Pakistan Banking Sector: the Need for Second Tierof Reforms

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Pakistan Banking Sector: The Need for Second Tier of Reforms Dr. Shamshad Akhtar Governor, State Bank of Pakistan Pakistan Banking Association, U.K 12 November 2006

Introduction 1. Banking sector of Pakistan has been transformed within a short period of 5 years (CY2000-05) from a sluggish and government-dominated sector to a much more agile, competitive and profitable industry. Speed and sequencing of banking sector transformation and its role in promoting economic growth is now a leading story of a sector success. Within Pakistan it offers a story of what effective leadership of regulator and change management and corporate governance can achieve and offer. Outside Pakistan it is serving to offer rich lessons in what difference governance of regulator can make and how bank restructuring and privatization can change the landscape of the industry. At this session of UK’s Pakistan Banking Association I propose to share with you few key elements of this success story. I would however be amiss if I did not share with you the profitability and gains in banking industry and its role in promoting economic growth. 2. The banking industry in Pakistan will continue to enjoy these trends and has promising prospects. However, sustainability of banking sector performance is dependent on continued macroeconomic stability, stronger vigilance on the sector to ensure effective compliance of industry with the prudential regulatory and supervisory framework, and banking sector’s maturity to reorient their business models to enhance their penetration ratio and address the asset: liability mismatches. At Pakistan to ensure macroeconomic stability coupled with effective risk management and mitigation will be critical to Pakistan’s future and a precondition for sustainability of banking sector reforms. 3. The astounding growth of banking sector has stimulated and leveraged growth across the board. Major reforms in the banking sector have resulted in a more resilient and efficient financial system that is better placed to absorb significant macroeconomic shocks. Confidence in banking sector performance and prospects remains strong and scope for expansion and diversification remains phenomenal. This is supported by a combination of factors: 4. Banking sector liberalization and restructuring was well sequenced and well designed. In early 2000, financial sector reforms received strong impetus from high degree of political commitment as well as macroeconomic stability, both a prerequisite for smooth and effective implementation of financial sector reforms. The pace and sequence of bank restructuring was possible as the Government created fiscal space for

absorbing the costs of the nonperforming and legacy loans. In parallel the financial deepening process triggered by financial liberalization reinforced and was supported by the rising economic growth and activity. 5. Financial liberalization process in Pakistan has been remarkable. It not only resulted in privatization of large public sector banks but the process of privatization was effectively conducted offering new management in most cases relatively cleaner bank where the key issues of NPL resolution and rationalization of work force were dealt with upfront or ongoing flexibility is awarded through special schemes to deal with the outstanding issues. Augmenting the private sector involvement, the entry requirements for new private banks were relaxed but made more stringent --both in terms of capital requirements and fit and proper criteria for both management and Board of Directors. 6. Accompanying financial liberalization process was a strong effort on the part of central bank to bring the prudential regulatory and supervisory framework for banks at par with the BIS standards. Pakistan is fully/largely compliance with the 28 of the 30 Basel Core Principles for effective Banking Supervision and the remaining 2 principles relate to consolidated supervision, and are under consideration for...
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