Review of Structural Reforms in Financial Sector of Pakistan

 An efficient financial system is essential to facilitate economic
transactions.
 Financial Sector Development and Economic Development are
inter-related.
 Well functioning and efficient financial sector improves the living
standards of population.
 Improves overall economic efficiency through the efficient
allocation of resources.
 Improves economic growth and the stability of the economy.

STRUCTURAL ADJUSTMENT PROGRAMS (SAP)
 Started in early 1990’s.
 It includes
 Fiscal consolidation.
 Reforms of the trade and exchange rate systems.
 Price liberalization.
 Deregulation of financial sector activities.

 Commercial banks.
 Development finance institutions.
 Stock market

 Privatization
 Corporate Governance
 Liberalization of Foreign Exchange Regime
 Consumer financing
 Taxation Reforms
 Interest Rate Policies

 Efforts began in earnest after the creation of
Privatization Commission (PC)
 Privatization of state owned enterprises;
Banks
Power utilities
Telecommunications
 167 transactions
 Revenue of over Rs. 476,212.2million

 Banking sector has the highest share with 33 %.
 Telecom has 28 % share.
 Energy and industrial sector has 20 % and 19 %
respectively.

 All the Nationalized Commercial Banks except one
has been privatized.
 The asset share of government in nationalized banks
have reduced from 100 percent to less than 20 %
 Private sector now owns 80 % of the banking assets.

 As a first step of privatization of banks twenty
three banks were allowed to work.
 Ten banks belongs to domestic sector and rests
were international/foreign banks.

 Large segments of the banking system have been
transferred to private sector.
 Private sector owns and operates most of the
banking sector.

 Entrusting the directors/managers with responsibilities.
 Improving economic efficiency and growth.
 Prevents mismanagement and infuses discipline.
 Ensure transparency and accountability
 Protects the depositors' interests
 Brings change in the organizational culture

 ICAP has drafted “Code of Corporate Governance”
 It addresses the national requirements for good
governance practices.
 In March 2002, the SEC directed the stock exchanges
to incorporate the Code.
 The listing regulations were amended to include the
recommendations of the Code

 Setting up foreign exchange companies in the private sector.
 Allowing acquire of equity abroad.
 No barriers to entry and exit of Foreign registered investors
 Foreign exchange accounts in domestic banks were allowed for both
residents as well as non-residents.
 Foreign registered investors can bring in and take back their capital,
profits etc without any prior approval.

 FDI started to increase.
 It has started to decrease over the
years due to
• Global economic crisis,
• Declining security situation
•The flood situation.

 FDI had its up and downs until late 1990’s.
 It started to flourish in early 2000.
 Over the years due to global economic crises and
security situation it started to fall.

 FDI is an integral part of a country’s GDP.

It is an established financing product of mature
economies having the following types.
 Personal loans: payment of goods, services and
expenses
 Auto loans: to purchase a vehicle for personal use
 Housing Finance: for purchase of land plus
construction.
 Credit Cards: include charge cards, debit cards,
Stored Value Cards (SVC), and Balance Transfer
Facility (BTF)

1. The financial liberalization process led
 to the creation of a banking system owned by
the private sector.
 free allocation of resources as per market
based mechanism
2. The easy monetary policy of the central bank
 providing customers with financing options at low rates
to meet demand.
3. The influx of liquidity in the banking sector
 motivated banks to diversify and expand their earni
ngs

 The State Bank of Pakistan has given a big boost
to consumer financing.
 Middle income groups can now afford to purchase
on installment basis.
 This has given a large stimulus to the domestic
manufacturing of these products.
 Bank’s consumer finance share in overall credit
of the banking system had risen to 3.8 percent.

 Banks now offer a wide range of products under
the consumer finance umbrella.
 Personal loans, auto loans, credit cards and
mortgage finance are few of them.
 Composition and growth of these products in the
last few years has been very high.

 Government has restructured the key support institutions
such as SMEDA and SME Bank.
 They have been established to provide leadership in
developing new products such as program loans, new credit
appraisal and documentation techniques.
 the SBP is also contemplating to set up Credit Information
Bureau in the private sector for collection/compilation of
data on the credit history of SMEs
 Benefits Landless labor and poor women in the rural areas
 The lending and deposit rates upward movement.

 Program lending is the most appropriate method
to assist the SME financing needs.
 Small and medium entrepreneurs are expanding
their fabrication and manufacturing capacities
and upgrading technology

 SME sector contribution towards GDP has
increased over the years.

 Simplification of tax laws and procedures
 Introduction of universal self assessment system
 Intelligent use of IT tools.
 Human resource development and Business Process
reengineering.

 Banking sector is one of 7 major taxpaying
sectors
 Reduction in the corporate tax rate on banks
from 58 percent to 35 percent
 Banks have earned about $ 1 billion of profits
 Such reforms has resulted in the increase in
collection of taxes over the years.

 Is a powerful policy instrument
 Interest rates directly affect business conditions and economic
activities
 Before financial reforms, interest rates were set administratively
 Liberalization of interest rate by removing caps and ceilings on
deposits and lending rates.
 The current interest structure of banks is market determined

 The current interest structure of banks is market
determined
 SBP has removed all kinds of interest rate
controls.

 Macroeconomic stability
 A greater degree of consolidation
 Prudent regulatory and supervisory framework
 Maturity and reorientation of financial industry
 Diversified and competitive financial system
 Strong corporate governance

Review of Structural Reforms in Financial Sector of Pakistan

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