Roadmap for shariah-compliant products

Clearing house NCCPL explores opening Pakistan stocks to Islamic finance

KARACHI: The clearing house will develop new shariah-compliant products for finance in future contracts as well as in daily trade transactions at the Pakistan Stock Exchange (PSE) to boost trade volume at the bourse, an official said on Wednesday.

“The NCCPL (National Clearing Company of Pakistan Limited) will make Islamic financing  available for the PSX and  will also reduce limit for collateral deposits in cash in conventional financing products,” Muhammad Lukman, Chief Executive Officer of NCCPL told The News.

Lukman said financiers and browsers both showed interests and higher demands for Islamic financing in the market. "The outpaced growth in Islamic banking is an example to gauge demand for the product in the market... many people think Islamic financing products should be rolled out."

He said the product is likely to be named as Margin Trading System (MFS) which will be shariah-compliant. “It would be available to investors as soon as the regulator (the Securities and Exchange Commission of Pakistan) approves... a concept paper of the product is with SECP," Lukman said.

The NCCPL, which would become Central Counter Party (CCP) by June 2016, manages three conventional financing products namely Margin Trading System (MTS), MFS and Securities Lending and Borrowing System (SLBS). However, SLBS is almost inactive because of no interest from the investors.

A move to allow Islamic finance and similar products to be bought and sold in PSX, would give the market a boost. Islamic banks and shariah-compliant mutual funds would be the financiers in the products.

Lukman said the clearing house is also working to cut ceiling of cash as collateral deposits to give investors opportunity to avail higher financing for stocks buying. “Changes in the available financing products will be made on borrowers demand and also to manage risk factors," he said.

At present, borrowers deposit minimum of 25 percent cash as collateral against total value of the shares. "The limit could be reduced to 10 percent while investors would be allowed to submit securities in place of remaining balance of the 25 percent," Lukman said.

The financing in MTS and MFS is around Rs6 billion and the interest rate in both the products are capped at KIBOR plus eight percentage points. "But, dull trade at the market kept interest rate low around 10 percent these days," Lukman said.

At present around 35-40 securities are eligible for financing in Margin Trading System. However, there are no pre-decided names of eligible securities for financing in the Margin Financing System as it remained dependent at the mutual understanding between lenders and borrowers.

Lukman said the clearing house has also sought approval from the federal tax authority for reduction in the rates of Capital Gain Tax (CGT) on shares transactions and/or reduce periods for holdings securities.

Presently, investors pay a maximum of 15 percent CGT if they sell securities in less than one-year. The tax rate is reduced to 12.5 percent if they hold securities for more than one-year, or sell within two years.

The tax rate further came down to 7.5 percent for holding of securities for more than two years and selling within four-year. Similarly if the investors sell the securities after four-year from time of the purchase then there is no CGT.

"Keeping in view dull activities in the last one year, we have suggested FBR (Federal Board of Revenue) to cut tax rates or at least freeze maximum tax rate at 15 percent,” Lukman said. “Besides, we also proposed to reduce the maximum time limit to two-year for CG T exemption," he said.

The NCCPL has collected around Rs3.5 billion CGT in the first six months of the current fiscal year. In the last fiscal year ended June 30, 2015, the company collected Rs6.4 billion under CGT.

The company also planned a product -- National Custodial Services (NCS) -- which would allow investors to make its custodian of their shares in a sub-account, instead of keeping them in a sub-account with their brokers.