By APP
Karachi : Governor, State Bank of Pakistan (SBP) Dr. Shamshad Akhtar said Saturday that the country’s financial sector assets have recorded a phenomenal growth in the last 10 years as its assets surged to $ 180 billion or 125 percent of GDP. “Total assets of financial sector were 95 percent of the gross domestic product (GDP) at the end of 1997”, she said while speaking at the convocation of the Institute of Bankers, Pakistan (IBP).
The Governor said the financial stability in Pakistan has benefitted from structural transformation of the banking sector and wide-ranging policy initiatives of the State Bank. She said the country’s prudential regulatory regime has been crafted to promote and preserve financial sector stability and for this purpose the State Bank has set up a Financial Stability Department.
The regulatory framework encourages financial sector growth, diversification and innovation, healthy competition and risk-taking to ensure a sustainable and aggressive income stream, opportunities for enhancing the franchise value of banks, prudent behaviour and effective risk management and loan provisioning requirement are stringent enough to discourage infection of loan portfolio, and safeguarding social obligations and consumer interests, she noted.
Dr. Shamshad Akhtar said the central bank has introduced exhaustive guidelines on corporate governance, risk management, business continuity plan, internal controls and stress testing to promote sound banking practices.
She said, “a survey was underway to assess the compliance of banks’corporate governance with SBP regulations.”
The financial sector stability has been further fostered by strengthening of banks’ system-wide capital base to Rs 372 billion, the SBP Governor added.
Dr. Shamshad said Basel- II regulations will augment the economies of scale and scope, and efficiencies as competition and innovation grow.
She said the financial stability will further benefit from SBP efforts to operationalise Real-Time Gross Settlement System (RTGS) named as PRISM (Pakistan Real Time Inter-bank Settlement Mechanism) in June 2008 that will allow shift from traditional paper-based, end-of-the-day settlement system to electronic payment system for large value, low volume inter-bank funds’ transfers and settlements.
Dr. Akhtar pointed out that money markets’ stability has also improved with the SBP’s efforts to develop an effective market-determined yield curve for government securities which sets the stage for the corporate debt market.
Besides, derivative market, which is an important pillar for effective risk management, though still in its infancy, has taken off.
At present, she said, interest rate swaps are allowed in Pak rupee and in other currencies after SBP’s approval. Likewise, forward rate agreements are also allowed in Pak rupee and other currencies with the approval of SBP. Presently there are five banks which have been given the status of authorised derivative dealers by SBP, she added.
However, Dr. Akhtar noted that substantial growth in financial sector brings with it the attendant risk. She said although it is comforting that financial risks are well contained, growing macroeconomic imbalances, unless addressed urgently, could threaten the financial stability.
SBP Governor said one of the major risks to Pakistan’s financial stability is its overall lack of financial sector diversification. “Of particular concern is the size and issues surrounding non-bank sector,” she said and added that of the total financial sector assets insurance companies account for barely three percent, mutual funds three percent and are largely sponsored by banks, while other non-bank financial companies two percent of the system and holders of listed private bonds less than one percent.
Dr. Akhtar said the NBFCs are fragmented and weakly capitalised, and called for revisiting the regulatory and supervisory framework of insurance sector and NBFCs.
For financial sector stability, it is critical that such institutions be better capitalised and a conducive environment is created for the growth of promising segments (collective investment schemes, including mutual funds), niche markets and products for leasing, modarabas, housing finance and venture capital, and unleashing penetration in the insurance industry.
While market capitalisation has grown impressively, its role in raising long term risk capital or debt for new industry over the last several years has been limited, she added.
She stressed that there is also further scope for enhancing banking sector stability too. Although competition is emerging with the growth of mid-sized banks and foreign acquisitions, five largest banks hold 50.6 percent of total banking sector assets; though there is a clear reduction in the level of concentration which was at 63.2% in 2000, she added.
The Governor said the presence of undercapitalised small banks is likely to pose risks particularly during periods of adverse economic cycles. “Entry of foreign presence and Islamic banks and mergers and acquisitions will enhance competition, diversify business sources and facilitate further consolidation,” she remarked.
SBP Governor underlined the need for a greater credit diversification for strengthening financial sector stability.
She said over 50 percent of the bank credit portfolio is concentrated in corporate sector serving fewer industries.
Diversification of banks’ loan portfolio to support more retail and infrastructure financing will be critical for the growth of banking sector, she said and added the State Bank also needs to develop its capacities to monitor financial position and probability of default of the corporate and household sector within the stability framework.
Dr. Akhtar said taking cognizance of maturity mismatches, SBP has introduced different cash reserves requirements for demand and time liabilities to encourage banks to mobilise long term deposits.
Specifically, while the demand liabilities (including time liabilities of less than one year maturity) attract CRR of 8.0 percent, time liabilities of more than one year maturity are exempted from CRR, she added.
She said SBP was now working to develop adequate policy framework for consumer protection, development of financial safety nets such as deposit insurance, and a well-laid out “lender of last resort” procedure which strike a balance between enhancing consumer protection and minimising moral hazard concerns, she said.
She also highlighted the need to encourage improvements in efficiency of financial intermediation by reducing banking spreads.