Whereas, the State Bank of Pakistan (SBP) declared in its annual Financial Stability Review (FSR) this month that Pakistan’s financial sector has remained in a sound and stable state at the end of calendar year 2016, it also highlighted the risks the financial sector could be exposed due to the growing political and economic concerns in the region and the world. The regional and global concerns as highlighted by the central bank in its report include the low world economic growth, especially slow growth in advanced economies and oil-price induced economic shocks in the Gulf Cooperation Council (GCC) countries.
The growing political and economic concerns in GCC countries would have repercussions for Pakistan’s financial sector as these are the major export destinations and source of remittances for the country. Moreover, international trade slowdown; rising protectionist sentiments and policy normalization in the US that might lead to tighter financial conditions in the Emerging Markets and Developing Economies (EMDEs). In view of the emerging risks there is a dire need to take measures for strengthening the central bank’s regulatory and monitoring frameworks, improve the efficiency and security of the payments systems, enhance financial consumer protection and reinforce corporate governance regime.
The SBP’s report, however, assesses the resilience of the banking sector to adverse scenarios by means of macro-stress testing. The results exhibit that the banking system is, generally, able to withstand adverse shocks. The report posts the outlook of the financial sector in 2017 to remain largely positive amid the highlighted risks.
Banking sector accounts for around three-fourth of the country’s financial sector. The banking sector performed well in 2016. The growth momentum of advances picked up further, while asset quality got improved. The gross advances increased by 12.81% in 2016 compared with 8.12% a year ago. The non-performing loans to total loans ratio has come down to a decade low level of 10.01% at the end of calendar year 2016.
Banks’ profitability has, however, moderated, after seeing exceptionally high growth in the last few years, according to the SBP. The country’s Banking sector witnessed unprecedented growth after 2001 due to low interest rate and product innovation in consumer financing. Information and communication technologies (ICT) have brought about a revolutionary change in the financial sector. This revolution finds manifestations today in shape of innovative banking products and services such as Automated Teller Machines (ATMs), internet banking, tele-banking and so on. The online banking has accelerated financial inclusion gradually changing the financial landscape in the country. The banking industry, however, faces tough competition unleashed in the global arena. Pakistan has witnessed in recent years a growing trend toward branchless banking, which is actually a distribution channel strategy used to deliver financial services without relying on bank branches. It can also be used as a separate channel strategy that entirely forgoes bank branches. Branchless banking regulation was first introduced in the country in 2008.
GROWTH OF ISLAMIC BANKING
Islamic banking is one of the emerging fields in global financial market. It is growing at very fast pace all around the world. Islamic investment banks and Islamic venture capital funds are yet to be launched in Pakistan. Pakistan is not at par with the Muslim world in growth and development of Islamic finance, yet it has shown an impressive growth and diversification in Islamic finance over the past three decades. There are 29 Islamic open ended funds 18 voluntary pension funds and 1 closed ended fund in the country. Islamic funds industry has yet to evolve, develop and grow with new market players in Pakistan. Islamic principles encourage entrepreneurship in productive sector, or in other words they enhance productive capacity of the economy. The experts, however, believe that there remains entrepreneurial risk, which can only be eliminated at the cost of compromising the basic distinctions of Islamic economic principles. There is a dire need for establishment of institutions, which could promote entrepreneurial culture. Questions have also been raised against the performance of Mudarabah companies and some Islamic scholars have declared investment with these companies as non-compliant from Islamic principles standpoint.
Islamic finance, however, faces numerous challenges for its growth in the country. There is however a long way to go forward in this regard. There is still a dire need to work for expansion of client base of Islamic funds management industry in the country.
Sukuk is a Shariah-compliant bond. Sukuk securities are structured to comply with the Shariah and its investment principles, which prohibit the charging, or paying of interest. Dubai Islamic Bank (DIB) has shown interest in promoting Islamic banking in Pakistan and is willing to assist in floating the country’s Sukuk bonds. In a meeting between a DIB delegation headed by DIB chief executive officer Dr Adnan Chilwan and Finance Minister Senator Ishaq Dar in Dubai last year, Chilwan had expressed the desire that DIB was keen to work closely with the Government of Pakistan particularly in the promotion of Islamic Banking in the country.
An IMF’s report on regional economic outlook released in April said that a more favorable global environment is helping to improve economic prospects in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and Caucasus and Central Asia (CCA) regions, although growth prospects remain subdued. Ongoing regional conflicts—which have led to a large number of refugees and internally displaced people — continue to exact not only a high humanitarian cost, but also significant economic consequences, both for countries directly impacted by conflict and their neighbors.
The global factors shaping the world economic outlook for 2017 will be reflected in the outlook for the MENAP region through their impact on commodity prices, export demand, remittance flows, exchange rates, and financial conditions, according to the IMF. Global growth is gaining momentum and is projected to reach 3.5 percent in 2017 and 3.6 percent in 2018, a steady improvement over the 2016 growth rate of 3.1 percent.
Forecasts for growth in the United States and Europe, in particular, have been revised up since the fall. And, while the outlook for emerging market and developing economies has been revised slightly down, growth projections for China have been marked up. The global outlook is consistent with somewhat higher commodity prices and stronger global trade, which will support economic activity in the MENAP region.
Pakistan cannot catch up with its Asian neighbors like India and China in terms of economic development without making investment in new banking technology. In the Asian economies, the investors and businesses are looking for more supportive financial services, with a demand for financing solutions, hedge funds, and asset-based securities. The banking Channels play an important role in enhancing the trade of a country with its major trading partners. Pakistan needs to establish and strengthen its banking channels with friendly countries including China, Iran, Turkey and Malaysia with an aim to increase the bilateral volume of trades.