SBP suggests complete removal of badla financing

Posted on 12.28.06 by StockPK Team @ 12:56 pm    

State Bank of Pakistan on Wednesday suggested to policy makers that badla financing in share markets be completely “removed with better risk management tools”.

It further said, “few (stock) brokers can still manoeuvre the market.”

Releasing its annual review of performance of financial markets-2006, the central bank said the March 2005 crisis hints towards market manipulation.

Though number of investors has grown tremendously over the years few big brokers can still manoeuvre the market.

The SBP said another factor instilling instability in equity markets is the presence of badla or CFS financing which it said, “Supports speculative activities without proper exposure.”

The central bank said going forward there is a need to further strengthen market ethics, diversify investor base and remove badla financing together with implementing better risk management tools.

Finally the central bank said “two major crisis in stock markets however indicate that there is plenty of room for improvement.

These events not only provide an opportunity for self-assessment but also highlight the need to strengthen the governance of the exchanges.”

With regard financial market operations, it said financial markets witnessed a surge in volume while improving further in terms of efficiency during last year.

Central bank said despite commendable improvements, there are areas, which need further reforms in order to enhance the role of financial markets in Pakistan.

Central bank said the long-term government bond, PIB market is still underdeveloped largely due to supply constraints and lack of market making by primary dealers.

Central bank has observed that the supply side issues would only resolve if government sells adequate amount of PIBs on regular basis.

Primary Dealers should play a role in educating their corporate clients to make better pricing decisions and change a buy-and-hold strategy.

Finally the central bank has observed the failure in development of long-term government bond market also adversely affected the corporate bond market. The size of both bond markets is well below compared to both the emerging market economies and developed countries.

Source: The News