Special Edition-07.pdf - Lahore School of Economics

74
Shakil Faruqi
The financial strength of the banking system, therefore, is closely
tied to the financial fortunes of these large five banks. They are the price
setters; while at the same time in the past, many of them were loss leaders
as well. Their profitability and solvency is of systemic significance to the
banking system and hinges upon the efficiency of their operations and cost
effectiveness, risk management, credit outreach and their business
diversification. Impetus for future improvements will come from institutionspecific
initiatives concerning meaningful capacity building and change
management. This will happen mainly owing to pressures of profitability and
efforts to maintain their relative market shares. A direct role of the SBP or
the government in this arena is no longer material as it was in the past.
Financial Intermediation – Structural Change and Growth
The core function of financial intermediation in Pakistan remains
with the commercial banks, not the NBFIs, and this is unlikely to change in
the future. The assets of the NBFIs, both state-owned and private, as a
proportion of total assets of the financial system steadily declined from 24%
in 1990 to 11% in 1995, mainly owing to the closure or privatization of
DFIs, or because of a much faster growth of private banks as a group as
compared to the growth of private NBFIs as a group, regardless of the
spectacular growth of some segments of the NBFIs such as leasing companies
or Islamic finance companies.
This decline in the asset share of the NBFIs is reflective of a faster
decrease in the share of advances, since loans outstanding are the largest
part of assets of a financial institution any time. In 1990, advances of the
NBFIs were 27% of financial system advances, and declined to 7% last year.
If we add Islamic finance, this proportion increases slightly. Currently,
deposits of the NBFIs as a group are a minuscule proportion of the total
financial system deposits, at about 2%. If we add the deposits of Islamic
finance, this proportion increases to about 3%. For these reasons, the focus
has to be on the operations of the banking system. The role of NBFIs has
been marginalized no matter what indicator is used and they are not
significant for the future of the financial system of Pakistan.
The deregulation of the interest rate structure occurred gradually
and the regime has undergone a significant change during the reforms from
administered rates to market-based rates. This transition was not smooth as
there was periodic volatility in interest rates but not destabilizing
movements. This is a considerable achievement of the monetary authority,
the SBP, when observed in the light of comparative experiences of financial
reforms in similar phases in other countries. The SBP discount rate has now