Special Edition-07.pdf - Lahore School of Economics

78
Shakil Faruqi
In spite of attention given to housing finance, the proportion of
house building finance remains an insignificant fraction at only about 2% of
banking system credit as compared to 12-18% in Asian countries and 25-
35% in advanced countries. Until some years ago, the housing sector was
classified by many commercial banks as an unproductive sector, even though
there are roughly 38 industries whose growth is directly linked to housing
construction and is a leading indicator in advanced countries to gauge the
performance of the economy over the short term. Mortgage lending is beset
by two issues: the prime one is the bankability of property collateral
tendered and the mismatch in the maturity structure of bank funding and
house building loans of long term maturities.
III.
Post Reform Era – Management of Financial System
The objectives of managing the financial system are to maintain
stability, growth, soundness and solvency which boils down to maintaining the
sustainability of the financial system. These issues have been front line
concerns of the SBP and form the core of its strategic objectives. These are:
maintaining price stability with growth, broadening the access of borrowers to
banking credit and the provision of financial services, ensuring the soundness
of the financial system, exchange rate and foreign exchange reserve
management, and the strengthening of the payments system. Stability is the
prime focus of monetary management, while soundness and solvency are the
prime focus of banking supervision and regulation, though there is no hard
and fast division as such. The practice turns out to be that way.
Review and analysis of financial reforms in Pakistan and their impact
has already been done in an exhaustive fashion in the series of the Financial
Sector Assessment (FSA) reports and Banking System Review (BSR) reports
launched by the SBP nearly five years ago. These two annual series are
unique in that hardly any central bank among developing countries has
undertaken this task as systematically as the SBP has done over the past five
years. At the start, the focus was on the impact of reforms on the financial
system. It has now shifted to maintain the soundness of the banking system
as viewed through CAMEL indicators, and the evaluation of improvements
in the system of banking supervision and regulation.
The focus of maintaining soundness and solvency centers around
what the banking system does, given that on the intermediation side its role
is overwhelmingly significant. The front line issue is how the banking system
has fared thus far regarding soundness and solvency, and what are the
prospects in the post-reform era? In this sense, managing a financial system