Sep 8 - 14, 2008

While total foreign direct investment in last fiscal 2007-08 registered a decline in comparison to preceding fiscal year, consistent growth of FDI in last eight fiscal years in financial sector clearly indicates that shadow of politico-economic crises have not dashed the hopes of investors in just emerging and lucrative banking and financial intermediation services of Pakistan. It is rightly said that economic resilience in Pakistan in the current decade earnestly owes to robust performance of the financial sector that is instigating foreign investors to expand and diversify their financial businesses into Pakistan through strategic alliances, mergers, and acquisitions.

The low penetration of financial services in Pakistan is a main persuasive point for foreign financial institutions. In particular, banks so far have over 30 million account holders. There is a large portion of bankable population underserved in the country. It is worthwhile to note the Islamic financial system which is getting fast popularity nationwide. The assets of Islamic banks alone are growing at a tightened pace that has not been exemplified in any other modules of financial sector. Along with, specialized banking companies as well as non banking institutions are also registering growth in their assets. Forming 95% of the financial sector, however, Pakistan's banking sector has been receiving key attention of FDI over years.

In last eight fiscal years inflows of FDI in financial sector have been moving up steadfastly. Stunningly, in first month of current fiscal year too $43.4 million FDI was landed in the financial sector of the country. This sector has so far cumulatively absorbed $3.6 billion foreign capital. During the period, $3.55 million FDI was pocketed in FY02, $207 million in FY03, $242 million in FY04, $269 in FY05, $329 million in FY06, $930 million in FY07, and $1.6 billion in FY08. The sector has been the second largest FDI recipient after communication sector.

Over a long period of time government economic policies had been more favorable to foreign investors. Especially it invited participation of foreigners in financial sector through friendly banking reforms that not only enlarged the capital formation in the country but also expanded the volume of banking services. The capital transference along with modern expertise of internationally renowned banks set trends in provision of financial services to public and private participation brought considerable changes in the conventional ways of financial intermediating. Although there are still lot more to be required to level provision of services with the international standards, Pakistanis never before accustomed to such mechanized and people oriented financial transactions instituted in this century.

The suasion can not go along without taking into account the fears that ascendancy of foreign stakes in national financial sector may cloud under country's sovereignty and decisions regarding financial policies would be making abroad, limiting national economic managers role to mere spectators, making country a forecourt of freely operating aliened companies. At least people would get the windfalls of civilized society while living inside the border does this happen.

The effective modes introduced by the regulator to attract FDI in financial sector are reflected in the desirable outcomes of increasing profits in both banking and specialized banking companies. Importantly, divestment in state-owned commercial banks gave birth to turnaround in financial services besides earned government substantial revenue. In addition, government restrained itself to regulate and monitor working of banks afterwards. The impact of this was evidenced in surge of investors' interest in banking and finance sector of Pakistan.

Issuance of securities in foreign capital markets also help in building foreign reserves of the country. Government's intention to issue Sukook bond will likely to get a hold of attentions in global foreign market. GDRs may become an effective tool of accumulating foreign capital in banking and finance notwithstanding the apprehensions of foreign economic analysts about the prospects of Pakistan's financial market. Moody's expects robust progress particularly in banking sector of Pakistan in future given that political instability in the country eases off.

Mergers and acquisitions in banking remains a direct approach to improve foreign reserves of the country. M&A sprouted diversification of and expansion in financial sector of Pakistan to a greater extent. Enrooted origin in the dawn of ongoing century, perhaps the concept of M&A started in the nation in year 2000 when first merger was taken place between Bank of America and Union Bank. Since then over 50 mergers and acquisitions of banks and non bank financial institutions have occurred. Liberalized financial sectors policies and banking reforms of 90s indeed motivated private banks to begin financial operations in the country. It is not an exceptional phenomenon in the country, in fact, foreign participation in financial sectors of emerging market economies increased rapidly during 90s, though late in Pakistan.

Because of the small capital base of private banking companies, five giant banks acquired sizable market shares whatever available during that decade. Probably, the confinement of market shares by the pentose was the real whisk behind capital formation by the private stakeholders. Along with that, SBP increased the minimum paid-up capital requirements gradually from Rs. 500 million to Rs. 750 million in 2002, to Rs. 1,000 million in 2003, to Rs. 1.5 billion in 2004 and to Rs. 2 billion in 2005. According to SBP roadmap for capital requirement, by 2009 banks and specialized financial institutions will be bound to increase paid up capital to Rs. 6 billion.

The roadmap of FI reforms is favorable for the foreign investors. Earlier investors confronted with irrevocable legal impediments in deals related to M&A. Now through issuance of new license SBP has started facilitating mergers in foreign banking companies not incorporated in Pakistan. This proved a desirable relief sought after by foreign banks with plan to invest in Pakistan.

The serious and practical efforts of the central bank in promoting healthy customer oriented banking sector are clearly indicating towards its inclination to woo foreign investments in the country. A vast space is also available for accommodating astronomical investments in other profitable sections of Pakistan's financial sector such as insurance, leasing, non-conventional banking, the full potentials of which are yet to be harnessed.