State Bank of Pakistan Governor for development of debt market to spur economic growth

Karachi: Pakistan’s economy and financial sector are now at a stage where they can support and benefit from vibrant and efficient debt market. Size of private debt, or Term Finance Certificates TFCs, remained around Rs 74 billion (0.5% of GDP), which is paltry as compared to outstanding domestic government debt of Rs 4.64 trillion (31.4% of GDP). There is clearly underexploited capacity available to support economic growth.

This was stated by Governor, State Bank of Pakistan Yaseen Anwar in his keynote address on Role of Financial Institutions & Capital Markets in Pakistan’s Economy Wednesday at PAF Air War College, Karachi. He said banks continue to be main provider of debt in the system. “In absence of active capital market, commercial entities fail to procure long term debt financing, and rely on short, medium term loans from banks.”

“Banks are trying to limit their credit risk and it has become more challenging to raise private debt for a business. While some credit uptake may take place in future, it is unlikely banks will be keen to finance new long term projects anytime soon. We are facing several domestic issues that limit ability to fully attain our potential. Financial institutions, businesses must become more competitive, innovative, SBP & SECP must actively facilitate financial markets, and government step up its function of providing infrastructure for growth, most crucially to meet energy demand of productive sectors,” he stressed.

He said there is need for coordinated efforts and support of government, of regulators (SBP & SECP) and banks for development of fixed income market that is necessary to diversify financial sector, which in turn would enhance its role in supporting economic growth. “We have unambiguously designated our future path that includes three main priorities (a) to make our banking sector more resilient against exogenous shocks through our macro (systemic) and micro prudential framework, (b) actively encourage technological solutions for financial access and efficient payment system, (c) address development needs of financial markets, broaden array of product, services as well as outreach.”

“We would like to see our banks operating at world class standards and synergistically reinforcing real economy. We are actively working at a pace to achieve this goal. Despite current economic challenges, we are confident we will succeed. Total assets of our banks amount to Rs7.7 trillion as of end-June 2011. Deposits stand at Rs6.0 trillion, while advances, investments of sector are Rs3.8 trillion & Rs2.6 trillion respectively,” he added.

SBP Governor said in spite of economic slowdown, pre-tax profit of banking sector for year 2010 was Rs105 billion and for first six months of 2011, it was Rs77 billion. Banks stand at a healthy Capital Adequacy Ratio (CAR) of over 14% and shown steady increase in capital even in absolute terms. Equity of banks is now Rs722 billion (June 2011). “While picture appears quite stable, key challenge comes from economic slowdown. We have witnessed impact of an economic slowdown through rising credit risk in the banks,” he observed.

However, as banking regulator, big challenge arises from a two-pronged dilemma. “We want our banks to be sound, profitable, efficient users of their funds, yet we also want them to increase financial service penetration into unbanked segments of economy. SBP is pursuing second generation reforms for financial services industry and placed high priority on developing and implementing an effective strategy for financial inclusion.”

There is huge surge among banks to upgrade technology, on-line banking services. Automated Teller Machine network has been expanding and in June 2011 there were about 5200 ATMs operating in the country. Concept of branchless banking opened new avenue for efficient funds channelling. Progress in creating automated or on-line branches of banks was significant so far and expected almost all bank branches will be on-line or automated. Utility bills payment and remittances would be handled through ATMs, kiosks or personal computers reducing time and cost.

Payment system infrastructure was strengthened to provide convenience in transfer of payments to customers. Since 2008, branchless banking expanded steadily with increased participation of stronger and new players. At present, agent network under umbrella of branchless banking exceeds 20,000 that facilitate around 53 million transactions amounting to Rs196 billion (Sep-11).

He said enabling regulatory environment was provided for lending to Small & Medium Enterprises SMEs, agriculture, microfinance; thus banks, financial institutions are encouraged to expand scope of lending and customer outreach. Licensing and prudential norms for micro finance institutions designed with particular emphasis on facilitating growth of these institutions and expanding outreach to poor, vulnerable segments of population.

He said advances to SME sector declined from Rs.383 billion in Dec 2008 to Rs.292.5 billion in June 2011. Loan infection ratio of SME sector is around 16.8%. “We need to come up with sound solutions for revival of this sector. In March 2010, SBP came up with Credit Guarantee Scheme for small, rural enterprises with assistance of GOP and donor agencies that aims to motivate banks to lend to borrowers, who otherwise would not have access to credit under normal circumstances. Several other initiatives are also underway.”

Anwar said customer base of Microfinance Banks MFBs crossed 700,000 and Microfinance Institutions MFIs exceeded 1,300,000 in June 2011. At present 8 MFBs are operating in Pakistan, with total assets of Rs21.4 billion. SBP is engaged in collaborative efforts with civil society institutions, especially involving large NGOs, RSPs in providing complementary services, such as social intermediation, capacity building. Regulatory regime adopted by SBP for microfinance sector is that of a facilitator, guide and problem solver. “We do not prescribe for MFBs same onerous regulations that prevail for other financial institutions. We have Consultative Group from representatives of stakeholders, who guide us in development of regulations, prudential norms.”

He said large number of Pakistanis have remained withdrawn from commercial banking due to their strong belief against Riba-based banking. These individuals, firms now have opportunity to invest in trade, businesses by availing loans from Islamic banks, expand economic activity and employment. Total Islamic banking assets stand at Rs.560 billion (June 2011), which is 7.3% of total assets of banking sector.

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