Banking sector accounts for around three-fourth of Pakistan’s financial sector. 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. 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’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. Initially, internet banking was launched in Pakistan to provide a limited number of services. In 2002, the government of former President Pervez Musharraf took a landmark step for promotion of electronic banking in the country by promulgating the Electronic Transaction Ordinance 2002, which provided legal recognition of digital signatures and documentation reducing the risks associated with the use of electronic media in business. Branchless banking regulation was first introduced in the country in 2008. Today, ATMs, tele-banking, internet banking, credit cards and debit cards have emerged in Pakistan as effective delivery channels for traditional banking products.
Consumer financing has emerged out as one of most prolific aspects of banking in Pakistan. Consumer financing products include credit cards, personal loans, auto loans and housing mortgage. It not only contributes towards facilitating the life patterns of consumers, but it also proves to be a source of improvement for the image of banks.
Plastic cards business on the rise
Credit cards in Pakistan’s banking industry evolved with the introduction of credit cards by Habib Bank, the country biggest bank, a couple of decades ago when it launched the gold card. Then Citibank launched its Citibank Pakistan Visa Card in the 1990s. Then the Muslim Commercial Bank, the National Bank of Pakistan and Bank of America soon followed suit with their own credit cards. Presently, the various credit cards used in the country include Balance Transfer Card (used to transfer a high interest balance onto a low APR credit card), Instant Approval Card (offering instant approval on select credit cards from specific banks.), Business Credit Card (offering an expense management service that facilitates keeping track of outgoing business money), Student Credit Card (used for high school and college students with lower credit limits and fewer incentives to help keep their spending in check). Prepaid Credit Card (used to control spending.) and Reward Credit Cards (rewarding purchases in the form of Cash Back).
A credit card, offering valuable benefits for both consumers and banking industry, is a flexible payment tool accepted at millions of locations worldwide. Credit cards provide access to unsecured credit. They offer interest-free payment from time of purchase to the end of the billing period. They provide instant payment of purchases and allow for instant receipt of goods and services. They provide all-time access in a day. They give fraud protection with zero liability to the consumer in cases of fraud. Moreover credit cards offer air travel points, car insurance, damage and loss insurance and extended warranty programs. The retailers that accept credit cards receive fast and guaranteed payment, which can reduce line-ups at checkout.
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.
Improving and strengthening of banks
The banking industry in Pakistan faces tough competition unleashed in the global arena. The banking sector still needs to take effective measures for improving and strengthening its competitive position vis-à-vis the foreign banks. The banking industry must be able to meet increasingly complex banking needs if it is to flourish. 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.
The internet, ATMs, POS devices and mobile phones are the examples of online banking technologies, which serve to deliver a set of banking services and are part of distribution channels that may be used either separately or in conjunction to form the overall distribution channel strategy. Branchless banking may also complement an existing bank branch network for giving customers a broader range of channels through which they can access financial services.
Customer awareness should be increased to encourage use of services such as ATM, credit cards and internet banking. The banking sector still requires expansion and upgradation of the ATMs to overcome customer complaints in recent years. The banks must ensure provision of uninterrupted ATM services to customers and take responsibility for resolution of all types of issues emerging from outsourcing of ATM replenishment. ATM is the predominant alternate delivery channel of e-banking that leads the retail level e-banking/online services in terms of volume.