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Impact of Global Recession on Karachi Stock Exchange

INSTITUTE OF BUSINESS AND TECHNOLOGY Impact of Global Rescission on Karachi Stock Exchange Final Project/Thesis Course Code : MKT-606

MBA (Banking and Finance) FACULTY OF MANAGEMENT AND SOCIAL SCIENCES SPRING - 2011

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Impact of Global Recession on Karachi Stock Exchange

ACKNOWLEDGEMENT
First of all we would like to thank Almighty ALLAH who has guided us the way for a bright future. We would like to express my gratitude to our teacher and those who gave me the possibility to complete this thesis. We are deeply indebted to our teacher Dr. Noor Ahmed Memon whose help, stimulating suggestions and encouragement helped us in all the time of research for and writing of this thesis. We are also thankful to our parents who accommodated us during those long hours of work in writing Synopsis for Dissertation and all the friends and colleagues especially our UBL treasury members who equally encouraged us. We would also like to appreciate the co-operation we got from our classmates at the institute, which boosted our morale and encouraged us to strive for better results. Lastly, we offer my regards and blessings to all of those who supported me in any respect during the completion of the project.

Mohammad Farhan

Shaikh Muhammad Sufyan

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CONTENTS
ACKNOWLEGEMENT ABSTRACT CHAPTER 1: INTRODUCTION
1.1 1.2 1.3 1.4 Introduction Purpose of Study Research Objectives Research Methodology 6 7 7 8

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4

CHAPTER 2: LITERATURE REVIEW


2.1 Literature Review 11

CHAPTER 3: STOCK EXCHANGE


3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 History Mobilizing Savings for Investment Facilitating Company Growth Redistribution of Wealth Corporate Governance Creating Investment Opportunities for Small Investors Major Stock Exchange Contribution to GNP 16 17 17 17 18 18 18 22

CHAPTER4:KARACHI STOCK EXCHANGE


4.1 4.2 4.3 4.4 4.5 Karachi Stock Exchange KSE 100 Index KSE 30 Index KMI 30 Progress 23 25 28 32 37

CHAPTER 5: IMPACT OF GLOBAL RECESSION ON KSE


5.1 5.2 5.3 5.4 5.5 5.6 5.7 Global Recession Attributes of Recession Karachi Stock Market & Recession Causes & Effects of recession Global Impact on KSE Recession & Politics Consequences of KSE Recession 38 39 39 44 45 47 52

CHAPTER 6: CONCLUSION & RECOMMENDATIONS


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6.1 6.2

Conclusion Recommendations

55 55 57

REFERENCES

INSTITUTE OF BUSINESS AND TECHNOLOGY


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Impact of Global Recession on Karachi Stock Exchange

ABSTRACT SUBMITTED BY:

Mohammad Farhan Shaikh Muhammad Sufyan

DISCIPLINE: TITLE OF PROJECT REPORT:

MBA (Executive) Impact of Global Rescission on Karachi Stock Exchange

MONTH OF SUBMISSION:

April, 2011

NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon

Abstract
This report is covered the information related to the global stock exchange recession and its overall functions and working procedure. The main influence of this report is on Karachi Stock Exchange recession, its procedure of affecting recession on stock and its role that he played in an economy and all the related aspects are also covered of this report. The global stock recession that started in the fourth quarter of 2008 is expected to continue till mid-2010. It has affected almost all countries and Pakistan as well. In economics, the term recession means "The reduction of a countrys (GDP) for at least two quarters; or in normal terms, it is a period of reduced economic activity" The International Monetary Fund regards periods when global growth is less than 3% to be global recession. On the October 8, 2008, IMF released its World Economic Outlook, according to which the world economy was predicted to experience an all time low. While many economists and brokers alike panicked; some shock their heads in dismay; some just planned on waiting to see what twisted and interesting things might reap. We in Pakistan, however, just laughed at the naivety of the IMF, for this prediction did not use to us at all we were already in the bottom and going to back to worst in it, and had been so for over a year! Such predictions barely held any ground for the once 26th largest economy in the world, and 47th largest in terms of the

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dollar. It is sad to see our economy like this now, for Pakistan is actually a very economically diverse country, growing industries of textiles, agriculture, sports goods, chemicals, food processing, and fishing, to name a few etc. We were, at one time, one of the top exporters of fish and shrimps to Europe. In 2005, the World Bank said Pakistan as the top reformer in the region; and by 2006 we had managed to decrease our poverty level by 21 %. Unfortunately, now all these are a thing of the past, for right now is no better than that of any other under-developed country. The main reason for this downfall has largely been the political instability over the past few years; there is no proper economic policies were implemented; at least none that succeeded. This caused a very high rate of inflation, which, in 2008, had increased to a whopping 25% as compared to a 7.9% of 2006. In addition to this, we already had a negative balance of payments, with the quantity of imports outstripping the quantity of exports. The result was that our main stock exchange, the Karachi Stock Exchange, became stagnant for the first time and then declined drastically, and on top of that, Pakistans Gross Domestic Product (GDP) dropped to 4.9% in Pakistan after this declining. What occurred afterwards is what we call the domino effect. The value of the Pak Rupee crashed from 60-1 USD to 80-1 USD in only a month, the prices of commodities soared through the roof, the majority number of people living below poverty line increased from 60 million to 77 million, and consequently, the working class layman became virtually deprived from basic necessities like water, wheat, electricity, natural gas, and cooking oil; add to all this, the preposterous amounts of load-shedding, and what we get is a nation in shambles. This is the main reason for declining economy of Pakistan. So are main influence of this study is that what is the impending of global recession on Karachi stock exchange? The purpose of this study is to discuss the various factors impacting negatively or positively in the global recession on Karachi stock exchange in Pakistan.

1. INTRODUCTION
1.1 Introduction

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A stock exchange, formerly a securities exchange share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and trader s, to trade company stocks and other security in stock market. Stock exchanges also provide facilities for the issue and redemption of securities as well other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central place at least for recordkeeping, but trade is less and less linked to such a physical place, as advance markets are electronic networks, which gives them benefits of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important element of a stock market. Supply and demand in stock markets are driven by different factors which, as in all free markets, affect the price of stocks. There is usually no problem to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.1

1.2

Purpose of Study

The main purpose of this study that we work with investments, so we are particularly concerned with recessions because they can have a very negative impact on investment account values. We are going to look at the global recession on KSE with particular focus on how recession affected KSE on 2008 The main purpose of this study is to highlight the shortcomings present in different aspects of KSE and suggest the steps to overcome them to accelerate the development process. As it is discussed above that the current
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Karachi stock exchange Theory and evidence from the Karachi stock exchange Institute of Business and Technology 7

Impact of Global Recession on Karachi Stock Exchange

progress of Karachi Stock Exchange is the result of improvement in the numbers of factor which are affecting the KSE directly or indirectly, like political condition of country, regional issues, economical growth, GDP, inflation rate, financial policies, financial reformation etc. In these factors some are controllable but some are not or very difficult to control for a developing country. In this study only three factors or aspects are considered Which are highly involved in the development of any exchange and also controllable for the authorities and can be changed according to the situation? Organizational structure of the Karachi Stock Exchange Recession on Karachi stock exchange Impact of global recession on Karachi Stock Exchange

So what is the impact of global recession on Karachi stock exchange? The purpose of this study is to discuss the various factors impacting negatively or positively in the global recession on Karachi stock exchange in Pakistan. 1.3 Research Objectives

Through this research we would focus on the following area. 1.4 To know about Recession occurred in KSE To know about impact of recession on KSE To understand the causes of recession To know how to measure or control over recession To know about what has hit KSE during the time of recession To understand various problems faced by KSE during the time of recession To understand the customer attitudes at the time of recession To understand how Pakistan is hurt because of recession in 2008 Research Methodology

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This research study is based on recession and the data taken from KSE website, and other resources available on internet, The Karachi Stock Exchange recession study is an explanatory study which is aimed at explaining the impact of Global crisis and recession on Karachi stock exchange and what affect it will have on the financial institutions of developing countries. For this purpose content analysis was technique was used and several website, research papers and articles related to stock exchange and development economics were examined. This research initially included impact of global recession and how stock market was hurt because of recession in 2008. As in conceptual analysis, a concept is chosen for examination, and the analysis involves quantifying and tallying its presence, also known as thematic analysis. A specific number and set of concepts were examined such as effects of global recession on stock and financial crisis, its contagion effect on financial institutions of developing countries. In this content analysis the existence of a concept was examined. Set of rules were defined in this research regarding the existence of concepts and the linkages between these concepts. Data Collection: Research reports, which have already been developed on global recession and Karachi stock recession, have immense significance and they will form an integral part of data. International Review of Business Research Papers Vol. 5 No. 5 September 2009 2nd International conference on business and economic research 2 nd ICBER 2011 International Journal of Business and Social Science Vol. 2 No. 6; April 2011 World applied sciences journal 10 (5): 590-596, 2010 International Research Journal of Finance and Economics ISSN 14502887 Issue 35 (2010) Euro Journals Publishing, Inc. 2010

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European Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 14 (2008) Euro Journals, Inc. 2008

Instruments: For collection of primary data, I decided that following instruments will be used: 1. Questionnaire 2. Interview 3. Observation

Questionnaire: Questionnaires are very flexible as there are many ways to ask the same questions from different respondents. So, I planned to prepare questionnaire for a. People work with investments b. Treasurers c. Stock brokers d. People work with stock exchange Since the focus of the study is to find the factors affecting having the most significant impact on Karachi stock exchange recession in Pakistan, so, I decided that the multiple choice questions will be asked from entire set of respondents. 2 Interview: Personal Interviews are the most reliable source of getting information from respondents. For this purpose, I shall interview the people having the most knowledge about stock exchange. Following people will be contacted on some future time. a. Stock holders b. Stock brokers c. Economists
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Theory and evidence on Research Methodology Institute of Business and Technology 10

Impact of Global Recession on Karachi Stock Exchange

d. Government Officials Observation: Another instrument that will be used in my study is the observation. People will be observed thoroughly while conducting interviews and getting questionnaires filled. Data Analysis: This section of the report describes the descriptive and quantitative analysis. Firstly, we provide an analysis of global market recession under different aspects of recession on Karachi stock exchange and Appling different models in various odd days as discussed in methodology part. Secondly, we measure and discuss sector-wise performance of IPOs under Normal, Boom & Recession period of economy. Finally, the analysis of this recession is discussed on yearly base.

2. LITERATURE REVIEW

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2.1

Literature

Review

The Karachi Stock Exchange or KSE Situated in Karachi, Sindh, Pakistan. Founded in 1947, it is Pakistan's largest and oldest stock exchange, with many Pakistani as well as overseas listings. It is current premises are situated on Karachi Stock Exchange Road, in the heart of Karachi's Business District. Karachi Stock Exchange is the biggest and most liquidity exchange in Pakistan. It was declared the "Best Performing Stock Market of the World for the year 2002". As of Dec 8, 2009, 654 companies were listed with a market capitalization of Rs. 8.561 trillion (US$ 120.5 billion) having listed capital of Rs. 2805.873 billion (US$ 40.615 billion). The KSE 100TM Index closed at 9645.71 on June 19, 2010.By 30 July total market capitalization of the KSE reached Rs2.95 trillion, approximately 350 billion dollars. The exchange has pre-market sessions from 09:15am to 09:30am and normal trading sessions from 09:30am to 03:30pm. The Karachi stock exchange has undergone a considerable deal of downturn partly due to global financial crisis and partly on account of domestic troubles. It remained suspended in excess of 4 months and resumed normal trading only on December 15, 2008. The KSE 100 Index and KSE 30 Index after hitting the low around mid January has now rebounded and recovered 20-25% till March 12, 2009. By 30 July 2010 total market capitalization of the KSE reached Rs2.95 trillion, approximately 35 billion dollars. It was newly appointed in 18th September 1948. The KSE is the biggest and most liquid exchange in Pakistan and in 2002 it was Foreign buying interest had been very active on the KSE in 2006 and continued in 2007. According to estimates from the State Bank of Pakistan, foreign investment in capital markets total about US$523 Million. According to a research analyst in Pakistan, around 20pc of the total free float in KSE-30 Index is held by foreign participants.

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KSE has seen some fluctuations since the start of 2008.KSE Board of Directors has recently (2007) announced plans to construct a forty story high rise KSE building, as a new direction for future investment. Disputes between investors and members of the Exchange are resolved through deliberations of the Arbitration Committee of the Stock Exchange. Karachi Stock Exchange began with a 50 shares index. As the market grew a representative index was needed. On November 1, 91 the KSE-100 was introduced and remains to this day the most generally accepted measure of the Exchange. Karachi Stock Exchange 100 Index (KSE-100 Index) is a benchmark used to compare prices overtime, companies with the highest market capitalization are selected. To ensure full market representation, the company with the highest market capitalization from each sector is also included. In 1995 the need was felt for an all share index to reconfirm the KSE-100 and also to provide the basis of index trading in future. On August the 29th, 1995 the KSE all share index was constructed and introduced on September 18, 1995. World announced the Karachi Stock Exchange is the best performing world stock market in 2002. Since then the KSE keep on maintaining the reputation as one of the best performing markets in the world. Since 1991, foreign investors have an equal opportunity together with local investors to operate in the secondary capital market on the Karachi Stock Exchange. The establishment of the new policy for foreign investors and initiated privatization in Pakistan has accelerated the development of the KSE, which had even 663 companies listed in 2006. In addition, companies have a choice to be listed on one of the two markets - the ready market and the over-the-counter (OTC) market, which has lesser listing requirements. While the ready market requires listing companies to have minimum paid up capital of Rs 200 million (about UK 1.8 m), the companies with minimum of Rs 100 million can be listed on the OTC market. The Karachi Stock Exchange trades the KSE-100 Index. It is a highly-diversified index of 100 largest capitalization companies' stocks from all sectors of Pakistan
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economy. A constantly revised index is a good indicator of the overall Exchange performance over a period of time. In 2005, 88% of the KSE total market capitalization was represented by the KSE-100 Index. The membership in the Karachi Stock Exchange is limited. Only 200 individual and corporate entities can register as members in the KSE. In 2005, 162 members traded actively on the Exchange. In addition, foreign corporate entities may also become the members of the KSE with the condition that the nominee member of the company is a citizen of Pakistan. Its been for some time that the Karachi Stock Exchange has been frozen for official trading when on 28th August fearing a massive flight of capital the movers and shakers of KSE set a Floor-Price-Level at 9144.93 points which was the KSE index as of the last trading session on August 27th. The one month embargo was extended even further. Its been widely reported that many of the stalwarts of our stock market are practically on their knees pleading the government for a bailout plan. As an outsider with little insights on the specifics of this lucrative industry I feel there are two sides to the argument. The investor with some stake in the stock market vehemently advocates the implementation of the bailout package arguing that its geared up confidence building measure trying to prevent the flight of the hefty foreign investor. While the other side of the argument, advocated mostly by the layperson is to urge the government to focus their attention towards other pressing issues in the country, as they see these stock market goons as gamblers, who enjoyed the rewards in the last three years, and suddenly when the gambling gave way are coming back to ask for more money to help them resume Admittedly my arguments may only represent a cursory analysis of a very complex problem but I would like to use this opportunity to open this blog for the experts who may help shed light on what is the best solution out of this mess, more along the lines of whats best for Pakistan and not making the rich richer

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In economics, the term recession means "The reduction of a countrys Gross Domestic Product (GDP) for at least two quarters; or in normal terms, it is a period of reduced economic activity". Capitalism and Interest Based financial System are the root causes of world financial systems failure. It is going to convert into economic crisis. If it is not going to handle properly, its results may be more adverse than Great Depression. Pakistan was in crisis right from the beginning but financial crisis is increasing its rate of knots. Financial crisis is one of the major challenges of 21st century. It is not only parting negative impact on US but several rich countries' financial systems are also trembling under its weight. Economies of major world including Pakistan are at high level of risk. This crisis is also pointing fingers on the capitalistic companies and banks, which somehow are bigger than many countries. Pakistan was in crisis from the beginning of year 2007, but financial crisis triggered this crisis and situation is going to worst. Pakistan is passing from crucial phase of its life. Crisis in Pakistan was started when former President Pervez Musharraf suspended Supreme Court Chief Justice. Later on Lal Masjid incident took place which throughout Pakistan created huge tension because after this incident chain of suicide attacks started in the country, which has not been ended as yet. In large part due to fuel subsidies and other economic obligations, Pakistan's budget deficit of $21 billion is the highest in a decade, and the current account deficit is 8.4 percent of GDP. In all of Asia, Pakistan has the highest interest rates, least valuable currency, and riskiest financial obligations. As a result, Pakistani government debt is considered one of the riskiest in the world. Pakistan's currency, the rupee, has lost 20 percent against the falling dollar and is now near record lows. The Karachi Stock ExchangePakistan's oldest and largest stock exchangehas lost 40 percent of its value since April 2008. Just last August, the KSE put a floor on the index to keep shares from falling even further. Pakistan foreign currency reserves have dropped significantly due to the unstable political and security situation. In less than a year, Pakistan's foreign reserves have
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dropped from an all-time high of $14 billion last November to just under $6 billion today. Pakistan has taken loan from International Monetary Fund (IMF) on harsh terms and conditions to meet crisis. But financial crisis will be adverse due to this aid because terms are directing Pakistan, not to support their financial sector. Aid from USA and foreign remittance are one of the main contributions towards current account balance of Pakistan. But after the financial crisis, American aid stopped and foreign remittances to Pakistan also showing steep decline. All the bailouts and nationalizations are not the permanent solutions to this financial crunch. It may be possible that we will get rid of this crisis in few months or few years, but it will again come and hit the economies and challenge the financial systems of the world. We have to address the roots of this crisis. Basically all the financial systems of the world revolve around "Capitalism" and "Interest", which will somehow always invite such big recessions in the days to come.The basic economic statistics paint a dire picture. Two-thirds of the Pakistani population lives on less than $2 a day, with one-third of the population living below the poverty line. While the Pakistani economy expanded 5.8 percent in the last fiscal year, this rate of economic growth was the slowest since 2003 and is expected to fall to 4.6 percent this year. But the benefits of this economic growth have not reached the vast majority of Pakistanis. The newly elected government faces interlinked challenges: tackling emboldened militant groups and terrorist organizations, advancing political reform, and stabilizing the economy. If Pakistan's economy experiences further collapse, the government could lose further support of the people. Experts are saying that Karachi Stock Exchange, one of the worst hit Stock Exchanges of the world in the financial recession, has finally pulled through and that 3investors will make millions. Let us all hope that this proves to be true and the now 'broke' stock-'Brokers finally recover from this nightmare.

International Review of Business Research Papers Vol. 5 No. 5 September 2009 2nd International conference on business and economic research 2nd ICBER 2011 European Journal of Economics, Finance and Administrative Sciences Institute of Business and Technology 16

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3. STOCK EXCHANGE
3.1 History

The Karachi Stock Exchange, the oldest exchange in Pakistan, KSE was established in 1947 and became a registered company limited after a few years later. Since then it has been experienced a remarkable progress with only 5 companies listed and 90 members on the Exchange in the 1950s and 663 listed companies and 200 members in 2006. In 2002, the Karachi Stock Exchange was recognized internationally by the magazine 'Business Week' as one of the best performing stock exchange in the world. The Karachi Stock Exchange has started trading through the computerized trading system KATS (Karachi Automated Trading System) since 1997. As the need for Trading Workstations installation has been significant during the consecutive years, today over 1000 KATS workstations are already installed. In 2005, trading in the Internet was also started. Since 1990, corporate entities can become members on the Karachi Stock Exchange. However, they have to face stringent requirements of the Board of Directors and own a minimum capital of Rs. 20 million (approximately UK 181,000).At the beginning of 2006, 120 corporate members were registered in Stock Exchange. The Karachi Stock Exchange introduced KSE-50 Index at the end of the 20th century. However, just because of the growth in the stock market, the Index did not represent the stock market performance anymore. Thus, in 1991 a capital weighted KSE 100 Index launched. At the moment, the Exchange successfully trades two world-famous indices KSE 100 Index and KSE All Share Index, which was introduced in 1995. Karachi Stock Exchange is the biggest and most liquid exchange and has been declared as the Best Performing Stock Market of the World for the year 2002. As on May 30, 2008, 654 companies were listed with a market capitalization of Rs. 3,746.203 billion

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(US$ 56.334 billion) having listed capital of Rs. 705.873 billion (US$ 10.615 billion). History Graph of KSE 100 Index

Source Karachi stock exchange history 3.2 Mobilizing Savings for Investment

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels and firms. 3.3 Facilitating Company Growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

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3.4

Redistribution of Wealth

Stock exchanges do not exist to redistribute wealth. However, both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses. 3.5 Corporate Governance

By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privatelyheld companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the early 2000s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mishandled. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Web van (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International Group (2008), Lehman Brothers (2008), and Satyam Computer Services (2009) were among the most widely scrutinized by the media. 3.6 Creating Investment Opportunities for Small investor

As opposed to other businesses that need huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can easily afford. Therefore the Stock Exchange gives the opportunity for small investors to own shares of the same companies as large investors

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3.7

Contribution to GNP

To assess the relationship between stock markets development, and economic growth in a small developing economy like Pakistan, we used the log-linear model as follows:
LGNPPC = + 1 MC + 2 LFD + 3 LFNFD + 4 LINF + 5 LFDI + 6 LLTR + i

(1) Where; LGNPPC =Log of real Gross national product per capita, MC = Market

Capitalization (the amount of capital as share of GDP proxies by stock market development) LFD = Log of Financial Development (proxies by credit to private sector as share of GDP), LFNFD = Log of Financial Instability (measured by standard deviation of the inflation rates), LINF = Log of Inflation Rate, LFDI = Log of Foreign Direct Investment (in millions of dollars) as share of GDP, LLTR = Log of Literacy Rate (the ratio of the number of people completing primary education to total population). The reason for taking log is that taking the natural logarithm of a series effectively laniaries the exponential trend (if any) in the time series data since the log function is the inverse of an exponential function (Asteroid and Price, 2007). Table-1: Theory Intuition and Expected Signs Variable Theory intuition Improvement in the efficiency and Market Capitalization size of stock markets will circulate as + cholesterol in the process of economic growth positively. The expected sign of increase in Financial Development credit to private sector spurs the + economic activity in the economy through their causal channels. Financial instability induces to decline Financial Instability the investment activities directly and indirectly that deters the economic growth Expected sign

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Inflation Rate

Inflation

monetary instability that affects the economic performance through its detrimental impacts. Economic growth is expected to be

measures

the

Foreign Direct Investment

influenced positively by FDI along + with spillover effects through employment generating process. Higher literacy rate improves the

Literacy Rate

efficiency force.

of

an

economy

providing more productive

by + labor

Annual data of all variables have been collected from World Development Indicators database (WDI, 2006), World Bank, Economic Survey of Pakistan in (2006), and International Financial Statistics (IFS, 2006).

Descriptive statistics and correlation matrix of the variables of our selected model are expressed in Table 2a and 2b respectively. Table-2a Descriptive Statistics
Real GNP Per Capita 36 0.356 -0.150 3.259 332.880 4.319 Market Capitaliz ation 36 4.226 2.684 10.697 88.462 607.466 CreditPrivate 36 0.128 -0.559 3.687 115.192 0.562 FDI Financi al Instabili ty 36 1.264 -0.319 2.308 131.818 54.395 Inflatio n 36 0.549 0.192 2.653 71.733 10.250 Literacy Rate 36 0.236 -0.188 1.912 123.360 1.901

Variables Observations Std. Dev. Skewness Kurtosis Sum Sum Sq. Dev.

36 0.942 -0.649 2.605 -32.151 30.179

Table 2b
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Correlation matrix
Real GNP per capita Market Capitalization Credit-Private FDI Financial I n s t a b il i t y Inflation Literacy Rate

1.000 0.7303 0.7718 0.8397 1.000 0.4207 0.5518

1.000 0.6083

1.000

-0.5058 -0.5194 0.9252

-0.3936 -0.1804 0.6873

-0.3458 -0.5228 0.7100

-0.4959 -0.2538 0.8673

1.000 0.1444 -0.3781

1.000 -0.4090

1.000

*The data has been collected from international monetary financial statistics database (IFS) for Pakistan4

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3.8 Region Africa Americas Americas Americas Americas AsiaPacific AsiaPacific AsiaPacific AsiaPacific AsiaPacific AsiaPacific AsiaPacific AsiaPacific Europe Europe Europe Europe Europe Europe Europe

Major Stock Exchange in the World Stock Exchange Market Value (millions USD) 432,422.1 2,203,759.6 611,695.0 997,997.4 9,363,074.0 587,602.7 613,187.6 1,237,999.5 470,417.3 572,566.8 1,557,161.3 389,248.3 2,922,616.3 1,862,930.9 937,452.9 1,758,157.7 871,061.4 456,206.7 503,725.8 761,896.1 Total Share Turnover (millions USD) 17,999.7 2,325,238.3 30,748.5 84,323.0 1,517,615.7 37,400.1 14,425.0 80,696.8 81,755.0 39,057.1 142,144.2 75,365.5 301,781.5 146,173.3 264,970.3 241,151.1 114,994.0 48,094.8 55,299.9 63,435.6

Johannesburg Securities Exchange NASDAQ So Paulo Stock Exchange Toronto Stock Exchange New York Stock Exchange Australian Securities Exchange Bombay Stock Exchange Hong Kong Stock Exchange Korea Exchange National Stock Exchange of India Shanghai Stock Exchange Shenzhen Stock Exchange Tokyo Stock Exchange Euro next Frankfurt Stock Exchange (Deutsche Borse) London Stock Exchange Madrid Stock Exchange (Bolsas y Mercados Espaoles) Milan Stock Exchange (Borsa Italiana) Nordic Stock Exchange Group OMX1 Swiss Exchange

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4. KARACHI STOCK EXCHANGE


4.1 Karachi Stock Exchange

The Karachi Stock Exchange (KSE) is the largest and most liquid of the three stock exchanges in Pakistan. The KSE was established on 18th September 1947. It became a Limited Company by Guarantee on 10th March 1949. There were initially 09 members and only five companies were listed with a paid up capital of Rs. 37 million. The scale of operations has grown substantially over the years. As of June 30, 2006 there were 652 listed companies with a listed capital of Rs. 517,904.11 million (US$ 8,511.16 million) and a market capitalization of Rs. 2,942,739.59 million (US$ 48,360.55 million). The daily turnover on average is 270.50 million shares with average daily trade value being Rs. 32,869.61 million (US$ 540.17 million). Membership strength has gone to 200. The representation index for the market is the KSE 100 index, a capital weighted index initiated on November 1, 1991 which represents about 90% of the market capitalization of the Stock Exchange. In 1995 the need was felt for an all share index to reconfirm the KSE-100 and also to provide the basis of index trading in future. On August 29, 1995 the KSE all share index was constructed and introduced on September18, 1995. (Table 1) Some major sectors of the economy contributed extraordinary to the performance of the stock exchange market during 2007-08. These sectors include fuel and energy, banks and financial institutions, transport and communication, and chemicals and pharmaceuticals (Table 2).

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Table 1: Profile of Karachi Stock Exchange 2004-05 659 15 54.0 438.5 88.3 351.9 2068.2 2005-06 658 14 41.4 496.0 104.7 319.6 2801.2 2006-07 658 12 49.7 631.1 68.8 211.0 4019.4 2007-08 652 5 49.2 690.1 56.9 265.7 4622.9

Number of Listed companies New Companies listed Fund Mobilized (Rs billion) Listed Capital (Rs billion) Turnover of shares (billion) Average Daily Turnover of Shares (million) Average Market Capitalization (Rs billion)

Source: Pakistan Economic Survey 2007-08 Table 2: Scrotal Performance on Karachi Stock Exchange Sector General Index (%) 2006Market Capitaliz ation (%) 2006-07 (ACM)* (Rs Billion) 2007** 2008** 153.9 369.9 28.6 100.5 26.5 20.6 38.6 156.6 1267.4 241.9 1965.1 286.5 ------

07 1.Cotton and other Textiles -3.2 38.0 103.3 2.Chemicals and Pharmaceuticals 18.9 23.4 241.4 3. Engineering 49.8 65.9 15.0 4. Auto and Allied 29.7 45.2 92.0 5. Cables and Electrical Goods 18.2 35.9 20.0 6. Sugar and Allied 3.0 12.3 17.1 7. Papers and Boards 27.7 48.3 24.0 8. Cement 11.0 24.4 129.9 9. Fuel and Energy 9.2 1.4 1098.2 10.Transport and Communication 44.0 35.8 244.9 11.Banks and Financial Institutions 40.9 117.3 1341.8 12.Miscellaneous 7.5 62.7 241.3 Change 28.2 43.9 ---* Aggregate Market Capitalization; ** End April Source: Pakistan Economic Survey, 2007-08

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Decade wise Progress: The following is a decade wise progress of the stock index since its incorporation in 1947: Year no: of listed companies listed capital (Rs. in million) Market Capitalizing (Rs. in millions) (1) 1950 : 15 117.3 (2) 1960 : 81 1,007.7 1,871.4 (3) 1970 : 291 3,864.6 5,658.1 (4) 1980 : 314 7,630.2 9,767.3 (5) 1990 : 487 28,056.0 61,750.0 (6) 2000 :762 236,458.5 382,730.5 The KSE is run by a Board of Directors that consists of 10 members including the Managing Director. Out of these, 5 Directors are elected from the 200 members of the Stock Exchange and 4 non-member Directors are nominated and appointed by the Securities and Exchange Commission of Pakistan (SECP) from amongst the professionals belonging to various trades and professions. The SECP is also the overall regulatory body over the KSE as well as the rest of the Stock Exchanges in Pakistan. The Chairman of the Board is elected by the Board from amongst the non-member Directors. The operational and administrative activities of the Exchange are managed by the Managing Director who is also the Chief Executive of the Exchange.

4.2

KSE 100 Index

The KSE 100TM Index was introduced in 1991 and comprises of 100 companies selected on the basis of sector representation and highest market capitalization, which captures over 80% of the total market capitalization of the companies listed on the Stock Exchange. Out of 35 Sectors, 34 companies are selected i.e., one company from each Sector (excluding Open-End Mutual Fund) on the basis of the large market capitalization and the remaining 66 companies are selected on the basis of highest market capitalization. This is a total return index i.e. dividend, bonus and rights are adjusted. The same methodology is

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applicable in the case of All Share Index, which includes all the listed companies, (except Open-End Mutual Funds).

Most recognized index of the Karachi Stock Exchange Representation from all sectors of the KSE and includes the

largest companies on the basis of their market capitalization

Represents over 85% of the market capitalization of the

Exchange.

Objective: The primary objective of the KSE-100 index is to have a benchmark by which the stock price performance can be compared to over a period of time. In particular, the KSE-100 is designed to provide investors with a sense of how the Pakistan equity market is performing. Thus, the KSE100 is similar to other indicators that track various sectors of the Pakistan economic activity such as the gross national product, consumer price index, etc. Brief About KSE-100 Index: The KSE-100 Index was introduced in November 1999 with base value of 1,000 points. The Index comprises of 100 companies selected on the basis of sector representation and highest market capitalization, which captures the over 80% of the total market capitalization of the companies listed on the Stock Exchange. Out of the following 35 Sectors, 34 companies are selected i.e. one company from each sector (excluding Open-End Mutual Fund Sector) on the basis of the largest market capitalization and the remaining 66 companies are selected on the basis of largest market capitalization in descending order. This is a total return index i.e. dividend, bonus and rights are adjusted.

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List of KSE Sectors 1 .Open-end Mutual Funds 19 Oil & Gas Marketing Companies 2 .Close-end Mutual Funds 20 Oil & Gas Exploration Companies 3 .Modarabas 21 Engineering 4 .Leasing Companies 22 Automobile Assembler 5 .Investment Banks/Inv. Cos./Securities Cos. 23 Automobile Parts 6 .Commercial Banks 24 Cables & Electric Goods 7 .Insurance 25 Transports 8 .Textile Spinning 26 Technology & Communication 9 .Textiles Weaving 27 Fertilizers 10 .Textile Composite 28 Pharmaceuticals 11 .Woolen 29 Chemical 12 .Synthetic & Rayon 30 Paper & Board 13 .Jute 31 Vanaspati & Allied Industries 14 .Sugar & Allied Industries 32 Leather & Tanneries 15 .Cement 33 Food & Personal Care Products 16 .Tobacco 34 Glass & Ceramics 17 .Refinery 35 Miscellaneous 18 .Power Generation & Distribution Calculation Methodology: In the simplest form, the KSE-100 index is a basket of price and the number of shares outstanding. His value of the basket is regularly compared to a starting point or a base period. In our case, the period is 1st November, 1991. To make the computation simple, the total market value of the period has been adjusted to 1000 points. Thus, the total market value of the base period has even assigned a value of 1000 points. example of how the KSE-100 Index is calculated can be demonstrated by using a three-stock ample. Table 1 illustrates the process. First, a starting point is selected and the initial value of the here-stock index set equal to 1000. Taking stock As share price of Rs. 20 and multiplying it by its total common shares outstanding of 50 million in the base period provides a market value of

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one billion Rupees. This calculation is repeated for stocks B and Stock C with the resulting market values of three and six billion Rupees, respectively. The three market values are added up, or aggregated, and set equal to 1000 to form the base period value. All future market values will be compared to base period market value in indexed form. 4.3 KSE 30 Index

The primary objective of the KSE-30 Index is to have a benchmark by which the stock price performance can be compared to over a period of time. In particular, the KSE-30 Index is designed to provide investors with a sense of how large companys scrips of the Pakistans equity market are performing. Thus, the KSE-30 Index will be similar to other indicators that track various sectors of countrys economic activity such as the gross national product, consumer price index, etc. Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P, STOXX and SENSEX have adopted the same. MSCI, a dominating global index provider, shifted all its indices to the Free-float Methodology in 2002. KSE-30 Index is calculated using the Free-Float Market Capitalization methodology. In accordance with methodology, the level of index at any point of time reflects the free-float market value of 30 companies in relation to the base period. The free-float methodology refers to an index construction methodology that takes into account only the market capitalization of free float shares of a company for the purpose of index calculation. Free-float Methodology improves index flexibility in terms of inclusion any stock from all the listed stocks. This improves market coverage and sector coverage of the index. For example, under a Full-Market Capitalization Methodology, companies with large market capitalization and low free-float can be included in the stock Index. However, under the Free-float Methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes difficult to include closely held companies in the stock index during at the same time preventing their undue influence on the index movement.
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Introduced in 2006 Based on the Free Float Methodology Includes only the top 30 most liquid companies listed on the

KSE. Free - Float Methodology: Free-Float means to say proportion of total number of shares issued by a company that are readily available for trading at the Stock Exchange. It generally excludes the shares held by controlling directors / sponsors / promoters, government and other locked-in shares not available for trading in the normal course. Objective and Description: Free-Float calculation can be utilized to construct stock indices for the betterment of market representation than those constructed on the basis of total market capitalization of companies. It gives weight for constituent companies as per their actual liquidity in the market and is not unduly influenced by tightly held large-cap companies. Free-Float can be used by the Exchange for regulatory purposes such as risk management and market surveillance. Determining Free-Float Factor: The listed companies shall be submitted their pattern of shareholding, in the prescribed manner, to the Stock Exchange. The Exchange will determine the Free-Float Factor for each such company. Free-Float Factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the Free-Float market capitalization. Once the Free-Float of a company is determined, it is roundedoff to the top multiple of 5 and each company is categorized into one of the 20 bands given below. Pre Requisites to Qualify for Inclusion in KSE-30 Index: 1. The Company which is on the Defaulters Counter and/or its trading is suspended, declared Non-Tradable (i.e. NT) in preceding 6 months

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from the date of recomposition will not be considered for inclusion in KSE-30 Index; 2. The Company will be eligible for KSE-30 Index if its securities are available in the Central Depository System; 3. The Company should have been formal listing history of at least two months on KSE; 4. The company should have an operational track record of at least one financial year and it should not be in default(s) of the Listing Regulations; 5. The Company should have been minimum free-float shares of 5% of total outstanding shares; 6. The Company should be eligible for KSE-30 Index if its securities are traded for 75% of the total trading days; 7. The Open-End and Closed-End Mutual Funds will not be eligible for inclusion in the KSE-30 Index; Selection Criteria: The companies which qualify the prerequisites will be selected on the term of highest marks obtained as per the following criteria: Free-Float Market Capitalization: The scrip should be included in the Top Companies, ranked on the terms of free-float market capitalization. The free-float market capitalization for each company is calculated by multiplying its total outstanding free-float shares with the closing market price on the day of composition / re-composition. Liquidity: The scrip included in the top companies should also be characterized by adequate liquidity i.e. transaction cost and one of the practical, fact and accurate measures of market liquidity is Impact Cost. It is defined as the cost of executing a transaction in a given stock for a specific predefined order size of fixed rupee amount (currently set to Rs. 500,000). The transaction cost referred here is not the fixed cost typically incurred in terms of transaction charges or cost arising through CDC; rather it is the cost attributable to the market liquidity, which comes from buyers and sellers in the market. Average of the best bid price and the best offer price of a scrip at any
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time, called ideal price, is considered as the best price to trade in that particular scrip at that time. However, every buyer and seller suffers a cost in excess of this ideal price while actually executing a transaction (buy or sell). This price movement from the real price is known as the transaction cost and when measured as the percentage of real price is called Impact Cost. Under impact cost analysis high liquidity is represented by low impact cost. A stock with high market capitalization cannot be assumed to be liquid just because of its sheer size. Some large market capitalization stocks are in reality very illiquid. Similarly, high trading volumes, in themselves, are not enough to confirm consistent liquidity of a stock. Impact cost analysis looks at the order book of each stock market throughout the whole trading day and based on the bids and offers calculates impact costs in terms of percentages for each instance of the order book. The Impact Cost of each security is calculated as described hereunder: First the impact of cost is calculated separately for the buy and the sell side in each order book for past six months. The buy side impact cost (or the sell side impact cost) is the simple average of the buy side impact cost (or the sell side impact cost) computed in the last six months. Impact Cost of reckoned for the purpose of all computation is the mean of such buy side impact cost and sell side impact cost. Final Rank: The scrip should include in Top Thirty companies on the basis of final ranking. The final rank is arrived by assigning 50% weightage on the basis of free-float market capitalization and 50% weightage to the liquidity based on Impact Cost of the securities. The security having highest free-float stock market capitalization and lowest Impact cost is assigned full marks and the marks for rest of the securities are calculated proportionately. Selection of 30 companies for inclusion in the KSE-30 Index: The companies selected for inclusion in the KSE-30 Index are determined on the basis of "Free-Float Market Capitalization" methodology. As per this methodology, the level of Index at any point of time reflects the free-float market value of thirty component stocks related to a base period. The market
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capitalization of a company is determined by the multiplying price of its stock by the number of free float shares determined for the purpose. 4.4 KMI-30 Introduced in September 2008

KMI comprises of thirty stock Companies that quality the KMI criteria and are weighted by float adjusted market

Shariah screening capitalization.


12% cap on weights of individual securities. Rebalancing of the Index will be done bi-annually. Shariah Supervisory Board of Meezan Bank chaired by eminent

Shariah scholar Justice (Retd.) Mufti Muhammad Taqi Usmani.

A total return Index based on free float methodology

The objective of KSE-Meezan Index (KMI) is to serve as a gauge for measuring the performance of Shariah compliant equity investments. It may also act as a research tool for the Impact Costively of purposes in the strategic asset allocation process. Besides tracking performance of the Shariah compliant equities, its construction will increase investor trust and enhance their participation. Currently, the three indices being maintained at the Karachi Stock Exchange are KSE-100 Index, KSE All-Share Index, and KSE-30 Index. The KSE-100 and KSE All Share Indices are market capitalization indices while KSE-30 Index is based on free-float capitalization. The free-float methodology of index construction is being considered as the best thing by all major index providers including MSCI, FTSE, S&P, STOXX, and SENSEX, because it results in a performance measurement of stocks that are readily accessible and well traded. KSE-Meezan Index is also calculated using the Free-Float Market Capitalization, wherein, the level of index at any certain point in time reflects the free-float market value of the selected Shariah compliant shares in relation to the base period. The free-float methodology refers to an index construction

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methodology that takes into account only the market capitalization of free-float shares of a company for the purposes of index calculation. The free-float capitalization of the Islamic stock index constituents will be capped in relation to the overall capitalization of Islamic index at 12% on the first day of composition. At all subsequent re-compositions dates, any constituent breaching this limit will thus be brought in line with this requirement. Any surplus free-float capitalization will be distributed to the remaining companies according to their relative capitalization in the index. Free Float Methodology: Free-Float of a security is defined as the proportion of total shares outstanding that are deemed available for buying in the Stock Exchange. Therefore, it generally excludes the shares held by controlling directors / sponsors / promoters, government and other locked-in shares is not issuing for trading in the normal course. Free-Float methodology reflect the true picture of liquidity present in the market, hence the index movement is unbiased move towards the closely held companies, High net-worth individuals, speculators, and hedgers, will use the free float number for framing trading strategies, while surveillance to minimize market manipulation incidences. Not with standing to the above calculations, under no circumstances what so ever, free-float of scrip shall exceed its book entry shares, available in the Central Depository System. Share held by investors that would not, under normal circumstances, be available in the market for trading shall be treated as Controlling / Strategic Holdings and shall under no circumstances whatsoever, be included in the Free-Float. Shares held by promoters, directors, acquirers for the purpose of maintaining control, whether or not related to Government, or held by associated groups in terms of cross-holding or any shares which precisely cannot be sold in the open market shall preclude such numbers while determining the free-float. Determining the Free Float: Listed companies will be submitting their pattern of shareholding in the prescribed manner to support the Exchange determine a Free-Float Factor. Free-Float Factor is a multiple with which the overall
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regulatory

bodies may utilize these numbers for effective risk management and market

Impact of Global Recession on Karachi Stock Exchange

market capitalization of a company is adjusted to arrive at its Free-Float market capitalization. The screened list of Shariah compliant securities will be provided by the Al Meezan Investment Management Limited to provide its Shariah screening services. Once the equity is approved by Shariah Board and is included in the horizon for Islamic Index, its free-float is rounded-off to the higher multiple of five and each company is categorized into one of the 20 bands. Eligibility Criteria Screening Filters: The companies whose primary business is related to any of the following areas or Business Segments will not be eligible for inclusion in the Islamic Index. Conventional Banks and other Financial Institutions that are totally engaged in interest related activities. Enterprises having gambling or Alcohol also as a part of their concern. Cable Networks, entertainment channels, advertising and media with exception to the concerns engaged in the business for the news dissemination. Arms Manufacturing Conventional Insurance both Life and General Concerns involved in producing or financing concerns, which produce Non-Halal Food or perform any activity relating to packaging and processing of such foods items those are Non-Halal. Determination of financial ratios after its discussion with the Shariaboard The Company which is on the Defaulters Counter and/or its trading is suspended, declared Non-Tradable (i.e. NT) in preceding 6 months from the date of re-composition shall not be considered for inclusion in KMI-30 Index; The Company will be eligible for KMI-30 Index if its securities are available in the Central Depository System;

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The Company should have a formal listing history of at least two months on KSE; The company must have an operational track record of at least one financial year and it should not be in default(s) of the Listing Regulations;

The Company should have minimum free-float shares of 5% of total outstanding shares; The Company will be eligible for KMI-30 Index if its securities are traded for 75% of the total trading days; Mutual Funds (both Open-Ended and Closed-Ended) are ineligible for inclusion in the KMI-30

Screening - Financial Ratios and International Best Practice: The companies are examined for compliance in financial ratios, as certain ratios may violate compliance measurements. Al Meezan observes leverage, investments, illiquid assets, and revenue as key areas in the following manner from the prospect of non-compliant activities. All of these are subject to evaluation on an ongoing basis. Leverage Compliance: Compliance is measured as Interest bearing debt / Total Assets < 40 %; Investment Compliance: Compliance is measured as non-compliant investment / Total Assets < 33% Income Compliance: Companies with Revenues from non-compliant activities are eligible only if they comply with the following threshold: Noncompliant Income / Total Revenue < 5% liquid Assets Compliance: Compliance is measured as Illiquid Assets / Total Assets > 20%

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Net Liquid Assets Compliance: Market Price per share should be greater than Net Liquid Assets per share Selection Criteria: All the eligible companies for the Islamic Index can be included up to a maximum of thirty (30) companies. During the selection process, each companys financial reports are thoroughly reviewed by research analysts of Al Meezan to ensure that the company meets benchmarks or thresholds for Shariah compliance screening. Those that are found to be non-compliant are screened out. The industries that are considered non-compliant (as defined in the eligibility criteria) are not considered for inclusion in the Islamic, as these would not be appropriate for investment from Shariah perspective. From the list of Shariah compliant companies, securities are selected on the basis of free float and Impact Cost. While ranking the companies 50% weight is signed to free float capitalization and the remaining 50% is allocated to Impact Cost such that the companies with the highest free float and the lowest Impact Cost get the highest rank in the selection process. Top 30 ranked companies as per above criteria are included in Islamic Index.

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4.5

Progress Five Years Progress Report


5 YEARS PROGRESS 2007-2011 Upto 29-12-2007 Upto 31-12-2008 653 750,477.55 1,858,698.90 5865.01 5485.33 4400.76 10 15,312.12 7 26,500.00 146.55 14,228.35 30.76 5,229.97 Upto 31-12-2009 651 814,478.74 2,705,879.83 9386.92 9849.92 6665.55 4 8,755.73 1 3,000.00 179.88 7,450.75 1.03 89.66 Upto 31-12-2010 644 919,161.26 3,268,948.59 12022.46 11588.24 8359.31 6 33,438.45 4 5,650.18 132.64 4,405.20 4.58 396.90 Upto 17-05-2011 638 930,556.69 3,166,432.95 11930.24 11575.58 8294.92 2 5,000.00 116.49 4,559.86 5.98 708.71

Total No. of Listed Companies Total Listed Capital - Rs. Total Market Capitalization - Rs. KSE-100TM Index KSE-30TM Index KSE All Share Index New Companies Listed during the year Listed Capital of New Companies - Rs. New Debt Instruments Listed during the year Listed Capital of New Debt Instruments - Rs. Average Daily Turnover - Shares in million Average value of daily turnover - Rs. Average Daily Turnover (Future TM) YTD Average Value of Daily Turnover - YTD Foreign Investment in Securities Market Inflow Rs Outflow Rs Net Inflow/(Outflow) Rs

654 671,255.82 4,329,909.79 14075.83 16717.10 9956.76 14 57,239.92 3 6,500.00 268.23 25,262.97 61.69 9,077.61

YTD = Year to date a. The KSE 100 TM Index was introduced in November, 1991 b. The KSE All Share Index was introduced in September, 1995. c. Listed companies reflected in the relevant year have been stated after 6 companies delisted in 2006, 7 in 2007, 6 in 2008, 2 in 2009, 8 in 2010 and 4 in 2011 and merger of 14 companies in 2006, 4 in 2007, 4 in 2008, 4 in 2009 and 5 in 2010.5

5. IMPACT OF GLOBAL RECESSION ON KSE


5.1 Global Recession

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A global recession is a period of global economic slow downfall. The International Monetary Fund (IMF) takes many steps into account when defining a global recession, but it states that global economic growth of 3 percent or less is "equivalent to a global recession". By this measure, four periods since 1985 qualify: 19901993, 1998, 20012002 and 20082009.

Overview: Informally, as a national recession is a period of declining productivity. In a 1974 New York Times article, Julius Shiskin suggested several rules of thumb to identify a recession, which included two successive quarterly declines in gross domestic product (GDP), a measure of the nation's output. This two-quarter metric is now a commonly held definition of a recession. In the United States, the National Bureau of Economic Research (NBER) is regarded as the authority which identifies a recession and which takes into account several measures in addition to GDP growth before making an assessment. In many developed nations other than USA, the twoquarter rule is also used for identifying a recession. Where as a national recession is identified by two quarters of decline, defining a global recession is more difficult, because developing nations are expected to have a higher GDP growth than developed nations. According to IMF, the real GDP growth of the emerging and developing countries is on an uptrend and that of advanced economies is on a downtrend since late 1980s. The world growth is projected to slow from 5% in 2007 to 3.75% in 2008 and to just over 2% in 2009. Downward revisions in GDP growth vary across regions. Among the most affected are commodity exporters, and countries with acute external financing and liquidity problems. Countries in East Asia (including China) have suffered smaller declines because their financial situations are more robust. They have benefited from falling commodity prices and they have initiated a shift toward macroeconomic policy easing. The IMF estimates that global recessions seem to occur over a cycle lasting between 8 and 10 years. During what the IMF terms the past three global

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recessions of the last three decades, global per capita output growth was zero or negative. 5.2 Attributes of Recession

A recession has many attributes that can occur simultaneously and includes declines in component measures of economic activity (GDP) such as consumption, investment, government spending, and net export activity. These summary measures reflect underlying and highlighting drivers such as employment levels and skills, household savings rates, corporate investment decisions, interest rates, demographics, and government policies. Economist Richard C. Koo said that under ideal conditions, a country's economy should have the household sector as net savers and the corporate sector as net borrowers, with the government budget nearly balanced and net exports near zero. When these relationships look and become unbalanced, recession can develop within the country or create pressure for recession in other country. Policy responses are often designed to drive the economy back towards this ideal state of balance. A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different. As an informal shorthand, economists sometimes refer to different recession shapes, such as V-shaped, U-shaped, L-shaped and W-shaped recessions element. 5.3 Karachi Stock Market & Recession

THE decoupling hypothesis that the emerging world of which Pakistan is a part of no longer so nearly tied to the old industrial world that whatever happens in the latter would affect the former became popular before the global economy went into what economists have begun to call, the Great Recession.

Karachi Stock Exchange 100 Index

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Source Meta stock data The down turn started in the United States in the summer of 2007. Initially there was a consensus between economists that the downturn`s effect would not be felt by the emerging countries to the extent it would influence the more linked economies of the industrial world. That was not happened. We know from Pakistan`s experience that even in an economy that was not an integral part of the global production system, there were many negative consequences influence from the economic crisis in the United States and Europe. Pakistan`s exports were affected by the contraction in the global stock markets. The Karachi stock market, shaken by the rapid deterioration in the security situation, suffered as foreign capital flew out and joined the exit from a number of other emerging stock markets.

KSE-100 Index 3 Years Performance


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Source Karachi Stock Exchange Performance

It is an important thing, therefore, for Pakistan`s policy makers to stay abreast of the developing situation in the global economy. Today I will explore some of the current expert thinking on the subject of the Great Recession. I do belief that there are lessons to be learned for the governments in the merging markets. How close was the Great Recession to the Great Depression of the 1930s? One answer to the question was provided by Christiana Rumor, the head of President Barack Obama`s Council of Economic Advisers. She is one of the two senior officials in the new administration who have a good understanding of the Great Depression. The other, of course, is Ben Bernanke, the Chairman of the Federal Reserve, America`s central bank. Bernanke studied the subject as a graduate student and then published a book about it. He is generally credited with pulling the American economy back from the knee and brink of a depression. What is an economic depression? What distinguishes it from a deep recession is the paralyzing fear of the unknown. That fear leads consumers, investors and business managers to pull back from the stock market. They begin to hoard cash by sharply cutting expenditure. According to the students of economic depression, a devastating loss of confidence inspires behavior
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that overwhelms the normal self-correcting mechanisms (lower interest rates, inventory re-supply, and cheap prices) that normally prevent a recession from becoming deep and prolonged a depression. In other words, economic managers should be try to address the situation by using new tools. As the US economy got close to a depression, Bernanke, having lowered interest rates to near zero, went for what is called the quantitative easing of money. This he did by printing enormous amounts of money and got it to the credit starved sectors of the economy. This was done while hundreds of billion dollars worth of stimulus was being giving to the economy through the budget by way of the President Obama`s large stimulus package.

Did the state of the US economy justify these extraordinary moves? A report issued recently by Ms Rumor finds that the initial impact on the levels of confidence for all categories of economic actors was much more severe than was the case at the starting and during the Great Depression. While it is correct that stock prices fell by one-third from September to December 1929, the beginning of the downturn, it has to be recognized that for few people owned stocks then is the case now. The effect on the economy, therefore, was not as severe as was the case now when the fall in stock prices affected the levels of wealth for much more people. At this time, home prices barely dropped then but fell sharply now. From December 1928 to December 1929, households lost three percent of their accumulated wealth. This time they lost a much larger proportion as much as 17 percent. There were some policy take missteps that accelerated the pace of economic deterioration. Among them that was the decision not to support Lehman Brothers, the fourth largest US investment bank. The anniversary of the bank`s collapse inspired much commentary. While there was disagreement about the wisdom of the decision some people argued that even if the bank had not been allowed to fail, some other would have become the victim of the economic malaise. There is a consensus that the decision accelerated the deterioration. As Robert J. Samuelson of Newsweek puts it, by allowing Lehman to fail almost certainly made the crisis worse. By creating more unknowns which companies would be rescued, how much were `toxic`
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securities worth? It converted normal anxieties into abnormal fears that triggered panic. The economy, in other words, was brought near the state of depression not only by the economy`s own internal dynamics, but by public policy. The Lehman decision froze credit markets and resulted in the collapse of the stock markets. By year end, the Dow Jones industrial average was down 23 per cent from the level reached before the bank`s collapse and 34 per cent from a year earlier. There was panic situation in the financial markets which affected and cause an affect of financial markets and general confidence. In September, the Conference Board`s Consumer Confidence Index was 61.4. By February 2009, it fell to 25.3. Spending on consumer durables fell at the annual rate of 12 per cent in the first 3 quarters of 2008, accelerating to a decline of 20 per cent in the fourth. Investment by businesses fell by 39 per cent in the last quarter of 2008. When Obama administration decided to act. The most important lesson to be drawn from this episode in recent American economic history is that public policy plays an important role in the way economies develop and how they should be steered out of the crises into which they can given and find themselves as they look forward.

This lesson is particularly important for a country such as Pakistan that has allowed economic institutions in the public sector to weaken greatly, has lost the capacity to do some serious analytical work on the state of the economy in both the public and the private sectors, and has not been developed linkages between the private and the public sectors to developed. The last is particularly important since it provides the policymakers advice from analysts who do not have political axes to grind.

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Recession Period of KSE

Source of KSE causes & effects recession in 2008

5.4

Causes & Effects of Recession

April 20: Karachi Stock Exchange achieved a major milestone when KSE-100 Index crossed the psychological level of 15,000 for the first time in its history and peaked point 15,737.32 on 20 April, 2008. Moreover, the increase of 7.4 per cent in 2008 made it the best performer among major emerging markets. May 23: Record high inflation in the month of May, 2008 resulted in the unexpected increase in the interest rates by State Bank of Pakistan which eventually resulted in sharp fall in Karachi Stock Exchange. July 17: Angry investors attacked the Karachi Stock Exchange in protest at plunging Pakistani share prices

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July 16: KSE-100 Index dropped one-third from an all-time high hit in April, 2008 as rising pressure on shaky Pakistan's coalition government to tackle Taliban militants exacerbates concern about the country's economic woes. August 18: KSE 100 Index rose more than 4% after the announcement of the resignation of President Pervez Musharraf but Credit Suisse Group said that Pakistan's Post-Musharraf rally in Stock Exchange will be short-lived because of a rising fiscal deficit and runaway inflation. August 28: Karachi Stock Exchange set a floor for stock prices to halt a plunge that has wiped out $36.9 billion of market value since April. December 15: Trading resumes after the removal of floor on stock prices that was set on August 28 to halt sharp falls. 5.5 Global Impact on KSE

Financial crisis is one of the major challenges of 21st century. It is not only parting negative impact on US but several rich countries' financial systems are also trembling under its weight. Economies of major world including Pakistan are at high level of risk. This crisis is also pointing fingers on the capitalistic companies and banks, which somehow are bigger than many countries. Pakistan was in crisis from the beginning of year 2007, but financial crisis triggered this crisis and situation is going to worst. Pakistan is passing from crucial phase of its life. Crisis in Pakistan was started when former President Pervez Musharraf suspended Supreme Court Chief Justice. Later on Lal Masjid incident took place which throughout Pakistan created huge tension because after this incident chain of suicide attacks started in the country, which has not been ended as yet. In large part due to fuel subsidies and other economic obligations, Pakistan's budget deficit of $21 billion is the highest in a decade, and the current account deficit is 8.4 percent of GDP. In all of Asia, Pakistan has the highest interest rates, least valuable currency, and riskiest financial obligations. As a result, Pakistani government debt is considered one of the riskiest in the world.

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Pakistan's currency, the rupee, has lost 20 percent against the falling dollar and is now near record lows. The Karachi Stock ExchangePakistan's oldest and largest stock exchange-has lost 40 percent of its value since April 2008. Just last August, the KSE put a floor on the index to keep shares from falling even further. Pakistan foreign currency reserves have dropped significantly due to the unstable political and security situation. In less than a year, Pakistan's foreign reserves have dropped from an all-time high of $14 billion last November to just under $6 billion today. Pakistan has taken loan from International Monetary Fund (IMF) on harsh terms and conditions to meet crisis. But financial crisis will be adverse due to this aid because terms are directing Pakistan, not to support their financial sector. Aid from USA and foreign remittance are one of the main contributions towards current account balance of Pakistan. But after the financial crisis, American aid stopped and foreign remittances to Pakistan also showing steep decline. All the bailouts and nationalizations are not the permanent solutions to this financial crunch. It may be possible that we will get rid of this crisis in few months or few years, but it will again come and hit the economies and challenge the financial systems of the world. We have to address the roots of this crisis. Basically all the financial systems of the world revolve around "Capitalism" and "Interest", which will somehow always invite such big recessions in the days to come. The basic economic statistics paint a dire picture. Two-thirds of the Pakistani population lives on less than $2 a day, with one-third of the population living below the poverty line. While the Pakistani economy expanded 5.8 percent in the last fiscal year, this rate of economic growth was the slowest since 2003 and is expected to fall to 4.6 percent this year. But the benefits of this economic growth have not reached the vast majority of Pakistanis.

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The newly elected government faces interlinked challenges: tackling emboldened militant groups and terrorist organizations, advancing political reform, and stabilizing the economy. If Pakistan's economy experiences further collapse, the government could lose further support of the people.

Impact on Global Recession on KSE

Source meta stock data 5.6 Recession & Politics

Since inception, Pakistan has been facing complex issues on political and economic fronts. At the time of creation of Pakistan, there was no education, no industry, no agriculture, no trade, no commerce, and above all no infrastructure. However, with the passage of time, the country s economy, despite various shocks has managed to come out of pressure. The history of Pakistan can be divided into two distinct struggles of epic proportions; the struggle for independence and the struggle for survival. The struggle for the independence of Pakistan culminated in the creation of Pakistan albeit at great human cost. However, the struggle for survival continues despite the nation having sacrificed a lot, both in terms of precious human lives and socio-economic development. The people of Pakistan have lived through difficult times. The country survived despite many odds and its dismemberment. Today, the people are facing worst power crisis that is not

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only hitting hard to the country s economy but also badly affecting the fellow citizens. Now, Pakistan s critical issue is still the bad state of its economy. It has inflation rate in double figure, prices of essential items have been rocketing high and lack of investment in power generation capacity by the previous rulers have halted wheels of industry causing unemployment. The current state of our economy is related to war on terror with horrendous spill over affects on the rest of Pakistan. Americans bomb in the northern areas, the terrorists react to it by bomb blasting in rest of the country are making investors insecure and unsafe thereby hitting hard Pakistan s economy. In the back drop of Pakistan s economic outlook, first we need to understand that high inflation, surge in oil prices, security concerns, decline in FDI, widening trade gap and persistent load shedding are hitting hard to the country s economy. The Foreign Direct Investment (FDI) has always been a reflection of the success of foreign policy of any country but FDI statistics in Pakistan are presenting a glomming picture, which is not a good omen for economy at all. During the financial year 2007-08, the volume of US direct investment in Pakistan was $ 1,309.3 million, while in FY 2008-09 it was $ 875.3 million. Similarly, during FY 2007-08, volume of UK investment in Pakistan was $ 460.2, UAE $ 589.2, Japan $131.2 million and Hong Kong $ 339.8 million which came down to $263 million, $178.2 million, $74.3 million and $156.1 million respectively during FY 2008-09. There was 31.2% decrease in FDI during FY 2008-09 as compared to FY08 while 51% decrease in total foreign investment in FY09 as compared to FY08. Chief Operating Officer of Abbasi & Company Mohammad Ishaq Abbasi, while sharing his views about the problems being faced by the country s economy, said high inflation rate, surge in oil prices, depreciation in Pak rupee, decline in FDI, security concerns, load shedding are major issues confronted to the national economy. He said inflation remains the biggest threat to our economy, jumping over 25% in October 2008 before decelerating this year in June 2009 to 16 month s low of 13.13%. Depreciation in rupee, which has fallen from 60-1 USD to over 83-1 USD in a few months, security concerns resulting from our role in the War on Terror have created great instability, decline in FDI from a height of approximately $8.4bn to $4.6bn for the current
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fiscal year and extending trade gap as import growth exceeds export expansion causing the current account deficit to growing on Pakistan economy and Karachi stock exchange market in Pakistan as well. Talking about Pakistan s Stock Markets, Mr. Ishaq Abbasi said prior 2008 recession leading international magazine Business Week declared KSE-100 Index as the best-performing stock market index in the world. Post 2008 General Elections, uncertain political environment, and aforementioned factors resulted in the steep decline of the Karachi Stock Exchange. Now with the SBP tighter and stable monetary policies in an effort to conserve economic growth has contributed in reduction of money-market interest rates and the inflation may drop back to single digits in 2010. Further Pakistani government is now pursuing an export-driven model of economic growth successfully implemented by South East Asia and now highly successful in China. Recent announcement by the Ministry of Water and Power Development that load shedding will end through employing rental power units and that the country will be self-sufficient by the year 2011.Mr. Ishaq Abbasi said Pakistan has a growing upper and upper middle class, estimated at 6.8 million in 2002 and projected to grow to 17 million people by the year 2010, with relatively high per capita income. Thus middle term, however, may be less turbulent, depending on the political environment/militants actions and the GDP may pick up to over 4.5% per annum by 2011-12. This all contributes to my optimistic view on Pakistan s Stock Markets from medium to long term. At these levels, Benchmark Karachi Stock Exchange-100 Index seems to be consolidating itself supported by healthy corporate announcements. Had not been the uncertain political environment in the country and Pakistan s participation in war on terror, Karachi stock exchange 100 Index would have been trading above 9500 point s level currently. According to him, oil, utility, energy, fertilizer and cement stocks are still trading at discounts and can provide growth and value to investors in medium to long term. He further said the Securities and Exchange Commission of Pakistan (SECP) registered 243 companies during the month of July 2009, bringing the total corporate portfolio of registered companies to 53,424. Of
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243 companies incorporated during July 2009, 240 companies were limited by shares, comprising of 2 public unlisted companies, 224 private companies and 14 single member companies. In addition, 2 associations not for profit under section 42 of the Companies Ordinance, 1984 (the Ordinance) and one foreign company were also registered. Total authorized capital and paid up capital of 240 limited by shares companies, incorporated during July, 2009 amounted to Rs.1,463.9 million and Rs. 451.4 million respectively. During July 2009, number of new incorporation was highest at Lahore, whereby 91 companies have been registered, followed by Islamabad registering 66 companies, Karachi with 59 companies. Peshawar, Quetta, Faisalabad, Multan, and Sukkur registered 13, 1, 6, 6, and 1 company, respectively. Major share of new incorporation was witnessed in the trading sector comprising of 44 companies, followed by 26 each in services and construction, 19 in information technology sector and 14 in tourism sector. During the month, the Commission granted licenses to 2 associations not for profit under Section 42 of the Ordinance of which one is for promotion of education, and other for social services. Commenting on the state of country s economy in the backdrop of decline in FDI, businessman Mohammad Pervaiz Malik said foreign investment plays key role in making the economy of any country stronger, as it helps to initiate new ventures, promotes industrialization, creates new jobs and enhances government revenue. He said present regime has failed to convince even countries like USA and UK to increase their investment and support economy of Pakistan. Pevaiz Malik said though economic crisis is getting further deepening with every passing day but instead of evolving efficient policies, government has found an easy way and put on stake the future of Pakistan by borrowing from IMF and other financial institutions. He urged upon the government to take steps on war footing to attract foreign investors otherwise situation would go out of control. He said government should bind Pakistani diplomats posted abroad to make extraordinary efforts to improve the Pakistan perception in the eyes of the developed world. He said Pakistan embassies abroad should keep continuous liaison with the businesspersons and investors of their respective countries and strive hard to convince them to make investment in Pakistan. He said that
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huge energy crisis is also a major reason to decrease the investment in Pakistan. At the time when a large number of industrial units have been closed down due to more than 12 hours load shedding, how one can expect of any new foreign project just because of energy crises in Pakistan. The Vice President of SAARC Chamber of Commerce & Industry Iftikhar Ali Malik said that the government would have to evolve a methodology for cutting the cost of doing business in Pakistan. To achieve the goal, there is a dire need to cut the rate of markup considerably as on the one hand it would help make Pakistani merchandise competitive at the global market on the other it would expedite the process of industrialization in the country. He said improvement of Pakistan s perception in the eyes of potential foreign investors should be the cornerstone of all the policies made for the future. As the law and order situation must be given priority to attract foreign investment. Human resource availability and its development is an important aspect, which must not be ignored, he said. The Lahore Chamber of Commerce and Industry (LCCI) President Mian Muzaffar Ali said that he understands well that there is no overnight solution of the problems but definitely, there is a dire need to set a direction in the larger interests of the country. Mian Muzaffar Ali said, I strongly believe that today, we as a nation hold the utmost responsibility to deliver. We need to stop borrowing a few breaths in the form of funding from the international donor agencies or our debt repayments just so we can go for a few more steps yet not look for the cure for what we are plagued with. We understand that interim relief might be absolutely necessary for right now to continue, we need to start thinking of a long-term solution to our ills. We must have political stability if we are to industrialize. Political stability can only come with political maturity. Our politicians must now attempt to raise the stature and level of their politics from the present day classroom type boyish squabbles to more constructive criticism of their opponents. They must set themselves down to the task of nation building, he added. The LCCI President said that the law and order situation is indeed alarming these days. How can
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you expect any investment in this kind of scenario? Where even the local businessperson is shy to invest, how can you attract foreign investment? We seem to have lost our sense of direction. There is no discipline or respect for the Law left in our society. We will have to develop such a political and judicial system, in which the common citizen must be assured of the safety of his person and property. He must be confident of being able to obtain justice when wronged. We cannot achieve economic development in a situation when people cannot properly sleep due to fear of some untoward happening in the surroundings. 5.7 Consequences of KSE Recession

The fall of once great KSE 100 index from the 15700 level to a meager 4500 was indeed the worst crisis condition that ever hit the Pakistani stock markets. A lesser dreadful situation occurred in 1971 despite the fall of Dhaka. So far, there has been no formal inquiry conduct for finding the responsible elements. As it is always the case with the equity stock markets in Pakistan. A large number of people believed in hidden elements involved in the events that lead to the crisis. Fingers are pointed towards the previous and infamous mythical cartel rumored to having been responsible for disasters like this in the past as well. None of these accusations can be proven since all the previous investigations hardly held anyone responsible of those crises. Certainly, the instability brought on by the scuffle among the former president, PPP and PML (N) worked as a catalyst in weakening the foundations of Pakistani financial sector. Apparently, even the cool and calm nature of the new Prime Minister wasnt enough to bring a sense of calm in the highly volatile market. In my view the disaster that hit the Pakistani stock market was entirely home brewed. It may have intensified in the light of global financial crisis but it was in no way a result of domino effect set off from stock markets in the united state or Europe. The foreign investors pulling out of the Pakistani stocks bazaar was the first major step blow to the investor confidence in KSE. The departure of foreign element was not due to the global financial crisis rather it was a result of

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sudden devaluation of Pakistani currency. The rising oil prices had lead to a large trade imbalance. The panic was further intensified by the actions of State bank of Pakistan. SBPs lack of refusal in lending stockpiles of money to the central government needed the consequential rise in interest rate for cutting down inflation. This hampered progress in industries and services sector which severely hurt the investor sentiment. Later SECP the so-called 'savior' of the common man intervened in the stock exchanges when the fiasco had just started. By changing the upper and lower circuit values, KSE rose to its top ever of 960 points in an intraday trade. The math was very simple, your share could achieve 10% more value on a bullish day whereas lose only 1% on a bad one. The TV channels were filled with brokers cheering but critics shouting. The event was analogous to the notorious double shah scam. It was all perfect as long as the money kept coming in and the outflow was lesser than the inflow. The danger of the latter happening was foreseen by many with bigger consequences in mind like the total rupture of confidence in the stock market. Thats exactly what was to follow in KSE, a series of unprecedented low volume bearish weeks of trade acting like poison for the investor confidence. As the Pakistani equities continued to cataclysmically shed their value, the government got promised a rescue fund which would help stabilize the shares bazaar. The fund is in the beginning was supposed to be formed from the capital reserves of NIT and other mutual fund cash dumps. As the days passed by rescue fund seemed that more and more like a myth due to the infinite delays caused by the governments inability to convince fund managers. NIT refused in the beginning to participate; pleading on the grounds that they couldnt be possibly risk gambling the money in their vaults for a bailout since the deposits were life savings of pensioners & widows. Almost all mutual funds including NIT later suspended trading in their units ironically because of the scenario in KSE. In all likelihood if NIT had used a small portion of its fund back then, the shares bazaar and the mutual fund industry wouldnt have been faced this avoidable crisis.

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Afterwards KSE administration selects to freeze the floor. Months of almost zero trade followed the decision. The act evidently ripped all expectation from a small investors heart. Several shareholders defaulted during the tenure of the floor freeze. Many were pushed to sell their valuables and property in order to manage deficits. Was it a series of unfortunate events or a culmination of unprofessional acts that lead to the paralysis of Pakistans stock exchanges, a process that began in 2008? This is a question which still requires an answer. Hopefully the restored judiciary will address the issue at anyhow. At least finding the truth and apprehending the people responsible will to some degree do justice to the thousands who lost their life savings just because they chose to invest in their motherland.6

The Avoidable collapse of Karachi Stock Exchange 2008 KSE Article Source: http://ezine.pk/?expert=Ali Hammad Raza Institute of Business and Technology 55

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6. CONCLUSION & RECOMMENDATIONS


6.1 Conclusion

Main objective of this study is to cover the whole crisis of Karachi stock exchange an interest rates on the stock returns and volatility in Karachi stock exchange for period of 2008. This study confirms that the global financial crisis has a significant effect on the financial institutions of developing countries. Our findings about impact of global recession on Karachi stock exchange 2008 which support the impact of Global crisis and recession on Karachi stock exchange and what effect it will have on the financial institutions of developing countries. The perception that they had broken the links with the larger economies has been painfully disproved by the hard facts on those crises. Financial markets of the world are closely interconnected, and the impact of the world financial collapse on Emerging Economies is a witness to this fact. The government should introduce programs to recapitalize banks, guarantee bank liabilities, and provide liquidity to banks by funding markets and in some cases support troubled asset markets. Asset price inflation should be made under the control of monetary policy authorities by government. Responses to global crises must be methodical, inclusive, decisive, and organized. As Global problems may require global multilateral solutions. If the crisis will continue for long period, state and local governments may begin to restrict as they try to shore up new financing arrangements for their operations. 6.2 Recommendations

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In the current scenario of Pakistan, it was the dire need for the investors to find the securities having less correlation that can be used to diversify their portfolios for investments. In the volatile markets like Karachi Stock Exchange (KSE), keeping in view the findings and conclusion of the current study, it was proposed and recommended for the investors. Individual investor should be preparing before investment of any stock in stock exchange. Individual always use the dividend stock for save side. Purchase of common stock should be done when a company is upgrading itself: as it is the time when the companys share price is lower and its future earnings will be more. Investing across the board is a way more important during bear markets, when your assets can really get hammered by volatility. Make sure you can manage your risk with a diversified, well-balanced portfolio. Decisions for stock purchase should not be made by just considering the market value of equity: as the companys other internal and external factors have high significance in determining stock returns. If annual sales of a company are high, the wrong decision regarding its stock purchase should not be made. A company high variation in the market value of equity should not be Considered good for investment. If a Company is having negative correlation of Market Value of Equity with EPS, it should be avoided for investment, because it may have bad future prospects. Technical analysis should be made which would be an easy predictor of stock returns on the basis of Market Value of Equity and other economic factors.

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REFERENCES
History of the Karachi Stock Exchange http://www.advfn.com/StockExchanges/history/KSE/KarachiStockExch ange. History. Karachi Stock Market & Recession. Http://archives.dawn.com/archives/153612 Karachi stock market & recession. Five Year Progress Report on KSE http://www.kse.com.pk/ An Analysis on the performance of IPO- A Study on the Karchi Stock Exchange of Pakistan by Miss Shama Sadaqat, Muhammad Farhan Akhtar, Khizer Ali in April 2011 http: //www.ijbssnet.com/journals/Vol._2_No._6;_April_2011/30.pdf KSE-100 Index Years Performance http://3.bp.blogspot.com/_RBeSQasZTWY/SYw2S03FkjIAM/2mrsbZvDqY/s1600-h/performance_big.gif. KSE 100 Index http://www.docstoc.com/docs/32242077/KSE-100Index. Karachi Stock Exchange http://essaysforstudent.com/Business/Karachi-StockExchange/80452.html. European Journal of Economics, Finance and Administrative Sciences. http://www.eurojournals.com/finance.htm

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http://www.forexpk.com/weekly-updates/editors-pick/struggles-forsurvival-independence-characterises-history-of-pakistan.html

Interest Rate Volatility and Stock Return and Volatility by Nosheen Zafar, Syed Faiza Urooj, Tahir Khan Durrani in 2008 http://www.eurojournals.com/ejefas_14_13.pdf

International Review of Business Research Papers Vol. 5 No. 5 September 2009

2nd International conference on business and economic research 2nd ICBER 2011

International Journal of Business and Social Science Vol. 2 No. 6; April 2011

International Research Journal of Finance and Economics ISSN 14502887 Issue 35 (2010) Euro Journals Publishing, Inc. 2010

ISSN 1450-2275 Issue 14 (2008) Euro Journals, Inc. 2008 http://www.nationsencyclopedia.com/economies/Asia-and-theacific/Pakistan-MONEY.html

The Impact of Recent Global Financial Crisis On the Financial Institutions in the Developing Countries by Nida Iqbal Malik Subhan Ullah Kamran azam Anwar khan in Year2009http://www.bizresearchpapers.com/8.Nida.pdf

Volatilities Dynamics in Emerging Economies Case of Karachi Stock Exchange by Mahreen Mahmud and Nawazish Mirza

http://en.wikipedia.org/wiki/Karachi_Stock_Exchange World applied sciences journal 10 (5): 590-596, 2010 http://en.wikipedia.org/wiki/Global_recession Global Recession http://en.wikipedia.org/wiki/KSE_100_Index Causes & Effects of recession

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http://en.wikipedia.org/wiki/Recession Attributes of Recession http://karachi.metblogs.com/2008/11/04/karachi-stock-exchange-fiasco/ http://en.wikipedia.org/wiki/KSE_100_Index Causes & Effects of recession Sufyan Farhan

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