PAKISTAN’S FINANCIAL
SECTOR
Lecture: 12
Mahreen Mahmud
Reading

Sustainable Growth in the Financial Sector of Pakistan Ishrat Hussain, April 2005
Financial Reforms

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It is pertinent to ask whether the reforms brought about in the
financial sector of Pakistan will persist generating sustainable
growth in the sector or quickly dissipate.
Eight factors that attest the sustainability of growth in the financial
sector
Analysis assumes stability, continuity of good policies and good
governance
First
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Capital base of the banks has been strengthened by raising
the minimum capital requirements
Capital adequacy ratio which reflects the amount of capital
to finance the risk weighted assets
 As the banks mainly use the depositors’ money to take
risks they should also have their shareholders’ money at
stake too.
 High capital adequacy ensures that the bank
management exercise caution and prudence in granting
of loans.
Second
Quality of assets has improved

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Gross Non performing loans to Gross advances for the
commercial banks have come down from 25% to less
than 10 %
The flow of NPLs has dwindled to less than 5 percent
that means that 95 percent of the loans in banks’
portfolio are being fully serviced on time.
Third
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Earnings of the commercial banks have risen because
healthy competition and restructuring have resulted in
efficiency gains.
Spreads between the deposit and lending rates now
range between 3.5 to 4.5 percent compared to 7.5 to
8 percent five years ago.
Third
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The spreads have declined because the drag of NPLs has
disappeared
Corporate tax rates on the profits of the banks have
been lowered
Excess labor has been eased out through golden
handshake schemes in the three major banks – NPB,
HBL and UBL.
Cost – Income ratios have therefore fallen
Fourth
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Access to banking services broadened to middle and lower middle
income groups.
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SME financing, mortgage loans, automobile leasing, personal loans etc.
Khushhali Bank, and other microfinance institutions will reach out to
half a million households providing them small unsecured loans
ranging between Rs. 5,000 to Rs. 25,000
Fourth
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Salaried classes have also begun to leverage their incomes by
receiving personal loans the installments of which are deducted
from their monthly pay checks.
Diversifies the risk for the banks and allows them to earn a decent
return on their loan products.
Enhanced purchasing power -> stimulates aggregate demand ->
expansion of production of manufactured goods -> higher growth
of the economy.
Fifth
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With privatization of nationalized commercial banks
the role of the regulatory and supervisory authorities
has also changed.
The SBP has laid down fit and proper criteria for the
appointment of the Boards of Directors, Chief
Executives and Senior management of the banks.
Sixth
Apprehensions expressed about the risks to which the
banks have been exposed or will be exposed in the
future in light of the rising interest rates. Two criticisms:
1. More defaults on consumer loans as interest rates go
up.

Last five years the banks have been asked to
earmark reserves of 1.5 percent against their secured
consumer loans and 3 percent against unsecured loans
in their portfolios.
Sixth
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Pool of money will enable the banks to deal with in
the event they are stuck with higher defaults.
Repossession laws have been strengthened and
repossession of automobiles or houses has become
much easier for the banks and liquidate their
collaterals against which the loans have been given.
Sixth
2. Banks are fuelling the speculative activities such as
stock market share trading

The banks have been restricted by the SBP and their
total exposure to shares cannot exceed 20% of their
equity.
Seventh
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Human resource base of the banking system is being
upgraded.
New breed of bankers will be infused with
professional skills.
Industry wide standards for training, promotion,
compensation and benefits, severance and continuing
professional education.
Eight
Technology up gradation project
 ATMs and online banking.
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The Real Time Gross Settlement System (RTGS) will allow interbank transfer of funds from any place in the country
Cost savings will result in further efficiency of the banking
system and increased volume of business.
 It is estimated that the average cost of processing a cheque
is around Rs. 50 while that of ATM withdrawal is Rs. 15
Reading

Pakistan's financial Sector - A future Perspective - Dr.
Shamshad Akhtar, June 2006
The economic turnaround owes its origin to two principal
factors:
1. Persistent political and macroeconomic stability which
has helped restore investor confidence and
attracted domestic and foreign capital
2. The ongoing financial sector development and
transformation which has helped meet the growing
financing requirements of the productive sectors,
while generating consumption demand that turned
out to be the main driver of economic growth.
Pakistan’s financial sector’s scope and scale
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The liberalization and deregulation of the financial
sector has helped transfer the banking sector’s
majority ownership to the private sector.
There has been exceptional growth in the profitability
and efficiency of the financial services industry.
Pakistan’s financial sector’s scope and scale

Induced a degree of institutional diversification as
evident from:
(i) the growth of equity markets that, given their high
returns, has attracted foreign portfolio flows; and
Pakistan’s financial sector’s scope and scale
(ii) proliferation of a wide array of non-bank financial
institutions which provide a range of financial services
such as leasing, investment banking and fund
management, and offer Islamic instruments such as
modarabas and musharikas.
Issues - 1
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Large segments of the economy, population and
geography remain under served by the formal
financial system.
There is a need to extend the reach of the financial
system and better serve small entrepreneurs and
households, especially in the SME, agriculture and
service sectors, which account for most of the country’s
GDP and employment generation but presently
receive a relatively small share of total credit.
Issues - 2
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The recent global financial market turmoil and the current
privately-owned structure of the domestic banking system,
highlight the need for a financial safety net to deal with
contagion and systemic risks.
This includes:
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depositor protection,
Liquidity
Lender of Last Resort facilities in the SBP, an exit framework to deal
effectively with inevitable bank failures in ways that will strengthen
rather that weaken the banking sector as a whole
improved coordination mechanisms with the GOP in cases of systemic
problems.
Issues - 3
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The financial sector is too bank-centered and needs to
become more diversified in order to meet the country’s
future financing needs.
New issues of shares have been very limited
Issues - 4
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The privatization of the banking system made it more dynamic
and competitive but it still has some way to go.
New products have been developed, especially in consumer
lending.
 But competition is impeded
 by lack of transparency in the pricing of deposit-takingskewed
by the dominance of a few large banks with vast branch
networks
 Most deposit rates have remained steeply negative in real
terms, while bank margins have remained high.
Enormous potential for future financial
sector growth in Pakistan

The financial sector in Pakistan would have to double in size to reach
the level implied by the GDP ratios for India (202%) or the average
for all EMCs worldwide (216%). This would mean a doubling in
nominal terms. Such a doubling would imply a massive increase of
financial intermediation, i.e., financial savings and credit flows in the
economy
Enormous potential for future financial
sector growth in Pakistan
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The vision for Pakistan that one can draw from the data is that future
financial sector growth and deepening should be based on:
private sector intermediation, including banking, equities and
especially private debt markets.
This would allow resources to be channeled to the private sector,
both for private investment and consumption, which are the key
drivers of growth in the economy.