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Banks reluctant to directly fund investors as per globally practised margin financing;local version involves brokers with no risk for banks but is prone to cause crisis
Tuesday, August 04, 2009
By Salman Siddiqui
KARACHI: Stock brokers are about to convince authorities to re-launch the same leverage product (after rectifying it) on the Karachi bourse, which they had banned in April this year. They had identified the product as the main cause of 2008 historic crisis.
The product was called the Continuous Funding System Mark-II (CFS MK-II). And this time the authorities (KSE & SECP) are naming it Margin Financing (MF).
Karachi Stock Exchange (KSE) member on the Board of Directors Yaseen Lakhani termed the product-in-making as the homegrown Margin Financing and did not find it different from earlier discontinued CFS MK-II.
“There is no match between the locally under construction MF and the internationally available conventional Margin Financing product,” he compares.
Lakhani, who had also been the Chairman-KSE, is heading the camp of brokers strongly opposing the reinvention and revival of Badla system (i.e. CFS MK-II) under the new label of Margin Financing. But he is not against the introduction of conventional and internationally practiced Margin Financing system here, he clarifies.
One of the major differences between the internationally practiced MF and the local MF is the involvement of brokers in between financers (lenders) and financees (borrowers), The News learnt. In conventional MF, the banks are the only eligible financing party to many potential stocks investors and there is no middle man role available (e.g. stockbrokers) in between the two.
While in the proposed MF, brokers would bridge between financers and financees. In this system, unlike the conventional MF, any financially sound individual or institution can be the financer. They may include the stockbrokers themselves, banks (conventional & non-conventional), mutual fund(s) managing companies, leasing companies, mudaraba companies and etc, subject to the approval of Securities & Exchange Commission of Pakistan (SECP).
But the major hurdle in launching the world wide practiced MF product here in Pakistan is that banks are reluctant to directly finance stocks investors, one of the senior professionals told with the condition of anonymity.
In conventional MF, the total risk is owned by banks and if borrower (client) loses the lender too. But to remain safe from losing in a bear market, banks collect deposit of a certain percentage on the total amount of financing from the share purchaser e.g. 30 per cent (called margins), he explains and adds, margins are maintained upto the banks’ demand as per changes taking place in the share price.
The equal chances of losing financed money are also there in the local MF (Badla financing or CFS MK-II), but in this system the risk is owned by the middlemen i.e. broker and/or product manager like National Clearing Company of Pakistan (NCCPL) and/or KSE, he added.
So this is the risk factor, which is hindering the execution of conventional Margin Financing here since its full-fledged introduction in 2004. And moreover, the same hurdle (i.e. banks reluctance) is keeping the locally designed Badla financing product functioning since long though the Badla changed its shapes and names too as per time-to-time modifications, he underlined.
Arif Habib, another former chairman-KSE, is of the view that the availability of modified CFS MK-II (e.g. CFS MK-III) is must in market to avoid downsizing at brokerage houses, which cannot continue to sustain with thin turnover in a cash strapped market these days.
Habib is believed to be leading brokers seeking the resumption of CFS MK-II like product in the market after incorporating so many meaningful changes to make the product viable.
Why he is against the globally practiced Margin Financing product, Habib says this product would be available to only potential brokers and not to needy ones. Therefore, this product would make the rich brokers richer and the poor poorer, he added. He maintained that products, which were designed on international lines i.e. Cash Settled Futures, are available there in markets for the last couple of months, but these so called new products received the zero response, as not a single share was traded on this counter. So such products are not compatible in local markets, he underlined.
Advocating the re-launch of modified CFS MK-II (which Lakhani terms the home-grown Margin Financing), he believes there is no systematic risk involved in the product and added rules for default (financer or financee) and distribution of loses are there and defaulters should be dealt accordingly.
Do market regulators (KSE & SECP) have power to implement regulations in letter and spirit, Habib says when time comes to exercise powers designated to regulators, they set the law aside and use their discretionary powers for unknown special purposes.
Yasin Lakhani replying to a question that why he is against the introduction of modified CFS MK-II, said brokers with conglomerates of multiple businesses under one roof (i.e. stockbroker, banker, fund(s) manager and financer too in CFS MK-II) can have serious clash of interest within their conglomerates and to deal with the situation they can easily manipulate things and hurt others.
He believes that regulators should not allow the revival of old Badla financing and continue to work on the launch of internationally practiced Margin Financing, as India did in near past.
Habib and Lakhani, both the brokers, claim to have majority votes in favour of their moves. CDC-CEO Aftab Ahmed Tapal also endorses this great division between brokers’ groups and says leverage product could be any of these two.
Tapal is Chairman of SECP Consultative Group on Capital Markets. The group felt the deficiency of a leverage product and submitted its recommendations to SECP in first meeting held on May 05, 2009. Now SECP is waiting for the response of stakeholders for which the deadline was July 25, Tapal added.
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ISSN 1563-9479 
