There has been a noticeable positive transformation in the regulatory attitude of the Securities Exchange Commission of Pakistan (SECP) and it has already started to show results.

Firstly, the numbers of companies in the pipeline for raising capital by listing on the stock exchange over the past 12 months is at a record high. This has been aided by SECP reforms which lowered the cost of listings and waived some of the cumbersome requirements.

Similarly, there is a substantial increase in retail investor participation in the stock market. Pakistan’s capital markets have been shallow, with less than 250,000 stock accounts. Even smaller markets such as Bangladesh have ten times higher investor penetration.

Read: Why the time is right to go for an IPO on the PSX

While the Pakistan Stock Exchange (PSX) has not yet disclosed the updated figures on the number of retail investors, based on KTrade registrations, I think there must be at least 10 per cent growth in the number of people who invest in stocks.

Moreover, last week the PSX management announced that trading volume on the exchange in 1Q21 reached Rs2.28 trillion, the highest over the past 13 years. 

Trading volume or market liquidity is the most important indicator for the health of capital markets. Although the public tends to focus more on the KSE-100 Index, it is the volume on the market which reflects the depth of the market.

The biggest credit for this turnaround goes to the SECP and the PSX management. It is imperative to acknowledge the regulatory changes and to compliment those at the helm of these institutions.

After all, it is out of character from its own historical attitude and the general red tape which the bureaucracy is infamous for.

There has been a lot of change

Firstly, the SECP has been the flag bearer of Digital Pakistan. Over the past few months, they have enabled the digital process for registration of companies (with a turnaround of fewer than 24 hours), allowed digital onboarding for retail investors and enabled an eIPO system where people can invest money in IPOs digitally.

According to the SECP, there was a 40pc growth in new company registrations in February 202; around 2,257 companies were registered, which is two per cent of all companies ever registered with the SECP.

All of these companies were registered online and 30pc were issued the certificate within 24 hours. 

Secondly, the SECP's management has a proactive attitude towards facilitating new businesses. There seems to be a concerted effort to remove the hurdles to doing business.

An example of this is the FinTech Sandbox through which the regulator is helping develop a framework for new business models such as peer-to-peer lending, crowdfunding and insure-tech. They have also published a framework for digital assets and the use of blockchain.

Third, new investment products such as ETFs have been introduced.

Now there are five ETFs, which track the market. We think there is room for more innovative, sector-focused ETFs (which is one reason why we launched KASB Technology Index).

The regulator is also facilitating the listing of debt instruments. Last year, the government's Sukuk for the power sector was arranged through a book-building process on the exchange.

This led to better (i.e. cheaper) pricing for the government than raising that amount from banks. 

Good regulations are a necessary enabler for growth, just like bad ones can stifle and suffocate this potential, and Pakistan has massive potential for growth.

These changes towards ease of doing business and lower red tape will encourage greater capital formation and higher inflows of global capital.

A well-functioning capital market can help reduce Pakistan's dependence on debt. It is necessary for breaking the debt trap and also for enabling an entrepreneurial environment. 

The initiatives mentioned here are only for the past 18 months. It is a great and promising start, but there are a lot of other areas that still need attention and supportive regulation.

For example, the Pakistan Mercantile Exchange (PMEX) is still a marginalised institution that can play a critical role in bringing efficiency and transparency in agricultural commodity trading (such as sugar and cotton).

This could have a massive multiplier impact on almost every aspect of Pakistan's economy. A well-functioning commodity market can lead to better stock management and prevent the kind of mismanagement which has recently happened in sugar trading.

It can also bring the agriculture value chain in the formal economy and provide better pricing for the farmers by reducing the dependence on the middlemen.

Like the stock exchange, the Pakistan Mercantile Exchange can also benefit from regulatory support, especially deregulation and adoption of digital tools.

Ali Farid Khwaja, CFA, is the Chairman of KASB Securities. He lives in London with his wife and two daughters. He has worked in financial markets in the UK and Europe for over 17 years. He is an alumnus of Lums and was a Rhodes Scholar at University of Oxford.