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Role of Financial Institutions in Economy’s Development of Pakistan The importance of Financial Institutions (Fly) cannot be overemphasized. Financial Institutions perform the important function between providers of inevitable funds (depositors, securities holders etc. ) and the users of such funds (namely businesses). Any economy can’t progress without its financial sector facilitates its business activities consistently, and in the case of a developing country like Pakistan, these IFS act as a necessary source for economic growth as well.
The State Bank of Pakistan has played wow very important roles as the financial sector. Firstly it ensures soundness of banks and Doffs with a view to maintain financial stability; secondly it pursues a developmental objective under which it facilitates financial markets developments and enhancement of access to finance. The banking system, which contributes 88 percent share of the total financial sector and the share of non-bank financial institutions, is approximately 12 percent.
The Banking sector of an economy is generally the most significant player and performs three primary functions which include the facilitation of the payment system, manipulation of savings, and allocation of alienable funds. Historical perspective: The current structure of the financial sector in Pakistan is the result of several policy shifts and developments. The eras of financial sector developments in Pakistan can broadly be segregated into 1947-70, 1971-90 and 1991 to date period.
Period of 1947 to 1970 In 1947 the banks services were adversely affected and in June 30, 1948, the number of branches of scheduled banks came down to only 81 in the area of Pakistan. However, commercial banking made tremendous progress and achieved phenomenal Roth and there were 14 scheduled Pakistani commercial banks with 3,323 branches all over Pakistan and 74 branches in foreign countries. Development Financial Institutions (Doffs) played an important role in the early industrial development of Pakistan from the ass up to about the mid of ass.
These Doffs were major source that gives development funds to the private manufacturing sector and achieving socio-economic objectives. Period of 1971 to 1990 All 14 Pakistani commercial banks were nationalized and merged into 5 banks from January 01, 1974, and the financial aspects of the country changed significantly. The experiment of nationalization, however failed to give the desired results, as political interference in lending decision. The efficiency of the banks was affected severely, and at the end of sass, the banking sector in Pakistan had become unsuitable for adequately meeting the growing financial needs of the country.
Period of 1991 to date After realizing the weaknesses in Pakistanis financial system, a broad based program of reforms was framed for the financial sector in the early sass. The reform agenda Role Of Financial Institutions In Economic Development Of Pakistan By idealizing 23 Pakistan played a pioneering role in these reforms, and has championed the developments in the financial sector. Some of the major steps taken by the SSP under these reforms are as follows: For appropriation of nationalized commercial banks, the Government injected RSI. 30. 7 billion to offset the losses incurred by these banks and recapitulated them.
Professional bankers were appointed as Chief Executives and persons from the private sector were nominated on the Board of Directors and ultimately the banks were privatized. Besides the appropriation, fresh licenses were also issued to private sector sponsors to set up new commercial banks. The legal and regulatory framework was strengthened significantly, and State Bank powers under the Banking Companies Ordinance were enhanced in order to make it an effective regulator. In April 2011, the amendments in the BCC were carried out which further reinforced Kbps role as regulator of the banking sector.
The prudential regulations and various guidelines issued by SSP provided the essential impetus for prudent operations of the banks and Doffs. Foreign direct investment in the banking sector as made more viable; and since liberalizing, large numbers of reputable foreign shareholders have invested in locally incorporated Pakistani banks. The Capitalization of the banks has been enhanced steadily over the years. The minimum paid up capital (net of losses) was set at RSI. L billion in 2003, increased to RSI. O billion by 2005, RSI. O billion by 2009, and RSI. 10 billion to be achieved by 2013.
Over the years the monitoring of banks and Doffs has also improved. The on-site inspection and off-site surveillance has increased the level of supervision of SSP. The SSP also undertook massive capacity building during the late sass and early sass to upgrade the level of expertise of its officers. Merit-based recruitment, competency- enhancing training, performance-linked promotion, and induction of skilled human resources are now regular feature of Kbps corporate strategy. The MIFF and World Bank in their banking sector assessment of 2004 state Quote: “far reaching reforms have resulted in a more efficient and competitive financial system.
In particular, the pre-dominantly state-owned banking system has been transformed into one that is predominantly under the control of the private sector. The legislative framework and the State Bank of Pakistanis supervisory capacity have been improved substantially. As a result, the financial sector is sounder and exhibits an increased resilience to shocks”. Present day scenario Total assets of our banks amount to RSI. 7 trillion as of end June 2011. The deposits stand at RSI. O trillion, while Advances and investments of the sector are RSI. 8 trillion and RSI. Trillion respectively. In spite of the economic slowdown, the pretax profit of the banking sector for year 2010 was Rests billion and for the first six month of 2011 it was Errs billion. The banks stand at a healthy Capital Adequacy Ratio (CAR) of over 14 percent and have shown a steady increase in capital even in absolute terms, and equity of the banks is now Rests billion None 2011). The gross non-performing loans which were low in 2007 (7. 6%) are now at 15. 3% as of June 2011. Thanks to our conservative provisioning regime, the net Naps are still at a reasonable level at 5. %, but we are aware that unless an economic turnaround is achieved within a for some banks. Since IFFY, banks in Pakistan have been able to withstand the headwinds from weakening macroeconomic fundamentals. While they have remained largely insulated from the first round of shocks from the global financial crisis, we cannot ignore the adverse trends that have risen since then. The Global Financial Crisis (SGF) has continued despite the recovery efforts of advanced economies and has morphed from a financial crisis to a sovereign credit crisis with serious political implications.
The regulatory focus in Pakistan has strives to prevent and mitigate the occurrence of these factors as the financial sector continues to evolve and progress. Our financial institutions and businesses must become more nominative and innovative, regulators like SSP and SEEP must actively facilitate financial markets, and the Government should step up its function of providing infrastructure for growth, most crucially to meet the Energy demand of productive sectors. There is a huge surge among the banks to upgrade their technology and on- line banking services.
The ATM network has been expanding and on June 2011 there were approximately 5200 Tams operating throughout the country. Utility bills payment and remittances would be handled through Tams. The concept of branches banking has opened a new avenue for efficient channeling of funds. The State Bank took the lead and introduced Branches Banking Regulations in 2008. Since 2008, Branches Banking has expanded steadily with increased participation of stronger as well as new players.
At present, the agent network under the umbrella of branches banking exceeds 20,000 that facilitate around 53 million transactions amounting to Rests billion (Seep-11). Overall financial penetration in Pakistan remains quite low. The number of borrowers of 3. 8 million constituted only 2. 3% of the population on December 2010. Enabling regulatory environment has been provided or lending to SEEM, Agricultural and micromanage; thus banks and financial institutions are encouraged and enabled to expand their scope of lending and customer outreach.
In 2010 & 11 Consecutively, Pakistan has been ranked First in a sample of 55 countries in the category of “overall regulatory framework and practices for Micromanage” by The Economist Intelligence Unit (XIII) of The Economist Magazine. The customer base of Mobs (Micromanage banks) has crossed 700,000 whereas that of Miff has exceeded in June 2011. At present 8 Mobs are operating in Pakistan, with total assets of Errs. 4 billion. The fundamental importance of the SEEM sector in the economic development of the country.
While SEEM prudential regulations have been in place for years, we are in the process of reviewing and revising the same to make them more conducive for this sector. The economic slowdown has hit them particularly hard. The advances to SEEM sector declined from RSI. 383 billion in DCE 2008 to RSI. 292. 5 billion in June 2011. The loan infection ratio of SEEM sector has also risen and is around 16. 8 percent. Pakistan introduced the Islamic banking system in 2003 to operate in parallel with the conventional banking, providing a choice to the consumers.
A large number of Pakistanis have remained withdrawn from commercial banking because of their strong belief against rib-based banking. These individuals and firms now have the opportunity to invest in trade and businesses by availing of loans from Islamic banks and thus expand economic activity and employment. The total Islamic banking assets More importantly, this sector has shown more accelerated growth as compared to other segments. Deposits grew by 15. 9 percent while the overall deposit growth was 9. 4 percent None 2011 data). We are very optimistic about the prospects of B system.