A wide range of important structural reforms of banking sectors and wide-ranging policy initiatives of the State Bank of Pakistan (SBP) has facilitated the financial stability in Pakistan.
According to Economic Survey (2008-09), Pakistan's financial system has grown with leaps and bounds in the past few years but it still remains small relative to the size of the economy and in comparison with other developing countries in Asia and around the world.
The small size of Pakistan's financial system implies that many financing needs cannot be met and much of the country's economic potential remains unexplored. Notwithstanding, a wide range of important structural reforms of banking sectors and wide-ranging policy initiatives of the SBP has facilitated the financial stability in Pakistan, still many remain to be defined and implemented.
The financial assets have grown significantly in nominal terms in recent years, but they have not grown much in relation to the real economy as measured by the GDP, particularly in the last few years.
The banking sector of Pakistan has grown substantially amongst different segments of the financial sector. Over the last seven years the extraordinary performance of the banking sector has induced foreign direct investment (FDI) of $4.2 billion of which almost 90 percent has been received by the banking sector. Similarly, the privatisation of the banking system made it more dynamic and competitive. Despite the significant growth in the banking sector, the recent global financial crisis and the current privately owned structure of the domestic banking system highlights the need for a financial safety net to deal with systemic risk.
It includes depositor protection, liquidity and Lender of Last Resort facilities in the SBP, an exit framework to deal effectively with inevitable bank failures in ways that will strengthen rather than weaken the banking sector as a whole and improved co-ordination mechanism with the government of Pakistan in case of systemic problems.
The financial sector needs to become more diversified in order to meet the country's future financing needs, as it too is bank oriented. Growth of financial sector and real economic growth depends on each other. Hence, a faster growth of financial sector leads the economy towards sustainable growth.