Sep 15 - 21, 2008

The healthy performance of financial sector is crucial for the sustainability of overall economic growth. During the last few years, the sustained growth in asset size and profitability coupled with an enabling regulatory environment have proved to be the critical factors in attracting Foreign Direct Investment (FDI) in the Pakistan's banking sector from sound and highly reputed banks.

The entry of world class banks such as Barclays, SAMBA, Temasek Holdings, and Royal Bank of Scotland, is a strong proof that the present business environment is conducive to good market players. It is expected that these big names would add value through bringing in innovation and superior systems in the industry.

Financial experts told PAGE that the overall health of the banking sector has improved to a level where it can be sufficiently resilient against adverse pressure arising out of market changes.

In the last few months banks have faced challenges of higher interest rates and increase in volume of NPL, the implementation of sound capital adequacy policy, pursued by central bank, have ensured that the system is resilient to withstand such market adversities. For any financial sector to be well developed and efficient, it has to be diversified, profitable, well regulated and characterized by sufficient depth.

According to experts, Pakistan's financial sector particularly in recent times, has shown a lot of improvement and undergone tremendous transformation from primarily a sluggish and government-dominated sector to a much more agile, competitive and profitable industry. This phenomenal performance owes much to the financial sector reforms which initiated in the early 1990's and continued through out the decade and into the millennium. Consequently the banking sector has undergone a complete transformation. The ownership structure has changed and today 80% of the banking assets are under private management, they added.

The profitability, loan quality, capital adequacy and efficiency of commercial banks have shown substantial improvement. The capital of the bank acts as a buffer against market downturns and any other shocks, they said.

Over the last one year or so when the macro-prudential indicators started to show the signs of deterioration under the pressure of both local as well as global factors, the performance of the banking system on key financial soundness indicators continues to remain remarkable, they added.

The central bank statistics show the asset base of the banking system since 2006 has grown by 22% to Rs5.2 trillion that is well supported by 36% growth in the equity and 21% growth in deposits. The risk based capital adequacy ratio stands at 13.1%, well-above the minimum required level of 8 percent. It is this buffer that continues to provide resiliency to the banking system.

Although Non-performing loans (NPLs) in volume increased by Rs 18 billion during the first quarter, the higher level of provisioning has ensured that the infections impact remain in check as evidenced from the Net NPL to Net loans ratio which was 1.3% n March 2008 as compared to 1.6 % in Dec-2006, signifying that the banks set aside more reserves out of their earnings to cover the increase in loans that had become non-performing. Accordingly, the NPL coverage ratio and capital impairment ratio have improved; NPL converge ratio stood at 84.1% in March 2008 as compared to 77.8% in December 2006, while capital impairment improved from 9.7% in December 2006 to 6.8% in March 2008. This improvement was also backed by regulatory drive of SBP whereby the provisioning requirements were further strengthened in line with best international practices. Due to this change in regulatory requirement, banks had to provide additional provisioning expenses in 2007. The banks' strong earning capacity enabled them to absorb this additional charge and post a pre-tax profit of Rs 28.1 billion in March 2008 quarter which was slightly less than the Rs.33.1 billion profit of corresponding quarter of March 2007.

The SBP has already embarked on a reform agenda, to ensure that banking sector continuously evolves to meet the rapidly changing needs of the modern times. In this regard, SBP and the new Government have agreed to launch a far reaching long term structural reform program to provide strengthen legislative framework for the SBP to perform its role more effectively, laws and regulatory framework for banks.

Some of key elements of this reform agenda include (i) launching policy initiatives to enhance financial access for undeserved people and regions; (ii) improving consumer protection and developing adequate deposit protection scheme for small depositors, (iii) improve capital adequacy through implementation of Basel II Accord, and (iv) reinforce overall supervision of banks by ensuring that SBP has adequate powers to eventually undertake consolidated supervision of the financial groups.