dated October 15, 2015
in the group, shall not be taken into account for calculating the limit for
unquoted shares;]67
(i) offer any of its own or other securities for any consideration other than cash
[or liquid assets]68 nor make any loan or advance against these securities.
Unless otherwise specified by the Commission by notification in the official
Gazette;
(j) hold, deal or trade in real estate except for the use of NBFC itself or where
specified by the Commission by notification in the official Gazette[:
44
Provided that properties acquired by lending NBFC in satisfaction of its
claims shall be disposed of within a maximum period of seven years from the
date of acquisition;
[(k) raise deposits in any form by whatever name called except as specified by the
Commission in the Non-Banking Finance Companies and Notified Entities
Regulations, 2008
(l) provide unsecured facilities or exposures except as specified by the
Commission by notification in the official Gazette; [and]71
(m) encumber or mortgage or pledge or transfer clients’ assets deposited as
security with the NBFC against any facility extended to the client, for
securing its own obligation
(n) undertake the brokerage business in capital market except by forming a
separate company for this purpose.
[(3) An NBFC shall comply with such minimum equity requirement or any
other requirement in lieu of minimum equity requirement as may be
prescribed by the Commission from time to time for specific form of business
or class of companies by notification in the official Gazette.
7A. Payment of fee. - An NBFC shall pay such non-refundable fee as may be
specified by the Commission through notification in the official Gazette.]76
8. Opening or closure of bank account, account with a broker or branch. -

An NBFC shall inform its board of director regarding opening or closure of
any bank accounts, accounts with a brokers or branches of an NBFC and the
same must be recorded in the minutes of board meeting.]77
9. Insurance coverage. - An NBFC shall obtain sufficient insurance coverage

from an insurance company rated minimum A- by a credit rating agency
registered with the Commission against any losses that may be incurred as a
result of employee’s fraud or gross negligence. The NBFC shall make
disclosure about the insurance coverage in its financial statements.]78
10. Exchange fluctuation risk. A NBFC shall make satisfactory arrangement to

insulate itself from exchange fluctuation risks associated with foreign
currency obligations and transactions.
45
10A. Transitional provisions. - Within [six months]79 from the coming into force
of these provisions [or any amendments thereto]80, all NBFCs shall [ ]81 take
such other actions as are necessary to [comply]82 with the provisions of these
rules:
Provided that, notwithstanding the fact that such actions have not been taken
or such changes have not been made, the NBFC shall comply with the
provisions of these rules as if they are licensed or registered under these rules.
10B. Exemption from certain rules to specified Companies. - The companies

specified in Schedule II shall be exempt from certain rules specified in the
said Schedule or as may be prescribed by the Commission by notification in
the official gazette.
46
Unit–3
SECURITIES & EXCHANGE

COMMISSION OF PAKISTAN

47
CONTENTS
Page #
Introduction ....................................................................................................... 49
Objectives ......................................................................................................... 49
3.1 The Concept of Regulator and its Historical Evolution ........................... 50
3.2 Introduction to SECP .............................................................................. 51
3.3 Corporate Law Division .......................................................................... 51
3.4 Securities Market Division ...................................................................... 52
3.5 Specialized Companies Division ............................................................. 53
3.6 Insurance Division .................................................................................. 54
3.7 A Brief Discussion of other Support Departments of SECP ................... 55
3.8 Powers and Functions of the SECP ......................................................... 56
3.9 Functions and Powers of the Board ........................................................ 59
48
INTRODUCTION
This unit covers the basic information on the Securities and Exchange Commission
of Pakistan (SECP). Since SECP is the regulatory body of the NBFCs in Pakistan,
we have discussed the organizational structure, role and functions of the SECP.
Along with that, we have introduced the operational and working procedures of the
SECP.
OBJECTIVES
After going through the unit, you will be able;
i. to understand the structure of SECP
ii. to explain the functions of the SECP for the NBFCs
iii. to describe the role of the SECP for the NBFCs
49
3.1 The Concept of Regulator and its Historical Evolution
The establishment of business organizations in modern economies largely takes the
shape of a company. A company is a separate legal entity with perpetual succession,
common seal and can sue and can be sued in its own name separately from its
shareholder. To ensure the registration of companies and their smooth working, the
concept of corporate regulator has been devised. A corporate regulatory body
attempts to develop a fair, efficient and transparent regulatory system to protect the
interests of investors who put their money in the shares of various companies. To
perform this role, the corporate regulator develops rules, regulations and procedures
to guide companies on risk management in the financial and operational matters.
The success of a strong corporate regulatory system depends on the quality of
regulatory framework developed and the effectiveness of its implementation in the
corporate sector.
The history of corporate regulator in Pakistan dates back to the British period with
the Companies Act 1913 that was adopted by Pakistan in 1947. After independence,
the Ministry of Trade and Commerce was authorized by the government to
administer the company law in Pakistan. Some regulatory functions were also
performed by the Ministry of Finance and the State Bank of Pakistan. In 1969, the
Securities and Exchange Authority of Pakistan (SEAP) was established as an
attached department of the ministry of finance. The SEAP was formed to regulate
the trade on the stock exchange to protect the interests of shareholders and ensure
corporate transparency. In those days there was only one stock exchange at Karachi
and the stock exchanges of Lahore and Islamabad were developed in 1970 and 1989
respectively. The administration of companies was handed over to the SEAP in
1974.
However, there were several administrative shortcomings of SEAP on account of

corporate regulations. A new regulatory body was established in 1981 with the
name of Corporate Law Authority (CLA) which after the promulgation of the
Companies Ordinance 1984 became the statutory body to regulate the companies’
affairs. Apart from the administration of the Companies Ordinance 1984, the CLA
also worked as the regulator for the Modaraba sector, monopolies controller and
the regulator of the stock exchanges.
With the passage of time and development of new regulatory concepts in the
modern economies, a need was felt to modernize the corporate regulator in order to
facilitate the companies’ registration and the capital markets. Therefore, the
Securities and Exchange Commission of Pakistan (SECP) was established in
1997 to replace the CLA. The SECP was established with the guidance from the
50
global developmental agencies to ensure the maximum investors protections and
market facilitation. Along with acting as the corporate regulator, the SECP was also
entrusted to act as the regulator of the non-banking financial sector and the
insurance sector. Presently, the SECP is working as a strong regulatory body with
the adoption of latest corporate and financial laws along with the use of information
technology to facilitate the investors, companies and the financial markets.
3.2 Introduction to SECP

The Securities and Exchange Commission of Pakistan (SECP) was established in
1997 under the SECP Act 1997. The legal structure of the SECP makes it an
independent entity from the federal government with its own financial and
administrative powers. The head office of the SECP is at Islamabad with eight
regional offices throughout Pakistan. The SECP is headed by a chairman appointed
by the government of Pakistan for a period of four years. The SECP is required to
appoint commissioners to manage their various divisions and perform the
administrative functions. Along with the chairman and commissioners, to
effectively perform its operations, a policy board is established in the SECP to
formulate the long term policy decisions of the SECP. The SECP may employ as
many persons, committees and consultants as it deems fit to ensure its smooth
working. The SECP is required to submit annual report to the federal government
describing its regulatory achievements and important decisions made in the year.
The Securities and Exchange Policy Board is the highest level decision making
body in the SECP. It consists of eleven members appointed by the federal
government; five from the government sector and six from the private sector. The
board may call its meetings as it deems necessary to manage the affairs of the SECP.
Further, the board is empowered to establish committees on any important issue,
invite any person to its meetings for important briefing and conduct its matters as
its own regulations. This board acts the supreme decision making body for the
SECP and develop long term policies to facilitate and monitor the corporate sector.
3.3 Corporate Law Division

The organizational structure of the SECP is divided into various departments and
divisions. To perform its key functions, the SECP is divided into the four
functional divisions as discussed below:
1. Corporate law Division is entrusted to manage the corporate laws matters
for the registration of companies, monitoring and enforcement. The corporate law
division is further divided into two major departments:
51
i. Corporatization and Compliance Department: This department
deals with the incorporation of companies and their compliance
mechanisms. It consists of following wings:
a. Registration, Litigation and Advisory Wing deals with the
registration of companies, their legal matters and offer advice on
litigation matters.
b. Licensing & Regulating Wing is constituted to process the
licensing applications of various types of companies and it also
proposes the appropriate regulations for a particular sector.
c. Compliance & Complaints Wing works to ensure the compliance
with the existing laws and regulations and it also receives
complaints from the general public and investors for violation of
procedures by the companies.
d. Corporate Legal Framework, Research & MIS attempts to
devise suitable corporate legal framework for various kinds of
companies by conducting research on local economy and its various
sectors.
ii. Enforcement Department: This department is concerned with the
monitoring of the laws and regulations developed by the SECP. It has
five dedicated wings for these tasks: three for listed companies and two
for non-listed companies.
3.4 Securities Market Division
Securities Market Division deals with the capital markets and develops rules and
regulations for the effective functioning and monitoring of the trading of various
securities at the stock exchange and commodity exchange.
i. Policy, Regulation and Development Department: This department
develops policies, regulations and rules for the efficient functioning of the
capital markets. It is further divided into four wings:
a. Stock Exchange, Depository and Clearing House Wing deals with
the regulatory system, products and procedurals aspects of the
companies registered at the stock exchange.
b. Commodities and Derivates Wing keeps an eye on the commodities
markets and the derivatives products traded there in order to develop the
suitable regulations for the commodities and derivatives markets.
c. Debt Capital Market Wing deals with the issuance of the debt
securities and designing suitable regulatory structure for the trading of
debt securities in Pakistan.
52
d. Capital Issue Wing is empowered to issue regulatory guidelines on the
new offering of shares, issuance of prospectus and the allied matters.
ii. Market Supervision and Regulation Department: This department deals
with active monitoring of the capital market in Pakistan with the following
wings:
a. Market Surveillance Wing actively monitors the working of the
capital market in the real time to detect any unfair trading or
malpractices.
b. Beneficial Ownership Wing is concerned with the monitoring of those
shareholders who have more than 10% shares of a company for any
possible unfair trading.
c. Compliance and Inspection Wing monitors the capital market to
ensure the compliance with applicable regulatory framework by
inspecting the real market situations.
d. Brokers Registration and Investors Complaints Wing deals with the
registration of brokers for the capital markets and it also receives the
investors’ complaints against the brokers.
iii. Special Initiatives Department: This department is designed to work on any
special assignment related to the development of new products or trading
platforms in the capital markets.
3.5 Specialized Companies Division

This division deals with the Non-Banking Finance Companies for the development
of their regulations and monitoring systems to ensure the stability in their
operations.
i. Policy Regulation and Development Department: This department is
concerned with the development of policy guidelines, regulations and the
rules with the help of following wings:
a. Asset Management Companies Wing deals with the development of
appropriate regulatory framework and their registration matters related
to the asset management companies to minimize the operational and
financial risks.
b. NBFCs Litigation and Advisory Wing is entrusted with the handling
of prosecution and court matters related to the NBFCs.
c. REITS, Pension and Private Equity Wing focuses on licensing and
developing suitable regulatory framework for the real estate
management trusts, pension funds and the private equity funds.
d. Modaraba Wing is dedicated for the designing of suitable regulatory
framework and the licensing requirements of Modaraba companies.
53
ii. Supervision Department: This department is tasked with the monitoring of
the NBFCs to ensure the compliance with the applicable regulatory
requirements. It has following wings:
a. On-site Inspection Wing conducts on-site inspection on the premises
of the NBFCs in order to detect any deviation from the prescribed
procedures.
b. Off-site Inspection Wing deals with the monitoring of documents and
reports in order to know any deviation from the applicable regulations.
c. Enforcement Wing deals with the checking of NBFCs operations to
ensure the enforcement of the applicable laws, regulations and rules and
impose fine and penalties for any violation.
3.6 Insurance Division

This division deals with the regulatory and enforcement issues of the insurance
companies in Pakistan with the following departments:
i. Policy Regulation and Development Department: This department is
focused on the development of regulations and the issuance of licenses to the
insurance companies for doing businesses in Pakistan. It consists of two
wings:
a. Policy and Registration Wing deals with the registration, regulations
and insurance of the license of the life and non-life insurance
companies.
b. Re-insurance, litigation and advisory wing deals with the reinsurance
policies, litigation matters of the insurance companies and advises on
court proceedings against the insurance companies.
ii. Supervision Department: This department is concerned with the supervision

of the insurance market in Pakistan to detect any malpractices. It has
following three wings:
a. On-site Inspection Wing caters to the inspection of records on the
premises of the insurance companies in order to know any deviation
from the applicable rules and regulations.
b. Off-site Inspection Wing focuses on market reports and other external
information pertaining to the insurance companies to detect any
deviation from the applicable regulatory framework.
c. Enforcement Wing is entrusted to impose fine or penalty or
recommend for the prosecution in case of violation of applicable laws,
regulations and the rules by an insurance companies.
54
3.7 A Brief Discussion of other Support Departments of SECP
Apart from these functional divisions, departments and wings, the SECP also has
some other support departments that perform the vital functions. A brief description
of these departments is given below:
1. Appellate Bench:
The Appellate Bench of the SECP is mandated to hear appeals filed by the
companies and other aggrieved persons against the orders of the Commissioner or
any other officer of the SECP. The appeal is filed in the appellate bench registry
that evaluates the merit and maintainability of the appeal assists the appellate bench
in hearing the appeal. The appellate bench should consist of at least two
commissioners to hear the appeals. The appellate bench acts as the court for matters
falling in the SECP domain. The appeal against the decisions of the appellate bench
can be filed in the High Courts of the respective provinces.
2. Internal Audit:
The internal audit department is tasked with the monitoring of the prescribed
procedures in the SECP. This department ensures the compliance with the internal
control system developed to meet the regulatory requirements. To perform its
functions, the internal audit department constantly checks the governance, risk
management and adherence with the control system to know any deviation from
the prescribed procedures.
3. International Affairs, Communication and Coordination Department:

This department performs the multiple roles of coordination with the international
bodies, internal and external communication and coordination with the local
government institutions. The SECP is a member of the International Organization
of Securities and Exchange Commission, a global body to develop the
comprehensive set of standards for effective corporate governance. Additionally,
this department is also entrusted to maintain coordination with the local government
bodies i.e. State Bank of Pakistan, Federal Board of Revenue etc.
4. Law Division:
The law division functions as the independent division to advise the officers of the
SECP on the legal matters. It has three divisions:
i. Advisory Wing provides the legal advice to the various departments of the
SECP on the important legal matters. It also provides guidance on the drafting
of MoUs and other agreements with the external bodies.
55
ii. Litigation Wing deals with the management of the all cases filed by the
SECP and against the SECP in the court of law to defend the interests of the
SECP.
iii. Legislation Wing facilitates the drafting of various laws and regulations
related to the corporate sector and it also reviews the existing laws and rules
to suggest improvements.
3.8 Powers and Functions of the SECP

The SECP being the corporate regulator in Pakistan can exercise certain powers
and perform the prescribed functions to monitor the corporate sector, capital
markets, NBFCs and the insurance sector. These powers and functions of the SECP
are prescribed in the section 20 of the SECP Act 1997. A brief list of these powers
and functions is reproduced below from the above mentioned section:
1. regulating the issue of securities;
2. regulating the business in Stock Exchanges [Commodity Exchange] and any
other securities markets;
3. supervising and monitoring the activities of any central depository and Stock
Exchange clearing house;
4. registering and regulating the working of stock brokers, sub-brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an
issue, underwriters, portfolio managers, investment advisers and such other
intermediaries who may be associated with the financial services market in
any manner;
5. proposing regulations for the registration and regulating the working of
collective investment schemes, including unit trust schemes;
6. promoting and regulating self-regulatory organizations including securities
industry and related organizations such as Stock Exchanges and associations
of mutual funds, leasing companies and other NBFIs;
7. establishing and regulating entities for the protection of investors;
8. promoting, encouraging and enforcing the proper conduct, competence and
integrity of regulated persons;
9. proposing regulations for disclosures of information in public interest;
10. prohibiting fraudulent and unfair trade practices relating to financial services
market
56
11. promoting investors’ education and training of intermediaries operating in the
financial services market
12. hearing and deciding investor complaints against persons involved in
brokerage business for violations of securities laws, rules, regulations,
directives, codes, etc.;
13. conducting inspections and investigations in respect of matters related to this
Act and any administered legislation and in particular for the purpose of
investigating insider trading in securities and [initiating action against the
offenders;
14. ensuring development of a sound regulatory framework to counter and
suppress illegal,
15. improper and unfair practices in financial services market and other sectors
regulated by the Commission;
16. regulating substantial acquisition of shares and the merger and take-over of
companies;
17. regulating professionals who provide services within the financial services
market;
18. maintaining and issuing panels of auditors from which companies may
appoint auditors, and approving audit firms for financial institutions, listed
companies and NBFIs;
19. calling for information from and undertaking inspections, conducting
inquiries and audits of the Stock Exchanges and intermediaries and self-
regulatory organizations in the financial services market
20. considering and suggesting reforms relating to the financial services market,
regulated persons, companies and bodies corporate, including changes to the
constitution, rules and regulations of companies and bodies corporate,
securities exchanges or clearing houses;
21. encouraging the organized development of the financial services market and
other sector regulated by the Commission in Pakistan;
22. conducting research in respect of any of the matters set out in this sub-section;
23. performing such functions and exercising such powers of Federal
Government delegated to the Commission
57
24. performing such functions and exercising such powers (other than the power
to make any rules or regulations) under the Ordinance or any other law for
the time being in force as may, after the commencement of this Act, be
delegated to it by the Federal Government and exercising any power or
performing any functions conferred on it by or under any other law for the
time being in force;
25. proposing regulations in respect of all or any of the aforesaid matters for the
consideration and approval of the Board;
26. exercising all powers, discharging all duties and performing all functions
assigned to the Commission under, and generally administering, the Law of
Insurance;
27. ensuring and monitoring compliance by insurers, insurance surveyors and
insurance intermediaries of all laws, rules and regulations pertaining to
insurance for the time being in force;
28. regulating professional organizations connected with the insurance business;
encouraging the organized development of the insurance market in Pakistan.
29. to control and minimize misconduct, market abuse and financial crime in the
financial services market and other sectors regulated by Commission; for
regulating and facilitating the growth of Shariah compliant financial products
in the
30. to identify and address the factors resulting in systemic risk in the markets
regulated by the Commission;
31. to regulate and facilitate healthy growth of the corporate sector (private and
public), and to
32. promote good corporate governance for development of efficient
management and prudent financial practices;
33. establishing a foundation or fund to provide for welfare support and facilities
to the employees whether serving or retired and their families and to create,
establish, organize and assist in the social and cultural activities;
34. to regulate financial services market to ensure that they function in a fair,
efficient, transparent and orderly manner; and performing any other functions
entrusted to the Commission by the Federal Government from time to time.
58
3.9 Functions and Powers of the Board
The Securities and Exchange Policy Board sets the overall direction of the
corporatize regulations in Pakistan. The section 21 of the SECP Act 1997 prescribes
the powers and functions of the SEPB as reproduced below:
(a) when so asked to do and after consultation with the Commission, advise the
Federal Government on all matters relating to-
(i) the securities industry [and insurance industry];
(ii) regulation of companies and corporate sector and protection of the
interests of investors;
(iia) regulation of the insurance sector and protection of the interests of
insurance policy holders;
(iii) measures to encourage self-regulation by the Stock Exchanges[,
insurers, insurance intermediaries, insurance surveyors] and NBFIs by
specifying the standards for such self-regulatory organizations;
(iv) measures to promote the development of and to regulate the securities
market [and the insurance market]; and
(v) other related matters;
(b) consider and approve (with or without modification) any regulations with
respect to implementation of policy decisions, proposed to be made by the
Commission under the Act;]
(c) consider and approve (with or without modification) the budget for each
financial year of the Commission prepared and submitted to it;
(d) express its opinion in writing on any policy matter referred to it by the Federal
Government or the Commission;
(e) oversee the performance of the Commission to the extent that the purposes of
this Act are achieved;
(f) exercise all such powers and perform all such functions as are conferred or
assigned to it under this Act; and
(g) specify fees, penalties and other charges chargeable by the Commission for
carrying out the purposes of this Act.
59
1. Short Questions:
i. What is a corporate regulator?
ii. What is the SECP?
iii. How SECP works?
iv. What is appellate tribunal?
2. Long Questions:
i. Why a modern economy needs a corporate regulator? Elaborate in detail.
ii. Explain in detail the functional organizational structure of the SECP.
iii. What are the powers and functions of the SECP as per the SECP Act 1997?
iv. Explain the powers and functions of the SEPB as per the SECP Act 1997.
The SECP has strong laws but weak implementation? Do you agree with this
statement? What suggestions you can give to the SECP for effective corporate
governance of NBFIs?
4. Practical:
Explore the organizational structure of the SECP and fill this char
Place of Name of the
Division of SECP Wings Working
Office Head of Division
Corporate law
Division
Securities Market
Division
Specialized
Companies
Division
Insurance Division
60
INDUSTRY OVERVIEW:
Source: SECP Annual Report 2017-18
61
FURTHER READINGS

www.sbp.gov.pk
62
Unit–4
MUTUAL FUNDS
63
CONTENTS
Page #
Introduction ....................................................................................................... 65
Objectives ......................................................................................................... 65
4.1 Concept of Mutual Fund .......................................................................... 66
4.2 Types of Mutual Funds: Fund Structure-Wise......................................... 67
4.3 Types of Mutual Fund: Investment Objective-Wise................................ 68
4.4 Factors Affecting the Decision to Invest in Mutual Fund ....................... 70
4.5 Risk in Mutual Fund Investment ............................................................. 71
4.6 Technical Terms Related to Mutual Funds .............................................. 72
4.7 Operational and Working Issues of Mutual Funds ................................. 73
4.8 Benefits of Mutual Funds......................................................................... 75
64
INTRODUCTION
This unit covers the essentials concepts of mutual funds. The role of mutual funds
along with their types and functions. A further discussion is made on the open and
closed-ended mutual funds specifying the merits and demerits of each. Lastly, the
major issues and challenges for the mutual fund sector are discussed in detail.
OBJECTIVES
After reading the unit, you will be able;
i. to introduce the concept of mutual funds
ii. to elaborate the types of mutual funds
iii. to discuss the investment procedures of mutual funds
iv. to explain the major issue sin mutual fund industry
65
4.1 Concept of Mutual Fund
The financial markets provide a mechanism to the investors and users of funds to
meet their financial objectives. Within these financial markets, the role of financial
institutions is very important as they work to facilitate the transactions occurring in
the financial markets. These financial institutions, as we have studies them in
chapter 1, include banks, mutual funds, leasing companies, insurance companies,
pension funds etc. who design attractive investment schemes to encourage general
public for making investments. Once people invest their funds in the various
schemes of these financial institutions, the funds collected in this process are further
invested by these financial institutions in the various profitable sectors of the
economy to generate the adequate returns for their investors.
A mutual fund is a financial structure that collects funds from the various investors
and then allocates these funds as per the investment objectives of their owners into
the various sectors of economy. In this way, the mutual funds act as the agent in the
financial markets between the suppliers of funds and the users of funds. Generally,
a common man may not know the best option for making investment in an economy
as the market research and identification of profitable opportunities in a modern
complex economy is a difficult task. To fill this gap, the mutual funds offer their
services to the public by inviting deposits in their various schemes of investments
and promise them attractive periodic returns. In this way, the mutual funds work as
the financial intermediary thereby connecting the owners of the funds with the users
of the funds in a structured and secure way under a defined legal framework
supervised by the regulators.
To understand the working of a mutual fund, we need to look at the following

diagram;
66
As this diagram shows, the investors pool their funds together by depositing them
with the mutual funds and obtain a certificate called shares or certificates. The fund
managers then invest these funds in the various securities (bonds, shares, TFCs,
treasury bills etc.) and generate the periodic returns. These returns are then shared
with the investors (unit holders) as per their number of shares or certificates in a
particular mutual fund. A mutual fund is established by an Asset Management
Company (AMC) either as a trust or as an investment company. An AMC can issue
many types of the mutual funds each with its own different structure and investment
objectives. For each type of mutual funds, all AMCs are required to register and
obtain the license from the Securities and Exchange Commission of Pakistan
(SECP).
A mutual fund can generate returns for its unit holders in three possible ways;
i. Dividend/Interest is the periodic return shared with the unit holders out of
the profit earned by a mutual fund. This dividend is based on the performance
of the mutual fund in a particular period.
ii. Capital Gains are the increase in the value of the asset being managed by the
AMC and then sold to earn a gain. This gain is also shared with the unit
holders periodically along with the dividend.
iii. Increase in Unit Price may also provide financial benefit to the unit holders
as the daily movement in the prices of the shares or certificates issued by a
mutual fund may bring a gain. For example, a unit purchased of Rs. 5,000
may now be sold in the market at Rs. 5,300 capturing again of Rs. 300.
4.2 Types of Mutual Funds: Fund Structure-Wise

The establishment of a mutual fund may take several shapes as per its structure or
investment objectives. If we consider the fund structure, the mutual funds are
divided into two broader categories;
i. Open-Ended Funds:
An open ended fund is structured in a way to allow general public and institutions
to buy and sell the shares or certificates as per their choice at any time. The majority
of mutual funds operating in Pakistan is open ended and are further categorized by
their investment objectives. The open-ended funds are generally liquid, easy to
trade and widely recognized. A further description of open ended funds on the basis
of key qualities is presented below:
a. Quantity of units or certificates issued under the open-ended mutual funds
is not fixed and the fund size is not limited.
b. Trading of units or certificates for open-ended mutual funds is conducted
over the counter and not at any registered stock exchange.
67
c. Price Determination for the shares or certificates of open-ended funds is
done through the calculation of the Net Asset Value (VAV) on daily basis.
d. Redemption of shares or certificates in case of open-ended mutual funds is
done at any time based on their NAV.
e. Unit Classes are developed for open-ended funds and each class of shares or
certificates carry their own fees and other charges.
ii. Close-Ended Funds:

The close-ended funds are issued by a mutual fund that sells a fixed number of
shares or certificates within a designated time through the initial public offering
(IPO). The close-ended funds are generally issued to meet the long term capital
requirements of the businesses and investors. As compared to the open-ended
funds, the close-ended funds are issued less frequently, rigid in nature, time specific
offering and are traded only at the stock exchange. Other key qualities of the close-
ended funds are discussed below:
a. Quantity of units or certificates in case of close-ended funds is fixed as the
limited numbers of shares or certificates are issued during the subscription
period.
b. Trading of units or certificates of the close-ended funds can be conducted
only at the stock exchange among the willing buyers and sellers.
c. Price Determination of the shares or certificates of the close-ended funds is
done through the demand and supply of the shares or certificates in the
market.
d. Redemption of the shares or certificates of the close-ended funds is done at
a fixed future date prescribed at the time of issuance.
e. Units or certificates classes are not specified in the close-ended funds and
all shares or certificates are treated equally for buying and selling purposes.
4.3 Types of Mutual Fund: Investment Objective-Wise

After understanding the concepts of open-ended and close-ended mutual funds, we
need to pay attention to the functional types of the mutual funds as they are more
popular with the general public. In order to understand the working of mutual funds
with respect to their investment objectives, the mutual funds are divided into several
categories as discussed below:
i. Equity Funds are mutual funds offered by an AMC to the investors and their
funds are invested in the shares of various companies to generate the suitable
returns. The equity funds invest in the listed shares of the stock exchange and
earn dividends and capital gains for the investors.
ii. Debt Funds are the mutual funds offered by an AMC that deals with the
investment of funds in the bonds, debentures, TFCs and other debt securities
68
of the companies. The debt funds earn interest income for their investors by
holding various debt securities.
iii. Hybrid Funds also called the balance funds invest the funds collected in both
equity and debt securities. The logic behind the working of a hybrid fund is
to diversify the investments in the financial markets to maximize returns and
minimize losses.
iv. Money Market Funds are the mutual funds who invest the collected funds
in the short-term securities i.e. treasury bills, certificates of deposits,
commercial papers etc. The money market funds are designed to meet the
short-term investment needs of the investors.
v. Asset Allocation Funds are the mutual funds that provide liberty to the fund
managers to invest these funds as per their choice to generate the maximum
returns for the investors. The asset allocation funds carry a higher risk in their
investments due to their aggressive approach.
vi. Capital Protected Funds are designed to protect the principal invested
amount of the unit holders. These funds are preferred by those investors who
do not want to take excessive risk with their capital as a cumulative growth is
provided in the long term.
vii. Income Funds are the mutual funds who provide the regular flow of monthly
or periodic income to their investors. These funds place their investments in
relatively secured financial securities i.e. treasury bills, secured bonds, govt.
savings schemes etc.
viii. Islamic Funds provides the Islamic Shariah framework for managing the
funds of the investors. The Islamic mutual funds focus on the non-interest
bearing securities and the shares of companies doing halal businesses.
ix. Sector Specific Funds are the mutual funds that invest the collected funds in
a particular sector to generate the higher returns for the investors. These funds
carefully study the growth prospects of a particular sector before making such
investments.
x. Global Funds are the mutual funds that invest the pooled funds in global
equity, debt, commodities and forex markets in order to generate the best
possible returns for their investors.
xi. Commodity Funds are the mutual funds that invest their funds into the
commodity markets by buying and selling the futures contracts of metals,
energy and crops products.
xii. Govt. Securities Funds deals with the investment of the collected amounts
in the government long term (bonds, sukuks) and short term securities
(treasury bills etc) in order to generate a secure return for their investors.
xiii. Green Funds are relatively new phenomena as these mutual funds invest the
collected funds in the shares and other securities of those companies who
comply with the environmental laws and preserve the natural environment.
69
xiv. Index Tracker Funds are the mutual funds where the fund managers make
the investments by following a particular index of the stock exchange. The
investments are made proportionately in the shares of the companies covered
by an index.
xv. Regional Funds focus on investing the collected funds in a particular region
to generate the maximum possible returns. These funds carefully study the
growth prospects of a particular region for the world and invest their funds
accordingly.
xvi. Fund of Funds is a creative offshoot in the mutual funds industry where the
funds are invested in a particular fund whose objective is to hold other mutual
funds in its portfolio.
xvii. Exchange Traded Funds are also an innovative idea in the mutual funds
industry where a fund holds other funds in its portfolio as investment and then
the shares of the fund are offered for sale in the stock exchange.
xviii. Real Estate Funds are the mutual funds who invest the collected funds from
the investors in the real estate markets. These funds are also separately
managed by the Real Estate Investment Trusts (REITs).
xix. Infrastructure Funds are the mutual funds who collect the public funds and
then invest these funds in the infrastructure projects in the public and private
sector thereby earning an adequate return for the unit holders.
xx. Social Sector Funds are the mutual funds who collect funds from the
interested investors who are eager to invest in the social development of a
nation. The social sector funds invest these amounts in the businesses working
for the development of social sector of a country.
4.4 Factors Affecting the Decision to Invest in Mutual Fund

A person may make decision to invest his savings in the various types of mutual
funds as per his desired profit objectives. In order to make this investment decision,
there are several factors that should be considered by a person. A brief description
of these investment factors is given below:
i. Investment Objectives should be clear while making investment decision by
a person. The investment objectives can be aggressive risk taking in order to
earn a higher profit or accepting a lower return with a moderate or lower risk
investment categories.
ii. Funds Structure is important as the open-ended funds are more flexible and
easy to liquidate as compared to the close ended funds which are time-
bounded and of long term nature.
iii. Schedule of Charges needs to be seriously considered as the mutual charges
various kinds of fees and other expenses to the investors that may affect the
net returns of the investors.
70
iv. Liquidity helps investors to liquidate their investments in an easy manner.
Generally, the open-ended funds are considered more liquid as compared to
the close-ended funds and are preferred by the investors for short-to-medium
term investments.
v. Past Performance should be closely observed as the future profit rests
largely on the past performance of a fund. Therefore, the periodic returns
offered by the fund in last five years should be carefully studied.
vi. Economic Prospects of a country especially the future prospects of the
financial markets needs to be carefully studied as it becomes very difficult for
the mutual funds to survive in a low economic growth scenario.
vii. Institutional Strengths of a particular mutual fund should also be considered
while making the investment decisions as the mutual funds operated by large
sized AMCs or group of companies tend to perform better in bad economic
times.
viii. Time Preferences is another key factor as the investors should carefully
study the availability period (short-term, medium term or long term) of funds
for the investments.
ix. Tax Implications also impact the investment decisions as the tax credits
offered by making investment in a particular fund tend to attract more
investments in that particular fund.
x. Market Acceptability as collateral of the units or shares offered by a mutual
fund is also a significant factor in determining the decision for making
investment in a fund.
4.5 Risks in Mutual Fund Investments

Most mutual funds are not guaranteed, you might lose money over what you
invested. So the magnitude of risk in a mutual fund is subjected to what it invests
in.
For instance, stocks require much risk as compared to bonds so an equity fund
proves to be much riskier than bonds. Depending on the investment objective and
category, a mutual fund can be subject to any or all of the following risks which
could affect a fund’s performance.
1. Market Risk
The prices of and the income generated by the securities held by mutual funds may
decline in response to certain events, including those directly involving the
companies whose securities are owned by the funds, general economic and market
conditions, regional or global economic instability, or currency and interest rate
fluctuations.
71
2. Credit Risk
The risk that a security's issuer or the counter party is unable to meet its obligation
in full and/or on time such as payment of interest or repayment of capital or any
other financial or legal obligation.
3. Interest Rate Risk

The risk that an investment's value will change due to a change in the absolute level
of interest rates. Normally, rise in interest rates during the investment period may
result in reduced prices of the held securities.
4. Liquidity Risk
The risk stemming from the lack of marketability of an investment that cannot be
quickly bought or sold to convert in cash without loss. Certain securities may be
difficult or impossible to sell at the time and price that the mutual fund needs. The
mutual fund may therefore be forced to sell a security at a lower price, sell other
securities in its portfolio or forego an investment opportunity due to liquidity
constraints. This could have a negative effect on the Fund's performance.
4.6 Technical Terms Related to Mutual Funds

The mutual fund industry has become a giant financial intermediary system
employing separate terminologies and distinct concepts. These concepts are
necessary to understand to know the operational and working methods of a mutual
fund. A brief description of these important concepts and terms is given below:
i. Shares or Certificates are the legal documents issued by a close-ended
mutual fund to its subscribers and investors which are tradable at a stock
exchange.
ii. Units are the documentary evidence (hardcopy or electronic copy) issued to
the owners of funds who invest their money in the mutual funds.
iii. Net Asset Value (NAV) is the market value of all the assets held by a mutual
fund after deducting its liabilities. The NAV is calculated on daily basis for
the whole units issued so far by the mutual fund.
iv. Front End Load is an expense charged on the buying of the mutual funds
units from the investors at a prescribed rate. Some mutual fund may decide
not to charge the front end load to their investors.
v. Back End Load is an expense charged by the AMC at the time of encashment
of units of the mutual funds of the investors.
vi. Fund Manager Report is a financial document that shows the performance
of a mutual fund for a specific period. Generally, a fund manager report is
issued monthly for the information of the investors.
72
vii. Risk Tolerance is a type of the risk investors are willing to undertake for a
specific investment in a mutual fund. The risk tolerance in mutual fund is
categorized in three levels: aggressive, moderate and minimum.
viii. Offer Price is a price at which the units or shares of a mutual fund are issued
to the general public or the institutional investors. The offer price
ix. Redemption Price is the price at which the AMC is willing to enchash the
units of the mutual funds of the investors. The redemption price may include
certain charges.
x. Fee is an expense charged to the investors by the mutual fund for managing
the investment for a specific period. The fee also includes management fee,
trust fee and other fee.
xi. Fund Offering Document/Prospectus is a document that invites
subscription from the general public by describing the investment objectives
and the nature of the mutual funds along with a detail of the terms and
conditions.
xii. Constitutive Documents include trust deed, prospectus and other necessary
documents governing the establishment of a mutual fund.
4.7 Operational and Working Issues of Mutual Funds

The mutual funds industry in Pakistan is growing rapidly as the number of asset
management companies and their mutual funds is increasing every year. However,
there are certain issues and challenges being faced by the mutual fund industry as
a whole. Some of these operational and working issues are discussed below:
i. Unawareness among Investors:
The general public in Pakistan lacks a good sense of financial education as the
educational system of the country is outdated. The mutual funds also undertake
fewer advertisements and promotional activities to create awareness among the
masses. This lack of awareness is a major factor behind the lower participation of
the retail investors in the mutual funds.
ii. Limited Retail Network:

The mutual funds in Pakistan are concentrated in large cities only leaving a vast
segment of rural and small cities population. This problem of limited outreach is
compounded by the presence of mutual funds in selected areas of large cities only.
The limited retail network of mutual funds has not been able to attract large number
of investors especially from the smaller cities and rural areas.
iii. Higher Fees and Charges:

The mutual funds charge their investors various fees and other expenses for
managing their funds. These fees and charges negatively affect the net returns
73
received by the investors. Eventually, the burden of these extra payments
encourages the investors to put their funds in some other areas i.e. real state, banks,
savings centre etc.
iv. Complexity of Operations:

The investment in mutual funds requires some degree of financial knowledge and
ability to read the fund managers report along with the fund offering documents.
These sophisticated documents can only be understood by well-educated persons.
Further, the operational mechanism to understand the working of a mutual fund is
also a difficult task for a common man.
v. Underdeveloped Financial Markets:

As a whole, the financial markets are underdeveloped in Pakistan with fewer
products and limited institutional base. Similarly, the financial attitude among
general public is also focused on investments in the real markets i.e. property,
goods, services etc. The true functions of financial intermediaries are missing in the
financial markets of Pakistan as the majority of investors prefer non-financial
markets for investment purposes.
vi. Banks Dominance in Financial Sector:

The mutual fund industry is dominated by the banking sector as almost every large
banking group has its own asset management company. This dominance of banks
in the financial sector limits the competition in the overall financial markets thereby
resulting in lower returns for the investors.
vii. Lack of Professional Human Resource:

The role of professional fund managers and the supporting research staff is crucial
in the mutual fund industry. In Pakistan, the lack of professional managers is
evident as the majority of educational institutions in Pakistan do not offer courses
in the non-banking financial sector. This lack of professional fund managers has
resulted in filling the management positions with the relatively average level of
fund managers who lack creativity and strong financial analytical skills.
viii. Focus on Institutional Clients:

As discussed above, the mutual funds industry has not actively focused on the retail
investors. This has resulted in focusing only on the large sized institutional
investors by the mutual funds as they have huge funds for investment purposes. The
institutional clients generally prefer capital protection rather than returns that has
restricted the competition and innovation in the mutual funds industry.
74
ix. Perception of Frauds and Malpractices:
The investment schemes offered in the financial sector of Pakistan are often looked
with suspicion by the general public as there have been many frauds and
malpractices in the name of investment schemes. The general public needs a strong
dose of financial education to convince them to interact with the financial
intermediaries especially the mutual funds.
x. Higher Capital Requirements:

The regulatory body of mutual funds, the SECP, has placed many restrictions on
the operational aspects of the mutual funds. These include the minimum capital
requirements for starting a mutual fund or an asset management company. These
huge minimum capital requirements have restricted the space for the small size fund
managers to offer their services in the financial markets.
4.8 Benefits of Mutual Funds

The mutual fund industry has grown significantly at local and global level attractive
investors to put their funds in the various investment schemes. A mutual fund
basically acts as an agent in the financial markets for the investors to invest the
clients’ funds in the best possible ways to earn the maximum returns. A brief
discussion on the benefits offered by the mutual funds is given below:
i. Facilitator in the Financial Markets:

The mutual funds facilitate the investments in the financial markets by acting as the
intermediary between the owners and users of the funds. A common man may not
easily understand the working of financial markets and his/her knowledge of the
profitable opportunities in the stock exchange, commodity markets, money markets
etc. is limited. The mutual funds fill this gap by offering their services in the form
of floating various investment schemes.
ii. Ease of Liquidity:

The funds invested in the mutual funds are can be easily converted into cash or cash
equivalent in case of emergency need. This quality of liquidity of mutual funds
units attracts a lot of investors as people generally prefer liquid investments.
Moreover, the liquidity also enables the investors to enter and exit the financial
markets easily.
iii. Convenience to Buy:

Another useful quality of the mutual funds units is their convenience to buy from
the asset management companies. As compared to the investments in the stock
exchange or commodity markets where a lot of paper work and formalities are
75
observed, the investments in the mutual funds are made easily by visiting the offices
of the asset management companies. Some mutual funds are also offering the online
opening of accounts and buying the units through online bank accounts.
iv. Diversification:
The working of a mutual fund is based on the diversification of the funds into the
different sectors of the economy to generate the maximum returns and minimization
of losses. The principle of diversification also helps the mutual fund managers to
cover the losses occurring in a particular sector with the profits in another sector.
v. Professional Managers:
The mutual funds are managed by the professional managers who have vast
experience of managing investments in the various sectors of the economy. These
fund managers ensures the efficient allocation of investors funds in the various
productive sectors of the economy. The mutual charges a fee for the services
performed by the mutual fund managers for managing the investments of the
clients.
vi. Market Research:

A common investor is unable to deeply understand the profitable opportunities in
the economy. The operations and investment decisions of a mutual fund rest on the
market research conducted in order to know the profitable segments of the
economy. After a careful analysis of the emerging trends in the economy, the fund
managers decide to allocate the investors accordingly.
vii. Loss Minimization Tools:

A mutual fund has several loss minimization tools in its operating strategy to
counter the negative market effects on the investments. Among these tools,
diversification, hedging, portfolio management, market intelligence, securitization,
etc. These features enable a mutual fund to protect the investment of their clients in
the best possible ways.
76
1. Short Questions:
a What is a mutual fund?
b What are the closed ended funds?
c What are the unit holders?
d What is load?
2. Long Questions:
i. Discuss in detail the various types of mutual funds.
ii. Explain in detail advantages and disadvantages of investments in mutual
funds.
iii. What are the various working and operational issues of mutual funds in
Pakistan?
The mutual fund industry is growing rapidly in Pakistan? Explain the various
reasons behind this growth. Can this growth be further accelerated?
4. Practical:
Select any five different mutual funds working in Pakistan and fill this chart:
Name of Minimum Expected
Applicable Terms and Tax
Mutual Investment rate of
Fees Conditions Credit
Fund Required return
77
INDUSTRY OVERVIEW
As of June 30, 2017, the total size of the industry stood at Rs710 billion as compared
to Rs546 billion on June 30, 2016. The total number of funds /plans stood at 228 as
of June 30, 2017, as compared to 199 as of June 30, 2016. The industry was also
managing discretionary portfolio of Rs141 billion as of June 30, 2017.
As of June 30, 2017, equity funds (both conventional and Shariah-compliant)

dominated the assets under management of the industry with the largest share of
the mutual fund industry, i.e. 48.03%. Income funds (both conventional and
Shariah-compliant) held the second largest industry share, i.e. 17.76%, followed by
money market funds (both conventional and Shariah-compliant) with industry
share of 11.93%.
Growth of mutual funds in number and assets under management:

(in billion rupees)
78
FURTHER READING
Research Papers & Reports:
Mahmud, M., & Mirza, N. (2011). An evaluation of mutual fund performance in an

emerging economy: The case of Pakistan. The Lahore journal of
economics, 16, 301.
Nafees, B., Ahmed, S., & Zeeshan, S. (2013). The Claim of Mutual Fund Managers
of having Efficient Portfolio Than Capital Markets, Is It True. Research
Journal of Finance and Accounting, 83.
Nafees, B., Shah, S. M. A., & Khan, S. (2011). Performance evaluation of open end
and close end mutual funds in Pakistan. African Journal of Business
Management, 5(28), 11425-11434.
Nazir, M. S., & Nawaz, M. M. (2010). The determinants of mutual fund growth in
Pakistan. International research journal of finance and economics, 54(10).
Rasheed, H., & Qadeer, A. (2012). Performance Evaluation of Survivorship-Biased

Open-Ended Mutual Funds in Pakistan. International Research Journal of
Finance and Economics, (82).
Razzaq, N., Gul, S., Sajid, M., Mughal, S., & Bukhari, S. A. (2012). Performance
of Islamic mutual funds in Pakistan.
Shah, S. A., Hijazi, S. T., & Hamdani, N. H. (2005). Performance Evaluation of

Mutual Funds in Pakistan [with Comments]. The Pakistan Development
Review, 863-876.
Sipra, N. (2006). Mutual fund performance in Pakistan, 1995-2004. Centre for

Management and Economic Research (CMER), 1-14.
Zulfiqar, B., Raheman, A., Sohail, M. K., & Nasr, M. (2011). Examining the
Performance of Closed-End Mutual Funds Under Different States of Pakistani
Stock Market. International Review of Business Research Papers &
Reports, 7(3), 233-249.
79
Books:
Fabozzi, F. J., Modigliani, F., & Ferri, M. G. (1994). Foundations of financial

markets and institutions (Vol. 3). Upper Saddle River, NJ: Prentice Hall.
Kohn, M. (2003). Financial institutions and markets. OUP Catalogue.
Saunders, A., & Thomas, H. A. L. (1997). Financial institutions management.

Boston: Irwin.
80
Unit–5
MODARABAS

81
CONTENTS
Page #
Introduction ....................................................................................................... 83
Objectives ......................................................................................................... 83
5.1 Concept & Structure of Modaraba Business ............................................ 84
5.2 Types of Modaraba Business ................................................................... 85
5.3 Investment Risks in Modaraba Business ................................................. 87
5.4 Advantages and Disadvantages of Investing in Modaraba ...................... 88
5.5 Issues in Modaraba Industry of Pakistan ................................................. 91
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INTRODUCTION
This unit deals with the essential concepts of modarbas which are an Islamic form
of investments. The modarbas were introduced in Pakistan in 1980s as an alternate
form of investments. This unit will discuss the functions, structure, and types of
modarbas. The functional and operational issues of modarbas are also discussed in
the last section.
OBJECTIVES
i. to discuss the role and functions of modarbas
ii. to describe the structure of modarbas
iii. to explain the investment procedures of modarbas
iv. to discuss the major issues and challenges
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5.1 Concept & Structure of Modaraba Business
The basic concept of modaraba is similar to the mutual fund studied in the last
chapter. A modaraba is a collective investment scheme that works on the principles
of Islamic Shariah and offered to the investors by a modaraba management
company by promising an attractive return through wise investment decisions. The
concept of modraba is based on the interaction of two persons where the one person
provides the capital and the second person provides its skills in managing these
funds. The persons who provide funds are called rab-ul-mal and the person who
manages these funds is called the modarab.
The working of a modaraba is like a mutual fund that invites accepts deposits
from the investors (general public and institutions) and invests these funds into the
profitable trading, manufacturing, financing and other rewarding ventures. The
return generated on these funds is then shared with the investors periodically in
proportion to their investments. A modaraba business is supervised by the shariah
advisors who oversee the operational aspects of a modaraba and issue guidelines
for not investing the collected funds in the forbidden (haram) sectors of economy
as per the Islamic principles. Therefore, a mdaraba business offers an opportunity
to the religious minded investors to safely place their funds in the collective
investment schemes and earn the attractive returns.
The origin of modaraba business can be traced back to the earlier days of Islam
when the traders who bought and sold goods in various cities employed this concept
to accelerate their business activities. The modern form of company business has
been derived from the concept of modaraba that offers an institutionalized way for
managing the collective investments of different persons. In Pakistan, the legal
framework for the modaraba businesses was developed in 1980 as a part of a larger
drive to Islamize the overall economy. As a result, various modaraba companies
were established to offer an Islamic window of opportunity to the investors to invest
their funds in the different sectors of economy.
The legal structure of a Modaraba is governed by the Modaraba Companies

(Floatation and Control) Ordinance 1980 and the Modarabs Companies Rules 1981
together with the Companies Act 2017 and the related rules. A Modaraba
Management Company (MMC) is established by registration with the SECP under
the above mentioned laws by meeting the minimum capital requirements and the
fir and proper criteria for the sponsors. The office of Registrar of Modarabas has
been established within the SECP to deal with the registration and licensing matters.
The MMC then floats various types of modarabas (collective investment funds) in
the financial markets by issuing a prospectus for seeking investments. The SECP
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has also established a Shariah Advisory Board whose approval is required for the
issuance of a modaraba investment scheme. A modaraba can be structured
according to its objectives: specific purpose or multi-purpose and limited period or
for indefinite period.
5.2 Types of Modaraba Business

A Modaraba Management Company may start any type of halal business after
obtaining the license from the SECP. There are many forms of modaraba businesses
and their financing patterns. An MMC may enter into trading, manufacturing,
financing and other form of business based on its objectives and the expertise of its
fund managers. Generally, the funds deposited with the MMC are allocated in
different sectors of economy based on their expected returns and capital protection.
The various practitioners and researchers of Islamic finance have developed new
tools for effectively utilizing the modaraba funds. Some of these tools are being
used by modaraba companies and Islamic banks all over the world. A brief
explanation of these investment tools is given below:
i. Salam (Trade Financing):

The first form of financing used by the modarabas is called salam or trade
financing. In salam, the seller agrees to supply the specific goods to the buyer at a
future date against a price to be paid in advance at the spot. The price in this case
is paid in cash but the supply of purchased goods is made later on. Usually, this
form of financing is used in case of agricultural products and for other trading
businesses.
ii. Ijarah (Leasing):

The Islamic form of financing lease type transactions is called ijarah. As in a
traditional leasing, the lessor (owner of asset) agrees to supply a particular product
to the lessee (user of asset) against a periodic payment for a fix period. Upon the
completion of fixed period and payments of all installments, the asset is transferred
to the lessee.
iii. Istisna (Progress Financing):

The istisna is referred to as the progress financing where the financing depends on
the level of completion of an activity. Generally, this type of financing is made in
construction sector where a definite asset is required to build or constructed as per
agreed terms and conditions within a limited time. The funds are provided by the
modarabas based on the stage of completion of work.
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iv. Musharkah (Partnership Financing):
The musharka is basically a form of partnership financing where the partners agree
to put their funds in a particular venture and share the profits and losses in a pre-
agreed ratio. The musharka financing patterns are suitable in certain projects where
the other party also wants to contribute its capital in the project.
v. Murabaha (Cost Plus Financing):

The murabah financing agreements are widely used by the Islamic financial
institutions. In murabah transactions, instead of loan on interest, the particular
commodity is provided to the customer by the client through a third party. In
murabah transactions, the seller discloses the cost of the product and includes a
profit margin. The modaraba then discloses the cost and the profit margin to the
client. In this way, the trading of various commodities is completed among all
interested parties.
vi. Musawmah:
The musawmah transactions are similar to the Murabah except the true cost of the
commodity is not disclosed in the agreement. In this commodity financing
arrangement, only the seller knows the cost of the commodity and a halal profit is
allowed on it to be charged to its buyer. However, the underlying asset should be
in existence and the transactions should be conducted in the present date.
vii. Diminishing Musharkah:

The diminishing musharka is a relatively a new concept in the Islamic finance
industry. It is kind of partnership (musharka) financing in which the financer’s
share is divided into units to be purchased by the buyer. As the buyer pays the
installments and the number of units increases, the relative share of ownership of
asset is increased. These types of financing agreements are common for house
construction or buying agreements.
viii. Syndicate Modarba:

The syndicate modaraba is basically a joint investment of two or more modaraba in
a particular venture whose profits and losses are shared in an agreed ratio. The
syndicate modaraba financing arrangements are used in large seized infrastructure
projects which require huge amounts for completion.
ix. Islamic Continuous Funding System:

The Islamic Continuous Funding System is basically a credit facility to the client
for buying the speificed shares. At the time of buying these shares, the client
deposits an agreed amount to the moadaraba management company from whom the
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credit is sought. The MMC then buys these shares by extending a credit and shares
are bought and held in a specific amount.
x. Sukuk (Islamic Bonds):

To generate the long term funds from the market, the modarabas may also use the
option of sukuk. A sukuk is a long term bond that is structured to provide a periodic
return to its investors against the security of physical asset. The sukoks are widely
used in the Islamic finance industry globally to generate the long term funds.
5.3 Investment Risks in Modarba Business

Every business has to face multiple risks in its operational and financial aspects.
There are several risks related to the investments made by the investors in the
modarabas. A good modaraba fund manager is required to have a deep
understanding of these risks and suitable risk management systems should be
developed to effectively manage these risks. A brief look into these risks is
presented below:
i. Market Risk:
The market risk refers to the overall risk present in the economic sectors in which
the modarabs have made investments. Based on several supply and demand forces,
a particular sector or an industry may not perform economically sound and
significant losses may occur for various investments. A moadraba fund manager is
required to make investment decisions by deeply analyzing the market trends.
ii. Regulatory Risk:

The regulatory risk refers to the occurrence of non-favorable events affecting the
overall business model of the modarabas. For example, the current tax rebate
enjoyed by the modarbas investors may be affected due to any change in the
taxation structure. Similarly, the SECP may also develop some strict rules to
address any short-comings in the regulatory structure that may affect the
operational and financial aspects of modarabas.
iii. Systematic Risk:

The systematic risk refers to the overall risk in the financial sector of Pakistan that
may affect the returns on investments in modaraba sector. For example, any
abnormal change in the interest rates may also impact the operational and financial
aspects of the modarabas. In the same way, the occurrence of some major default
in the financial sector may also negatively affect the modarabas.
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iv. Religious Differences Risk:
The whole modaraba industry is based on the various investment guidelines issued
by the religious scholars. As Islam like any other religion has many sects who may
develop a difference of opinion on the working and operational structure of the
modarabas. This risk can be mitigated by building a consensus of all religious
groups for an agreed upon investment and operational guidelines.
v. Operational Risk:
The operational risk refers to the occurrence of non-favorable events within the
operating environment of the modaraba management company. These events
include fraud, large scale errors, change of key management personel, reputational
loss etc. These internal factors may also contribute negatively for achieving the
optimal profit level of a modaraba fund.
5.4 Advantages and Disadvantages of Investing in Modarba

There are many benefits for investing funds in the modaraba as compared to the
other options available in the financial markets of Pakistan. These benefits are
discussed briefly here:
i. Tax Benefits:
A modaraba provides tax benefits to its investors in the form of tax free
distributions of profits. As compared to other investment options, the distributed
profits of the modarbas are not taxed if the 90% of profits are distributed among
the investors. In this way, the investors receive higher returns on their investments
in the modarabas schemes.
ii. Islamic Way of Working:

In the Muslim dominated societies like Pakistan, a large majority of people prefer
Islamic methods for investments. As the earning and charging of interest on funds
is prohibited in Islam, the Muslims seek alternate tools for investments. The
business structure of modaraba provides this option to the general public to invest
their funds in an Islamic way.
iii. Monitoring by Shariah Advisors:

The operational aspects of the business of modarabas are supervised by the
religious scholars who ensure the investments of funds collected by the modarabas
in an Islamic way. The SECP has established a religious board for granting license
to a modaraba for starting its operations. The religious scholars ensure the
compliance of the overall business model of the modaraba with the Islamic
principles.
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iv. Wider Business Options:
A Modaraba Management Company can issue multiple types of modarabas and can
engage in trading, manufacturing and other ventures to generate suitable returns for
their investors. As compared to the mutual funds, the modarabas are allowed to
perform multiple functions with one license. Further, the modarabas can engage in
v. Minimum Capital Requirements:

As compared to the mutual funds, the modarabas are not required to have a large
minimum capital to start their businesses. The minimum capital requirement for the
modarabas is lower as compared to the mutual funds. Additionally, the modarabas
have an option to expand their businesses by obtaining just one license for their
operations. In this way, the managers of modarabas feel relaxed and focus on their
investments diligently.
vi. Market Acceptance:

The certificates issued by the modaraba management companies are tradable in the
open financial markets. The investment certificates can be traded at the stock
exchange by the investors in order to meet their financial requirements. The other
investment certificates issued by a modaraba are also accepted in the market for
trading, collateral and other economic objectives.
vii. Capturing Market Returns:

The modarbas provide an option to the investors to look beyond their own sectors
and capture the market returns offered by other sectors as well. The funds invested
in a modaraba scheme can be allocated to the various profitable segments of an
economy to generate the higher returns for the investors.
viii. Traders Facilitation:

The modarabas fund managers invest a significant portion of their deposits in the
trading sector to meet the financial needs of the trading communities. The trading
sectors of economy are generally overlooked by the other financial institutions and
this gap is fulfilled by the modarabas.
How to Invest in Modaraba Schemes?

There are several ways to invest in the modarabas for various class of investors.
Some of these methods and the investment tools have been explained below:
i. Modaraba Certificates:
The modaraba certificates are issued by a modaraba management company for
inviting investments in the modaraba. These certificates can be issued in two ways:
89
a. Initial Public Offer: Through Initial Public Offer (IPO), the modaraba
investment certificates are issued by a modaraba management company for
the first time in the primary market. The investors can directly apply for
buying the modaraba certificates from the modaraba management company
in the IPO. These certificates unlike shares of companies do not carry any
voting rights.
b. Direct Buying from Market: The modaraba certificates can also be
purchased from the secondary market after their initial offering through IPO.
The investors who are interested to buy these certificates may place their bids
through stock exchange to the existing investors as the modaraba certificates
are registered on the stock exchange.
ii. Non-Interest Bearing Certificates of Modarabas:

The non-interest bearing certificates are issued by the modarabas or Modaraba
Management Company to meet the additional funding requirements for making
various investment and other financial decisions. The holders of these certificates
are provided returns based on the structure of each certificates and its maturity
period. Some of these certificates are explained below:
a. Musharka Certificates: The musharaka certificates are issued by a
modaraba management company to seek funds from a class of investors on
partnership basis. These certificates are issued to seek funds for managing the
various investment options by a modaraba management company. Based on
the structure of partnership financing, the returns are accordingly shared with
the investors in a pare agreed ratio.
b. Term Finance Certificates: The Term Finance Certificates (TFCs) are
structured according to a fixed period of maturity with a defined returns plan.
These returns are not fixed but based on the various class of assets described
for such investments. The TFCs provide an option to modarabas for
generating medium to long term funds from the financial markets.
c. Sukuk: The sukuk is an equivalent of bond for generating the long term funds
from the investors in modaraba business. By offering sukuk certificates to the
investors, the modarbas can generate long term funds from the investors to
meet their long term financing requirements (project financing, infrastructure
financing etc.).
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5.5 Issues in Modaraba Industry of Pakistan
The modaraba industry in Pakistan is facing several issues and operational
challenges as the financial sector of Pakistan is dominated by commercial banks.
Alongside these commercial banks, some new Islamic banks have also started
functioning and offering Islamic financial products to the customers. The modaraba
industry is competing in this challenging financial environment coupled with the
lack of tangible government support. A brief discussion on the various issues and
challenges being faced by the modaraba industry in Pakistan is presented below:
i. Lack of Awareness:
The lack of awareness is the most challenging factor limiting the growth of
modaraba schemes. The genral public as a whole lack financial education and
surplus funds are usually invested in banks and real estate. The concept of
modaraba has not been widely communicated to the masses to encourage them to
invest their funds in the various modaraba schemes.
ii. Limited Outreach:

Due to the lack of awareness of the concept of modaraba and collective investment
schemes, the retail outreach of the modaraba sector is limited. A large majority of
modaraba management companies are situated in big cities which cater to only
small group of investors. There has been a lack of serious efforts on the part of
modaraba industry to expand their operations in the small towns and rural areas.
iii. Operational Hurdles:

The modaraba industry is based on the concept of collective investments that
requires wise investment decisions based on sound market analysis. In Pakistan, the
modaraba funds face several hurdles in their operational aspects as they lack large
deposits base, economies of scale and sophisticated risk management tools.
Similarly, the
iv. Lack of Trained Professionals:

The performance of every business is based on the competence and skills of its
employees. The modaraba industry requires experts in Islamic finance with sound
investments skills. The educational institutions in Pakistan are not producing the
vibrant class of modaraba fund managers who can scan the investment horizons
and produce the attractive returns for the investors.
v. Dominance of Banks:
The financial sector of Pakistan is dominated by banks as they have large deposits
base and wider retail networks. Further, the entrance of Islamic banks has also
91
limited the space of modarabas as the religiously minded investors are turning
towards the Islamic banks for the same financial products offered by the modarabas.
This has practically shrunk the operating space for the modaraba sector.
vi. Liquidity Management:

Another problem for the modaraba management companies is the shortage of funds
as they have limited deposits base with fewer investment options. A large portion
of the deposits is invested in the physical assets with longer maturity periods.
Further, the commercial banks are reluctant to extend easy credit lines to the
modarabas thereby curtailing their liquidity positions.
vii. Limited Funds:

With limited outreach and lack of investors’ interest, the modaraba management
companies in Pakistan have fewer funds for investments. As explained earlier, the
majority of investors prefer banks and other financial institutions for investments;
the attraction of modaraba funds is limited resulting in limited funds for the
modarabas.
viii. Higher Charges & Fees:

The modarabas management companies charge various expenses and fees on the
returns for managing the investments. These charges reduce the net returns for the
investors who have invested their amounts for higher gains. Due to the lack of
efficient operations, the expenses of modaraba management companies are higher
as compared to the asset management companies.
ix. Widespread Frauds & Malpractices:

The reputation of modaraba funds has been badly damaged due to the widespread
frauds and malpractices by some unregistered modarabas. This practice has resulted
in loss of trust of the potential investors on various chems of modarbas. Here the
role of SECP has also been poor as the regulator has failed to convince the investors
about the safety of their invested funds.
x. Limited Presence in Capital Markets:

The modarabas management companies have limited presence in the capital
markets as they lack financial attraction for the investors. This lack of active
participation in the capital markets has reduced the funding sources for the
modarabas. The government support has also been limited for favoring the
modarbas to actively participate in the capital markets.
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1. Short Questions:
v. What is a modarabas fund?
vi. What are the parties in a modaraba contract?
vii. What is the Shariah Board?
viii. What is ijara?
2. Long Questions:
i. Discuss in detail the working of modarabas in Pakistan.
ii. Explain the advantages and disadvantages of investments in modarabas funds.
iii. What are the various working and operational issues of modarabas in Pakistan?
iv. What are the major products/investment schemes of the modarabas companies?
The modarabas have not performed as per the expectation of the Islamic Shariah
scholars? What are the various reasons for the weak performance and the slow
growth of modarabas in Pakistan?
4. Practical:
Select any five different modarabas working in Pakistan and fill this chart:
Name of Minimum Expected
Applicable Terms and Tax
Modaraba Investment rate of
Fees Conditions Credit
Fund Required return
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INDUSTRY OVERVIEW:
1. At present, the registered modaraba companies are 37 while 25 modarabas are

operational. During 2016-17, a new company was registered as a modaraba
company.
2. During the year, the modaraba sector showed growth in terms of total assets.
The sector declared dividends up to 90%.
3. As per the online returns of 25 operational modarabas as of June 30, 2017,
the aggregate equity of the modaraba was Rs21 billion and total assets of the
modaraba sector stood at Rs44 billion. For the year ending June 30, 2016, 19
modarabas declared dividend in the form of cash.
4. As of June 30,2017, five modarabas were under winding up. During the last
few years, the modaraba sector has shown a steady growth.
5. The total assets of the modaraba sector were Rs37 billion as of June 30, 2016
as compared with Rs44 billion as of June 30, 2017, thus showing an increase
of 19%.
Some Listed Modarbabas in Pakistan are:

1. Awwal Modaraba.
2. Cresent Standard Modaraba.
3. First Elite Capital Mod.
4. First Habib Mod.
5. First Punjab Mod.(XD)
6. Habib Metro Modaraba.
7. Orient rental Modaraba
8. Sindh Modaraba.
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FURTHER READINGS
Research Articles:
Afza, T., & Asghar, M. J. E. K. A. (2014). Efficiency of Modaraba and Leasing
Companies in Pakistan. Procedia-Social and Behavioral Sciences, 109, 470-
482.
Akram, M., Rafique, M., & Alam, H. M. (2011). Prospects of Islamic banking:
reflections from Pakistan. Australian Journal of Business and Management
Research, 1(2), 125.
Hassan, Y., & Yasir, S. (2011). FINANCIAL GROWTH AND ANALYSIS OF
MODARABA SECTOR since 2001-2009 (In Pakistan). International
Journal of Global Management Studies, 3(2).
Hoepner, A. G., Rammal, H. G., & Rezec, M. (2011). Islamic mutual funds’
financial performance and international investment style: evidence from 20
countries. The European Journal of Finance, 17(9-10), 829-850.
Khan, T. (1996). Practices and Performance of Modaraba Companies (A Case
Study of Pakistan’s Experience) (No. 40). The Islamic Research and Teaching
Institute (IRTI).
Looney, R. E. (1996). Financial innovation in an Islamic setting: the case of
Pakistan.
Siddiqui, S. A. (1998). Mudarabah Finance: A Critical Review of Bacha’s Model
and Modarabas of Pakistan. Journal of Accounting Commerce and Finance:
Islamic perspective.
Books:
El-Gamal, M. A. (2006). Islamic finance: Law, economics, and practice.

Cambridge University Press.
Hassan, K., & Lewis, M. (Eds.). (2009). Handbook of Islamic banking. Edward
Elgar Publishing.

www.sbp.gov.pk
95
THE MODARABA COMPANIES AND MODARABA RULES, 1981
1. Short title and commencement.__ (1) These rules may be called the
Modaraba Companies and Modaraba Rules, 1981.
(2) They shall come into force at once.
2. Definitions__ (1) In these rules, unless there is anything repugnant in the

subject or context,__
(a) “Advocate” means a person entered in any role under the provisions of the
Legal Practitioners and Bar Councils Act, 1973 (XXV of 1973);
(b) “Certificate holders” means holders of Modaraba Certificates;
(c) “Chairman” means the Chairman of the Religious Board;
(d) “Form” means a form set out in the First Schedule;
(e) “Member” means a member of the Religious Board and includes the
Chairman;
(f) “Ordinance” means the Modaraba Companies and Modaraba (Floatation and
Control) Ordinance, 1980 (XXXI of 1980);
(g) “Religious Board” means the Board constituted under section 9;
(h) “Section” means a section of the Ordinance;
(i) All other terms and expressions used but not defined in these rules shall have
the same meanings as are assigned to them in the Ordinance.
3. Registrar. __ (1) The headquarters of the Registrar shall be at Islamabad.
(2) Without prejudice to the powers, duties and functions conferred or imposed
on him by the Ordinance, the following shall be the duties and functions of the
Registrar, namely:-
(a) to receive applications for registration as modaraba companies;
96
(b) issue to a modaraba company a Certificate of Registration which indicates the
serial number of registration, year of registration and office of issue and has
the official seal of the Registrar affixed thereto;
(c) to provide secretarial services to the Religious Board;
(d) to refer the applications for floatation of modaraba which shall be in Form-I,
to the Religious Board and obtain their certificate in writing in Form II that
the modaraba is not a business opposed to the injunctions of Islam;
(e) to receive applications for and grant Certificate of Authorization in Form III
for floatation of modarabas on such conditions as he may deem fit in keeping
with the provisions of section 11;
(f) to lay-down, receive and examine all reports, accounts and other documents
referred to in section 14 and to pass orders for and receive such additional
documents or reports or information as may be considered necessary;
(g) to issue a certificate in Form IV on receipt of a declaration in Form V that

Modaraba Certificate have been allotted in an amount not less than the
minimum amount stated in the prospectus to be raised in order to provide for
the business operations and expenses;
(h) to allow issue of certificates of a modaraba at a premium or at a discount.
(3) The Registrar shall examine or cause to be examined any documents received
and return for rectification any document filed with or delivered to him for
registration, filing or recording if it is found to be defective or incomplete or
mutilated and shall not register file or record such document until the
requirements indicated by him have been complied with and a revised or
corrected document furnished:
Provided that the Registrar may for special reasons instead of returning the
document demand a fresh document or ask the modaraba company to depute
a representative to rectify or complete the document as may be necessary.
(4) The Registrar shall not register, file or record any document in respect of
which a fee is payable until such fee has been deposited in the correct head of
account and receipt furnished to him and shall, pending the payment of such
fee, act in the same way as if no such document had been tendered for
registration, filing or record.
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(5) When a document is accepted for being registered, filed or recorded, the
Registrar shall issue an acknowledgement in Form VI of the First Schedule.
(6) All documents of each modaraba company and each modaraba shall be kept
together, distinct and separate from those of other modaraba companies and
modarabas.
(7) The Registrar shall make endorsement of the following particulars on every
document registered, filed or recorded in his office, namely serial number (a
separate serial number shall be given to each document); name of the
modaraba company and of the modaraba; brief description of the document
including its enclosures; and the date on which the document is registered,
filed or recorded, and shall sign, and affix his official seal, to every such
endorsement.
(8) In the office of the Registrar, there shall be maintained a register of modaraba
companies and a register of modarabas in Forms VII and VIII in which
particulars of the companies and the modarabas shall be entered in the order
in which they are registered or authorized, as the case may be.
(9) In the pages allotted to each modaraba company in the register, a note shall
be made of every document or fact relating to the Modaraba Company or
modaraba which is registered, recorded or filed with the Registrar.
(10) The Registrar shall also cause an alphabetical index to be maintained of

modaraba companies and modarabas in the register;
(11) The Registrar shall permit members of the public to inspect such registers and
records of documents maintained under this rule and such other rules as he
may deem fit, provided that, before such permission is granted, prescribed
inspection fee has been paid.
(12) The inspection of the documents shall be allowed during the office hours and
in the presence of the Registrar or a person authorized by him in his behalf.
(13) The Registrar shall, on the application of a person, grant copies of entries in
the registers and documents as are open to inspection duly signed, sealed and
dated by him on payment of the prescribed fees.
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(14) The Registrar shall take cognizance of omission to file or register documents
on due date or any other omission, lapse, irregularity or infraction of the law
by or in relation to a modaraba company or modaraba.
(15) The Registrar shall institute such enquiries or proceedings in respect of any
matter as may, in his opinion, be necessary to obtain information or evidence
respecting defaults or any lapse, irregularity or infraction of the law by any
modaraba company or in relation to a modaraba or any promoter, officer,
employee, liquidator or receiver.
(16) The Registrar shall cause to be prepared and keep a seal for authentication of
documents and certificates required for or connected with the registration of
modaraba companies and modarabas and related matters.
(17) The Registrar may assign any of the duties prescribed under the Ordinance or
these rules and generally regulate performance of duties and issue directions
to any officer or officials subordinate to him in such manner as he may think
fit.
(18) There shall be paid in respect of the several matters mentioned in the Second
Schedule the several fees therein specified.
(19) All fees, charges and other sums paid or realized under the Ordinance or under
any order of the Registrar, Tribunal or the Federal Government in pursuance
of the Ordinance and the rules shall be accounted for to the Federal
Government in the State Bank of Pakistan or any other bank acting as agent
of that Bank or the Government Treasury under head “1213-ECONOMIC
REGULATION-RECEIPTS UNDER MODARABA ORDINANCE” and the
receipt thereof shall be furnished to the Registrar, the Tribunal or the Federal
Government along with the documents, application or otherwise, as the case
may be.
4. Registration of Modaraba Company. __ (1) An application for registration

of a modaraba company shall be made to the Registrar in Form IX.
(2) The application shall be accompanied by__
(a) five copies of the Memorandum and Articles of Association;
(b) five copies of Certificate of incorporation;
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(c) receipted Treasury Challan in respect of the fees paid for the application;
(d) five copies of the latest audited accounts, if the company has already been in
business; and
(e) a precise description of the business being done, if it is already engaged in

business other than floatation of modaraba or if it proposes to undertake such
business in addition to flotation and management of modarabas.
(3) The company shall make such changes in its Memorandum and Articles of
Association or in their Board of Directors as may be required by the Registrar.
(4) The Registrar on being satisfied that the company is eligible to be registered
shall issue a Certificate of Registration in Form X on such conditions as may
be specified.
5. Tribunal.__(1) A person appointed to constitute a Tribunal shall hold office

for a term of three years unless he resigns or otherwise ceases to hold office earlier.
(2) A Tribunal shall, in consultation with the Federal Government, appoint such
officers and staff as are considered necessary for carrying out the functions of
the Tribunal.
(3) The hearing of and proceedings before a Tribunal shall be public unless the
Tribunal for reasons recorded in writing:-
(a) decides to hold the proceedings or any part thereof in private; or

(b) gives directions as to the persons who may be present thereat; or
(c) prohibits or restricts the publication of any part of evidence given before it or
contained in any document filed before it.
(4) There shall be an official seal of a Tribunal which shall be in the custody of
the Chairman or of an officer designed by him in this behalf.
6. Religious Board. __ (1) The Religious Board shall consist of three members
appointed by the Federal Government by notification in official Gazette, one of
whom shall be the Chairman.
(2) Two of the members shall be religious scholars and the Chairman shall be a
person who is, or has been, or is qualified to be a Judge of a High Court.
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(3) Meetings of the Religious Board shall be held to consider applications for
floatation of modaraba as and when called by the Chairman, but at least once
in every two months unless there is no business to transact.
(4) The Board may wherever so required obtain clarification or additional

information from the modaraba company or offer a personal hearing to the
modaraba company before arriving at a decision.
(5) The proceedings of each meeting of the Religious Board shall be recorded in
such manner as may be specified by it and the same shall be signed by the
Chairman or, in his absence, by the member presiding over the meeting.
(6) All orders and decisions of the Religious Board shall be authenticated by the
Chairman or a member or officer especially empowered in this behalf by the
Board.
(7) The Religious Board shall give its decision within thirty days from the date
of closure of its last hearing in a communication bearing official seal of the
Board.
(8) A member of the Religious Board shall hold office for a term of three years
unless he resigns, ceases to hold office or is removed earlier.
(9) Any casual vacancy shall be filled in by appointment by the Federal

Government of a person qualified to be a member, for the un-expired term of
the outgoing member.
(10) The members of the Board, other than a Chairman who is Judge of a High
Court, shall be entitled to :-
(a) a fixed fee of Rs.500/- per day;
(b) traveling and daily allowance as admissible to Grade 20 officers of the
Federal Government.
(11) The sittings of the Religious Board shall normally be held at Islamabad but
the Board may sit in such places in Pakistan as it may from time to time
decide.
(12) On being called upon to appear before the Religious Board appearance may
be in person or through an authorized representative.
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(13) All sittings of the Religious Board shall be presided over by the Chairman
and in his absence by a member as may be nominated by him.
(14) There shall be an official seal of the Religious board which shall remain in
the custody of the Chairman or an officer authorized by him in writing.
7. Capital of company also engaged in other business. ___ Unless it is a body

corporate formed under any law and owned or controlled by the Federal or a
Provincial Government, whether directly or through a company or corporation set
up by such Government, a company which is also engaged in business other than
floatation and management of modaraba shall be eligible for registration as a
modaraba company only if it has a paid up capital of at least seven and a half million
rupees of which an amount of not less than two and a half million rupees shall be
set aside for the modaraba free from any encumbrances.
8. Accounts and audit. ___ (1) Every modaraba company shall cause to be kept
proper books of account for each modaraba with respect to: -
(a) all sums of money received and expended by the modaraba and the matters in
respect of which the receipt and expenditure takes place;
(b) all sales and purchases of goods by the modaraba; and
(c) the assets and liabilities of the modaraba.
Explanation: - For the purpose of this sub-rule proper books of account shall not be
deemed to be kept with respect to the matters aforesaid if there are not kept such
books as are necessary to give a true and fair view of the state of the modaraba’s
affairs and to explain its transactions.
(2) The books of account shall be kept at the registered office of the Modaraba
Company or at such other place as may be authorized by the Registrar.
(3) Where a modaraba has a branch office, the modaraba company shall be
deemed to have complied with the provisions of sub-rule (1) and sub-rule (2)
if proper books of account relating to the transactions effected at the branch
office are kept at the branch office and proper summarized returns, made up
to dates at intervals of not more than one month, are sent by the branch office
to the registered office of the modaraba company or other place referred to in
sub-rule (2).
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(4) Every balance sheet of a modaraba shall give a true and fair view of the state
of affairs of the modaraba as at the end of its financial year, and every profit
and loss account ** [, cash flow statement and statement of changes in equity]
of a modaraba shall respectively give a true and fair view of the result of **[its
operations, cash flows and changes in equity] for the year then ended.
9. Submission of annual report by modaraba company. __ (1) The annual

report required by section 14 to be furnished by the modaraba company shall
include a balance sheet **[a profit and loss account, a cash flow statement
and a statement of changes in equity] in respect of each modaraba and fullest
information and explanations in regard to any reservation, observation,
qualification or adverse remarks contained in the auditor’s report.
(2) The balance sheet and profit and loss account included in the annual report
prepared by the modaraba company shall comply with the requirements of the
Third Schedule as nearly as possible **[, and the balance sheet, profit and
loss account, cash flow statement and statement of changes in equity prepared
by the modaraba company shall conform with such International Accounting
Standards and other standards as are notified from time to time in the official
Gazette by the Securities and Exchange Commission of Pakistan under sub-
section (3) of section 234 of the Companies Ordinance, 1984 (XLVII of
1984)].
(3) The balance sheet **[, profit and loss account, cash flow statement and statement
of changes in equity together with the notes forming part thereof] and profit and
loss account and statement of financial changes shall be audited by the auditor of
the modaraba and the report of the auditor shall be as prescribed in Form X
10. Submission of periodical report. ___ Submission of periodical reports. Every

modaraba company shall, within one month of the close of first, second and third
quarters of the financial year of each modaraba, prepare in accordance with such
International Accounting Standards and other standards, as may be specified from
time to time by notification in the official Gazette, for the purpose by the Securities
and Exchange Commission of Pakistan under sub-section
(3) of section 234 of the Companies O rdinance, 1984 (XLVII of 1984), AND
TRANSMIT BY REGISTERED POST TO THE Registrar and under postal
certificate to its certificate holders a profit and loss account, a cash flow statement
and a statement of changes in equity for, and a balance sheet as at the end of, that
quarter, whether audited or otherwise].
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11. Annual balance sheet. __ (1) The directors of every modaraba company shall
some date not later than eighteen months after the floatation of each modaraba and
subsequently once at least in every calendar year prepare an annual balance sheet
**[ and profit and loss account and a statement of changes in financial position] in
respect of each modaraba for the period in the case of the first account since the
floatation of the modaraba and in any other case since the preceding account.
(2) The accounting year adopted under the preceding sub-rule shall not be
changed without the prior approval of the Registrar.
12. Authentication of balance sheet. __ (1) Save as provided by sub-rule (2),

the balance sheet, profit and loss account, cash flow statement and statement and
statement of changes in equity] shall be signed by the chief executive and two
directors of the modaraba company.
(2) When the total number of directors of the modaraba company for the time
being in Pakistan is less than the number of directors whose signatures are required
by sub-rule (1), then the balance sheet **[, profit and loss account, cash flows
statement and statement of changes in equity] shall be signed by all the directions
for the time being in Pakistan or, if there is only one director for the time being in
Pakistan, by such director, but in such a case there shall be sub-joined to the balance
sheet **[, profit and loss account, cash flows statement and statement of changes
in equity] a statement signed by such directors or director explaining the reason for
non-compliance with the provisions of sub-rule (1).
13. Access to minutes of proceedings of general meetings of modaraba

company and of its directors. __ The auditor of a modaraba shall have full access
to the minute books of the modaraba company and in case the modaraba company
is also engaged in other business he shall be provided with authenticated copies of
the minutes and decisions concerning the affairs of the modaraba.
14. Information about the pattern of holding of certificates by subscribers. __

A modaraba company shall also circulate along with the annual accounts
information about the pattern of holding of the certificates by the certificate-holders
in Form XII or as near thereto as possible.
15. Liability where proper accounts not kept. ___ (1) If at any time it is shown
that proper books of account were not kept in relation to the modaraba, every
director and officer of the modaraba company who is in default shall, unless he
shows that he acted honestly and diligently and that in the circumstances in which
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the business of the modaraba company was carried on the default was excusable,
be criminally liable.
(2) For the purposes of this rule, proper books of account shall be deemed not to
have been kept in the case of any modaraba if there have not been kept such
books or accounts as are necessary to exhibit and explain the transactions and
financial position of the trade or business of the modaraba, including books
containing material entries from day to day in sufficient detail of all cash
received and case paid, and where the trade or business has involved dealings
in goods, statements of the annual stock-takings and (except in the case of
goods sold by way of ordinary retail trade) of all goods sold and purchased
showing the goods and the buyers and sellers thereof in sufficient detail to
enable those goods and those buyers and sellers to be identified.
16. Expenses to be reimbursed to modaraba company’s etc. __ (1) The

modaraba company shall be entitled to be reimbursed annually reasonable expenses
other than any remuneration in respect of directors, officers and employee of the
modaraba company.
(2) Such expenses shall be audited by the auditors of the modaraba company and
classified under appropriate headings as used in Profit and Loss Account, and
will form part of the annual accounts of the modaraba.
(3) For the purposes of the calculation of the remuneration payable to the
modaraba company under section 18 the profit shown in the audited profit
and loss account of the modaraba shall form the basis.
17. Capitalization of profits. __ (1) The Board of Directors of a modaraba

company may resolve that it is desirable to capitalize any part of the amount for the
time being standing to the credit of any of the modaraba’s reserve accounts or to
the credit of the profit and loss account or otherwise available for distribution and
accordingly decide that such sum be set free for distribution amongst the Certificate
holders who would have been entitled thereto if distributed by way of profit and in
the same proportions on conditions that the same be not paid in cash but he applied
either in or towards paying up any amounts for the time being unpaid on any
certificates held by such members respectively or paying up in full un-paid issued
certificates of the modaraba to be allotted and distributed credited as fully paid-up
bonus certificates to and amongst such Certificate holders in the proportion
aforesaid, or partly in one way and partly in the other, and the modaraba company
shall give effect to such resolution.
(2) Whenever such a resolution as aforesaid shall have been passed the directors
shall make all appropriations and application of the un-divided profits resolved
to be capitalized thereby; and all allotments and issues of fully paid certificates,
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if any, and generally shall do all acts and things required to give effect thereto,
with full powers to the directors to make such provisions to the issue of
fractional certificates or by payment in cash or otherwise as they think fit for
the case of certificates becoming distributable in, fractions, and also to
authorize any person to enter on behalf of all the Certificate holders entitled
thereto into an agreement with the modaraba providing for the allotment to
them respectively, credited as fully paid-up, of any further certificates to which
they may be entitled upon such capitalization, or (as the case may require) for
the application thereto of their respective proportional of the profits resolved to
be capitalized, of the amounts or any part of the amounts remaining un-paid on
their existing certificates and any agreement made under such authority shall
be effective and binding on all such Certificate holders.
18. Distribution of profit and reserves. ___ (1) The distribution of profit shall
include distribution in cash or issue of bonus certificates out of the capitalized profit
or any other security.
(2) The Board of a modaraba company may from time to time distribute to the
Certificate holders such interim profits as appear to the Board to be justified
by the profits of the modaraba.
(3) No distribution shall be made otherwise than out of profits of the year or any
other un-distributed profits or realized capital gains.
(4) The Board of a modaraba company may, before making any distribution of
profits, set aside out of the profits of the modaraba such sums as it thinks
proper as a reserve or reserves which shall, at the discretion of the Board, be
applicable for meeting contingencies, or for equalizing distribution of profit,
or for any other purpose to which the profits of the modaraba may be properly
applied, and pending such application may, either be employed in the business
of the modaraba or be invested in such investments (other than certificate of
the modaraba) as the Board may from time to time think fit).
(5) If several persons are registered as joint-holders of any certificate any one of
them may give effectual receipts for any profit payable on the certificates.
(6) Notice of any profit distribution that may have been declared shall be given
by post to the Certificate holder at his registered address or, if he has no
registered address in Pakistan, to the address, if any, within Pakistan supplied
by him to the modaraba company for giving notice to him.
(7) Where a notice is sent by post, service of the notice shall be deemed to be
effected by properly addressing, prepaying and posting a letter containing the
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notice and, unless the contrary is proved, to have been effected at the time at
which the letter would be delivered in the ordinary course of post.
(8) If a Certificate holder has no registered address in Pakistan, and has not
supplied to the company an address within Pakistan for the giving of notices
to him, a notice addressed to him or to the Certificate holders generally and
advertised in a newspaper circulating in the neighborhood of the registered
office of the company shall be deemed to be duly given to him on the day on
which the advertisement appears.
(9) The final distribution of the profit in respect of any accounting period shall be
made within six weeks after re-opening of the register of Certificate holders.
19. Appointment and removal of auditors. __ (1) Every modaraba company

shall, state in the prospectus the name and the address of the auditor of the modaraba
duly approved by the Registrar, who shall not be the auditor of the modaraba
company.
(2) The terms of the appointment of auditor shall be renewed every year with the
approval of the Registrar.
(3) If the modaraba company wishes to appoint an auditor other than the existing
auditor for the next accounting period, it shall inform the existing auditor in
writing giving reasons for such change, with a copy to the Registrar.
(4) The Registrar may, if he so desires, seek such information as he may consider
necessary either from the modaraba company or from the auditor or from both
and on being so desired the parties concerned shall provide the Registrar with
the required information.
(5) The auditor on his own accord shall be entitled to make such submissions in
connection with the proposed change to the Registrar as he may like.
(6) The Registrar’s decision on the proposed change of auditor shall be final.
(7) An auditor may resign from his appointment with the approval of the
Registrar obtained in writing.
20. Prospectus._ (1) Every prospectus issued by a modaraba company in respect

of any modaraba shall be dated, and that date shall, unless the contrary be proved,
be taken as the date of publication of the prospectus.
(2) A copy of the every such prospectus, signed by every person who is named
therein as a director or proposed director of the modaraba company, or by his
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agent authorized in writing, shall be filed for registration with the Registrar
on or before the date of its publication, and no such prospectus shall be issued
until a copy thereof has been so filed for registration.
(3) The Registrar shall not register any prospectus unless it is dated, and the copy
thereof signed, in the manner required by this rule.
(4) Every prospectus shall state on the face of it that a copy has been filed for
registration as required by this rule.
(5) If a prospectus is issued without a copy thereof being so filed, the modaraba
company, and every person who is knowingly a party to the issue of the
prospectus, shall be liable to a fine as laid down in section 32.
(6) Every prospectus of a modaraba must state the matters specified in Part I of
the Fourth Schedule and set out the reports specified in Part II of that schedule
and the said parts I and II shall have effect subject to the provisions contained
in part III of that Schedule.
20.A__ (1) Power to increase modaraba Fund. ___ (1) A Modaraba company
may, under the authority of a resolution passed at a meeting of its directors and with
the approval of the Registrar, alter the prospectus of a modaraba floated by it so as
to increase the Modaraba Fund by issue of new modaraba certificates subject to
such conditions as may be imposed by the Registrar:
Provided that, before according his approval, the Registrar shall, at the expense of
the modaraba, issue a notice of the proposed increase and conditions attaching
thereto for eliciting opinion of the modaraba certificate holders and others
concerned within a period of not less than fourteen days from the date of publication
in at least one issue each of a daily newspaper in English language and a daily
newspaper in Urdu language having circulation in the Province in which the stock
exchange on which the modaraba is listed is situate or, if the modaraba is not listed,
in the Province in which the registered office of the modaraba company is situate.
(2) Except to the extent otherwise specified by the Registrar for reasons to be
recorded, the new modaraba certificates shall rank pari passu with the existing
certificates in all matters including the right to such bonus or right issue and
dividend as may be declared subsequent to the date of issue of such new
certificates.
(3) The modaraba company shall file with the Registrar a notice of exercise of any
power referred to in sub-rule (1) and pay fees as specified for authorization to
float modaraba on the additional amount of modaraba fund increased in the
manner laid down in sub-rule (1), within fifteen days from the exercise thereof
108
indicating the conditions attaching thereto and shall also issue a notice thereof in
newspapers in the manner laid down in Proviso to sub-rule (1)].
20B.___Further issue of Modaraba Certificates. __ (1) Where the modaraba

company decides to increase the modaraba fund of a modaraba by the issue of new
modaraba certificates, such certificates shall subject to the conditions imposed by
the Registrar, be offered to the existing certificate holders in proportion to the
existing certificates held by them, and such offer shall be made by notice specifying
the number of certificates to which the certificate holder is entitled, and limiting a
time within which the offer, if not accepted, will be deemed to be declined.
(2) The offer of new modaraba certificates shall be accompanied by a circular
duly signed by the directors of the modaraba company or an officer of the
company authorized by them in this behalf in the form prescribed by the
Registrar containing material information about the affairs and accounts of
the modaraba and setting forth the necessity for raising of further funds with
business prospects.
(3) A copy of the circular referred to in sub-rule (2) signed in the manner
specified therein shall be filed with the Registrar before it is sent to the
modaraba certificate holders.
(4) If, in any case, the whole or any part of the issue of certificates so offered is
declined or is not subscribed, the modaraba company may offer the
unsubscribed part in such manner as may be approved by the Registrar.
(5) Where the new modaraba certificates forming part of the Modaraba Fund are
to be issued to the public, a prospectus shall be issued which shall comply, in
all respects, with the requirements applicable to a prospectus and be subject
to the liabilities specified in the Ordinance and the rules therefore.]
21. Invalidity of certain conditions as to waiver of notice. ___ (1) Any

condition requiring or binding any applicant for certificates to waive compliance
with any requirements of the Fourth Schedule or purporting to affect him with
notice of any contract, document or matter not specifically referred to in the
prospectus, shall be void.
(2) It shall not be lawful to issue any form of application for the certificates of
modaraba different in text from the one forming part of the Fourth Schedule:
Provided that this sub-rule shall not apply if it is shown that the form of
application was issued either;
(a) in connection with a bona fide invitation to a person to enter into an
underwriting agreement with respect to the certificates; or
(b) in relation to certificates which were not offered to the public.
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22. Register of certificate holders. ___ (1) Every modaraba company shall
maintain a register of “Certificate holders” in the manner required in respect of
register of shareholders under the Companies Act, 1913.
(2) The following provisions shall apply to the registration of the transfer of a
Modaraba Certificate, namely: -
(a) an application for the registration of the transfer of certificates in a
modaraba may be made either by the transferor or the transferee, and
the modaraba company shall enter in its register of Certificate holders
the name of the transferee in the same manner and subject to the same
conditions as if the application for registration was made by the
transferee:
Provided that, where such application is made by the transferor, no

Registration shall be made if objection is taken by the transferee within
two weeks from the date of receipt of a notice of such application issued
to him by the modaraba company;
(b) for the purposes of clause (a) notice to the transferee shall be deemed to
have been duly given if dispatched by prepaid post to the transferee at
the address given in the instrument of transfer and shall be deemed to
have been delivered in the ordinary course of post;
(c) it shall not be lawful for the modaraba company to register a transfer of
certificate of the modaraba unless the proper instrument of transfer duly
stamped and executed by the transferor and the transferee has been
delivered to the modaraba company along with the relative modaraba
certificate provided that, where it is proved to the satisfaction of the
directors of the modaraba company that an instrument of transfer signed
by the transferor and transferee has been lost, the modaraba company
may, if its directors think fit, on an application in writing made by the
transferee and bearing the stamp required for an instrument of transfer,
register the transfer with notice to the transferor on such terms as to
indemnity as the directors of the modaraba company may think fit;
(d) if a modaraba company refuses to register the transfer of any certificate,

the modaraba company shall, within two months from the date on which
the instrument of transfer was lodged with the modaraba company, send
to the transferee and the transferor or notice of the refusal indicating
reason for such refusal.
110
(3) The following provisions shall apply to succession to a certificate in the case
of death of the holder, namely: -
(a) the legal heirs of a deceased Certificate holder, according to Shariat
shall be the only persons to be recognized by the modaraba company as
having any title to his certificates;
(b) any person becoming entitled to a certificate in consequence of the death

of the Certificate holder may be registered as a Certificate holder on
producing such evidence as may be required by the modaraba company;
(c) any person who becomes entitled to a certificate in consequence of the

death of the holder may, instead of being registered as the holder
himself, elect to have some other person to be named by him registered
as a transferee of such certificate;
(d) the person electing to have some other person registered as a holder in
accordance with the above provision shall testify to such election by
executing an instrument of transfer in favour of his nominee;
(e) such instrument of transfer shall be presented to the modaraba company

together with such other evidence as the directors of the company may
require to prove the title of the transferee, and thereupon the transferee
shall be registered as a holder.
23. Annual list of Certificate holders and summary. __ (1) Every modaraba
shall within eighteen months from its flotation, and thereafter once at least in every
year, make a list of all persons who, on the date of the re-opening of the register of
certificate holders relative to declaration of final dividend or, where there is no such
date in any particular year as, on 31st December of the year, are Certificate holders
and of all persons who have ceased to be Certificate holders since the date of the
last return or in the case of the first return since the floatation of the modaraba.
(2) The list shall state the names, addresses, and occupations of all the past and
present Certificate holders therein mentioned, and the number of certificates
held by each of the existing Certificate holders at the date of the return,
specifying certificates transferred since the date of the last return, or in case
of the first return, of the floatation the modaraba by persons who are still
members and persons who have ceased to be Certificate holders respectively
and the dates of registration of the transfers, and shall contain a summary
distinguishing between certificates issued for cash and certificates issued as
fully or partly paid up as bonus certificates or issued as fully or partly paid
certificates otherwise than in cash, and specifying the following particulars,
namely :-
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(a) the amount of the certificates of the modaraba and the number of
certificates into which it is divided;
(b) the number of certificates taken from the commencement of the

modaraba up to the date of the return;
(c) the amount called up on each certificates;
(d) the total amount of calls received;
(e) the total amount of calls un-paid;
(f) the total amount of the sums (if any) paid by way of commission in
respect of any certificates or allowed by way of discount in respect of
any certificates since the date of the last return or so much thereof as has
not been written off at the date of the return;
(g) the names and addresses of the persons who at the date of the return are
the directors of the modaraba company and of the persons (if any) who
at the said date are the managers or officers of the modaraba company,
and the changes in the personnel of the directors, managers and officers
of the modaraba company, and the changes in the personnel of the
directors, managers and since the last return together with dates on
which they took place; and
(h) the total amount of debt due from the modaraba in respect of all
mortgages and charges which are required to be registered with the
Registrar under these rules.
(3) The above list and summary shall be contained in a separate part of the
register of Certificate holders and shall be completed within thirty days from
the date referred to in sub-rule (1) and the modaraba company shall forthwith
file with the Registrar a copy signed by a director or by the manager or
secretary of the modaraba company, together with a certificate from the such
director, manager or secretary that the list and summary state the facts as they
stood on the day aforesaid.
24. Inspection of register of certificate holders.___ (1) The register of

Certificate holders and the index thereof shall at all times be kept at the registered
office of the modaraba company, and, except when closed under the provisions of
this rule, shall during business hours be open, subject to such reasonable restrictions
as the modaraba company may lay down in the prospectus, for inspection by any
Certificate holder, or any other person on payment of five rupee, or such less sum
112
as the modaraba company may require, for each inspection and for making extract
there-from.
(2) Any Certificate holder or other person may require a copy of the register, or
of any part thereof, or of the list and summary required by these rules, or any
part thereof, on payment of one rupee for every hundred words or fractional
part thereof required to be copied and the modaraba company shall cause any
copy so required by any person to be sent to that person within a period of ten
days, exclusive of non-working days and days on which the transfer books of
the modaraba are closed, commencing on the day next after the day on which
the requirement is received by the modaraba company unless the person
concerned asks for receiving personal delivery at a later date.
(3) If any inspection required under this rule is refused or if any copy required
under this rule is not sent or delivered within the period specified under sub-
rule (2), Registrar may, without prejudice to any penalty to which the
company or any director or any officer thereof may be liable under the
Ordinance, on a representation, be and order compel an immediate inspection
of the register and the index or direct that copies required thereof shall be sent
to the persons requiring them.
25. Power to close register. ___ A modaraba company may, on giving seven
day’s previous notice by advertisement in some newspapers circulating in the
province in which the registered office of the modaraba company is situate, close
the register of Certificate holders for any time or times not exceeding in the whole
forty-five days in each year and not exceeding fifteen days at any one time.
26. Return as to allotment. ___ (1) Whenever a modaraba company floats any
modaraba and makes any allotment of its certificates, the modaraba company shall,
within one month thereafter: -
(a) file with the Registrar a return of the allotments, stating the number and
nominal amount of the certificates comprised in the allotment, the
names and address of the allottees and the amount paid if any due or
payable on each certificate; and
(b) in the case of a certificate allotted as fully or partly paid up otherwise

than in cash, produce for the inspection and examination of the Registrar
a contract in writing constituting the title of the allottee to the allotment
together with any contract of sale, or for services or other consideration
for which the allotment was made, such contracts being duly stamped,
and file with the Registrar verified copies of all such contracts and a
return stating the number and nominal amount of certificates so allotted,
the extent to which they are to be treated as paid up, and the
consideration for which they have been allotted.
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(2) Where such a contract as is referred to in sub-rule (1) is not reduced to writing,
the modaraba company shall, within one month after the allotment, file with
the Registrar the required particulars of the contract stamped with the same
stamp duty as would have been payable if the contract had been reduced to
writing, and these particulars shall be deemed to be an instrument within the
meaning of the Stamp Act, 1899, and the Registrar may, as a condition of
filing the particulars, require that the duty payable thereon be adjudicated
under section 31 of that Act.
(3) If the Registrar is satisfied that in the circumstances of any particular case the
period of one month specified in sub-rules (1) and (2) for compliance with the
requirements of those sub-rules is inadequate, he may extend that period as
he thinks fit, and in that event, the provisions of sub-rules
(1) and (2) shall have effect in that particular case as if for the said period of one
month the extended period allowed by the Registrar were substituted:
Provided that in case of default in filing with the Registrar within the time specified
in sub-rules (1) and (2) any document required to be filed by this rule, the modaraba
company, or any person liable for the default, may apply to the Federal Government
for relief, and the Federal Government, if satisfied that the omission to file the
document was accidental or due to inadvertence or that on other grounds it is just
and equitable to grant relief, may make an order extending the time for the filing of
the document for such a period as the Federal Government may think proper.
27. Certain mortgages and charges to be void if not registered. ___ (1) Every
mortgage or charge created by a modaraba and being either: -
(a) a mortgage or charge for the purpose of securing any issue of Participation
Term Certificate (PTC); or
(b) a mortgage or charge on any immovable property wherever situate or any

interest therein; or
(c) a mortgage or charge on any book debts of the modaraba; or
(d) a mortgage of a charge, not being a pledge, on any movable property of the
modaraba except stock-in-trade; or
(e) a floating charge on the undertaking or property of the modaraba; shall, so far as
any security on the modaraba property or undertaking is thereby conferred, be
void against the liquidator and any creditor of the modaraba, unless the required
particulars of the mortgage or charge, together with the instrument, if any, by
which the mortgage or charge is created or evidenced, or a verified copy thereof,
are filed with the Registrar for registration in the manner required by these rules
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within twenty-one days after the date of its creation, but without prejudice to any
contract or obligation for repayment of the money thereby secured, and on a
mortgage or charge thus becoming void under this rule, the money secured
thereby shall immediately become payable:
Provided that: -
(i) in the case of a mortgage or charge created out of Pakistan comprising solely
property situate outside Pakistan twenty-one days after the date on which the
instrument or copy could, in due course of post, and if dispatched with due
diligence, have been received in Pakistan shall be substituted for twenty-one days
after the date of the creation of the mortgage or charge, as the time within which
the particulars and instrument or copy are to be filed with the Registrar, and
(ii) where the mortgage or charge is created in Pakistan but comprises property
outside Pakistan, the instrument creating or purporting to create the mortgage
or charge or a copy thereof verified in the required manner may be filed for
registration notwithstanding that further proceedings may be necessary to
make the mortgage or charge valid or effectual according to the law of the
country in which the property is situate; and
(iii) where a negotiable instrument has been given to secure the payment of any
book debts of a modaraba, the deposit of the instrument for the purpose of
securing an advance to the modaraba shall not for the purpose of this rule be
treated as a mortgage or charge on those book debts; and
(iv) the holding of PTC entitling the holder to a charge on immovable property
shall not be deemed to be an interest in immovable property.
(2) Where any mortgage or charge on any property or a company required to be

registered under sub-rule (1) has been so registered, any person acquiring such
property or any part thereof, or any share or interest therein, shall be deemed
to have notice of the said mortgage or charge as from the date of such
registration.
28. Registration of charge on properties. ___ Whenever the modaraba acquires

any property which is subject to a charge of any such kind as would, if it had been
created by the modaraba after the acquisition of the property, have been required to
be registered under these rules, the modaraba shall cause the required particulars of
the charge, together with certified copy of the instrument, if any, by which the
charge was created or is evidenced, to be delivered to the Registrar for registration
in the manner required by these rules within twenty-one days after the date on
which the acquisition is completed :
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Provided that, if the property is situated and the charge was created outside
Pakistan, twenty-one days after the date on which the copy of the instrument could
in due course of post, and if dispatched with due diligence, have been received in
Pakistan shall be substituted for twenty-one days after the completion of the
acquisition as the time within which the particulars and the copy of the instruments
are to be delivered to the Registrar.
29. Prosecution of delinquent directors of modaraba company. ___ (1) If it

appears to the Tribunal in the course of a winding up that any past or present
director, manager or other officer of the modaraba company, or any member of the
modaraba company has been guilty of any offence in relation to the modaraba for
which he is criminally liable, the Tribunal may, either on the application of any
person interested in the winding up or of its own motion, direct the liquidator either
himself to prosecute the offender or to refer the matter to the Registrar.
(2) If it appears to the liquidator in the course of a voluntary winding up that any
past or present director, manager or other officer of the modaraba company
or any member of the modaraba company has been guilty of any offence in
relation to the modaraba or modaraba company for which he is criminally
liable, he shall forthwith report the matter to the Registrar and shall furnish to
him such information and give to him such access to and facilities for
inspecting and taking copies of any documents, being information or
documents in the possession or under the control of the liquidator relating to
the matter in question, as he may require.
(3) Where any report is made under sub-rule (2) to the Registrar, he may, if he
thinks fit, cause an enquiry to be conducted in the matter.
(4) If on any report to the Registrar under sub-rule (2) it appears to him that the
case is not one in which proceedings ought to be taken by him, he shall inform
the liquidator accordingly, and thereupon, the liquidator may himself take
proceedings against the offender.
(5) If it appears to the Tribunal in the course of winding up that any past or present
director, manager or other officer of modaraba company, or any member of the
modaraba company has been guilty as aforesaid, and that no report with respect
to the matter has been made by the liquidator to the Registrar, the Tribunal may,
on the application of any person interested in the winding up or of its own motion,
direct the liquidator to make such a report, and on a report being made
accordingly the provisions of this rule shall have effect as though the report had
been made in pursuance of the provisions of sub-rule (2)
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(6) If, where any matter is reported or referred to the Registrar under this rule, he
considers that the case is one in which a prosecution ought to be initiated he
shall take action accordingly:
Provided that no prosecution shall be initiated without first giving the accused
person an opportunity of making a statement in writing to the Registrar and
of being heard.
(7) When any proceedings are instituted under this rule it shall be the duty of the
liquidator and every officer and agent of the modaraba company past and
present (other than the defendant in the proceedings) to give all assistance in
connection with the prosecution which he is reasonably able to give, and for
the purposes of this sub-rule the expression “agent” in relation to a modaraba
company shall be deemed to include any banker or legal adviser of the
company and any person employed by the modaraba or modaraba company
as auditor, whether that person is or is not an officer of the company.
(8) If any person fails or neglects to give assistance in the manner required by
sub-rule
(7) the Tribunal may, on the application of the Registrar, direct that person to
comply with the requirements of the said sub-rule, and where any such
application is made with respect to a liquidator, the Tribunal may, unless it
appears that the failure or neglect to comply was due to the liquidator not having
in his hands sufficient assets of the company to enable him so to do, direct that
the costs of the application shall be borne by the liquidator personally.
30. Responsibility for fraudulent trading of persons concerned. ___ If in the

course of winding up or enquiry of a modaraba it appears that any business of the
modaraba has been carried on with intent to defraud creditors or Certificate holders
of the modaraba or for any fraudulent purpose, the Tribunal on the application of
the Registrar or the liquidator or any creditor, may, if it thinks proper so to do,
declare that any persons who were knowingly parties to the carrying on of the
business in the manner aforesaid shall be personally responsible, without any
limitation of liability for all or any of the debts or other liabilities of the modaraba
as the Tribunal may direct.
31. Loan or contribution to associated undertakings, etc. prohibited. ___ No.

loan or contribution shall be made by the modaraba to any of the associated
undertakings of the modaraba companies or political parties or other organization
of political nature.
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32. Advisory Committee. __ (1) The Federal Government may, for the purpose
of obtaining advice and assistance in carrying out the purposes of the Ordinance
and the rule, constitute an Advisory Committee.
(2) The Committee shall consist of:

(a) a Chairman to be nominated by the Federal Government;
(b) the Registrar;
(c) a nominee of the Institute of Chartered Accountants of Pakistan;
(d) the President of the Federation of Pakistan Chambers of Commerce and

Industry;
(e) the President of the Karachi or Lahore Stock Exchanges, as the Federal
Government may specify;
(f) the Managing Director of Bankers Equity Limited or National

Investment (Unit) Trust or of the Investment Corporation of Pakistan as
the Federal Government may specify; and
(g) not more than five other persons to be appointed by the Federal
Government.
(3) The persons referred to in clauses (e) and (f) of sub-rule (2) shall be appointed
on the basis of rotation.
(4) Unless the Federal Government otherwise directs, the Chairman and a
member of the Committee shall hold office for a period of three years and
shall be eligible for re-appointment.
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Unit–6
LEASING COMPANIES

119
CONTENTS
Page #
Introduction ....................................................................................................... 121
Objectives ......................................................................................................... 121
6.1 Concept of Leasing .................................................................................. 122
6.2 Types of Leasing ...................................................................................... 123
6.3 Products Offered by Leasing Companies in Pakistan ............................. 125
6.4 Functions Performed by Leasing Companies in Corporate Development 126
6.5 Issues in Leasing Industry of Pakistan .................................................... 128
6.6 Advantages of Leasing ............................................................................. 130
120
INTRODUCTION
This unit covers the essential concepts of leasing which is emerging as a major form
of financing in personal and business decisions. We will discuss the basic concepts
of leasing, types of leasing, investment and financing options through leasing.
Lastly, we will discuss the major issues and challenges in the leasing industry of
Pakistan.
OBJECTIVES
i. to describe the functions of leasing
ii. to discuss the types of leasing
iii. to understand the working of leasing companies
iv. to know the challenges and issues of leasing companies
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6.1 Concept of Leasing
The basic concept of leasing is based on the centuries old principles of payment in
installment whereby a seller agrees to handover an asset to a buyer for use and
receives the payment in periodic installments over a defined period. The modern
economies around the world have adopted this concept of installment purchasing in
the form of leasing. The growth and expansion of modern business and industry
depends on the availability of capital assets used in producing various kinds of goods
and services. Generally, the buying of capital assets i.e. plants, machinery, buildings,
commercial vehicles etc. requires huge capital outflows that may put heavy strain on
the budgets of a company. However, every company wants to acquire modern
machinery to expand its operations at minimum cost. The mechanism of leasing
fulfills this demand gap of the various sectors of economy by providing the latest
machinery, plants, vehicles, building etc. on easy periodic installments. These
installments include the cost of the asset and an interest collectively called the lease
rentals charged by the leasing company for the use of asset.
A simple leasing transaction involves two parties; lessor and lessee. A lessor is a
person who is the owner of the asset and who provides it to the other party for use
against a periodic payment. A lessee is a person who obtains the asset o lease from
the lessor and uses it in its business operations and makes periodic payment to the
lessor. The structure and relationship of lessee and lessor depends on the contents
of the leasing agreement signed by the both parties specifying the term of lease,
rate of interest, asset to be used, terms and conditions of use and provisions related
to the disposal and end of term possession of the asset. As there are many forms
and types of leasing agreements, the leasing companies may make adjustments in
the terms and conditions for the use of an asset.
The legal structure of a leasing company is based on the applicable legal

framework in Pakistan where the leasing companies are registered as a public
limited company under the Companies Act 2017 and the leasing companies are also
required to get register and obtain license under the Non-Banking Finance
Companies Rules 2003. The operational aspects of the leasing companies are
governed through the Non-Banking Finance Companies & Notified Entities
Regulations 2008 and other circulars, directives and guidelines issued by the
Securities and Exchange Commission of Pakistan. In addition to these regulatory
requirements, the leasing companies are also required to observe the Code of
Corporate Governance 2012 for strategic decision making.
The sources of funds for leasing companies include the issuance of shares and
obtaining funds for the operational matters. These shareholders are entitled to
participate in the profits of the leasing companies along with the initial investors
(subscribers to the memorandum and the promoters). In addition to shares, the
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leasing companies are also allowed to raise funds through the issuance of short-
term and long term certificates of deposits from the general public and institutional
investors. These certificates carry a defined interest rate to be paid in periodic
installments to the investors with a defined maturity period. The leasing companies
may also obtain loans from the banks in order to meet their financial needs.
6.2 Types of Leasing

There are many forms and types of leases based on the requirements of the users of
the asset. The leasing companies provide assets on lease to the lessee and a formal
contract is signed by the both parties. Based on this contract, a lease transaction
may take several forms and unique characteristics. However, some of the more
generally used types of leasing arrangements are described below:
i. Finance Lease:
A finance lease, also called the capital lease, is a type of lease transaction in which
the lessee makes periodic payment for the use of the asset. In the finance lease
contract, the ownership of the asset is transferred to the lessee at the end of the lease
term. During the lease term, the depreciation and maintenance of the asset is the
responsibility of the lessee. In the finance lease, the lessor receives the total cost of
the asset including the interest in the periodic payment through installments. The
finance lease is used widely in the manufacturing and mining sectors where the
plants and machineries are acquired on lease for business operations.
ii. Operating Lease:

The operating lease is a type of lease contract whereby the asset is provided to the
lessee for use and periodic lease rentals are received by the leasing companies.
Contrary to the finance lease, in the operating lease, the asset is not transferred to
the lessee at the end of the lease term. During the lease term, the maintenance and
depreciation of the asset is the responsibility of the lessor. The operating lease is
the most suitable form of leasing for those assets whose economic life expired at
the end of the lease term.
iii. Sale & Lease-Back:

Another type of lease transaction is the sale and lease back arrangement whereby
the lessee sells a particular asset to the leasing company and gets the same asset on
lease form the leasing company. In this form of leasing contract, the lessee receives
the required cash flows from the leasing company and continues to use the same
asset for its operational purposes in the business. After getting the asset back
through lease agreement, the structure of this lease can be of operating or finance
lease as per the requirements of the lessee.
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iv. Specific Lease:
A specific lease is a lease agreement in which an asset is obtained on lease for a
specific objective or project. Generally, this type of lease transactions are entered
into by the construction sector companies where the working of an asset is based to
a particular project. A specific lease agreement is generally of operating lease
characteristics; however, the mutual agreement between the lessee and the lessor
may change its form to a finance lease agreement.
v. General Purpose Lease:

A general purpose lease agreement is type of lease in which an asset is provided to
the lessee to be used on multiple projects or for different events. The general
purpose lease is widely used in the auto sector where personal and commercial
vehicles are provided by the leasing companies to be used as per the requirements
of the lessee. A general purpose lease may take the form of operating lease or
finance lease as per the requirements of the lessee.
vi. Leveraged Lease:

It is another type of lease in which an asset is provided by the leasing company to
the lessee by obtaining a loan from a financial institutions or buying asset on credit
form the manufacturers. This type of lease agreements are entered into by the lessor
and lessee to obtain an asset form the market which is generally a high-price item.
The leasing company then includes the cost of loans/funds into the lease rentals to
be charged form the lessee in the periodic installments.
vii. Sales Type Lease:

It is a type of lease agreement in which the manufacturers of different assets directly
provide their assets on lease to the other competitors in the industry. This type of
lease is basically an industry collaboration phenomenon where the lessee directly
engages with the manufacturers without involving the leasing companies. The sales
type lease transactions are entered into by the lessee in order to meet the short-term
requirements of the business operations.
viii. Synthetic Lease:

Another type of lease contract is the synthetic lease agreement where a special
purpose entity is created by a lessee and asset is leased by the lessor to that entity.
The special purpose entity arranges a loan for obtaining asset on lease. The lessee
then obtains the asset from the special purpose entity and uses it in the business
operations. This type of financing arrangements is used by the companies as a form
of off-balance sheet financing to meet their operational and financial needs.
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6.3 Products Offered by Leasing Companies in Pakistan
The leasing companies offer various types of assets for leasing in Pakistan. These
assets include plants, machineries, vehicles, energy equipment, medical devices,
technological equipment etc. A wide range of leasing contracts is available in
Pakistan to avail these assets on operating, finance and other types of lease
agreements. Along with the leasing companies, banks, modarabas and other
financial institutions also provide different kinds of assets on lease to their
customers. A brief description of these products and services offered by the leasing
companies in Pakistan is given below:
i. Plant & Machinery:

The leasing companies provide vital plants and machinery to the industrial units on
easy installments enabling them to expand their production capacity. These plants
and machineries have huge buying costs and some businesses are unable to afford
them. The leasing companies fill this gap by providing plants and machineries
originally developed in the economically advanced countries. Without leasing
contracts, the small and medium sized businesses in Pakistan will be unable to buy
the sophisticated plants and machineries for enhancing production.
ii. Industrial Equipment:

Along with the plants and machineries, other necessary industrial equipment is also
provided on lease by the leasing companies in order to meet the needs of the
industrial units. This equipment includes spare parts and other small size necessary
for the efficient working of the industrial units. The leasing companies provide
these industrial equipments in order to ensure the smooth operations of the plants
and machineries.
iii. Commercial Vehicles:

The transport sector of Pakistan lacks modern fleet of commercial vehicles to meet
the logistics needs of the businesses. To meet this shortage, leasing companies
provide commercial vehicles i.e. trucks, containers, buses and other vehicles for
commercial transportation. These vehicles are provided on finance or operating
lease arrangements with defined maturity periods and periodic payments.
iv. Medical Devices:

The health sector of Pakistan is facing several problems include the lack of modern
medical machinery and devices to detect and treat various diseases. In order to meet
this deficiency, the leasing companies are now offering medical devices to the
government and private hospitals to install the latest medical equipment for
effectively diagnosing the life threatening diseases.
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v. Personal Cars:
The growing middle class in Pakistan is interest in buying cars but their high price is
preventing a large portion of this segment to buy personal cars. To meet this demand,
the leasing companies are offering personal cars on easy installments to the middle
class buyers through finance lease agreements. This facility of perusal car leasing has
increased the choice of buying auto for the emerging consumers in Pakistan.
vi. Energy Equipment:

As the Pakistan is facing power shortages, the demand for energy producing
equipment is growing rapidly. The demand for generators, UPS, solar panels, wind
turbines etc. is growing exponentially and the leasing companies are offering
various options to the interpreted buyers to avail the facility of installment
purchasing. The leasing companies are also offering the commercial energy
equipment to various industries to meet their energy demand.
vii. Commercial Buildings:

The urban areas are growing significantly in Pakistan and the demand for
commercial real estate is rising rapidly. To meet this demand, the leasing
companies are offering commercial buildings for business use on different leasing
arrangements. The leasing companies are offering commercial real estate plazas for
office use and other corporate purposes on various lease arrangements.
viii. Technological Equipment:

The I.T sector is making global progress and the demand for various computers,
mobile phones, I.T spare parts and other electronics products is rising in Pakistan.
The leasing companies are offering I.T products on easy installments to the
interested buyers on periodic payments. The leasing companies have enabled the
Pakistani consumers and I.T professionals to use the latest I.T equipments through
various leasing contracts.
6.4 Functions Performed by Leasing Companies in Corporate

Development
The leasing sector has played a crucial role in the industrial development in
Pakistan. This role is further enhanced by the offering of various assets on lease
based arrangements by other financial institutions. As Pakistan is a developing
country with lower capital formation and under-develop financial markets, the
demand for acquiring assets on installments has been met through the leasing
contracts. A brief discussion on the role of leasing products and companies on the
development of industrial sectors is given below:
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i. Provision of Modern Plant and Machinery:
The leasing companies have offered the installment purchase of modern plants and
machinery to the industries in Pakistan that has resulted in enhancing efficiency
and production levels of the factories. Similarly, the quality of products especially
in textile sector has been improved due to the access to the latest machinery
arranged through leasing agreements.
ii. Industrial Expansion:

The industrial units in Pakistan are always reluctant to expand due to the shortage
of funds for buying new machinery and other necessary assets. The leasing
companies have offered the installment purchase of these assets on easy terms and
conditions that have brought the establishment of new industrial units in urban and
rural areas. Similarly, the logistics issues have been solved through the offering of
large trucks on lease basis.
iii. Fixed Capital Formation:

The industrial expansion has enabled business leaders to enhance fixed capital
formation in the form of building new units, installing new machinery, designing new
warehouses etc. The overall rate of fixed capital formation (investments in physical
assets) has increased as a result of availability of various assets through the lease
arrangements. Further, the formation of new industrial units have brought competition
in the markets resulting in improvement in product quality and availability
iv. Installment Purchasing:

Before the spread of leasing products, the industrial units were compelled to either
buy the used machinery or spend higher amounts on the modern imported
machinery. The leasing brought the option of buying a useful asset and paying the
price in installments. This financial arrangement created a space for the businesses
to put their funds in other important areas of the business.
v. Alternate of Bank Loans:

The leasing agreements are an alternate of costly bank loans which carry
compounded interest rates and strict terms and conditions along with the collateral
of an existing asset. The leasing companies offered the required assets to the
industrial units on easy terms and conditions with option of installment payment
that provided much-needed control over cash outflows to the businesses.
vi. Higher Sales Volumes:

The acquisition of modern plants and machinery and other assets on leasing has
brought a significant expansion in the operational capacity of various businesses.
The leasing companies have also facilitated in sales growth of engineering
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companies by marketing their products to the interest commercial clients through
various leasing agreements. In this way, the light engineering industry has
expanded its operations in Pakistan in partnership with the leasing companies.
6.5 Issues in Leasing Industry of Pakistan

After discussing the various aspects of leasing in Pakistan, now, we need to pay
attention to the issues and challenges being faced by the leasing industry in
Pakistan. As a developing country, Pakistan has vast potential to expand its
industrial and commercial base but this potential is limited by the under-develop
financial markets. The financial institutions in general Pakistan and the leasing
companies in particular are facing various problems in their offering of leasing
products. A brief discussion of these challenges and issues is presented below:
i. Lack of Awareness:
Pakistan is a developing country with a majority of economic establishments is in
small and medium sized entities. These SMEs are owned and operated by semi-
literate persons who have limited awareness of leasing concepts. Further, the
financial education in Pakistan is of poor quality with limited access that has not
communicated the core concepts of leasing to the vast sections of society.
Additionally, the leasing companies have also not undertaken massive advertising
to educate the consumers about its benefits.
ii. Limited Outreach:

The problem of lack of awareness is compounded by the limited presence of leasing
companies in some big cites only. The absence of leasing companies in smaller
cities and agricultural belts has reduced the business options for the leasing
companies. The leasing companies have not focused on building partnerships with
manufactures in smaller towns to avail their services.
iii. Lower Recovery Rate:

The major problem being faced by the leasing companies in Pakistan is the lower
recovery rate of the lease rentals earned on the leased assets. The overall business
environment and managers of small size businesses with local political connections
refuse to honor their commitments on the timely payments of periodic lease rentals.
This issue has severally impacted the profits of the leasing companies as the
recovery staff is often forced to write-off the balance dues.
iv. Banks Dominance:

The overall leasing sector in Pakistan is now dominated by commercial banks as
they are allowed by the State Bank of Pakistan to offer the various leasing products.
128
This practice has reduced the operational space for the leasing companies as the
commercial banks have wider retail presence with vast financial resources. The
dominance of banks has reduced the financial options for the leasing companies as
they lack other viable financial alternatives.
v. Limited Product Range:

Pakistan is primarily an agricultural country that requires large quantity of
agricultural machineries for the farmers. However, the leasing companies are
mostly urban based with their products designed to meet only industrial demands.
This industry specific portfolio designing by the leasing companies have forced the
farmers to fill their demand through informal sector. Further, the other emerging
sectors like oil, gas, mining, transport etc. also have huge demand for various kinds
of machineries which is presently not met by the leasing companies.
vi. Lack of Professionals:

The operational aspects of leasing companies require trained manpower to run the
day-to-operations and design attractive product packages. However, the
educational institutions in Pakistan are not producing the graduates capable of the
skill-set required for working in the leasing companies. This shortage of trained
managers has adversely affected the operations of leasing companies which are
currently run by the poorly trained staff.
vii. Strict Regulations:

The leasing companies in Pakistan are regulated by the SECP through NBFCs
regulations 2008 and the NBFCs rules 2003. These regulations have outlined strict
requirements for the establishment of the leasing companies i.e. minimum capital
requirements, fit and proper criteria for directors, operational restrictions,
restrictions on seeking funds etc. Some of these regulations have put extra
compliance cost on the leasing companies requiring them to ensure adoption of the
strict criteria.
viii. Informal Hire-Purchase Sector:

Along with the formal leasing sector which is regulated by the SECP, the informal
hire-purchase sector has experienced significant growth in recent years. This
informal leasing sector also provides various assets on installment purchasing to
the consumers competing directly with the formal sector. The SECP has not taken
any serious compliance action against these unregistered businesses that are selling
their products in the various markets and adversely impacting the business of
leasing companies.
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ix. Restricted Import Regime:
As the leasing companies promise to bring latest plants and machineries and other
equipment to the industrial sector, this practice is highly affected by the restricted
import regime of Pakistan. At the import stage, machinery, various tariff and taxes
are required to be paid which escalate the cost of the imported items. As the
business of leasing in under-develop countries is highly dependent on the imports,
the government should design separate import-stage taxation system for the leasing
sector.
x. Weak Industrial Alliances:

The business of leasing depends on the strong relationships between the leasing
companies and the manufacturers of plants, machinery, cars, electronics items etc.
The leasing companies working in Pakistan has not built strong dynamic
relationship with the existing manufacturers to market their products through the
leasing agreements which has severally impacted the sales volume of the light
engineering industry and the other equipment manufactures.
6.6 Advantages of Leasing

i. Control of Cash Outflows:
The option of taking an asset on lease helps a company to control its cash outflows
as the normal buying process will involve significant cash outlays. The leasing
arrangement offers an opportunity to the businesses to manage their cash holdings
as it only pays the lease rentals in installments. In the absence of leasing, every
business will have to purchase the asset for its operations that may affect the cash
position significantly.
ii. Tax Savings:

The interest payment on the lease transactions is deductible for tax purposes from
the profits of a company. The lease rentals include the interest or mark-up expenses
to be paid to the leasing company. These financial expenses are deductable from
the gross profits of a company and ultimately results in lower tax liability.
iii. Financial Planning:

The leasing agreements provide a strong base for financial planning to a company
as the cash inflows and outflows can be managed effectively. The lease agreements
commit only periodic lease rentals payments to the lessor and the excess cash
inflows can be used productively in other segments of the business. Further, the
leasing provides an alternate of bank financing that involves significant
compounded interest payments along with providing some assets as collateral.
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iv. Asset Acquisition:
The leasing agreements provide the possession of an asset to the lessee without
making full payment to the lessor. The acquisition of asset in this manner adds up
the operational capacity of the business and production can be enhanced in a
significant way. Further, the cost of the asset is paid in installments over a long
period of time during which the goods produced by operating the asset can be sold
easily.
v. Utilization of Spare Capacity:

The leasing enable a business to utile its spare capacity by installing more machines
and plants to enhance production. Without leasing, a business will have to wait for
a long time to generate the enough cash inflows to buy an asset. The utilization of
extra capacity brings efficiency in operations and reduces the overall fixed costs of
the business.
vi. Adoption of Modern Technology:

The leasing companies especially focus on the new plants and machineries
developed in industrial countries and arrange the import of these equipments for
the local industry. The new technology enables machines to consume less energy
and produce more units. As the newly developed plants and machineries have
higher costs, the only feasible way to acquire them is though leasing contracts.
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1. Short Questions:
i. What is leasing?
ii. What is finance lease?
iii. Define the lease rentals?
iv. What is sale and lease back?
2. Long Questions:
i. Discuss in detail the various types of leasing.
ii. Explain the advantages and disadvantages of buying an asset on lease.
iii. What are the various operational issues of leasing companies in Pakistan?
iv. Discuss in detail the importance of leasing companies in Pakistan.
The leasing companies are not witnessing strong growth in Pakistan. In your
opinion what are the reasons for this weak performance? Can the business of hire
purchase-installment purchase replace the old leasing industry?
4. Practical:
Select any five different leasing companies working in Pakistan and fill this chart:
Name of
Rate of Terms and Tax
Leasing Type of Lease Duration
Interest Conditions Credit
Company
INDUSTRY OVERVIEW:
An upward trend was witnessed in the asset size of leasing companies during the
year 2016-17. The asset size of leasing companies has increased from Rs.42.2
billion as of June 30, 2016 to Rs.43.3 billion as of June 30, 2017. During the period
under review, the SECP granted permission for the formation of two new NBFCs
132
with the main object of undertaking business of leasing after grant of formal license.
Licenses of four leasing companies were also renewed during the course of the year.
Total assets
Lending NBFC No. of Entities
(In billion rupees)
IFCs 10 81
NBMFCs 20 61
Leasing companies 08 43
Total 38 185
133
FURTHER READINGS
Afza, T., & Asghar, M. J. E. K. A. (2014). Efficiency of Modaraba and Leasing

Companies in Pakistan. Procedia-Social and Behavioral Sciences, 109,
470–482.
Gallardo, J. (1999). Leasing to support small businesses and microenterprises. The

World Bank.
Nair, A., Kloeppinger-Todd, R., & Mulder, A. (2004). Leasing: An Underutilized

Tool in Rural Finance.
NBFCs Reform Committee Report 2012.
Shah, S. Z. A., & Jam-e-Kausar. (2012). Determinants of capital structure of leasing

companies in Pakistan. Applied Financial Economics, 22(22), 1841–1853.

www.sbp.gov.pk
134
Unit–7
INVESTMENT FINANCE
COMPANIES & HOUSE FINANCE
COMPANIES

135
CONTENTS
Page #
Introduction ....................................................................................................... 137
Objectives ......................................................................................................... 137
7.1 Introduction to Investment Finance Companies ...................................... 138
7.2 Functions of Investment Finance Companies ......................................... 139
7.3 Role of Investment Finance Companies in the Economic Development 142
7.4 Issues in Investment Finance Industry in Pakistan .................................. 144
7.5 Introduction of House Finance Companies.............................................. 146
7.6 Products Offered by House Finance Companies in Pakistan................... 147
7.7 Issues in House Finance Industry in Pakistan .......................................... 148
136
INTRODUCTION
This unit deals with investment finance companies which facilitate the offering of
securities and other investment management services. The role, functions and types
of investment finance companies are discussed in detail. Along with this, the role
of investment finance companies in the overall economy is discussed to help
students understand the importance of financial intermediation.
OBJECTIVES
i. to describe the concept and working of IFCs
ii. to discuss the functions of the investment finance companies
iii. to explain the role of IFCs in the capital markets
iv. to discuss the role and functions of the house finance companies
137
7.1 Introduction to Investment Finance Companies
The basic concept of an investment finance company is to facilitate the corporate
sector in the arrangement of necessary capital both in equity and debt form. The
investment finance companies work to help companies to raise capital through the
issuance of shares, bonds and other financial instruments. The investment finance
companies are also called the investment banks in some countries performing
similar functions. The objective of an investment finance company is to act as an
agent in the capital markets and facilitate the interaction of suppliers of funds
(individuals & institutions) with the consumers of funds (businesses). The
investment finance companies work to meet the capital requirements of different
businesses by convincing various investors to invest in their securities in order to
earn a suitable market return. These investors include individual investors with
sizeable disposable incomes and the institutional investors (mutual funds,
modarabas, govt. bodies etc).
There are several structural forms of investment finance companies in the

different parts of the world. Some investment finance companies work in the form
of investment banks that primarily deals with the issuance and redemption of shares
and bonds in the capital markets. The role of investment bank also includes
corporate advisory for strategic financial decisions. The investment finance
companies in some countries also include the brokerage firms which provide
buying and selling of securities in the financial markets. In the financial system of
the USA, the investment finance companies include factors, discount agents, sales
finance agents, and credit card companies etc. that meet the financial requirements
of the various groups of society.
The working of an investment finance company is based on the concept of

financial intermediary which acts as the middleman in coordinating the actions of
investors and businesses. In the capital markets, the investment finance companies
offer their services as an agent to facilitate the offering of share capital to the
potential investors. Apart from this role in the capital market, the investment
finance companies are also engaged in arranging long term project finance,
advising mergers and acquisitions, working on the scenarios of corporate
restructuring, issuance of debt securities etc. The purpose of an investment finance
company in the financial markets is to facilitate the businesses in getting the
required funds from the investors in a simplified manner.
The Sources of Finance for an Investment Finance Company are limited as these
firms are not allowed to seek public deposits like a traditional commercial bank.
However, the investment finance companies may issue certificate of deposits for
138
short term financial needs and the certificates of investments for medium and long
term financial requirements. The investment finance companies also issue their
own shares to the interested investors and put this money in the profitable
opportunities. The investment finance companies may also get loans and other lines
of credit from the commercial banks for meeting their financial needs. The earnings
of investment finance companies include the fees, commission etc. received on
facilitating the issuance of securities and other profits/interest earned on various
investments.
The legal framework for Investment Finance Companies in Pakistan consists

of the Companies Act 2017 as the Section 282 of the old Companies Ordinance
1984 is adopted for the establishment of the NBFCs in Pakistan. Apart from the
corporate law, the Non-Baking Finance Companies (Establishment) Rules 2003
deals with the legal requirements for the establishment of an investment finance
company in Pakistan. To supervise the operational aspects, the Non-Banking
Finance Companies & Notified Entities Regulations 2008 provides the legal
guidance on the practical working of an investment finance company. The
Securities and Exchange Commission of Pakistan (SECP) is entrusted with the
responsibility of the regulatory duty of the investment finance companies in
Pakistan. The SECP has established elaborate mechanism to supervise the working
of investment finance companies and ensure the compliance with the applicable
laws and regulations. For this purpose, a separate NBFC division has been
established within SECP to deal with the regulatory compliance of the all NBFCs
working in Pakistan.
7.2 Functions of Investment Finance Companies

The investment finance companies provide various kinds of services to their clients.
The NBFC & NEs Regulations 2008 (Regulation No. 29) has prescribed various
kinds of functions to be performed by the investment finance companies in
Pakistan. A brief description of these functions is given below:
1. Money Market Activities:

The money market activities refer to the participation of investment finance
companies in the short-term financial transactions. These include:
i. Issue of Certificates of Deposits to raise the short-term funds from the
money market. These certificates are issued to the potential investors by
promising an attractive rate of return.
ii. Discounting Commercial Bills refers to the acceptance of commercial bills
of various firms and encashment of these bills against a discount rate in order
to provide the required liquidity to the clients.
139
iii. Assistance in Issuance of Commercial Papers includes the administrative,
technical and legal guidance for the issuance of short term commercial papers
by various clients.
2. Capital Market Activities:

The capital market activities include the involvement of investment finance
companies in the capital markets in order to facilitate the growth of investments.
These activities include:
i. Underwriting is the process of assisting the issuance and sale of the securities
of a company in the capital markets. The investment finance companies
perform this role to help companies raise funds from the capital market.
ii. Professional Analysis includes the technical working on the prospects of
issuance of shares or bonds by a company. Through this analysis, the market
demand is estimated and the appropriate offering price is decided.
iii. Making Investments refers to the actual investment of its own funds by the
investment finance company in various securities offered in the capital
markets in order to earn the reasonable profit for the shareholders.
iv. Portfolio Management refers to the holding of various securities of different
firms on behalf of the clients with a view to maximize the market returns and
minimize the market risk and the investment finance companies charge their
fees accordingly.
v. Documents Preparation includes the preparation of necessary financial and
legal documents on behalf of the client to float securities, make merger and
acquisitions plans and design portfolio in the capital markets.
3. Project Financing:
The project financing includes the various activities undertaken by an investment
finance company to participate in the various projects. These activities include:
i. Investments in Long Term Projects by the investment finance company in
order to earn the long term returns for the investors of an investment finance
company. These investments are made subject to the restrictions of the SECP
on the maximum limits.
ii. Corporate letter of Credit is opened by the investment finance company
against a fee to facilitate the companies for importing plant and machinery
from the foreign countries.
iii. Syndicate of Investors is organized by the investment finance company to
fund a large size project by investing an agreed share of funds by each
participating financial institution.
140
4. Corporate Finance Services:
The corporate finance activities include a vast set of functions performed by the
investment finance company for the various corporate clients. These activities
include:
i. Financial Advisory is provided to the various businesses related to designing
an optimal capital structure with the right mix of equity and debt components
and on the matters of issuance of various securities. This financial advisory is
based on the market research and the applicable legal frameworks.
ii. Corporate Restructuring is performed for the financially distressed firms
who are unable to pay their immediate debts. These debts are rescheduled in
order to provide a financial space for the business to payback its liabilities.
iii. Mergers and Acquisitions transactions are conducted by the interested
parties only after getting professional advice from the investment finance
companies which scan their financial and operational records to map out the
mergers and acquisitions terms and conditions.
iv. Custodian of Securities is a role played by the investment finance companies
to hold various securities on behalf of their clients against a fee and on the
orders of client these securities are disposed off or traded in the market.
v. Market Research is conducted by the investment finance companies in order
to know the emerging patterns of profitability in the various sectors of
economy and this research is communicated to the interested clients for
strategic decisions.
5. Other Activities:
Apart from the activities listed above, the investment finance companies also
perform some other functions to facilitate the financial markets and institutions.
These activities include:
i. Govt. Financial Advisory function is performed by the investment finance
companies on recommending the right time for offering the shares of public
sector companies or other financial securities in the financial markets.
ii. Discounting Services is a role played by the investment finance companies
to accept the bills of exchange in the market against a fee or profit to provide
liquidity in the market.
iii. Other Clients Services includes the offering of safe deposits vaults, payment
to various parties etc. by the investment finance companies to its corporate
clients in order to facilitate their operations.
iv. Extend Secured loans to the corporate clients for medium to long term
durations is another function of the investment finance companies in Pakistan.
However, the SECP has imposed restrictions on the maximum lending
capacity of the investment finance companies.
141
7.3 Role of Investment Finance Companies in the Economic
Development
The investment finance companies play a key role in the economic development of
a country. The level of working and nature of operations of investment finance
companies depend on the quality of financial markets in a country. To build a strong
financial market, the design, structure and legal framework related to the
operational and financial aspects should be simplified and transparent for the
investors and businesses. The dynamic financial markets with a higher level of
participation of investors make the working of investment finance companies easier
and effective. In order to understand the role of investment finance companies in
the overall economic and financial development of a country, the following
functions are important to discuss:
i. Mobilization of Savings:
The investment finance companies identify the profitable opportunities in the
markets and design suitable investment schemes for the investors. In this way, the
individual and institutional investors are encouraged to put their funds in the
various investment plans offered by the investment finance companies. Similarly,
the requirements of corporate financing are met by floating shares and bonds in the
capital markets with the help of investment finance companies.
ii. Increase in Investments:

The presence of investment finance companies increase the overall investments in
the financial markets as investors are actively guided by these companies by
highlighting the profitable opportunities in the various sectors of economy. The
provision of actual capital market information to the investors enables them to make
wise financial decisions. The guidance by the investment finance companies in the
matters of project financing, mergers, acquisitions etc. is extremely important for
enhancing the overall efficiency of the market.
iii. Capital Formation:

The capital formation in the form of new plants, machinery, buildings etc. requires
huge funds with longer payback periods. The presence of investment finance
companies in the capital markets makes it possible for the corporate sector to easily
issue new shares and bonds in the financial markets and obtain the necessary funds
for investment in the long term assets.
iv. Access to Capital Markets:

Without the presence of investment finance companies, the access to the capital
markets for the corporate sector becomes very difficult. The ground-level research
142
and financial analysis of the investment finance companies enable the businesses
to participate in the capital markets in the form of issuance of shares, bonds and
other securities. The role of underwriter and market maker in the financial markets
is played by the investment finance companies to facilitate the collection of funds
through the capital markets.
v. Asset Pricing:
The investment finance companies enable the capital markets to correctly price the
shares, bonds and other tradable financial assets of a company. The investment
finance companies provide the technical financial information to the investors for
valuing the real price of a financial asset. The trading services in the financial
markets are actually performed by the brokerage houses who work with the close
collaboration of the investment finance companies.
vi. Risk Management:

The investment finance companies manage the risk to the earnings present in a
market on behalf of their clients. The risk is managed through the allocation of
clients funds in different securities (portfolio management) based on their market
returns and relative risk level to maximize the returns on the investments.
vii. Project Financing:

The various large size projects in an economy requires huge funds and a single
investor may not be able to fiancé these projects. Here the role of investment
finance companies is crucial who joins the various investors and develops a
syndicate for mutually financing a large size industrial and infrastructure project.
viii. Industrial Expansion:

The expansion of industry is dependent on the availability of long term funds on
easy terms and conditions. The investment finance companies enable different
businesses to access the capital markets and obtain the required funds of long term
maturity for industrial expansion.
ix. Employment Generation:

With the increase in overall investment levels and industrial expansion through
access to the capital markets, the net impact on the employment generation is
positive as businesses now requires more workers for production and services. In
this way, the working of investment finance companies increase the employment
opportunities for the general public as the financing requirements for the industrial
expansion are met though the capital markets.
143
x. Liquidity Injection:
Through their role as the discount house, cash management functions, acceptance
of commercial papers etc. the investment finance companies inject the required
liquidity in the financial markets for the smooth working of various businesses.
This role of liquidity enhancer improves the overall efficiency of the market
meeting the financial needs of industries.
7.4 Issues in the Investment Finance Industry in Pakistan

After discussing the various functions and the benefits of the investment finance
companies, now, we come towards a brief discussion on the various operational
and financial issues being faced by the investment finance companies in Pakistan.
Some of these issues are related to the regulatory aspects supervised by the SECP
and some issues relate to the overall working of financial institutions and markets
in Pakistan. A brief list of these operational and working issues is given below:
i. Lack of Trained Professionals:

The investment finance companies require professionals with sound economic and
financial background. The quality of existing MBAs and financial education is very
weak and the industry is facing shortage of competent professionals in the areas of
portfolio management, project financing, mergers, acquisitions, market research
etc. There is a dire need to reset the curriculum in the business schools of Pakistan
to produce the graduates capable of running modern investment finance companies.
ii. Under-Developed Capital Markets:

The overall financial markets and especially the capital markets are underdeveloped
in Pakistan. There are only 600 listed companies in Pakistan and a large number of
businesses are working as private limited companies or in the form of family owned
partnership businesses. Further, the operational structure of the investment finance
companies makes them less attractive for the investors in Pakistani capital markets.
iii. Limited Outreach:

The investment finance companies are largely based in the urban areas with lesser
presence in the smaller towns. Even within urban areas, their working is limited to
few clients and industrial groups. The overall lack of financial education related to
the capital markets has also affected the outreach of the investment finance
companies.
iv. Strict Government Regulations:

The investment finance companies in Pakistan are under the supervision of the SECP
and their transactions are actively monitored by the regulator. Through NBFCs
144
Regulations 2008 several restrictions are imposed on the working and financial aspects
of the investment finance companies which limit their set of activities.
v. Low Number of Investors:

The overall investor base in the financial markets Pakistan is very and these
phenomena affects the overall working of the investment finance companies. The
number of active investors both individuals and the institutional is very low and the
offering of new shares and bonds is subscribed by a small set of investors only.
vi. Competition with the Commercial Banks:

The financial sector in Pakistan is heavily dominated by the commercial banks and
the different functions of investment finance companies are also performed by the
commercial banks. This kind of action by the commercial banks puts them in direct
competition with the investment finance companies which have lesser financial
resources.
vii. Limited Funds Resources:

The overall number of investment finance companies in Pakistan is very low and
their total funds are just 1% of the overall deposits of the financial system of
Pakistan. The limited funds resources are a barrier towards the active participation
in the financial markets especially the in the capital markets.
viii. Informal Economy:

The large portion of economy of Pakistan exists in the informal sectors which are
out of the scope of the investment finance companies. Even in the informal
economy, there are many unregistered investment finance companies working in
the retail, wholesale, real estate and the other sector of economy without the
regulatory cover of the SECP.
ix. Lack of Capital Protection:

The lack of financial education among the general public in Pakistan makes them
feel easy with the banks where deposits are relatively secured and in the real estate
sector. The investments in the capital markets are based on the selection of risk
level and market failure may wipeout the invested capital of the people as the SECP
does not guarantee the capital protection. This fear of loss is preventing a large
number of investors for putting their funds in the capital markets through the
investment finance companies.
x. Limited Capital Floatation:

As there is a limited number of listed companies in Pakistan, the overall demand
for the issuance of shares, bonds and other financial securities is low as the
145
financing requirements are bet through loans from commercial banks and family
financing. The limited number of Initial Public Offerings (IPOs) has also reduced
the scope of the investment finance companies in Pakistan.
7.5 Introduction to House Finance Companies

The need for housing is a basic human need that requires significant outflows of
the financial resources. In the developing countries with rising population and
urbanization, the residential space is squeezing resulting in lesser supply of housing
units to the general population. The provision of affordable housing in the
developing countries is a huge challenge for the governments as the financial
resources of the government are limited. To meet the market demand of housing
units, the concept of private sector housing companies has been developed that
provide the necessary funding to the general public to buy the required houses.
The basic idea of a house finance company or a mortgage company is of a

financial institution that provides long term funds in the form of loans to the eligible
persons to buy, construct or renovate a house. The borrower will utilize the loan for
buying, constructing or renovating a house and the repayment of loan will be made
over a period of 5, 10, 15 or 20 years period based on the mutual agreement. The
repaid amount will include an interest rate along with the principal sum to the house
finance company. In this way, the house finance companies try to solve the issue
of shortage of homes as an alternate form of living on rented space. The house
finance companies select the eligible borrowers and extend loan after following the
due process and necessary verification. The repayment of the house loan with
additional mark-up is usually designed over a long period of time generally from
five to twenty years.
There are many benefits of the house finance companies as the long term funds
provided by the house finance companies result in increasing the home ownerships
in a country. To acquire a house on mortgage or long term credit basis, a person
can save the rental expenses which he has to bear in the absence of a mortgage.
Further, the repayment of house loans can be designed in a periodic installment that
can be paid easily by a person with regular income. In this way, that person may
become the owner of house by paying the all installments of the house loan.
Additionally, the acquiring of a house on mortgage or house finance basis provides
a regular saving option to the concerned person which is used to repay the loans.
Lastly, the value of a house increases with the passage of time so the owner of
house is entitled to the unrealized gains on the value of asset.
146
There are many types of house finance models being practiced in all over the
world. The first type is a public housing finance models that is funded and formed
by the governments in the respective countries to provide the low cost housing to
the poor sections of society. This model is practiced widely in the developing
countries where the government provides low cost subsidized housing on easy
installment to the lower income groups. The second form of housing finance
companies is that of established through the public-private partnership models in
which a private lender extends loans to the eligible borrowers on subsidized mark-
up rates. The objective of this type of model is to encourage house loans to the
wider sections of society on easy interest rates. The third form of house finance
companies is that of private financial institutions established to provide loans to the
eligible borrowers on the market based interest rates to acquire property in the real
estate sector. These types of house finance companies target high value individuals
who can afford the expensive houses in the urban areas. These house finance
companies also include banks who have designed various house finance products
for the high income categories.
The regulatory aspects of house finance companies are managed by various

bodies. In case of the House Building Finance Company Limited, the SECP has
licensing control while the SBP has the operational control. In case of provincial
low cost housing companies, the provincial government exercises their controls as
per the objectives of the designed housing companies. Inc case of commercial
(including Islamic) banks, the operational controls lies with the SBP that actively
monitors the maximum exposure of the various house finance products of the
banks. The SBP also implements the target set by the federal government for the
provision of minimum housing loans to the general public.
7.6 Products Offered by House Finance Companies in Pakistan

The House Building Finance Company Limited (HBFCL) previously House
Building Finance Corporation (HBFC) is the biggest house finance company in
Pakistan, It was established in 1951 to deal the massive inflow of the refuges from
India who lacked residential places. The HBFC established many housing units in
Pakistan and the major urban centers were targeted in the initial years of operations.
As a result the issue of shortage of houses was largely tackled in a systematic way
with the help of HBFC financing. However, with the passage of time, various
governments interfered in its internal matters and the loans were granted on
political basis resulting in lower recovery rates and reduced profit margins. With
heavy losses, it was restructured in 2007 and converted into a limited company from
a corporation with independent board of directors. The major products of the
HBFCL being offered these days are discussed below:
147
i. House Construction is a major product offered by the HBFCL in which the
long term loans is provided by the HBFCL to the eligible borrowers on easy
terms and conditions. The section criteria in this type of loan depends on the
location of the proposed plot of land for construction of house, the equity to
be participated by the borrower and the repayment terms and conditions
mutually agreed in the contract.
ii. House Renovation is another product of the HBFCL in which a long term
loan is provided to repair an existing house, add extension or completely
renovate the house as per the requirements of the borrowers. The loan is
extended by the HBFCL by carefully evaluating the needs of the project the
suitable terms and conditions are added in the contract for ensuring the
repayment of the loan.
iii. House Purchase is also a product of the HBFCL in which the long term loan
is offered by the HBFCL to the eligible borrowers to purchase a new house.
The loan is approved on the basis of repayment capacity of the borrowers and
the terms and conditions are laid out in the contract of the loan.
iv. Commercial Buildings is also targeted by the HBFCL in the form of
provision of loans to the small scale real estate developers for building
commercial areas and small residential complexes. The HBFCL closely work
with the private sector as the real estate dealers are the primary stakeholders
in the housing sector.
7.7 Issues in House Finance Industry in Pakistan
The house finance industry in Pakistan is facing several challenges and issues in
the working and operational matters. A brief description of these issues is presented
below:
i. Limited number of house finance institutions in the house finance industry
is a worrisome trend in-spite of the many efforts of the government to revive
this industry. Apart from the HBFCL, there is no large scale federal
government body to provide low cost housing to the poor. Some provinces
have started the low cost housing projects but their scale is too small for a
large population. The banks are also providing limited house finance loans
resulting in shortage of housing units.
ii. Lower recovery rate is the biggest challenge for the house finance
companies in Pakistan as the default rate on the loans is very high. The
recovery teams of house finance companies are not professional and the
selection of borrowers is not performed professionally to ensure the timely
payments of the loan which has resulted in lower profitability for the banks.
iii. Property titles issue is a major problem in the recording of immovable assets
in Pakistan as the old laws and complex documentation is preventing the
148
growth of house loans in Pakistan. The occurrence of frequent frauds in the
sale and purchase of lands has built a reputational risk for the real estate
sector. This risk has discouraged many real estate investors including the
house finance companies.
iv. Poor insolvency laws are preventing the growth of housing loans as the
lender is unable to secure the property in case of default by the borrowers.
The tenancy laws are also rigid making it harder for the house finance
company to vacate the house in case of default by the borrower. Since the
house loans are long term in nature, sound guarantees are required to be
placed before entering into the contract.
v. Private housing societies have entered the housing market which operate
under the umbrella of cooperative societies laws and facilitate their members
in installment payments. Along with these societies, various property dealers
have also entered into the market by developing various easy payment
options. This has created another type of house finance industry with its
players and the absence of strict regulations has enabled the huge growth in
private housing societies business.
1. Short Questions:
i. What is an investment finance company?
ii. What is underwriting?
iii. Define certificates of investments.
iv. What is project financing?
2. Long Questions:
i. Discuss in detail the various functions of the investment finance
companies.
ii. Explain the role of investment finance companies in financial development
of a country.
iii. What are the various operational issues of investment finance companies
in Pakistan?
The investment finance companies are the backbone of the capital markets in
Pakistan. Dou you agree? What is the potential of the IFCs in the economic
development of Pakistan?
149
4. Practical:
Select any five different IFCs working in Pakistan and fill this chart:
Name of
Investment Major Financial Terms and Ownership
Profitability
Finance Activities Instrument Conditions Pattern
Company
INDUSTRY OVERVIEW:
The number of investment finance companies remained unchanged at 10 since June

30, 2016. However, the asset size of investment banks has increased from Rs77
billion as of June 30, 2016 to Rs81 billion as of June 30, 2017.
Total assets
Lending NBFC No. of Entities
(In billion rupees)
IFCs 10 81
NBMFCs 20 61
Leasing companies 08 43
Total 38 185
150
Some IFCs/IBs working in Pakistan are:
1. Arif Habib Limited.
2. BIPL Securities Ltd.
3. Escorts Investment Bank Ltd.
4. First Capital Sec. Corp. Ltd.
5. First Credit & Investment Bank Ltd.
6. First Dawood Investment Bank Ltd.
7. First National Equities Limited.
8. Invest Capital Investment Bank Ltd.
9. Jahangir Siddiqui & Company Ltd.
10. Pakistan Stock Exchange Limited.
11. Pervez Ahmed Securities Ltd.
12. Security Investment Bank Ltd.
151
FURTHER READINGS
1. Economic Survey of Pakistan (Latest) available on www.finance.gov.pk
2. Financial Markets and Institutions by Anthony Saunders
3. Financial Institution Management by Helen P. Lange
4. Financial Institutions and Markets by Meir G. Kohn
5. Financial Markets and Institutions by Frederic Mishkin and Stanley G Eakins
6. Fundamentals of financial institutions management by Marcia Millon Cornett
7. NBFCs Reform Committee Report 2012
8. SECP Annual Report (latest) available on www.secp.gov.pk
9. State of Economy Annual Report, State Bank of Pakistan (Latest) available

on www.sbp.gov.pk
152
Unit–8
PENSION FUNDS, PRIVATE EQUITY

AND VENTURE CAPITAL FUNDS

153
CONTENTS
Page #
Introduction ....................................................................................................... 155
Objectives ......................................................................................................... 155
8.1 Concept of Pension Funds ....................................................................... 156
8.2 Types of Pension Funds ........................................................................... 157
8.3 Role of Pension Funds in the Financial Markets ..................................... 158
8.4 Introduction to Private Equity Funds ....................................................... 159
8.5 Types of Private Equity Funds ................................................................. 159
8.6 Potential of Private Equity Funds in Pakistan.......................................... 160
8.7 Introduction to Venture Capital Fund ...................................................... 161
154
INTRODUCTION
This unit deals with three emerging types of NBFCs; pensions funds, venture
capital funds and private equity funds. As these three are relatively newer types of
NBFCs, their basic concepts, functions and working are described to familiar
students with their essential concepts.
OBJECTIVES
i. to explain the concept of pension funds and venture capital funds
ii. to discuss the functions of pension funds and venture capital funds
iii. to elaborate the role of pensions funds and venture capital funds
iv. to discuss the concept, functions and role of private equity funds
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8.1 Concept of Pension Funds
The need for long term savings is a basic human instinct as the capacity to earn
diminishes with the passage of life. In old age, the savings made in the earlier years
of life are used to meet various economic needs. In the modern economic system,
there are various tools to develop long term savings in the form of financial and
physical assets. The financial assets are created through the long term savings plan
offered by the financial institutions to the individuals. These financial plans include
deposits accounts, investments in long term bonds, buying investment certificates,
mutual funds investments, pension funds investment etc. This chapter deals with
the role of the pension funds to promote the long term investments in the economy
and provide the old age financial support in the form of pension.
The basic concept of a pension fund is based on the long term investment
objectives where investors regularly contribute to the fund. These funds are then
further invested in the capital and money markets to generate the suitable returns.
The investors are paid the principal amounts and the cumulative generated returns
in the old age i.e. after 60 years of age. The origin of pension funds goes back to
the 20th century when European governments started developing welfare states in
order to provide maximum financial support to the needy section of society. In the
present economic environment, the pension funds are operated by both the public
institutions and the private companies. Along with the state, the private sector has
also started the offering of facility of pension to their employees on contribution
basis.
The working of a pension fund is managed by a pension fund manager usually an

asset management company. The pension fund manager offers the various types of
sub-funds in the market for public subscription. These sub-funds include equity
funds, debt funds, money market funds etc. The investors provide their funds in the
desired sub-fund of the pension fund and choose the appropriate level of risk
appetite. The investors may decide with the help of pension fund manager the
frequency of depositing contributions. The pension fund manager is responsible for
the efficient allocation of investors’ funds in the various industries and sectors as
per the market trends and investment objectives. The returns generated are kept
with the pension fund manager and the accumulated amount is shared on attaining
the age of retirement.
The regulatory framework for pension funds in Pakistan is composed of various

laws and regulations. The pension funds are categorized as the Non-Banking
Finance Companies (NBFCs) under the section 282 of the Companies Ordinance
1984 (retained by the Companies Act 2017). The SECP being the regulator of the
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pension funds has issued the Voluntary Pension Funds Rules 2005 to manage the
operational aspects of the pension funds. The SECP has also issued various
directives, guidelines and circulars for the efficient functioning of the pension
funds. As the pension funds are managed by the asset management companies in
Pakistan, the working of the asset management companies is also monitored by the
SECP under the NBFCs Rules 2003 and the NBFCs & NEs Regulations 2008.
8.2 Types of Pension Funds

In the beginning, the pension plans were offered to the government servants only
on their retirement. However, in the modern economic times, every country has
opened the space for the participation of the private sector in the pension industry.
This has brought the concept of the private pension fund manager that collects funds
from the general public and makes economy-wide investments. There are various
types of pension funds which offer different types of pension plans to the
individuals. A brief description of these pension funds and their sub-funds is given
below:
i. Public Sector Pension Funds are offered and managed by the government
institutions for providing the pension benefits to the government servants.
These pension funds are designed to provide a decent periodic payment to the
retired government servants. Generally, these pension funds are operated
without taking any contribution from the government employees.
ii. Private Sector Pension Funds are offered by the private sector companies
to their employees in order to provide them pension facility. Generally, these
pension funds are operated on the basis of contribution from the employees.
The funds collected are invested further and a lump sum amount is paid after
retirement with some periodic contributions.
iii. Voluntary Pension Funds are also called the contributory pension funds in
which any individual whether employed or not can participate by depositing
the required amount in the pre-agreed periodic intervals. The voluntary
pension funds are the largest category of the pension funds in the world
offering attractive pension plans to the various investors.
iv. Debt Pension Funds is a sub-category of the pension funds where the
majority of the collected funds from the investors are invested in the various
debt securities i.e. bonds, TFCs, commercial papers etc. The investment in a
debt fund carries a low to medium level of risk for the investors.
v. Equity Pension Funds is a sub-category of the pension fund in which a large
portion of the collected funds from the general public is invested in the shares
of various companies. The pension fund manager allocates the funds in the
various classes of shares of different companies based on market research and
emerging economic trends.
157
vi. Money Market Pension Funds is a sub-category of the pension funds where
the bulk of collected funds are invested in the short-term securities of the
money market in order to generate the suitable returns for the investors. The
money market pension funds allocate their investments as per the guidelines
of the SECP to minimize the risks associated with them.
vii. Islamic Pension Funds is an emerging phenomenon in the pension fund
industry where the pension plans are offered to the interested investors who
want to invest in Shariah compliant companies and sectors only. The Islamic
pension funds operate by observing the investments guidelines of the Shariah
Board of the SECP.
8.3 Role of Pension Funds in the Financial Markets

The pension funds play an important role in the financial markets as they invite
long term deposits from the general public and invest in profitable projects. Along
with the insurance companies, the pension funds are also a source of long term
financing as the nature of their investments is long term. Apart from the long term
investments, the pension funds also participate in the financial markets and perform
the following functions:
i. Increase in Savings as a new tool for investment becomes available to the
interested investors who want to save for their old age. In this way, a new
class of investors emerges that provides the funds to the pension funds for the
suitable investments thus encouraging the retail investors to save more for
pension funds contributions.
ii. Improvement in Investments is a direct result of enhanced savings as the
pension fund managers seek funds from the general public by offering
attractive pension plans. The offering of various pension plans by the pension
fund managers provides a new class of investment tools and instruments for
the retail investors.
iii. Long Term Capital Formation is required for the development of economic
and industrial infrastructure of a country. The pension funds provide the
necessary capital for building and acquiring the long term fixed assets for public
and private sector and the periodic returns are accumulated by the pension funds.
iv. Financial Coverage for Aged Population is necessary as the cost of living,
health expenditures and other household expenses are easily met through the
funds released by the pension funds after the retirement. In this way, the
economic dependence of aged parents on children is decreased resulting in
higher family incomes.
v. Tax Benefits for making contributions to the pension funds are a huge benefit
for a working person. The Income Tax Ordinance 2001 provides tax credit
for making contribution to a pension fund. In this way, the contribution to the
pension funds provides the tax savings to the eligible investors.
158
8.4 Introduction to Private Equity Funds
The ever expanding global economies require a smooth flow of funds to the new
and innovative businesses. A large portion of these funds comes through the formal
financial markets by issuing shares, bonds and other securities. However, there are
many investors who want to invest their funds without going to the formal financial
markets and avoiding lengthy procedures and public scrutiny. The private equity
holders refers to a group of investors who pool their funds privately to invest in
new start-up companies or buying existing firms to expand their market position.
The basic concept of a private equity fund is similar to a partnership where a group
of likeminded investors pool their funds to invest in new and emerging firms in order
to generate suitable returns. The private equity funds are not listed on a stock
exchange and their ownership structure resembles with partnership agreement
whereby a group of investors agrees to put their capital in a particular fund for limited
time period. The purpose behind forming a private equity fund is to facilitate the
investors to place their funds in an easy and comfortable way for earning the required
returns without entering into the complex world of capital markets.
The working of a private equity fund is simple as the collected funds are invested
in different types of companies depending on their growth potential and expected
profitability. The structure of a private equity fund is like a close ended mutual fund
where only a small group of investors put their money for investment objectives.
The fund manager manages the all collected capital and distributes the earnings in
a pre-agreed ratio among the partners. The terms and conditions for a private equity
fund are set by the partnership agreement of the fund and all financial matters are
decided accordingly.
The regulatory aspects of private equity funds in Pakistan are covered by the
Private Equity and Venture Capital Regulations 2008 and the private equity funds
are regulated by the SECP. The fund manager is licensed by the SECP after meeting
the fit and proper criteria laid out in the above said regulations. Apart from these
regulations, the SECP has also issued various guidelines and circulars for the
efficient functioning of the private equity funds.
8.5 Types of Private Equity Funds

There are many forms of private equity funds each with their own set of
investment objectives and ownership structures. However, a good way to
understand the various types of private equity funds is to classify them according
159
to their investment strategies and objectives. A brief account of these investment
strategies is given below:
i. Venture Capital refers to investments made in the new and emerging
companies at their early stage of operations. This type of private equity
investments is directed to provide early stage financing to the young
companies by assuming the various risks. In return for financing, the private
equity investors are promised an ownership share or revenues share in the
new companies.
ii. Buyouts refer to an investment strategy in which funds are invested in
companies that have significant market position in order to exercise influence
in their operations. This type of private equity investments occurs to capture
the market position of a company with an intention to expand it further and
possibly add more business segment to enhance its market power.
iii. Growth Capital means the investment in strong companies who have good
business position and want to expand in new markets and areas. The objective
of growth capital strategy is to put funds in the relatively strong companies
without an intention to exercise control and power in the operations of the
company. Generally, this type of private investment is for acquiring a
minority stake in order to earn the suitable returns.
iv. Special Situations consists of many forms of investment objectives in which
the funds are provided by the private equity funds in order to restructure the
distressed firms who have large debts on their balance sheets. This type of
investment strategy also includes providing the necessary funds in the form
of equity to a troubled firm and acquiring the majority ownership stake.
8.6 Potential of Private Equity Funds in Pakistan

Although private equity funds are a new entrant in the financial industry of
Pakistan, the potential for their operations and working is very promising. As the
business environment in Pakistan is very challenging with new entrepreneurs
feeling it hard to obtain the necessary capital, the potential for the private equity
investors is very high.
i. Increase in Investment will be observed as a result of the emergence of more
private equity funds in Pakistan. The presence of private equity funds will
provide an incentive to the existing and new class of investors to participate
in the new form of investments. The private nature of this type of investment
will enhance the trust of local investors for investments in the local markets.
ii. Financial Support to Businesses will be provided through the increased
investments in the private equity funds. The new businesses in Pakistan face
the shortage of capital due to the limited funds and the capital markets in
Pakistan are not developed to extend the necessary funds to the early stage
160
companies. Therefore, the presence of private equity funds will enhance the
overall financial support to the new businesses and firms.
iii. Ease of Working is another potential benefit for the investors of the private
equity funds as their capital is easily managed and remains restricted to a
limited group of investors. The majority of retail investors lack financial
education to access the capital markets and the emergence of private equity
funds may provide a method for making investments in the different types of
companies.
iv. Solution for Troubled Firms can be provided by the private equity investors
who want to extend their funds to the debt ridden firms in order to acquire
majority stake in their ownership. Similarly, the private equity funds may also
provide funds in the form of debt to solve the liquidity crises of the
companies. Once the financial troubles for these companies are ended, they
are further resold to the interested investors for profits.
v. Promotion of Entrepreneurship is a direct result of the establishment of
dynamic private equity funds in a country which can extend necessary capital
to the inventors, scientists, and other entrepreneurs to develop new products
and market them in order to facilitate the consumers and earn suitable returns.
The presence of private equity funds will send a positive signal to the
emerging business class to realize their business dreams.
8.7 Introduction to Venture Capital Funds

Innovation and creativity are the hallmark of modern economic system and the
wealth of firms is determined on the basis of new products launched in the market.
However, the process of developing new products and solutions requires huge
research work to be undertaken by the scientists and the experts. These research
activities require large funds which early stage firms find it hard to obtain from the
financial institutions and the market. Here comes the role of the venture capital
funds that provide the early stage financing to the new firms and research labs to
develop new products.
The basic idea of a venture capital fund is to support the early stage young firms
in order to enable them to develop their products and build strong business
foundations. The financial institutions generally hesitate to provide funds to the
young firms that leave a gap in meeting their financial needs. A fund is developed
by the likeminded investors to provide financing to the interested entrepreneurs.
This fund can be provided in the form of equity on ownership sharing basis or in
the form of a debt that carries a fixed interest.
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The working of a venture capital fund is similar to the private equity funds
discussed earlier in this chapter as a group of investors agrees to finance the early
stage operations of a firm. These investors put their funds in a collective scheme
and a fund manager is appointed who carefully selects the eligible investors for the
venture capital funds. The investments made in a venture capital fund may result in
bringing an ownership share or a revenues share depending upon the nature of
agreement between the entrepreneur and the venture capital fund.
The regulatory framework for venture capital funds is covered under the Private
Equity and the Venture Capital Funds Regulations 2008 and the venture capital
funds are regulated by the SECP. The SECP has also issued various guidelines and
the directives for the venture capital funds.
1. Short Questions:
i. What is a private equity fund?
ii. What is a pension fund?
iii. What is a venture capital fund?
iv. What is restructuring?
2. Long Questions:
i. Discuss in detail the various types of pension funds and their role in the
financial markets.
ii. Explain the concept of private equity funds and their potential in the
small business development in Pakistan.
iii. Elaborate the types and importance of the venture capital funds in
Pakistan.
Why pension funds are growing in Pakistan? Explain with the help of data. Also
discuss the way forward for the private equity funds in Pakistan.
4. Practical:
162
Select any five different pension funds working in Pakistan and fill this chart:
Name of Type of Expected Pension
Terms and Tax
Pension Pension Rate of Fund
Conditions Credit
Fund Fund return Manager
INDUSTRY OVERVIEW:
Private Fund Management

During the year, three NBFCs were granted license to undertake private equity and
venture capital fund management services business under the newly promulgated
Private Fund Regulations, 2015.
Voluntary Pension System

As of June 30, 2017, the assets of the pension schemes stood at Rs25 billion,
compared to Rs19.3 billion on June 30, 2016, showing a 37% growth in the last one
year.
The key statistics in respect of pension fund industry as of June 2017 is as follows:
Total assets of pension fund industry Rs 26 billion

Net assets Rs 25 billion
Total number of pension funds 19
Shariah-compliant pension funds 10
Conventional pension funds 9
Number of pension fund managers 10
163
FURTHER READINGS
Reports & Books:
Clark, G. (2000). Pension fund capitalism. OUP Catalogue.
Cumming, D., Siegel, D. S., & Wright, M. (2007). Private equity, leveraged
buyouts and governance. Journal of Corporate Finance, 13(4), 439-460.
Davis, E. P. (1998). Pension funds: retirement-income security and capital markets:
an international perspective. OUP Catalogue.
Grabenwarter, U., & Weidig, T. (2005). Exposed to the J-curve: Understanding and
managing private equity fund investments.
Holzmann, R., & Stiglitz, J. E. (Eds.). (2001). New ideas about old age security:
Toward sustainable pension systems in the 21st century. The World Bank.

www.sbp.gov.pk
164
Unit–9
INSURANCE COMPANIES

165
CONTENTS
Page #
Introduction ....................................................................................................... 167
Objectives ......................................................................................................... 167
9.1 The Concept of Insurance .................................................................. 168
9.2 Types of Insurance Companies .......................................................... 169
9.3 Principles of Insurance ....................................................................... 171
9.4 Benefits of Insurance for Business and Society ................................. 173
9.5 Major Insurance Firms in Pakistan ......................................................... 174
9.6 Role of Pakistan Reinsurance Company Limited .................................... 174
166
INTRODUCTION
This unit deals with the essential concepts of insurance and the working and
operational mechanism of insurance companies are explained. Along with that,
different types of insurance are pinpointed to enable students to understand the
scope of insurance. Lastly, the working and operational issues of insurance
companies are elaborated in the context of Pakistan.
OBJECTIVES
i. to discuss the concept and principles of insurance
ii. to discuss the working of insurance companies
iii. to describe the types of insurance companies
iv. to elaborate the benefits of insurance for individuals and businesses
167
9.1 Introduction of Insurance
The risk management is a process in which potential risks are identified, evaluated
and a strategy is selected to deal with them. The first step in a risk management
process is to identify the all potential risks in a business. These risks may relate to
any area of business where 100% supervision is not possible. Once these risks are
identified, the next task is to evaluate them. A risk is evaluated in terms of its
frequency of occurrence and its impact on business performance. After the analysis
of risks, appropriate policies are selected for managing these risks. These policies
generally all in four categories as shown in the diagram below:
A business may select any of these four policies to deal with the potential risks. The
policy of risk acceptance is selected when the effects of a risk are low on business
performance and a specific budget is allocated to manage these risks. The second
policy of risk avoidance is selected when the potential risk is area specific and
cannot be handled with any policy. The management of a business does not need to
enter in the particular transaction. The third policy is to mitigate risk by making
some internal changes in a business to accommodate risks. The fourth policy is to
transfer the risk in a business to a third party. The insurance companies fall into this
category where some businesses transfer their risks to the insurance companies that
promise them to pay in the event of a loss.
Broadly speaking, insurance is a mechanism through which the potential losses of

a business are transferred out of the business to a third party that compensates the
business in the event of a loss. For this purpose, the insurance company receives
fees for rendering such services. In other words, insurance is a mechanism through
which the loss is transferred from the business to the insurance company. The
business organization pays a particular amount called premium to the insurance
company periodically. The insurance company makes payment to the business
168
organization in case of loss. The working of insurance companies is dependent on
the type of risks a business is facing and their possible transfer to the insurance
companies.
The following diagram shows the simple working of an insurance policy:
Premium is paid by the individuals to the insurance company that
compensates them in the event of loss.
For example, a company ABC Ltd. wants to protect its plant from the financial
losses that can incur due to the fire. For this purpose, the ABC Ltd. enters a contract
with an insurance company for managing this risk of fire. Under the contract, the
ABC Ltd. will pay a premium of Rs. 50,000 per month to the insurance company
and insurance company will compensate to the ABC Ltd. in the event of fire at the
plant for a maximum Rs. 10 million. In this contract, both parties will be in a win-
win situation. For the ABC Ltd. the loss that may occur due to the fire at plant may
be managed and insurance company receives a fee of Rs. 50,000 per month.
9.2 Types of Insurance Companies

The insurance companies offer different schemes to the individual and business
customers to meet their specific needs. Generally, insurance companies are divided
into two categories: life insurance companies and non-life insurance companies.
Another way to study the insurance industry is to understand the insurance
companies through the type of insurance they offer. Following is the most common
type of insurance services available in Pakistan:
i. Life Insurance:
It is type of insurance in which a person pays premium annually to the insurance
company to cover the risk of death. In case of death, the insurance company pays a
particular sum to the legal heirs of the person. This is the most common type of
insurance that individuals select to insure their life.
169
ii. Medical Insurance:
The medical or health insurance works in a way that a person regularly pays a
premium to the insurance company and the insurance company promises to pay his
medical bills in case of his illness. Generally, the person insured gets treatment
from the hospital and the bills are paid to the hospital by the insurance company.
iii. Fire Insurance:

The fire insurance is a type of insurance where a person pays premium to the
insurance company to compensate him in the event of fire at the plant, property or
house. The fire insurance policy is offered by the insurance companies preferably
to the businesses where the effects of loss by fire are larger.
iv. Marine Insurance:

This is the oldest kind of insurance where the business organizations pay a
particular premium to the insurance company to compensate them in case of loss
of goods placed on a ship. This type of insurance encourages business organizations
to participate more in the international trade as the risk of loss is minimized.
v. Auto Insurance:
The auto insurance is offered by the insurance companies for the protection of
vehicles. It works in a way that the owner of vehicles pays a regular premium to
the insurance company and the insurance company undertakes all risks associated
with loss on vehicles including damage, accident, fire, theft etc.
vi. Machinery Insurance:

Another type of insurance is the machinery insurance that targets high value
machines used by a business. These high value machines need special attention,
and a specific insurance policy is designed to compensate the owners of machines
in case of their theft or loss by fire.
vii. Liability Insurance:

The liability insurance is generally used by the business organizations where the
debtors might default on the trade debts. For this purpose, the business organization
or in some cases debtor pays a premium to the insurance company and the insurance
company promises to compensate the business organization in case of default by
the debtors.
viii. Accident Insurance:

The accident insurance aims at reducing the financial effects on a person incurred
through an accident. Generally, a person pays a premium to the insurance company
and the insurance company compensates him financially in the case of an accident.
The insurance company specifies the limits of financing it can provide according
to the type of injury.
170
ix. Employee Insurance:
Another form of insurance that is practiced by the business organizations is
employee insurance. This type of insurance covers a wide variety of injury risks
that an employee might face in an industrial unit. The business organization pays
the annual premium to the insurance company and in case of any injury to the
employee the insurance company compensates the employee.
x. Islamic Insurance:
The Islamic insurance (Takaful) refers to specific type of agreement in which the
Islamic principles of Shariah are followed to design an insurance contract. It is
widely practiced in Islamic countries presently and operates on the principles of
mutual co-operation and trust. The insured person pays a regular sum tot eh
insurance company that promises him to cover his specific risks.
9.3 Principles of Insurance

The insurance companies operate on the basis of certain principles. These principles
are fundamental rules of the insurance industry on the basis of which the business
of insurance is conducted. These principles are elaborated below:
i. Principle of Utmost Good Faith:
The first principle of insurance is the utmost good faith. It refers to the disclosures
of all material facts related to the subject matter of insurance. For example, if a
person is intending to insure the building of his business then he is required to
disclose all important facts to the insurance companies related to that building.
These may include date of construction, expiry period, weather pattern etc. This
principle attempts to help insurance companies to decide the subject matter of
insurance after considering all material facts.
ii. Principle of Insurable Interest:

The second principle of insurance is the insurable interest that implies a monetary
relationship of the subject matter of insurance with the insured person. For example,
if a person has insured his car, then it is necessary that the person should have any
monetary relationship with the car (ownership, rent etc.). If the car is given to a
person by his employer, then no monetary relationship exists in this case.
iii. Principle of Indemnity:

The principle of indemnity states that the insurance company shall compensate the
insured person in the event of loss which is dependent on the happening or non-
happening of a contingent event. The insurance company shall measure the amount
of loss suffered by a person and the provisions of relevant insurance policy are
checked to determine the amount of compensation payable to the insured person.
171
iv. Principle of Contribution:
The principle of contribution states that the insured person shall contribute a sum
called premium to the insurance company for receiving the compensation in the
event of loss. The premium is calculated on the basis of amount of compensation
that the insured person will receive in the event of loss. The insurance company
invests the amounts of premium of received from different persons in some
profitable adventures.
v. Principle of Subrogation:
The principle of subrogation states that the insurance company shall receive any
benefit after the payment of the compensation money to the insured person. For
example, if a building is destroyed by fire, the insured person shall receive the
compensation money from the insurance company. However, after the payment of
insurance money to the insured person, the insurance company shall get possession
of all the scrap of building left after fire.
vi. Principle of Proximate Cause:
The principle of proximate cause states that the insurance company shall
compensates the insured person in the event of loss only for those conditions as are
mentioned in the contract or insurance policy document. For example, if a person
has a life insurance policy and he commits suicide then insurance company is not
responsible for paying insured money to the legal heirs of the person as suicide is
not covered under the life insurance policy.
The diagram below lists the key principles of insurance business:
Principle of
Indemnity
Principle of
Principle of
Insurable
Subrogation
Interest
Principle of Principle of
Proximate Utmost Good
Cause Faith
Principle of
Contribution
172
9.4 Benefits of Insurance for Business and Society
i. Provides Employment:
The first benefit of insurance to the general public is the provision of employment
opportunities to the public. The insurance companies employ lot of people in the
form of agents and surveyors who works at ground level and persuades people to
enter into insurance contracts.
ii. Sources of Capital Investment:

The money people pay to the insurance companies in the form of premium is a
source of investment in the country. The insurance companies collect premium
from different person and the aggregated amount is invested in the stock exchange
or in the government papers.
iii. Means of Savings:

The life insurance enables individuals to set aside a specified sum of money each
year and pay it to the insurance company in the form of premium. This practice
encourages savings among public and also provides the benefits of life insurance.
iv. Reduction of Losses:

The insurance enables businesses to manage their losses by paying a specified sum
to the insurance companies. In the event of loss, the insurance companies
compensate the insured person and help him to minimize the losses.
v. Removes Fear & Worries:

Another benefit of insurance is that it removes fear and worries in the minds of
insured persons. The insured persons can undertake new risks and business ventures
without any fear of abnormal loss as the insurance company promises to
compensate them in the event of loss.
vi. Stimulates Business Enterprises:

The main benefit of insurance to the business organizations is that it encourages
them to make new investments, take risky projects and purchase new machinery to
expand the business operations. The insurance mechanism enables the managers to
manage their risks.
vii. Cost Stabilization:

The insurance enables the business organizations to stabilize their costs and
minimize their losses. In the absence of insurance, the abnormal losses decrease the
profits of a business. The insurance companies promise to pay in the event of loss
helps to stabilize the earnings of a business.
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9.5 Major Insurance Firms in Pakistan
The insurance sector is witnessing strong growth in Pakistan due to rising personal
incomes and increasing knowledge of financial security and risk management. The
insurance sector in Pakistan is regulated by the Securities and Exchange
Commission of Pakistan (SECP). A separate insurance division has been created in
the SECP to deal with the operational aspects of the insurance companies. A brief
overview of the insurance sector is given below:
No. of Total Insurance
50
Companies in Pakistan
Total Companies 9
Annual Premium
Life Insurance Companies Rs. 180 billion
Collected
Annual Growth 11%
Total Companies 41
Annual Premium
Non-Life Insurance Companies Rs. 85 billion
Collected
Annual Growth 20%
Total Assets under the
management of Insurance Rs. 1,165 billion
Companies
Total premiums received by
Rs. 265 billion
Insurance Companies in 2016
Life Insurance Penetration
0.80
Ratio
Insurance Sector Growth in
13%
Last Five Years
9.6 Role of Pakistan Reinsurance Company Limited

The concept of reinsurance is the foundation of the insurance industry as it covers the
risks of insurance companies in managing their claims and settlements. The whole
concept of insurance industry rests on the probability of the claims filed by the insured.
If a large number of the insured persons file their claims then it becomes very difficult
for the insurance company to settle all their claims and make payments. To better
manage their risks, the insurance companies get themselves insured with the
reinsurance companies. Therefore, the presence of strong and vibrant reinsurances in a
country signals the strength of the overall insurance industry.
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In Pakistan, the function of reinsurance is provided by the Pakistan Reinsurance
Company Limited (PRCL) which was formed in 1952 as Pakistan Insurance
Corporation under PlC Act 1952 to facilitate the local insurance industry. From its
origin, it has managed the following funds and schemes:
i. National Insurance Fund (NIF),
ii. National Coinsurance Scheme (NCS),
iii. War Risks Insurance (WRI) and
iv. Export Credit Guarantee Scheme (ECGS)
In 2000, Pakistan Insurance Corporation was incorporated as a public limited

company. From the administrative point of view, The Pakistan Reinsurance
Company Limited is a public sector company udder the control of the Ministry of
Commerce. The company is lead by a Chairman with a nine member Board of
Directors. Out of these nine members, seven are nominated by the Federal
Government while others are elected from the reputable business community.
The PRCL has provided the financial support to the local insurance industry and
has developed schemes to manage their risk exposure. The voluntary association to
PRCL provides attractive and competitive terms to the local insurance Companies.
Globally, Pakistan Reinsurance Company Limited (PRCL) is the founder member
of the Federation Afro-Asian Insurers & Reinsurers (FAIR).
Functions of PRCL:
1. To provide services to the local insurance industry to monitor outflow of
foreign exchange
2. To develop working business relations with other reinsures in the world
3. To train its people according to fast changing business market requirements
as well as to provide them with the ideal working environment
4. To share risks and manage resources by extending reinsurance facilities to the
local insurance companies
5. To facilitate in the development of the national insurance industry
6. To increase domestic retention capacity to preserve valuable foreign exchange.
175
1. Provide short answers to the following questions:
i. Differentiate between risk and insurance?
ii. How do you define the term premium?
iii. What is meant by the risk management?
iv. List down the principles of insurance.
v. What is meant by the insurable interest?
vi. What is the concept of reinsurance?
2. Practical Exercise:
The following table provides a blank sheet for comparing premiums, sum insured,
term of insurance conditions and end of term payment. Contact your local insurance
agents of various companies and fill this table.
Name of Policy Annual Sum End of term
Insurance Term Premium Insured payment Conditions
Company (Year) (Rs.) (Rs.) (Rs.)
176
INDUSTRY OVERVIEW:
No. of Total Insurance Companies

50
in Pakistan
Total Companies 9
Life Insurance Companies Annual Premium

Rs. 180 billion
Collected
Annual Growth 11%
Total Companies 41
Annual Premium
Non-Life Insurance Companies Rs. 85 billion
Collected
Annual Growth 20%
Total Assets under the

management of Insurance Rs. 1,165 billion
Companies
Total premiums received by
Rs. 265 billion
Insurance Companies in 2016
Life Insurance Penetration Ratio 0.80

Insurance Sector Growth in Last
13%
Five Years
177
FURTHER READINGS
Ahmed, N., Ahmed, Z., & Usman, A. (2011). Determinants of performance: A case
of life insurance sector of Pakistan. International Research Journal of
Finance and Economics, 61(1), 123-128.
Ahmed, N., Ahmed, Z., & Ahmed, I. (2010). Determinants of capital structure: A
case of life insurance sector of Pakistan. European Journal of Economics,
Finance and Administrative Sciences, 24(24), 7-12.
Malik, H. (2011). Determinants of insurance companies profitability: An analysis

of insurance sector of Pakistan. Academic Research International, 1(3), 315.
Malik, H. (2011). Determinants of insurance companies profitability: An analysis

of insurance sector of Pakistan. Academic Research International, 1(3), 315.

www.sbp.gov.pk
Ul Rehman, W., Ilyas, M., & ur Rehman, H. (2013). Intellectual capital

performance and its impact on financial returns of companies: An empirical
study from insurance sector of Pakistan. African Journal of Business
Management, 5(20), 8041-8049.
______[ ]______
178

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Study Guide

Course Code: 5478 Units: 1–9

First Edition ...................................... 2023

Price .................................................. Rs.

Typeset by ......................................... M. Hameed Zahid

Printing Incharge ............................... Dr. Sarmad Iqbal

Printer ............................................... AIOU-Printing Press, Islamabad.

Publisher ........................................... Allama Iqbal Open University, H-8, Islamabad

Chairman: Prof. Dr. S. M. Amir Shah

Course Coordinator: Mr. Moazzam Ali

Writers: Mr. Moazzam Ali

Reviewers: Prof. Dr. S. M. Amir Shah

Layout: Mr. Hameed Zahid

Editor: Mr. Fazal Karim

Moazzam Ali Tarar

Unit–1: Introduction to NBFIs ........................................................................ 1

Unit–2: Regulatory Framework of NBFCs ..................................................... 15

Unit–3: Securities & Exchange Commission of Pakistan ............................... 47

Unit–4: Mutual Funds ..................................................................................... 63

Unit–6: Leasing Companies ............................................................................ 119

Unit–9: Insurance Companies ......................................................................... 165

Written by: Mr. Moazzam Ali

1.1 Introduction to Financial Institutions ....................................................... 4

1.2 Financial Markets..................................................................................... 6

1.3 Role of Financial Institutions in Financial Markets ................................ 8

1.4 Introduction to NBFIs .............................................................................. 9

1.5 Role of NBFIs in Economic Development .............................................. 11

Self-Assessment Questions ............................................................................... 13

Further Readings ............................................................................................... 14

After reading this unit, you will be able;

i. to describe the functions of financial markets

ii. to introduce the types of financial institutions

iii. to explain the role of financial institutions

In modern capitalists’ economies, the financial institutions have become a key

Non-Banking Financial Institutions

ii. Classification by Maturity of Claim.

iii. Classification by Seasoning of Claim.

iv. Classification by Delivery:

v. Classification by Product Type:

1.3 Role of Financial Institutions in Financial Markets

ii. Allocation of Funds:

iii. Development of Investment Avenues:

vi. Facilitating Trading of Financial Assets:

vii. Provision of Liquidity:

viii. Efficient Funds Utilization:

1.4 Introduction to NBFIs

1.5 Role of NBFIs in Economic Development

ii. Investment of Funds:

iii. Infrastructural Development:

iv. Business Expansion:

vi. Capital Formation:

A suggestive list of further readings is provided herewith:

1. Financial Markets and Institutions by Anthony Saunders

2. Financial Institution Management by Helen P. Lange

3. Financial Institutions and Markets by Meir G. Kohn

4. Financial Markets and Institutions by Frederic Mishkin and Stanley G Eakins

5. Fundamentals of financial institutions management by Marcia Millon Cornett

Written by: Mr. Moazzam Ali

2.1 Historical Background of NBFCs in Pakistan Regulations ..................... 18

2.2 Companies Act 2017 and NBFCs ............................................................ 19