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SBP's ten-year vision & strategy for financial sector.

Article Excerpt
Pakistan's financial system grew significantly in the last few years. At present, total financial assets have reached $175 billion (110% of GDP). The banking system constitutes 95% of the total assets of financial institutions and bank shares constitute 40% of the stock market capitalisation. Among different segments of financial markets, banking sector has gained dynamism, profitability, respectability and strength.

Deposit base rose to $60 billion and advances to $47 billion. Supported by growing financial intermediation process, banks aggregate profitability rose to $1.8 billion. Recapitalization and prudent lending has lowered net non-performing loans (NPLs) to below one percent of assets. Banks capitalisation and quality of assets have helped raise the risk weighted capital adequacy ratio to 13.2 percent.

These Achievements are Impressive, However:

(i) A large segment of population and geography is still under served from the existing financial markets and this gap will grow as Pakistan's population rises further.

(ii) The financial system has to gear itself to meet the growing requirements of the economy in particular infrastructure, which conservatively requires almost $ 150 billion over next few years;

(iii) New types of risks have emerged as banks acquired different types of non-bank financial (NBF) institutions including investment finance, brokerage, asset management and insurance companies etc. Some of these have been merged into the banks while others remain as subsidiaries. Banks are beginning to cross-sell different financial products through their branch networks. This is a market driven development but does pose systemic risks and supervisory challenges. Some banks have also acquired strategic and non-strategic stakes in non-financial companies. These create a different set of risks that will need to be thought through and dealt with carefully.

(iv) Financial sector needs to be diversified as the banks currently meet bulk of the country's financing requirements. While market capitalization of stock market has increased significantly, new issuance of capital is small. Similarly, the debt markets constitute largely of government securities, while the corporate paper market is limited.

(v) Finally, within regional context Pakistan's financial system despite its growth is still small. For instance, the financial system of other Asian emerging financial market countries twice or three times larger in relative terms and the Gulf States have now geared themselves into regional financial hubs.

Keeping in view these considerations, the State Bank of Pakistan's (SBP) is now launching a ten year Financial Sector Strategy. This strategy has been developed based on

* a comprehensive assessment and evaluation of the banking system that helps draw key lesson;

* Pakistan's forward looking economic development strategy and vision; and

* learning from the emerging changes in global and regional financial architecture and financial advancement and innovation.

This paper aims to capture the objectives and broad elements of the financial sector strategy which will be finalized and adopted by the third quarter of the 2008 after consultation with stakeholders. The scope of the paper is confined principally to reforms of banking sector and regulatory architecture which would require some principal changes or new legislation.

The Objective Of The Financial Sector Strategy Will Be To Borden & Deepen The Finicial System To Help Pakistan:

i) Achieve higher and sustainable economic growth,

ii) Develop a dynamic, robust and stronger system.

iii) Mobilize the domestic and foreign resources for...

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