Current Situation and Critical Issues
Pakistan’s banking sector reforms which were initiated in the early 1990s have transformed the sector into an efficient, sound and strong banking system. The most recent comprehensive assessment carried out jointly by the World Bank and the IMF in 2004 came to the following conclusion:
“ for reaching reforms have resulted in a more efficient and competitive financial system In particular, the predominantly 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 Pakistan’s supervisory capacity have been improved substantially. As a result, the financial sector is sounder and exhibits an increased resilience to shocks.”
The major changes that have occurred in the banking sector during the last decade or so can be summarized as follows:
a) 80 percent of the banking assets are held by the private sector banks and the privatization of nationalized commercial banks has brought about a culture of professionalism and service orientation in place of bureaucracy and apathy.
b) The banks that were losing money due to inefficiencies, waste and limited product range have become highly profitable business. These profits are, however, being used to strengthen the capital base of the banks rather than paying out to the shareholders. The minimum capital requirements have been raised from Rs. 500 million to Rs. 6 billion over an extended period in a phased manner. The consolidation of the banking sector into fewer but stronger banks will lead to better management of risk.
c) The banks that were burdened with the non-performing and defaulted loans have cleared up their balance sheets in an open transparent, across-the-board manner. Contrary to the popular myth the main beneficiaries of the wirite-offs of the old outstanding and unrecoverable loans have been from almost 25 percent to 6.7 percent by Dec. 2005. Small individual borrowers the ratio of non-performing loans of the Commercial Banks to total advances has declined.
d) The quality of new assets has improved as stringent measures are taken to appraise new loans, and assure the underlying securities. Online Credit Information Bureau reports provide updated information to the banks about the credit history and track record of the borrowers. Loan approvals on political considerations have become passé. Non-performing loans account for less than 3 percent of all new loans disbursed since 1997.
e) The human resources base of the banks has been substantially upgraded by the adoption of the principles of merit and performance throughout the industry. Recruitment is done through a highly competitive process and promotions and compensation are linked to training, skills and high performance. The banks now routinely employ MBAs, M.Coms, Chartered Accountants, IT graduates, economists and other highly educated persons rather than Clerical and Non Clerical Workers. The banking industry has become the preferred choice of profession among the young graduates.
f) Banking Technology that was almost non-existent in Pakistan until a few years ago is revolutionizing the customer services and access on-line banking, Internet banking, ATMs, mobile phone banking and other modes of delivery have made it possible to provide convenience to the customers while reducing the transaction costs to the banks. Credit Cards, Debit Cards, Smart Cards etc. are a thriving and expanding business in Pakistan. Once the RTGS is put in place the payment system in Pakistan. Would enter a new phase of modernization.
g) Competition among the banks has forced them to move away from the traditional limited product range of credit to the government and the public sector enterprises, trade financing, big name corporate loans, and credit to multinationals to an...