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OVERVIEW OF BANKING INDUSTRY IN PAKISTAN
The banking sector has witnessed a dramatic change during the last five years, which is not only redefining priorities and focus of the banks, but also threatening the domination of traditional players. The story begins with the freezing of the foreign currency accounts in 1998, which was a catalyst for the nosedive of the economy into the recession. Some US $ 11 billion of foreign currency deposits came under threat and resulted in flight of capital to havens outside Pakistan. With the rupee under pressure and market liquidity going down, the interest knee-jerked upwards, investors confidence plummeted and the industry went into a glide mode with the wait and see attitude. After the 9/11, the international scenario changed dramatically and with it the global perception of Pakistan, which suddenly became a much sought after the member of the war against terrorism. Apart from dome direct benefits such as an improvement in the term of trade with the European Union (EU) and restructuring of substantial part of the foreign debt, perhaps the greatest economic benefit came from the clamp down on the informal channels of foreign remittances and investigation into the movement and sources of any large amounts held abroad. This resulted in a flight of Pakistani Capital in the reverse direction and a large increase in the home remittances. This in turn led to a strong Rupee and an increasingly liquid market. The Sate Bank of Pakistan (SBP) also took measures to bring down the interest rates and the discount rates reduced from 14% p.a. in July 2001 to 4% in April 2003. However, despite the low interest rates, the global recession and local uncertainties stifled credit demand and liquidity further accumulated. Apart from the narrowing of spreads due to the fall in the interest rates, deregulation of foreign currency transaction forced banks to [pic]
quote highly competitive prices to tight market, resulting in a further erosion of profits from traditional source. Mean while, State Bank of Pakistan (SBP) moved ahead to setup an environment to ensure healthy and secure banks, through good governance discipline, capital adequacy requirements and higher disclosure. All the commercial banks operating in Pakistan now have a minimum capital on One Billion Rupees. Due to unfavorable market conditions and more demanding regulatory environment, the weaker players, which had only tapped limited markets, went up for sale. In the foreseeable future we are likely to see more banks being sold or merged. On the other hand, the managements of the big four banks showed good results through better management, and adopted a more aggressive and accommodating stance towards the markets they were serving. These banks are now posing a bigger challenge to the smaller banks. Due to their greater reach, increased focus on customer needs, improved response times, and increasing use of technology. In this new era, the foreign banks will also witness serious threats to their traditional markets, i.e corporate financing, from the invigorated large domestic banks and fast growing new private sector banks. Most banks will focus more intently on retail banking products such as personal loans, small business finance, mortgages and investment products. The advent into the retail will only be hampered by scarcity of skilled human resource with exposure in handling consumer products especially assets. The consumer will also be reached through technology dependent channels of distribution such as ATM, Debit and Credit cards and the Internet. The other potential market that...
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