required to maintain a minimum margin of 30 %. • the total investment in shares has been capped at 20 % of the equity in case of banks and at 35 % in case of islamic banks and dfis. • the investment in a single company by any bank / dfi has been limited to 5 % of their equity. • the total exposure which a bank can take on a single company in the shape of direct investment in its shares or by lending against the security of its shares has been capped at 30 % of the paid - up capital of the company. • banks / dfis are also required to obtain prior approval from state bank if they wish to invest in any company in excess of 5 % of their own paid - up capital or 10 % of the capital of the company. the reason why i have mentioned these details is because i wanted to show what this prudential regulatory structure has resulted in. empirically we know that direct investment in the shares of listed companies has grown from approximately rs. 16 billion in december 2001 to rs. 38. 9 billion by december 2005. likewise, financing against quoted shares has grown from under rs. 5 billion to approximately rs. 39 billion over the same period. the bulk of the liquidity in the capital markets is in the form of cfs 4 or what was earlier called as badla. ( rs. million ) continuous funding system year dec 2001 dec 2002 dec 2003 dec 2004 dec 2005 financing against quoted shares 4, 598 7, 371 13, 393 35, 506 38, 872 investment in shares * 16, 132 23, 164 29, 797 24, 623 36, 370 another important statistics worth quoting is that financial institutions represent one fourth of the total market capitalization. the reason why i am going through all of these statistics is to illustrate that there is a regulatory framework that guides this interdependence and defines the regulatory architecture, and moreover, there is a movement towards greater interdependence and inter - linkages. but is this sufficient or should we do something more? what lessons can we learn from international markets? in other jurisdictions and particularly in developed markets, the relationship between the capital markets and banking is much deeper and clearly more interdependent. this has encouraged the development of the mechanism for risk sharing and risk transfers, such as derivatives and securitization, which allows proper financial leveraging by enhancing the risk - bearing capacity. of course emerging worries about the

to china ( 200 % ), malaysia ( 162 % ), hong kong ( 443 % ), singapore ( 185 % ) and philippines ( 61 % ). • equity market capitalization as a percentage of gdp in pakistan was 31 % in 2005. although now it has increased to 40 % and in fact, went up to 44 % in april 2006, but it is still substantially low relative to malaysia ( 141 % ), thailand ( 67 % ) and korea ( 90 % ). • likewise, the volume of bonds outstanding as a percent of gdp is merely 5. 5 % in pakistan compared to malaysia ( 90 % ), singapore ( 68 % ) and china ( 27 % ), although in china the bulk of these bonds are sovereign. while pakistan has definitely improved quite a bit, when we compare ourselves to the region, we are still lagging far behind and for me this is where we should strive to make more inroads. in my view, not only is there more room for banking assets to grow, but more fundamentally, there is now need to finally jolt the non - bank financial sector more strongly. it is indeed noteworthy that the growth of kse 3 conservative estimates, as stated in the medium term development framework, 2005 - 2010, planning commission of pakistan. karachi stock exchange market capitalization has risen from under 2000 points to over 10, 000 points in the last few years, and went on to record highs of 12, 274 points on april 17, 2006. average daily turnover is remarkable, which, at 525 million shares, makes kse one of the most liquid markets. likewise the p / e ratio of 9. 45 is extremely attractive when compared with average price earning ratios of neighboring countries. likewise, kse ’ s dividend yield ratio also offers good prospects relative to other emerging markets. however, i still maintain that pakistan ’ s capital market lacks sufficient depth, breath and maturity. it is prone to structural vulnerabilities and manipulation. this is confirmed by the decline in the number of listed companies from 762 in the year 2000 to 658 in 2006. moreover, as i have already mentioned, market capitalization as a percentage of gdp is still low and there are very few listed debt securities. but there are promising prospects and with various stakeholders ’ efforts, the stock market has achieved many milestones. the stock exchanges have fully automated the trading system with a t + 3 settlement cycle. the shares are traded in dematerialized form and settlement