When the Islamisation of the economy in Pakistan was launched in the early eighties, the authorities must have considered the various methods of moving towards this objective. It should have been obvious that to produce any worthwhile results this effort must be multi-dimensional. However, in their anxiety to show some concrete results to the people, the managers of this project put all their eggs in one basket, the Profit & Loss Sharing Accounts.
Not surprisingly, in their hurry, they either overlooked or discarded some of the other options which in the long run could have produced more solid and worth-while results. One such option to which no attention was apparently the paid in the Islamisation of the economy, is the systematic development of equity financing as a major instrument of resource mobilisation as well as interest free large scale investment of funds in corporate enterprises.
While there is no doubt that the development of equity financing as a major instrument of Course industrial investment is a long term project which would show results only gradually, as against the PLS Account system which produced instant results in the form of pictures of VIPs opening accounts in various banks, the fact remains that in five or six years time the growth of equity financing could have produced very tangible and very beneficial results. It would have set in motion a chain of activity which, among other things, would have brought into the stock market the lakhs of gullible investors who put all their savings in the hands of the totally unscrupulous finance companies.
Before proceeding to discuss the difficulties involved in the build-up of equity financing through a systematic development of the stock market in Pakistan, it is necessary to examine how far equity financing and the other available modes of financing are compatible with the parameters laid down by the Islamic economic system. For the time being at least, whenever any one talks of Islamisation of the economy all attention is focused on the prohibition of ‘Riba’, although much work needs to be done with regard to a proper definition of this term. The orthodox view which today completely holds the field, is that any fixed predetermined return on investment is Riba. This obviously rules out all forms of loans and debenture financing as un-Islamic, but if vigorously and honestly applied this definition would also, knock out mark-up and other similar devices in which also, when all is said and done, the return is pre-determined and fixed. In fact, if we were to go further, even leasing, in which also you get a fixed pre-determined return on your invested capital, in the form of rent if not interest or profit, could be considered to be of doubtful validity from the Islamic point of view. As against all these doubts and uncertainties about the piety of these various procedures, there can be no doubt at all that equity financing is totally acceptable even with the most vigorous interpretation of the prohibition of Riba. The return on equity investment is completely Software flexible and by its very nature, no one can suspect it of being pre-determined. Why then virtually no attention was paid to this option, when we started working on the Islamisation of the economy, is a sixty-four dollar question.
One possible reason for this attitude, as already pointed out, was that in pursuing this option, there was no possibility of showing quick spectacular results. Equally important is the fact that the Government would have had to undertake a multi-dimensional effort which would have involved treading on the toes of many powerful vested interests. It would have involved developing long-range policies to build up the stock market in Pakistan as a major instrument of resource mobilisation in the country, by providing various incentives to the genuine shareholders and introducing effective curbs to check the cupidity of those who manipulate the market to derive unfair advantages form it. Form the present estimated number of only 250,000 share holders in the country, the number of genuine investors in the stock market needed to be pushed up to at least four time that figure in five years time. In fact, it would be necessary to take concrete steps to increase both the demand and supply of corporate share on the stock market. But all these steps would have followed and worked out only if there was a sincere commitment on the part of the government to develop the stock market in Pakistan as a major instrument of its policy of Islamisation of the economy, and this commitment unfortunately was not there.
A fresh opportunity for assessing the value and need of developing equity financing in a vigorous manner has now been provided by the establishment of a permanent commission on the Islamisation of the economy. Among other things, one can only hope the members of this Commission would find time to consider the need, utility, and importance of a vigorous stock market in any scheme of Islamisation of the financial system. However, in their case also the question of commitment and conviction comes first. At the same time, if they are satisfied about the inescapable necessity of pursuing this option, they fortunately are in a position not only to make recommendations in this direction but also to see to it that their recommendations are implemented fully and expeditiously.
If and when the Government on its own or on the recommendation of the recently set-up permanent commission decided to develop and strengthen the stock market in Pakistan into a major instrument of mobilisation of savings and providing Riba-free funds for industrial development on a long term basis, some of the end steps which it might consider taking are briefly discussed below.
To be a potent and effective vehicle of public participation in the growing industrial development of the country and in order to bring about some measure of economic egalitarianism which is the undeniable essence of Islam, the stock market has to be widened and strengthened and the number of listed companies increased from 350 to at least 1000. For this purpose, not only more fiscal incentives will have to be given but other methods of persuasion through governmental recognition and non-fiscal preferential treatment will also have to be provided to listed companies. At the same time, the management and performance of the listed companies will have to be improved by giving vigorous political support to the Corporate Law Authority to implement the provisions of the Corporate Law Ordinance fully and without any hesitation. Efforts will also have to be made to improve the quality of corporate audit so that the small share holder may feel confident that he is getting a completely accurate picture of the affairs of the company whose fortunes he is sharing. The small share holder’s fear of manipulation of share prices by some insiders in the stock market would also have to be put to rest by undertaking close and continuous monitoring of stock market operations through the existing agencies. Incentives and facilities should also be provided for the establishment of shareholders associations, so that the shareholders can make their presence felt in the management of corporate enterprises.
Through these and other similar measures the confidence of the small investor and shareholder in the continuing growth and prosperity of the corporate sector will have to be built up. This confidence in the future of the stock market has been badly shaken by continuing political uncertainty and certain other factors. A reflection of this lack of confidence in the future of corporate enterprise in Pakistan is to be found in the fact that the average price earning ratio of listed companies in Pakistan is barely 9 to 10, when in the USA there are many companies whose price earning ratio is more than 200, denoting a strong confidence in Ravenfields the continuity and stability of their economic system.
If, therefore, it is recognised that equity financing is one of the most truly Islamic methods of providing corporate financing and promoting economic development in this country, the government will have to make an all out political commitment to support, in every possible way, the widening, broadening and strengthening of the stock market. Builder And as a token of government’s sincerity about this commitment, the desirability of establishing a National Stock Market Council with the Finance Minister as its Chairman should also be considered. This Council should not only co-ordinate all measures for the continuing healthy development of the stock market, but should also promote a strong public relations effort to bring the common man into the stock market in a big way.
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