The Need for a Sharia-Compliant Meter at PSX – Newspaper

According to the World Bank’s ranking on financial inclusion, Pakistan ranks poorly at 136th out of 158 countries. According to Pakistan Securities and Exchange Commission data from the Capital Market Development Plan report, only 210,000 retail investors have a trading account at the Pakistan Stock Exchange (PSX). The number of active investors in PSX is approximately 100,000. This represents less than 0.1% of the population.

In comparison, other regional markets have much higher levels of participation. The Bangladesh stock market has 2.7 million participating retail investors, the Malaysian stock market has 2.5 million retail investors, Thailand 1.46 million and India has a retail investor base much larger 32 million. Even Sri Lanka, which has a population of only 21 million, has 630,000 retail investors.

One of the reasons for this low investor turnout is the lack of information about stock market investment opportunities and the general public’s apprehension about the authorization of stock market investments by Sharia. Due to the general perception that stock market investments are often based on speculation, apprehensions regarding market manipulation and market features such as short selling and margin borrowing raise doubts about the compliance status to the sharia of the negotiation process. Often, the lack of clarity among investors regarding the business model and level of Shariah compliance of listed scrips leads many Shariah scholars to advise the general public to stay away from stock market investing.

One of the ways to address this problem is to develop a Shariah-compliant trading window at the Pakistan Stock Exchange, which would streamline the trading process in a Shariah-approved and compliant manner, which would increase trust and investor information, while providing peace of mind and confidence in the soundness of stock market investments in light of Sharia principles.

Shariah-compliant stocks account for 56% of the market capitalization and average trading volume of PSX’s business, representing a significant portion of all listed equity investments in the country.

To date, many steps have been taken by the PSX to address this perception problem by incorporating measures that aid Shariah-compliant investments through the stock market.

The KMI-all Equity Index and the KMI-30 Index are the two indices that provide a universe of Shariah-compliant stocks for investment, screened by the KMI Shariah-compliant selection criteria. Additionally, the first Shariah-compliant exchange-traded fund (ETF), Meezan Pakistan ETF, was launched in 2020, which tracks Shariah-compliant securities with higher market capitalization.

The PSX has also issued notices to listed companies to ensure that they make all relevant disclosures required for Shariah screening and such disclosures have also been mandated under the Companies Act 2017. All these steps have helped provide a platform for investors to easily make investments in Shariah-compliant securities. In light of these, PSX won the award for Best Islamic Stock Exchange 2021 by the Global Islamic Finance Awards, as more than 50% of securities listed on PSX are Shariah compliant.

However, aside from stock picking, the apprehension of the trading process remains unaddressed and many investors are still unaware of the possibility and ways to undertake Shariah compliant stock market investments in Pakistan. Therefore, to further facilitate investors in Shariah-compliant securities, a Shariah-compliant trading mechanism is the necessary next step.

According to our analysis of data from the last three years of the PSX, the all-share index and the KMI-all-share index (shown in the table), Sharia-compliant stocks represent 56% of the market capitalization and average trade volume. of PSX activity, which accounts for a significant portion of all listed equity investment in the country.

Additionally, the three-year annualized growth rate of Shariah-compliant stocks was significantly higher than that of the overall PSX-listed stock universe, while relative to the growth differential between the two indices, the volume of exchanges was comparatively weaker for KMI-All.

One of the reasons is the lack of an Islamic trading meter on PSX, due to which the general public who wants to invest directly in Shariah-compliant stocks, in a Shariah-compliant manner, cannot do it.

With a total of Rs 17.6 billion, 2021 was a record IPO year. Of the five IPOs last year, four of them (worth Rs 11.2 billion) were Shariah-compliant certificates as Islamic banks were among their bankers at issuance . It also signals strong public demand for Sharia-compliant investments.

With recent government efforts to channel foreign investment into Pakistani capital markets, funds have flowed into PSX via Roshan Digital Account Holders (RDAs). A significant number of RDA holders from Meezan Bank requested a Sharia compliant trading facility, due to which Meezan Bank had to request specific brokers to maintain a Sharia compliant trading system, especially for their customers.

Additionally, since 40% of mutual fund assets in Pakistan are managed by Shariah-compliant mutual funds, the proposed Islamic meter can help improve their liquidity and returns by facilitating immediate trading, controlling volatility and helping to reduce trading costs.

Ahmed Ali Siddiqui, Director, Center of Excellence in Islamic Finance, IBA.
Maryam Tariq, Research Associate

Posted in Dawn, The Business and Finance Weekly, April 18, 2022

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