Mar 30 - Apr 05, 2009

As against the worldwide trend of low interest rates even zero rated, Pakistan continued to follow stance of tightening of the monetary policy using the high interest rate as a tool to contain inflationary pressures at the cost of stalled economic activities.

Contrary to the concept of high interest rate to control inflation, the central banks in the United States, Canada, UK and even in India are gradually reducing interest with a view to cope with the persisting economic recession.

The European central bank (ECB) President Jean-Claude Trichet has described the low interest rate to zero as the new weapon to battle the deepening economic recession.

Trichet is allowing the ECB's deposit rate, which lenders earn on overnight deposits with the central bank, to usurp the benchmark refinancing rate and become the main driver of short-term borrowing costs. At just 0.5 per cent, the deposit rate matches the Bank of England's key setting and is only a step away from the zero-to-0.25-per cent range the Federal Reserve uses.

Although the State Bank of Pakistan has recently decided to further incentivize financing under Export Finance Scheme (EFS Part-II) by way of lowering mark-up rates yet only for high performers.

It may be noted that SBP already charging lower mark-up rate from exporters against export refinance facility under EFS in order to enable them to become competitive in the international market.

Under the revised EFS 6 percent per annum mark up will be charged from the exporters who will increase volume of export by five times, while 6.5 percent pa from those who increase 4.01-5 time, 7 percent pa at 3.01-4 times and 7.5 percent pa to those who will increase export 2-3 times.

The exporters who have achieved excess performance as mentioned above will claim benefit of mark-up rate differential from SBP through their bank provided they have no export proceeds overdue bills.

The benefit in mark-up rate will be reimbursed to exporters through their banks on submission of claim form to respective offices of SBP-BSC, after verification of export performance at the end of each financial year.

The trade and industry however feels in order to ignite a spark in the dull and dreary economic conditions and to come out of the persisting recession the incentive of low interest should have been given to all stake holders across the board to achieve the desired results.


Meanwhile, the financial experts are of the view that the interest rate cycle is about to move in a reverse gear with the expected drop of 400 basis point in the discount rate from existing 15 percent to 11 percent in the forthcoming policy review of the central bank which is due sometimes in April.

On the back of worldwide trend, the central bank in Pakistan too is likely to go for a drastic cut in the interest rate apparently as an effort to cope with the economic slow down as being done by other central banks of the world.

According to informed sources in the financial circles, since Pakistan is probably the only country yet to go through a reversal in the interest rate cycle among Asian markets, a significant cut in the interest rate expected with a view to ignite a spark into otherwise sluggish economic activities both at macro and micro level.

In fact the cut in the interest rate was long overdue as done by other economies elsewhere as well as in the face of stability returned into macro situation under the IMF program.

The trade representatives as well as the financial gurus feel that the cut in interest rates would have triggering effects on the so far depressed stock market as well. There are other positive developments which are bound to enliven activities in the market including indication for up-gradation of the sovereign rating, re-instatement of Pakistan in MSCI last week.


Robust balance sheets, stellar capitalization as well as attractive valuation metrics indicate that the commercial banks in Pakistan as well as the Islamic Banks relatively are in a much better position as compared the banking scene in the Asia Pacific region.

It is said that attractive opportunities emerging for longer-term investors in the Pakistan financial regime as compared to their peers across the region especially the quality of assets and rate of return which is reflected in the financial results recently announced by the listed banks.

The sound banking indicators are usually attributed to the prudential regulations in Pakistan as against the highly deregulated financial system especially in the United States and the Western economies where the financial system had to suffer the worst ever crisis primarily due to excessive deregulated system which was given the name of innovation.


The latest development on foreign investment inflows features Dawood Islamic Bank which has received Rs1billion US$ 12.9 Million investment from Unicorn Investment Bank Limited, based in Bahrain. Unicorn already had a 22.2% equity stake in Dawood Islamic Bank prior to the current investment. With the new investment the equity of Unicorn Investment Bank, in Dawood Islamic Bank has increased to 37% percent

The investment by Unicorn Investment Bank, would further boost the ability of the Dawood Islamic Bank to provide support to trade and industry through its various Riba free banking products Said Mr. Rafique Dawood, Chairman Dawood Islamic Bank.

The interest of Unicorn in DIBL reflects the strength of the Islamic Banking System of Pakistan which has withstood the current turmoil in the global financial markets proving to the world that Shariah compliant financing is more transparent and trust worthy. Islamic deposits represented 4 percent of total deposits in Pakistan in 2008, but this figure is projected to reach 10 percent of total deposits, or approximately US$13 billion, by 2014.

Meanwhile stabilizing macro and easing monetary environment in the face of expected 400bps cut in policy rate sometimes next month is sure to lend a supporting hand to the stakeholders in the economy.