Export diversification, import substitution opportunities exist: Consulting firm for addressing structural deficiencies

KARACHI: The experts have underscored the importance of addressing structural deficiencies and the need for consistent economic policies, a report said.

They highlighted enormous opportunities for export diversification and import substitution as well as agriculture growth. Large majority of leaders spoke about the need for tax and other reforms including broadening of tax net, privatization of state-owned enterprises and pursuing public-private partnerships, it added.

A consulting firm M/S A. F. Ferguson & Co. (PwC Pakistan) on Wednesday released its second annual banking publication 2024 titled “Road to Sustainability”. The report provides some interesting insights on economy, banking industry’s financial performance and other core themes including financial inclusion, priority sector financing, digital, and Islamic banking.

There are some relevant perspectives of industry leaders and senior bankers including Dr. Inayat Hussain (Deputy Governor SBP), Saleem Ullah (Deputy Governor SBP), presidents and CEOs of several banks and other notable C-suite members.

Also there are some useful information from surveys done by the firm in the areas of customer experience, risk management and anti-financial crime, as well as a study of digital on boarding journeys in Pakistan. For global comparisons, there are analyses of banking sector developments in certain countries and best practices of banks operating in different regions.

The publication particularly highlights a major space for credit expansion, with Advances to Deposits Ratio further declining from 50 percent in December 2022 to only 37 percent as of June 2024, and a corresponding surge in Investments to Deposit Ratio from 77 percent to 94 percent during the same period. While we see some recent adjustments in the wake of ADR tax, there is still large room for intervention by banks. Pakistan’s ADR of 37 percent is much lower than Bangladesh at 88 percent, India 75 percent, Sri Lanka 63 percent and Kenya 62 percent while Pakistan’s IDR of 94 percent is much higher than Bangladesh at 22 percent, India 34 percent and Sri Lanka 42 percent.

Priority sector financing continues to remain at sub-optimal levels with SME contribution in total loans at 3.7 percent and Agri 4.0 percent. SME lending in other countries as a percentage of total loans is much higher e.g. Indonesia 20 percent, Bangladesh 19 percent, and India 16 percent. Both SME and agri financing are areas worth exploring by the banks through carefully designed strategies, processes and tools.

While the report does highlight some notable improvement in financial inclusion with Pakistan standing at 60 percent, there is still underpenetrated space compared to regional peers and emerging economies. Cash continues to pose a challenge in relation to inclusion as well as digitization with our cash in circulation ratio at 35 percent compared to Bangladesh 15 percent, India 16 percent and Kenya 10 percent.

“In the context of digital payments, while we have witnessed a steady adoption, there is still sizeable room for uptake considering only 20 percent mobile banking enrolment and cash still comprising more than 40 percent of the total volume of retail payments within the banking system.”

In Pakistan, paper-based transactions comprise 20 percent of total transactions while ATM traffic constitutes 30 percent of e-transactions. This compares to less than 1.0 percent paper-based, with ATM engagement at around 5.0 percent of e-transactions in regional economies.

Banks may need to promote behavioural shifts through loyalty and digital engagement programmes. But there is greater need for broader government and regulatory push to create a wider ecosystem that incentivises digital and disincentives cash.

“Recent 26th amendment in the Constitution of Pakistan relating to Riba elimination by December 2027 creates some major implications for the entire financial services industry that goes much beyond banking. We may therefore see a major acceleration in pace of Islamic conversion across industries and specially banking where growth momentum has been significant in the past as well,” the report said.

The report highlights critical challenges in the conversion journeys as well as provides recommendations for a successful transition.

Copyright Business Recorder, 2024