TARIQ AHMED SAEEDI - tariqsaeedi@hotmail.com
Sep 15 - 21, 2008

The race to grapple with financial position in emerging economies expedited a long ago, compounded with international financial crisis, further this instigated devouring financial institutions to tighten their grips in and around developing economies. Following fundamental of marketing, they are innovating financial products in accordance with the prominent needs existing in an economy or in conformity with desires of potential target market. In case of Pakistan, markets that are catching attention of financial players are surfacing untapped or poorly served areas in small, medium and cottage industries, retail trade, restaurant business, etc. Similarly, institutions concentrating operations domestically are receiving spillovers of inundation of investments in financial sector especially banking, compelling them to map out their marks in the midst of evolving competition. Hence, they are expanding branch network to rural and suburban areas where great business opportunities exist.

Ministry of Finance has under the patronage of international supporter initiated a study to understand contemporary needs of banking transactions in rural areas of Pakistan. The result of this study is expected at this fiscal year end. The final research report will disclose refined information for FIs to design financial products accordingly. Development and growth of small and medium business has been a daunting task for the government for long due to informal structure and impediments presented at demand and supply side. Concerning later, neither public sector commercial banks, private, foreign and nor specialized banks have considerably focused on development of targeted or tailor made products for small and medium sector. Same is the destiny for micro finance. The market and interest risks further distract the focus.

While there are ample opportunities available in both micro financing and lending to SMEs, volatility in interest rate, foreign exchange rate, and equity prices pose serious threats to earnings of banks. Despite market and interest risks and increasing cost of non performing loans, over years, profitability of banks has substantially been increasing. Total pre-tax profit of the banks jacked up from Rs. 7 billion in 2000 to Rs. 123.6 billion in 2006. Given the low saving to GDP ratio, growth in profitability indicated towards a positive development that people were depositing their money in banks. However, critics see profit growth with different angle, saying banks are making profits by keeping rate of return on deposits low. In fact, banks lending rate is more than that of deposit rate and banking spread in Pakistan is said to be highest in the region. According to a renowned banker, this is against State Bank' provision. It is a sheer exploitation that banks are having real negative rate of returns: rate of return which is below inflation rate. Arguably, bank spread has gained a widening gap alike in developed and emerging economies.

Lending to small and medium organizations is not significant in Pakistan in spite of the sector's importance in building mainstream economy. No latest data are available about the sector, but last released statistics by Economic Census of Pakistan-2005 showed that there were 3.2 million business economic enterprises or establishments operating nationwide and of which SMEs constituted over 99 percent. Its share in industrial employment was 78 percent and in value addition around 35 percent. Retail trade, wholesale, restaurants and hotel business formed major portion of 53 percent of overall activity in SME sector whereas industry and service had 20 and 22 percent respectively. Not only that the sector promotes entrepreneurship and self employment in the country, it also helps in accelerating sustainable economic progress.

It is statistically proven that resilience in banking services has more reflected in flourishing consumer financing than lending to small trade sector. Till June 2008, Rs. 418, 936 million personal loans- including bank employees, consumer financing, auto loan, credit cards-were disbursed while gross loans extended to potentially laden sectors such as farming of animals (livestock), agricultural and animal husbandry services, hunting, trapping, forestry & logging, fishing, fish farming, knit wear, carpets and rugs, wearing apparel, readymade garments, jewelry and related articles, and handicrafts were Rs. 103,086 million.

The reason for considering these sectors is their involvement of small manufacturing and with cottage or home grown industry. Except knitwear that despite too separately concentrates in small sized factories, is counted in large scale manufacturing. Otherwise, in other sectors, volume of production does not require long chained industrial processes and can be increased with small working capital.

Especially agriculture sector can guarantee profitable banking operations provided strategic financial solutions for the sector. Since agriculture employed over 43 percent of approximately 50 million workforce of Pakistan after trade (14.43%), services (14.41%) and manufacturing (13.54%), it could better absorb liquidity of banks with healthy returns. Financial solutions emerged as a result of detailed working could minimize the risk associated with NPLs. According to World Bank, the repayment rate for micro credit loans it extended to more than 275,000 borrowers in Pakistan, of which 45% were women, was 100%.

World Bank has been the main financer of Pakistan's Poverty Alleviation Funds. Poverty alleviation through extending micro credits is not only beneficial for the socio-economic development but also for financer. Private sector participation in exploring rural as well urban bankable market would magnify reach of financial lending services nationwide. Demand volume of micro credit in Pakistan is very high, giving financial institutions an opportunity to benefit from economies of scale.

Extension of loans to electric and communication and other emerging vocations against low interest rate can halve underemployment in the country. Only incentives can lead customers to banks that in turn can get better return on assets. As there are lots of people who despite requirement of using banking services avoid banking transactions, banks can expand services outreach by attracting them. It would also support increase national saving. Unlike Pakistan where government assumes main responsibility of disbursing micro credit, India has private banks like Citi Bank largest shares in assets of micro credit.