Tuesday, August 23, 2011

Banking and Investment sector in Pakistan

The development in the banking sector and the real economy are equally supported by each other. An emergent and vibrant banking sector is fundamental for economic growth in Pakistan. The banking sector comprises the foundation of the financial sector in Pakistan.
The government owned Institutions dominated the banking in Pakistan. It accommodated the economic needs of the government, public enterprises as well as private sectors. Public sector dominancy leads to inefficiency in the banking sector. Besides that, the economic efficiency of the banks remained short and that directed towards low savings and investment in the private sector which then resulted in small growth. These problems comprised of the intense ownership of financial assets, high taxes, and narrow range of products. Other than that, they did not diversify into consumer and mortgage financing.

In order to develop the efficiency of financial system, the Government of
Pakistan introduced the macroeconomic and financial sector restructuring program.

After the privatization of most of the chief banks, the banking sector has developed in size. Besides the banking sector has become more competitive and economically stronger. The enhancement of management brought high productivity, trace short non-performing loans (NPLs) and levels of capital adequacy well above dictatorial necessities .Despite the successful growth in recent years, the banking sector prolongs to have a great prospective for further enlargement, diversification and financial growth.
The financial sector is too bank-centered and in order to meet the future financing needs of the country, it needs to become more diversified. The increase in the financing supplies of private and public communications’ investment, mostly in the transportation and energy sectors, are expected to remain unmet until the development of new long-term financing sources outside the banking sector. According to a conservative estimation of the GOP’s Medium Term Development Framework for 2005-10, around USD 150 billion (Rs. 12.0 trillion) will be required for such investments over the time it faces.
However, The BSS assembles and develops on the presented SBP Strategic Plan for 2005-10.That plan included some 20 functional as well as management strategies. It’s been observed that many of those strategies have been implemented, while others have been integrated with the BSS.
A multi-faceted microfinance has been developed by SBP and Pakistan Microfinance Network (PFM) to triple the number of microfinance beneficiaries from 1 million to 3 million by 2010 and then to 10 million by the year 2015. In order to support this program, commercialization of the microfinance industry has been encouraged so that it becomes sustainable socially and financially.
According to a research, Banks will be required to increase their MCR to Rs. 23.0 billion by the end of 2013.Except microfinance banks (MFBs); all banks will be required to comply. The requirements of MCR for DFIs have been kept the same as was instructed. This forced banks (and DFIs) either to strengthen further by finding merger partners or exit the market, with the higher MCRs as a new spate.
The researches have also concluded that the State Bank of Pakistan has accepted the merger of Atlas Bank and Summit Bank (Arif Habib Bank Ltd). Merger, acquirement and LBOs (Leveraged Buyouts) in the banking sector in Pakistan have been found out to be more common as compared to the other sectors. The trend signifies that it is an improved and developed sector than any other. However, other sectors like textile, leather, apparel, pharmaceuticals are considered as the major industries in Pakistan.
It has been observed that despite some significant achievements, the microcredit growth target which reached out to 3 million borrowers by the end of 2010, embarked in the strategy, continued to be unattained for many reasons. As a result, SBP initiated the practice to re‐visit the policy of 2007 in the current context and build up a medium term deliberated outline for sustainable microfinance in Pakistan.

On the other hand, the industry is yet to create foremost breakthroughs to develop into a dynamic contributor within the general financial sector and to contact millions of underserved people. The existing outreach of 2 million borrowers is merely 7% of the potential market. The Microfinance Strategy of the year 2007 rest a mark to reach 3 million borrowers by the end of 2010 from 0.9 million borrowers as it was in Dec 31, 2006.

The sector accomplished an inspiring growth rate of 43% per annum in 2007 and 2008, though, the microcredit growth lowered down in 2009 and 2010. Even though the growth of credit remained lower than its target, the microbanking industry progressed in deposit mobilization and microinsurance.

As far as the deals and companies in the sector of Banking are concerned, they found out to be as:
• Debt Financing: 70%
• IPOs: 15%
• M&A: 10%
• Restructuring: 5%
M&A is most common in the banking sectors. Here’s a table of M&A activity from 2002 – 2010 that has been updated from time to time:

M&A in Pakistan seldom takes place to create value; this consolidation in the banking sector is determined by dictatorial requirements.
According to the updated commercial banking report of Pakistan, the commercial banking forecast series of BMI covers 59 countries that account for 80% of global GDP. Each report which was being researched at source shows independent assessment of BMI and 5-year forecasts to end-2014 for the commercial banking sector in the market. By the means of its expertise in the country risk and financial markets analysis, BMI has produced private models to estimate a capital of key variables on the commercial banking sector. Historic and forecast data have been provided for the sector’s overall asset and liability growth, client loans, and client deposits. Forecasts for basic ratios counting the loan-deposit ratio and the loan-asset ratio are also included, in addition to the core macro-economic forecasts. Data has been presented in both local currency and US dollar terms.

Private sector investment and consumption should be observed as the key elements of the economy. They must be supported by increasing economic intermediation and services, counting banks as well as non-bank financial institutions, stock market and the debt securities. Changes should be introduced and developed on the strengths of the financial coordination, effort on removing the flaws and gaps and concur upon the speed, contents and staging of these reforms.