In mid-2024, the State Bank of Pakistan
(SBP) began cutting interest rates after holding them at a record 22%. Bank
deposits and treasury bills were no longer paying as much, so shares on the
Pakistan Stock Exchange (PSX) became more appealing to investors. The KSE-100
climbed about 84% that year and continued rising in 2025. By then, the index
had reached levels that would have seemed unlikely just a year before.
As stock prices went up, more attention
turned to buying shares on credit. Investors who qualified could borrow through
the Margin Trading System run by the National Clearing Company of Pakistan
Limited (NCCPL), or use financing arranged by their brokers. For some retail
investors, leverage trading had previously seemed like something used mainly by
larger or more active clients of brokerage firms. During the rally, it became a
topic of discussion in WhatsApp investment groups and financial YouTube
channels, where people talked about borrowing money to catch up with the rising
index.
The reduced rates changed the cost of
borrowing. Margin financing had been expensive during the period when the
policy rate stood at 22%, and financing costs began to ease as interest rates
came down. Banking, fertilizer, cement, and energy shares were among the
sectors attracting attention during the rally, although returns varied
considerably between individual companies. Investors who had watched prices
rise throughout 2024 could see why borrowed money appeared tempting in 2025.
The difficulty was that a lower financing cost did not make a falling share
price any less damaging.
The widening investor base was another
part of the picture. New accounts continued to be opened through the Central
Depository Company, while brokerage firms offered digital services that made
entering the market easier. Some investors could complete much of the
account-opening process without visiting a broker's office. Getting a trading
account was one thing. Borrowing money to buy shares was harder, since
investors still had to qualify and provide the required collateral. For people
who had entered the market during a long rally, the possibility of a sharp
decline could be easy to underestimate.
The trouble with borrowed money became
clear whenever share prices fell sharply. During the rally, news about regional
tensions or the federal budget sometimes sent stocks lower, leaving investors
with margin accounts under pressure. A fall in the value of their shares could
mean having to put more cash into the account or provide additional collateral.
Those who could not come up with the money risked having their shares sold by
the broker, even when prices were already down. When brokers sold shares from
accounts that could no longer meet margin requirements, it sometimes added to
the selling already taking place. Brokers were doing more business as trading
picked up, though they still faced the risk of customers being unable to pay
back borrowed money. The Margin Trading System has its own restrictions. Not every
stock can be bought on margin, and the amount investors can borrow depends
partly on the shares they use as collateral.
Pakistan's stock market has been through
this before. The KSE-100 fell sharply after reaching its peak in 2017,
something longtime investors still remember. Many of those who bought their
first shares during the 2024 and 2025 rally had only seen the market going up.
They had yet to see what happens when prices keep falling for months. The
current interest in leverage trading has developed during a period when borrowing
costs were falling and share prices were rising. A market can continue climbing
while credit remains affordable, but a decline in prices can quickly become
costly for investors who have borrowed to buy shares. If financing costs rise
again, keeping those positions open may become harder still.
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