Banking & Financial Sector
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The Economy
Pakistan is one of the key emerging markets of South Asia with a total
population of over 140 million people. Pakistan’s GDP is expected to grow at
over 5% during the year 2003-04. Macroeconomic stability and financial sectors
reform are targeted to have a positive, substantial impact on real
economy.
The Banking Sector
The banking sector in Pakistan consists of Commercial Banks and Specialized
Banking Institutions. During the quarter-1 of financial year 2004 as per SBP
Quarterly report there has been robust growth in deposit mobilization and credit off
take with a rise of PKR 23.1 billion in net credit to the private
sector.
Changes in Selected Banking Sector
Indicators
Billion Rupees
| |
FY 01 |
FY 02 |
FY 03 |
|
Deposit Mobilization |
112.2 |
173.5 |
275.1 |
| Gross disbursements |
105.9 |
199.3 |
387.3 |
| Net Credit |
66.9 |
41.7 |
133.2 |
| Credit to Private Sector |
54.3 |
32.3 |
167.7 |
| Stock pf NPLs |
18.8 |
14.0 |
-7.0 |
| WA lending rates (basis points) |
103 |
-185 |
-454 |
|
WA deposit rates (basis points) |
-89 |
-83 |
-227 |
Note: Negative sign indicates decline over the previous year
Source: State Bank of Pakistan
Regulatory function
The banking sector in Pakistan is highly regulated. As the Central Bank of the
country, the State Bank of Pakistan regulates the banking sector with full
autonomy. In general, State Bank of Pakistan is responsible for licensing,
directing, supervising, controlling and inspecting banks, and for exercising
various monetary control policy measures. In addition, the Securities and
Exchange Commission of Pakistan also monitors the operations of the listed
banks in so far as they relate to public shareholding matters.
Improved financial performance
The performance of the Pakistani banking sector has improved considerably in
the years 2002 and 2003 on account of the following:
- Induction of professional management
The performance of nationalized banks has significantly improved as the
restructuring process initiated in these banks since the year 1997 has begun
to show positive results.
- Reduction in administrative costs versus total income
Banks, especially the nationalised banks have taken steps, to reduce their
administrative expenses.
- Reduction in tax rates
The tax rates have reduced from 58% in 2001 to 50% in 2002 to 44% in
2003 to 41% in 2004 and will decline to 38% in 2005 and reach 35% for 2006
onwards..
Reform measures by State Bank of Pakistan
The State Bank of Pakistan/ Ministry of Finance have introduced the following
reforms in the banking sector:
- Further strengthening of Prudential Regulations.
- The policy for opening and closing of branches has been significantly liberalised.
- A free-floating market driven exchange rate system has been introduced. In
addition, restrictions on buying and selling of foreign exchange by banks have
been removed.
- The Banking Companies (Recovery of Loans, Advances, Credits and Finances)
Act, 1997 was introduced in February 1997. Special banking courts have been
established under this Act to facilitate the recovery of non-performing loans
and advances from defaulted borrowers.
- The Government has formed the Corporate and Industrial Restructuring
Corporation (CIRC) to take over the non-performing loan portfolios of
nationalized banks on certain agreed terms and conditions and issue government
guaranteed bonds earning market rates of return. The purpose for which CIRC
has been established is two-fold:
- to concentrate recovery efforts against loan defaulters
- to improve the profitability of nationalized banks
- Appointment of independent persons to the Board of Directors of the
Nationalized Commercial Banks
- The requirement for minimum capital of banks has been enhanced to Rs 1
billion to encourage consolidation of smaller banks.
- To improve the quality and reliability of reporting, the format of statutory
accounts has been revised on the basis of International Accounting Standards,
quarterly reporting to the shareholders has been initiated, and periodic
reporting to regulators has increased. In addition, the State Bank of Pakistan
has published a list of approved auditors for various sizes of banks.
- Good corporate governance culture is being enforced, both by the SBP and
SECP, covering director’s responsibilities, improved reporting, empowerment of
audit committees and internal audit and independence of external auditors.
- Credit rating for all commercial banks has been made mandatory.
- Extension in the period of carry forward of losses to 10 years and
offsetting of losses by parent company in case of acquisition is allowed.
- Tax rates for commercial banks have been reduced.
- Tax laws have been changed to facilitate merger and acquisition of banks and
financial institutions by allowing group tax loss relief.
- Government bonds have been issued against long outstanding tax refund claims
of banks. Consequently, this will lead to an increase in the profitability of
these banks, as funds blocked in non-earning assets will be converted into
earning assets.
Recent trends in the Banking Sector
The key trends in the banking sector are as follows:
- Increased Merger & Acquisition activity in the banking sector with local
private banks having made several domestic acquisitions
- Large expansion of branch network and deposits by private and some foreign
banks
- Rationalisation of branches by nationalised banks
- Increased focus towards consumer finance
- Increased focus on attracting local rupee deposits
- Increased emphasis towards automation and customer service
- Reduction in the increase in non performing loans as a result of better
governance of banks and greater accountability process initiated by the
government
- Significant increase in inward remittance business as a result of
governmental clamp down on unofficial remittance channels following September
11.
