A history of development of Pakistan’s financial sector (and similarities with India)

Yaseen Anwar, Governor of the State Bank of Pakistan gives a super speech on the topic. What is amazing to note is some interesting similarities and differences with India’s history of financial markets.

He divides the development in three phases:

  •  1947-73: focus on building financial system as after partition there were just a very few bank branches etc. In 1947, just 81 branches in Pakistan which increased to 3233 domestic branches (of 14 banks) and 74 foreign bank branches by 1973. Development Financial Institutions were set up to provide credit in critical sector. In 1980s and 90s most of these DFIS ran into problems. (DFI history just like India)
  • 1973 to 90: Bank nationalisation on Jan-1-1974 and 14 banks merged to 5 fully national banks as it was felt banks neglecting weaker areas and giving credit to only well-off people. India did this 5 years before, so it seems Pakistan just followed India. May be there was a wave of nationalisation in other countries as well. Am not sure about this. This was a failure obviously as too much political interference led to huge decline in efficiency.
  • 1991 to date: reforms started and Banks were privatised. Again 1991 marks the year of reform for India. However, unlike India Pakistan opened its banking system much more and did away with govt owned banks. In India  this was much more selective and still 75% of banks business done by Public sector banks. In pakistan private sector banks assets increased from zero in 1991 to 80% by 2004. SBP’s role as banking regulator was also strengthened. FDI in banks was allowed and professionals picked to head and run banks. Better regulation led to increase in capital norms

However problems of high NPAs continue which has worsened post crisis and Pakistan’s own macro problems. Gross NPA’s at 15.3% and thanks to some provisioning Net NPAs at 5.5% . SBP has taken measures to increase branchless banking and ATMs.

Pakistan’s fin system is mainly bank dominated:

The banking system, which constitutes 88 percent share of the total financial sector, is comprised of 34 commercial banks and 4 specialized banks. The share of non-bank financial institutions is approximately 12 percent, and includes leasing companies, Mudarabas, insurance companies, investment banks, housing finance companies, venture capital companies, and mutual funds.

As market-bases system has much lesser share, he says time to increase this share. Interestingly, he says debt markets can develop before equity markets:

Now I would like to touch upon the role and importance of Capital markets that mainly consists of Stock (equity) and Debt markets. The capital market provides an avenue for raising long-term financing needs of businesses through equity and long term debt by attracting investors with a long term investment horizon. Both the banks as well as capital markets are vital in ensuring the desired level of liquidity in the system, facilitating efficient  price discovery and allocation of credit and diversifying risks in the economy. However at present the level of development varies considerably in each market. While banks take the lion’s share of the overall financial sector as dominant players in money and foreign exchange markets, the capital market has yet to develop and still requires nurturing to reach its true potential. Even within capital market, the corporate debt market is truly at nascent  stage.

While equity markets typically tend to develop earlier than the debt markets in most developing countries, Pakistan’s economy and financial sector are now at a stage where they can support and benefit from a vibrant and efficient debt market. The size of Private debt, or Term Finance Certificates (TFCs) in Pakistan, remained around Rs. 74 billion (0.5% of GDP) which is paltry compared to the outstanding domestic government debt of PKR 4.64 trillion (31.4% of GDP). There is clearly underexploited capacity available to support economic growth.

Hmm. Needless to say India is much ahead in capital marksts segment though corp bond market still remains non-existent.

Nice stuff and historical similarity with India.


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