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Banking sector advancement in Pakistan

A robust banking sector is a healthy sign for the economy of a country. It is this sector that plays the role of financial intermediation between savers and investors, which actually determine the rate of economic growth. The banking sector plays a critical role in mobilization of savings from households from across the country and placing them at the disposal of entrepreneurs.

Banking sector accounts for around three-fourth of Pakistan’s financial sector. The central bank’s quarterly performance review of the banking sector for the quarter of current fiscal year 2017-18 that ended on 31st December said improving asset quality, stable liquidity, robust solvency and slow pick-up in private sector advances were the key developments during the last quarter of CY17. The asset base of the banking sector had expanded by 4.5 percent during the quarter. The report said that strong demand from textile and cement sectors had improved gross advances to private sector by 7.3 percent on a quarterly basis and 16.4 percent on a yearly basis despite retirement of credit in chemical and pharmaceutical sectors.

February 28 report of Moody’s on the banking system’s outlook, says, 9.2 percent of gross advances of the country’s banking industry are non-performing loans (NPLs). Asset risk in the context of banking refers to a high level of non-remunerative loans in total asset portfolio. High levels of NPLs negatively impact banks’ supply of money to the economy and increase the cost of lending.

No doubt, the NPLs on banks’ balance sheet not only affect their capital but also affect economic growth. NPLs continue to grow because of bad lending, and dismal economic conditions. During past five year period (2010-16), the NPLs relative to gross advances have declined from 15 to 9 percent.

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.

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. Islamic finance can find rich social grounds for its growth and expansion in Pakistan.

What primarily concerns the users of Islamic financial services is the Shariah compliance of the services. Noncompliance of Islamic law can result in withdrawal of funds from an Islamic bank. Hence, Shariah compliance is a serious matter for an Islamic bank.

As a regulatory authority of the insurance sector, the Securities and Exchange Commission of Pakistan (SECP) should take initiatives to tap the country’s enormous potential in the sector by providing level playing fields to government and private sector.

There is a dire need to make efforts for making the banking system more inclusive and focus its lending activities on the SMEs and agriculture sector. The banking authorities should reduce spreads between the deposit and lending rates and increase the profits on deposits so as to encourage the depositors to save more rather than consume.

The country 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.

Pakistan’s banking system should match the developed countries’ in promoting innovative techniques and upgrading skill level within the banking system. One cannot ignore the nexus between finance and technology in the present age. Innovative technological solutions pose hard challenges to the traditional banking. Today, Fintech is bringing a silent revolution in banking industry all over the world. Fintech” stands for producing user-friendly, automated and efficient financial products & services.

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