The Financial Sector Assessment report, released by the State Bank on 15th October 2005, contains a comprehensive account of the developments during Calendar Year 2004 (CY04). The financial sector, the report claims, has recorded visible changes not only in its size and ownership structure but also in its key performance indicators.
"The overall size of the financial sector (measured by assets) increased to Rs 4.5 trillion with an impressive rise of Rs 569.1 billion during CY04". Over 80 percent of this increase came from the banking sector, which further increased its dominance in the overall financial sector. The share of CDNS, on the other hand, declined by 3.4 percentage points due mainly to a net outflow of funds from national saving schemes.
As regards ownership structure, the share of the private sector increased to 56.6 percent, reflecting the efforts of the government to promote the role of private sector in the economy not only by providing an enabling business environment but also by divesting its investment holdings in financial institutions through the ongoing process of privatisation.
The equity to liability ratio of the financial sector also increased to 8.5 percent from 7.6 percent at the end of December 2003.
An incremental amount of Rs 145 billion was disbursed as credit by the banks, taking the outstanding credit volume to Rs 1.62 trillion at end CY04, showing a 34.4 percent growth over March 2004. This large increase was the "outcome of continued implementation of banking sector reforms, surplus liquidity with banks, and a growth-oriented monetary policy".
The corporate sector was the major recipient of bank credit in 2004 with a share of 54 percent, followed by the SME sector at 17.5 percent, agriculture at 15 percent and consumer finance at 9.4 percent. Fixed investment constituted almost 41 percent of the credit extended to the private sector. Consumer finance outpaced credit growth in all the sectors with an increase of almost 84 percent during the year, whereas agriculture credit disbursement grew by 48 percent. Islamic financial services that have achieved remarkable progress in recent years, have also been discussed in detail in the assessment report.
Given the increasingly diversified asset portfolio of the banking sector, the various risks associated with this development have also been highlighted in the report along with their mitigants in terms of regulatory directives.
A detailed regression analysis has also been carried out to examine the relationship between non-performing loans and their determinants, at both the external and internal level.
A perusal of the assessment report would indicate that Pakistan's financial sector has continued to perform exceedingly well during CY04 and that, incidentally, is the heading of the press release issued by the State Bank to highlight the developments during the year.
Thanks to the consistent implementation of financial sector reforms, the financial sector has not only expanded considerably but has also developed the resilience to absorb shocks arising from unforeseen developments.
The rise in equity to liability ratio is particularly a welcome development in this respect. Also, non-performing loans (NPLs) that were very high compared to other countries have been brought down to manageable levels.
The response of the State Bank in terms of amendments in prudential regulations to adjust to the evolving situation has also been quite commendable. Overall, the readers of the assessment report will find a comprehensive and faithful narration of the developments, generally highlighting their positive aspects during the year but would miss the mention of policy shortcomings.
For instance, depositors are still getting a raw deal, service charges of banks are high and most of the time hidden, and inflation continues to be at a high level. Incidentally, it may be pointed out that containment of inflation is the most important function of a central bank.
Hopefully, such issues will be raised and discussed threadbare in the Annual Report of the State Bank likely to be released very soon.
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