Special Edition-07.pdf - Lahore School of Economics

The Lahore Journal of Economics
Special Edition (September 2007)
Financial Sector Restructuring in Pakistan
Muhammad Arshad Khan and Sajawal Khan *
Abstract
In this paper an attempt has been made to review the financial
restructuring process and its importance for economic growth and
macroeconomic stability. The main focus is on the financial restructuring
efforts undertaken by the government of Pakistan since 1990. We also
analyze the impact of financial restructuring by using various financial
indicators. The overall results suggest that the financial industry in
Pakistan is showing remarkable and unprecedented growth. Unlike 1990,
the performance of the financial sector is much better today. After the
successful completion of first generation reforms, the introduction of second
generation reforms is required, which will help to further strengthen the
financial system and transfer the benefits of the first generation reforms to
society.
I. Introduction
In a modern economy, an efficient financial system is essential to
facilitate economic transactions, specialize in production, and establish
investor-friendly institutions and competitive markets. A stable and efficient
financial system not only reduces uncertainty and the cost of transactions but
also improves overall economic efficiency through the efficient allocation of
resources. A more balanced and vibrant financial system will contribute to
economic growth and the stability of the economy. In contrast, regulated
financial systems lead to underdeveloped and incompetitive markets, with a
financial sector dominated by government owned financial institutions that
impose constraints on economic growth. It is now widely recognized that
weak and inefficient financial systems are more vulnerable to contagion, less
able to cope with volatile capital flows and exchange market pressures, and
more likely to propagate and magnify the effects of financial crises. This
* The authors are respectively Associate Professor Government Post-graduate College
Muzaffarabad (Azad Kashmir) and Lecturer Government Degree College Ghazi, Haripur
(NWFP) and both are currently working as Research Associates, Pakistan Institute of
Development Economics, Islamabad.