Pakistan’s banking sector has come a long way since the reforms of ’97, with more than 80 per cent now consolidated in private hands. The steady progress makes for an impressive how-to-reform narrative for the industry, duly appreciated by international financial institutions. Yet despite the advancement, there remain numerous avenues the banking sector needs to take advantage of for increased market penetration and diversity.
Pakistan’s bank-to-GDP ratio is currently around 30 per cent, trailing even regional contemporaries like India, Sri Lanka and Malaysia. Also, in the absence of debt markets, banking remains the only source of credit for businesses, implying that the sector must increase its footprint in the wider financial system for more consolidated overall expansion. Secondly, there is an urgent need to enhance geographic and product coverage of the banking sector. Currrently, only four or five large cities consume in excess of 70 per cent of available bank credit, while the deposit base draws contributions from all over the country. This way, large tracts in KP, Balochistan, Northern Sindh and Southern Punjab are unable to tap credit markets despite contributing to the resource base. The industry as a whole is in need of devolving into a more equitable geographical representation, with the redistribution supervised by the central bank.
The need for product diversification also becomes apparent considering only five per cent credit is advanced to the agriculture sector, still the life-blood of the economy with 22 per cent contribution to the GDP. Similarly, SMEs are allocated in the 12-13 per cent range, even though the number was close to 17 per cent not long ago. The consumer sector, too, has received decreasing attention, its share dropping from 12 per cent to around seven per cent. The biggest chunk is reserved for the corporate sector. Therefore, the need to develop more products is pressing. Along with reversing the retardation observed in these categories, the banking sector should also focus on expanding the micro-finance system, especially since it connects with the lowest elements of society.
It bears noting that for reforms and diversification to have the desired positive impact on the wider economy, these steps must be complemented by creating viable alternatives to banking credit. Debt markets need to be created. The government should establish the yield curve on a consistent basis. Medium to long term bonds should be floated through PIBs and relevant government institutions. Debt should be made available for companies with direct market access.
Furthermore, equity markets should be linked to the real economy. Currently, the stock market is dominated by few scrips and fewer investors, with market buoyancy not reflected in economic activity. Even when market capitalisation reached $75 billion in ’07, benefits failed to flow into the economic growth machine. Instead, the trend just left a few scrips more expensive, increasing market bias. Therefore, it is essential to mandate market regulators with integrating the bourse and the wider economy, principally through floating shares, private equity and also sale of distressed assets.
So far, the banking sector has turned into a healthy, vibrant industry in the near decade and a half since the ambitious reforms that not only turned it to profitability, but also provided a viable framework to check unnecessary leakages in other sectors. Yet despite the impressive consolidation, it must now grow further and ensure filling gaps in the financial system that inhibit integrated financial and economic expansion. The areas identified reflect pockets where essential inputs, though fragmented, are nonetheless available. What is required is of the banking sector is to reorient its posture and initiate diversification that market regulators must then monitor very closely.
The writer is a former finance minister