Financial sector assets are now 125 percent of GDP: Dr Akhtar
KARACHI: The assets of country’s financial sector have grown to $180 billion or 125 percent of the Gross Domestic Product, said Dr Shamshad Akhtar, Governor State Bank of Pakistan (SBP), on Saturday. She said its assets were only 95 percent of GDP in 1997.
Speaking at the convocation of the Institute of Bankers Pakistan (IBP), the governor said, “Financial stability in Pakistan has benefited from structural transformation of the banking sector and wide-ranging policy initiatives of the State Bank.”
“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,” she said.
Dr Akhtar said the regulatory framework encourages (i) financial sector growth, diversification and innovation; (ii) healthy competition and risk-taking to ensure a sustainable and aggressive income streaml; (iii) opportunities for enhancing the franchise value of banks; (iv) prudent behavior, effective risk management and loan provisioning requirement stringent enough to discourage infection of loan portfolio; and (v) safeguarding social obligations and consumer interests.
SBP governor said the State Bank has introduced exhaustive guidelines on corporate governance, risk management, business continuity plan, internal controls and stress testing in order to promote sound banking practices.
In 2007, SBP was stringent in overseeing the management and board conduct, their conformity to fit and proper criterion. Furthermore, two major sets of new regulations were introduced under which banks were required to induct independent board members and adopt umbrella risk management guidelines. “There is now a survey underway to assess the compliance of banks’ corporate governance with SBP regulations,” Dr Akhtar added.
She said the financial sector stability has been further fostered by strengthening of banks’ system-wide capital base to Rs 372 billion. “Process of consolidation has been catalyzed by 30 odd proactive mergers and acquisitions (both domestic and foreign-led), moratorium on licensing of conventional banks, and rise in minimum capital requirements for banks and DFIs,” she said and added that banks have also initiated implementation of the standardized approach, as prescribed under Basel II regulations. Over the period, this is expected to augment the economies of scale and efficiencies as competition and innovation grows, she opined.
Dr Akhtar said the enhanced push from the State Bank for delivery of development finance would help diversify the credit portfolio and would alter risk profile. She said the financial stability will further benefit from State Bank’s efforts to operationalize 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 market’s 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.
Moreover, derivative market, which is an important pillar for effective risk management, though still in its infancy, has taken off. The derivative market is being regulated under SBP’s Financial Derivatives Business Regulation. At present, 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 Authorized Derivative Dealers by SBP, she added.
However, Dr Akhtar said the substantial growth in financial sector brings risks as well. She said although it is comforting that financial risks are well contained, growing macroeconomic imbalances, unless addressed urgently, could threaten the financial stability. She 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 3%, mutual funds 3% and are largely sponsored by banks. Other non-bank financial companies are only 2% of the system and holders of listed private bonds even less than 1% of it, she said.
Dr Akhtar said the NBFCs are fragmented and weakly capitalized, and added that there is a need to revisit the regulatory and supervisory framework of insurance sector and NBFCs. For financial sector stability, it is critical that such institutions be better capitalized and a conducive environment be 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.
While market capitalization 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 that presence of undercapitalized 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.
The SBP governor pointed out that another area where there is scope of strengthening financial sector stability is the greater credit diversification. She said that over 50% 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 that taking cognizance of maturity mismatches, SBP has introduced different cash reserve requirements for demand and time liabilities to encourage banks to mobilize long-term deposits.
She said the financial sector is now predominantly owned by the private sector that presents some new challenges. SBP is now working in developing 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.
“At the same time, there is a need to encourage improvements in efficiency of financial intermediation by reducing banking spreads,” she stressed and added the State Bank is further developing capacities to monitor operational risks associated with weak internal control systems, delays in adoption of information technology solutions and outsourcing of processes by banks. staff report
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