Oct 26 - Nov 01, 2009

Pakistan's banking industry continued to show the resilience against major risk factors through improved solvency position, according to State Bank of Pakistan's Quarterly Performance Review of the Banking System for the quarter ended June, 2009.

"The banking system continued to show the resilience against major risk factors, though the heightened credit risk remained a major source of concern for banks," noted the review report.

It said the growth in non-performing loans (NPLs) pacified and deposit after showing some stagnancy witnessed strong growth of 8.2 percent during the quarter. Banks posted pre-tax profit of Rs28.6 billion during the first six months of the year 2009 while risk-based Capital Adequacy ratio (CAR) for banks improved to 13.5 percent in April-June, 2009 (12.9 percent in Jan-Mar, 2009).

"This improvement in CAR was caused by growth in equity as well as reduction in Risk Weighted Assets as the banks shifted their asset mix from private sector credit to less riskier lending to public sector and government papers," the report pointed out.

It pointed out that the asset base of the banking system grew by 6.0 percent over the quarter to reach Rs 6,087 billion. The asset mix, however, witnessed significant change as banks continued to focus on government papers and lending to public sector. A 5.0 percent growth in advances was mainly contributed by lending to public sector for commodity operations and Public Sector Enterprises (PSEs). However, due to heightened credit risk as well as private sector's low demand for credit, banks' lending to private sector declined by 1.8 percent, the report said.

According to the report, NPLs grew by 4.9 percent over the quarter and infection ratio stayed at 11.5 percent. However, due to increased loan loss provisions, net infection ratio decreased to 3.7 percent in June, 2009 (3.9 percent in Mar09) and provisions covered 70 percent of the NPLs. The higher loan loss provisioning during the quarter nonetheless affected the earnings. Pre-tax Return on Assets of 1.7 percent though lower than the levels of corresponding periods of last couple of years, was higher than the entire year results of CY08, the report added.


Despite operation of a large number of banks both local and international the number of depositors in the banking sector is only 26 million while only 7 million have access to bank loans.

The untapped market indicates potential for investment as well as business opportunities for the banking sector in Pakistan.

Speaking at the inauguration of branchless banking product 'Easy Paisa'- a joint effort of Tameer Microfinance Bank and Telenor Pakistan -SBP Governor Syed Salim Raza said that developing an inclusive financial sector was a top policy priority area for the State Bank. He said that in the recent past, complete transformation of the banking industry supported by privatization and restructuring and market-oriented policies had resulted in broadening, deepening and diversifying financial services. "Yet, financial penetration remains quite low with only 26 million depositors, 7 million borrowers, and over 20,000 people per bank branch in Pakistan," he said and added that a significant majority were unable to access even the simplest financial services, meaning that they paid more to manage their money, found it harder to plan for the future and cope with financial pressures, and were more vulnerable to financial distress and over-indebtedness.

In this context, leveraging technology and finding innovative products and delivery channels, such as mobile phone banking, is the best way to increase financial outreach. The mobile phones and other branchless banking models have changed the lives of people in many countries around the World, such as Philippines and Kenya.

Usage of mobile phones has increased manifold in Pakistan within a couple of years and over 90 million SIMs have been issued in the country. Within a short span of around 15 years the mobile phone industry has gained landmark success by providing cheapest call rates, increased outreach and a number of value added services, he added. This provides immense opportunities to our banking system which caters to 26 million bank accounts through a network of 9358 branches, sub-branches booths etc.

"Therefore, synergic opportunities exist for banks and mobile operators to join hands and start working on each other's strengths. I am sure the branchless banking is one such business where there is a win-win situation for both the bank and mobile network operator," SBP Governor added.

Mr. Raza said this was the time the financial institutions needed to move away from their inertia and their traditional business offerings so as to adopt continuous innovation as a building block of their business. The adoption of innovative ways of doing business by financial institutions not only gives rise to positive externalities but it also helps in improving the timeliness and quality of data, smoothens markets functioning thereby resulting into a resilient and a strong financial system, he added.

In order to broaden the scope of access to financial services by exploiting information technology, the SBP has introduced Regulations on Branchless banking. The branchless banking is a recent innovation which is expected to shift and change the mindset from traditional branch banking to a new way of banking, he said. "I would like to reiterate that only innovative approaches and models hold the key to long-term development of financial services industry in Pakistan," he said.

In fact, tremendous business potential exists for branchless banking in the country which allows financial institutions and other commercial players to offer alternate and economical financial services outside the bank premises.

The State Bank has always encouraged innovation and provided enabling regulatory environment in order to drive the banks to increase their outreach. "As a regulator, we are concerned about the un-banked masses of our country that do not have banking facilities," he said and added that branchless banking was a milestone to substantially increase the financial services outreach to the un-banked communities.

He said the banks had started to show interest in branchless banking and SBP had given regulatory approval to three banks to carryout branchless banking business. Six banks have been given approvals to offer cell-phone base banking services to their existing customer base as an alternate delivery medium, he said and added that there were many other banks in initial discussions with SBP on their proposals to start branchless banking.

He said in the last few years SBP had consistently been following a regulatory approach which promoted broadening of financial services to a larger population. Moreover, SBP is playing a developmental role by managing donor and government-funded programs. 'I would urge the innovative institutions to share their experiences with other players.'

He appreciated the joint efforts of Tameer and Telenor for being the first to launch the business of Branchless banking and to bring in ground-breaking product into the Pakistani market.



The State Bank of Pakistan, under the Pakistan Remittance Initiative (PRI), has put in place a new payment mechanism whereby the banks would inform on daily basis to each other about the bank accounts to be credited with the remittances received while the funds shall route through Real Time Gross Settlement (RTGS) System simultaneously with the exchange of information.

The new mechanism will address the issue of delay in interbank settlement of remittance transactions. Five major commercial banks have now begun transferring remittances into beneficiaries' accounts the same day under the new mechanism. Allied Bank of Pakistan, Habib Bank Ltd., MCB Bank, National Bank of Pakistan and United Bank Ltd. have joined the mechanism in the first phase and these banks are fully functional for this program with complete capability and capacity.

On the first day of its functioning, these banks credited Rs 100 million into beneficiaries' accounts on the same day under the new mechanism. This is a strategic milestone for the smooth delivery of home remittances under PRI.

With the successful completion of this milestone, State Bank is now making efforts to bring more banks into this fast track payment mechanism. The goal is to integrate all the banks into payment network for smooth flow of remittances.

The new payment mechanism facilitates banks for immediate transfer of funds through RTGS which makes remittance funds immediately available to the participating beneficiary banks so that they can credit remitted amounts to beneficiary accounts.

It may be pointed out that the State Bank, Ministry of Finance, and Ministry of Overseas Pakistanis have undertaken a joint initiative called 'Pakistan Remittance Initiative' recently with a view to facilitating the flow of remittances through formal channels. This initiative has started to materialize and remittances through formal channels are showing considerable growth.