Special Edition-07.pdf - Lahore School of Economics

The Post-Reform Era Maintaining Stability and Growth 71
At the system level, changes in the structure of the financial system
occurred mainly due to the privatization of financial institutions as reflected
in the asset holdings of the public and private sectors over the CY90-05
period; the entry of new commercial banks, both domestic and foreign, new
micro-finance banks, and Islamic finance institutions. Simultaneously,
reforms and restructuring occurred among the clients of the banking
system, mostly PSEs, which facilitated changes in the financial system.
Changes in the operations occurred due to the revamping of the policy and
regulatory regime governing financial intermediation and deregulation. The
directed credit system that prevailed until the mid-1990s with layered
allocative targets for specific sectors, sub-sectors or priority categories has
been replaced by a market based credit system, and the role of DFIs and
specialized financial institutions has been greatly reduced. The interest rate
structure and foreign exchange regimes have been liberalized and are
market-based, more or less.
Privatization and Deregulation
The dimensions of structural transformation owing to privatization
can be gauged from changes in the ownership structure of assets together
with changes in the patterns of financial intermediation and the
participation of public and private sector financial institutions. At the system
level, in CY90 the share of assets owned by public sector institutions, both
banks and NBFIs in the total financial system assets was about 80%, and it
dropped dramatically to about 26% in CY06. The converse holds true for
the share of the ownership of private sector banks and private NBFIs over
these years. Since the banking system is predominant in the financial
system, this shift in the ownership structure was slightly more pronounced,
but closely followed this pattern of change.
While the structure of asset ownership thus shifted towards the
private sector, the share of the public sector in the use of total financial
resources mobilized in the country did not decrease, and this is not
reflected by the share of the public sector in banking credit or banking
assets alone. The reason is that nearly half of the annual flows of financial
resources – the annual flows of financial savings, are being channeled to the
public sector. This is being done through public sector borrowings from the
financial system, NSS operations which are outside of the banking system
but are a part of financial system flows, currency seignorage, and the
inflation tax through their own modalities and mechanisms. Consequently,
the public sector is still able to garner a hefty share of total financial
resources generated in the country through the operations of the financial