Pakistan's financial system has been ranked 34 out of 52 countries in the World Economic Forum's first Financial Development Report, which was released in Pakistan through the Competitiveness Support Fund (CSF) in December, 2008.
A financial system is a structure that channels funds from savers/investors to those who require funds for building infrastructure, starting and running businesses, building or improving houses, consumer financing of big-ticket items like automobiles, etc. Financial systems are crucial for the allocation of resources in a modern economy. Currently, Pakistanis save about 15% of the GDP to provide a pool for domestic investments from private savings, which amount to nearly $ 25 billion a year. In addition, Pakistani expatriates remit nearly $ 8 billion a year that flow into Pakistan's economy through the banking sector.
The WEF report is a comprehensive analysis of financial systems and capital markets in 52 countries that explores key drivers of financial system development and economic growth in developing and developed countries and serves as a tool by which countries can benchmark themselves and establish priorities for financial system improvement.
Arthur Bayhan, Chief Executive of the Competitiveness Support, told the media: "I am very happy to see that financial system in Pakistan is well reformed and competitive vis-à-vis Asia and Europe. Pakistan is ranked ahead of the Russian Federation (35), Indonesia (38), Turkey (39), Poland (41), Brazil (40), Philippines (48) and Kazakhstan (45)."
The United States narrowly edged the United Kingdom to take the top position in the Financial Development Index. The United Kingdom was second while China ranked 24 and India 31.
The Financial Development Index is based on three main pillars - Factors, Policies and Institutions, Financial Intermediation and Capital Availability and Access. These are further divided into sub - pillars.
Under Factors, Policies and Institutions pillar, Pakistan ranks 49th in institutional environment, 50th in business environment and 37th in Financial Stability. In the Financial Intermediation Pillar Pakistan ranks 25th in banks, 42nd in non banks and 17th in Financial Markets. Under Capital Availability and Access, Pakistan ranks 33rd.
Indicators showed that in business environment Pakistan had development advantage in Cost to Export, ranking 6th, Cost of closing business 5th.
In Financial Stability Change in Real Effective Exchange rate ranked 20th, External debt to GDP 10th, Frequency of banking crises 1st, stability index 15th.
In corporate governance Pakistan ranked at the very top in shareholder rights index, 14th in strength of investor protection.
In the Non banks pillar, Pakistan ranked 9th in the Real growth of direct insurance premiums. In equity market movement Pakistan ranked at the top again in equity market turnover.
Importance of Financial Services Sector:
Banks are often described as a nation's economic engine, in part because they provide financial intermediation functions between savers/investors who are looking for safety and growth and consumers/businesses who are looking for access to credit and capital.Banks also play a major role as instruments of the government's monetary policy aimed at regulating interest rates and money supply in the economy. The current economic crisis in the United States and Europe, marked by the ongoing weakness of major banks and the resulting credit and capital crunch, underlines the critical importance of the banking sector in national and global economies. Recognizing the crucial importance of the financial sector in global economic recovery, the Obama administration is allocating the bulk of the stimulus money to restore the health of major U.S. banks.
Banking in Pakistan:
In Pakistan, the total banking sector serves around 6 million borrowers and 25 million depositors, implying a penetration rate of 3.6 percent and 15 percent respectively. In terms of access to microfinance, which means the availability of small loans, micro deposits and micro-insurance services to low income households, the current penetration rate is only 10 percent. In other words, 85 percent of Pakistan's population does not have access to any regulated financial services institutions at all, which inherently creates an uneven and an inequitable economic world, where the majority of people are financially marginalized. This situation drives the poor to rely on informal sources of funding like the unscrupulous moneylender, where the calculus of the relationship works to the detriment of the borrower. Well regulated banking and microfinance sectors are, therefore, absolutely necessary to give hope to the poor in breaking the vicious cycle of dependence and poverty.
Between 2002 and 2007, Pakistan's accelerated economic growth was underpinned by a strong banking sector. Classified as Pakistan’s and region’s best performing sector, the banking industry’s assets rose to over $60 billion, its profitability remains high, non-performing loans (NPLs) are low, credit is fairly diversified and bank-wide system risks are well-contained. Almost 81% of banking assets are in private hands. Likewise, the present foreign stake comes to 47% of total paid-up capital of all the financial institutions regulated by Pakistan's central bank, the State Bank of Pakistan.
Pakistan's foreign reserves hit a record high of $16.5 billion in October 2007 but fell to $6.6 billion in November, largely because of a soaring import bill. As the commodity prices rose and inflation in Pakistan reached near 25%, the State Bank of Pakistan was forced to raise its discount rates to as high as 15%. However, there has been a dramatic decline in the cost of imports such as oil during the last few months, spelling relief for Pakistan and other non-OPEC developing nations. The price of oil has dropped to about a quarter of what it was last summer.
Pakistan signed a $7.6 billion loan agreement with the International Monetary Fund in November to stave off a balance of payments crisis. It received its first tranche of $3.1 billion that month. In its first assessment since November, IMF has expressed satisfaction with Pakistan's progress. “Initial developments under the program have been positive,” IMF spokesman David Hawley told a regular news briefing, according to Pakistan's Dawn newspaper. “The foreign exchange rate has appreciated somewhat and preliminary information suggests that end-December targets for net international reserves and net domestic assets at the State Bank of Pakistan were met,” he added.
Pakistan's economy deteriorated sharply over the course of 2008, as inflation surged, and the current account deficits jumped on the back of rising oil and food prices, according to a World Bank report.
The report titled ‘Global Economic Prospects 2009’ says political turmoil and ongoing security concerns have also taken a toll on Pakistan’s economy, while the global financial crisis added substantial downward pressures on its financial markets. Pakistan and the International Monetary Fund agreed to lower the target for the gross domestic growth this fiscal year to 2.5 per cent from 3.5 per cent but many analysts said even achieving this target would be very ambitious.
The general deterioration in regional trade balances has been offset by large remittance inflows, which represent a sizable, and generally increasing share of GDP: during 2007, 14 per cent in Nepal, 8 per cent in Bangladesh and Sri Lanka, 4 per cent in Pakistan, and 3 per cent in India.
Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis are expected to be temporary. A relatively rapid rebound is expected in 2010, with a projected revival of GDP growth to 7.2 per cent.
During 2001-2007, former Prime Minister Shaukat Aziz, a banker by training and extensive experience in New York, understood the role of banking, finance, investment and consumer credit in economic growth of a nation. He focused on building strong banking, investment and finance sectors in Pakistan to underpin its economy. He strengthened capital availability, an essential and increasingly important economic input, in addition to labor and land improvements. With higher education budget up 15-fold and overall education spending up 36% in two years, he focused on education to improve the availability of skilled labor to fill new jobs. He pushed land development and public and private construction spending to improve infrastructure and facilities to attract greater business investment and create jobs. Mr. Aziz was largely successful in his efforts.
In general, there are primarily two types of banks in Pakistan: Commercial Banks and Investment Banks. Both types of banks provide financial services essential for Pakistan's economy to function and grow.
Commercial Banks:
Commercial Banks are privately-owned institutions that, generally, accept deposits and make loans. Deposits are money people entrust to an institution with the understanding that they can get it back at any time or at an agreed-upon future date. A loan is money let out to a borrower to be generally paid back with interest. This action of taking deposits and making loans is called financial intermediation. A bank's business, however, does not end there.
Most people and businesses pay their bills with bank checking accounts, placing banks at the center of our payments system. Banks are the major source of consumer loans -- loans for cars, houses, education -- as well as main lenders to businesses, especially small businesses. When banks are strong and the credit flows, it helps the overall economic growth. When banks are in crisis, the impact on business and consumers multiplies the weakness in the economy.
Following is an incomplete list of commercial banks in Pakistan:
* Allied Bank of Pakistan, Karachi
* Arif Habib Bank Limited, Karachi - (Formerly Arif Habib Rupali Bank)
* Askari Bank, Rawalpindi
* Atlas Bank, Karachi
* Bank AL Habib, Karachi
* Bank Alfalah, Karachi
* Crescent Commercial Bank, Karachi.
* Faysal Bank, Karachi www.faysalbank.com
* Habib Bank, Karachi
* Habib Metropolitan Bank, Karachi
* JS Bank
* KASB Bank, Karachi
* MCB Bank Limited (formerly Muslim Commercial Bank), Islamabad
* Mybank Limited, Karachi
* NIB Bank, Karachi
* PICIC Commercial Bank, Karachi
* Saudi Pak Non-Commercial Bank, Karachi
* Soneri Bank, Karachi
* Union Bank, Karachi - Standard Chartered Bank has acquired Union Bank
* United Bank, Karachi
* Bank Of Punjab, Lahore
* Citi bank,Islamabad
* Standard chartered Bank Ltd,Karachi
* ABN Amro Bank Ltd,Karachi Now merged in RBS (Royal Bank of Scotland)
* HSBC Ltd,Lahore
Investment Banks:
Investment banks provide four primary types of services: raising capital (private equity or public offerings of shares), advising in mergers and acquisitions, executing securities sales and trading, and performing general advisory services. Most of the major Wall Street firms are active in each of these categories. Smaller investment banks may specialize in two or three of these categories.
The list of investment banks in Pakistan includes the following:
* Al-Towfeek Investment Bank Limited
* Arif Habib Securities
* Invest Capital Investment Bank Limited
* Atlas Investment Bank Limited
* Crescent Investment Bank Limited
* Escorts Investment Bank Limited
* First Credit and Investment Bank Limited
* First International Investment Bank Limited
* Fidelity Investment Bank Limited
* Franklin Investment Bank Limited
* Islamic Investment Bank Limited
* Jahangir Siddiqui Investment Bank Limited
* AMZ Securities
* Orix Investment Bank (Pakistan) Limited
* Prudential Investment Bank Limited
* Trust Investment Bank Limited
Insurance Sector:
Pakistan's insurance sector is quite small, but it does serve its capital raising and investment purpose. The sector includes life insurance, property and casualty insurance and health insurance, as well as microinsurance offered by several microfinance companies and NGOs.
According to the Insurance Association of Pakistan (IAP), gross non-life premiums of business underwritten in Pakistan totaled Rs. 33.96bn (US$428mn) in 2008, a rise of 3% over the previous year. Net premium revenue increased by 10% to Rs. 22bn (US$264mn), while underwriting profits recovered from PKR600mn to PKR2bn (US$24mn). Net claims decreased by 3.5% to Rs. 13.8bn (US$166mn). However, the total assets of IAP members fell by Rs. 7bn to Rs. 92bn (US$1.1bn). This was due mainly to investment losses amid the dismal performance of both the Karachi stock market and the wider national economy. The number of people employed in the sector also fell, according to the IAP’s figures. In 2007 there were 3,540 insurance workers, but only 3,473 in 2008. The non-life sector remains fragmented, with fierce competition between the three larger companies and dozens of small insurers writing premiums of below Rs. 1mn per annum.
The overwhelmingly dominant player in the life sector remains the State Life Insurance Corporation of Pakistan (SLIC). Although it has been targeted for privatization by successive governments, SLIC remains in state hands. However, the government’s stand-by loan agreement with the International Monetary Fund might accelerate the process of disinvestment. SLIC’s results provide an accurate picture of the overall growth of the life sector in Pakistan.
The most significant feature of SLIC’s 2008 performance was a sharp upward movement in first year premium subscriptions. These increased by 34% to Rs. 5.16bn (US$61mn), a rapid acceleration from the decade-average growth rate. Renewals grew much less rapidly, at 16% to Rs. 13.4bn (US$160mn). The surge in interest for life insurance may reflect the dwindling prospects for personal security in Pakistan. This might conceivably mark an improvement in the hitherto dismal prospects for the life sector. As the publisher noted in their last report, life density remains extremely low despite efforts by SLIC to extend its operations into rural areas.
A number of non-profit and commercial microfinance players, including Agha Khan Microfinance, Acumen Fund and Munich Re, are promoting micoinsurance for the rural and urban poor in Pakistan. Such policies are offered to recipients of microloans to protect households that are climbing out of poverty from catastrophic losses such as the death of the breadwinner, severe or chronic illness, or loss of assets including livestock, crops or housing. These sorts of events can push poor or vulnerable households back into the depths of poverty.
Here are some of the key players in micoinsurance:
1. SAFWCO Sindh Agricultural and Forestry Workers Coordinating Organization
2. DAMEN Development Action for Mobilization and Emancipation (DAMEN)
3. TRDP Thardeep Rural Development Prigram
4. PRSP Punjab Rural Support Program
5. NRSP National Rural Support Programme
6. SUNGI Sungi Development Foundation
7. KASHF Kashf Foundation
Finance Expo 2009:
Finance Expo Pakistan 2009 Exhibition was held last week in Karachi to showcase the most competent, dynamically growing and innovative companies that demonstrate the latest financial systems and methods stimulating the development of the banking and finance industry.
The Expo was an opportunity to network with decision makers, economists and experts of Banks, Takaful, Modaraba, Insurance Companies, Asset Management Companies, Stock Exchanges, Security Companies, Financial Education Institutes, & Leasing Companies and also of the fast growing industries like IT & Telecom, Oil & Gas, Alternative Energy & Power Industries, Agriculture, Pharma, Textile, Builders & Developers, Auto as well as Media.
The event is a platform for banking and financial institutions to come together and share ideas and the challenges presented to this rapidly growing industry.
The exhibition and conference highlighted the value that banking, financial institutions and other revenue generating industries bring to boost the economy of Pakistan. Moreover, the Event presents opportunities for displaying products, services and solutions towards the potential buyers.
Summary:
In spite of the international economic crisis, continuing political turmoil and rising militancy in Pakistan, the financial services sector has held up fairly well in the last year. Its future, however, remains tied to a measure political stability in the country that allows economic activity to occur unhindered. Let's hope the nation's political and ruling elites can find a way to find a peaceful way forward.
Related Links:
Introduction to Banking and Economy
Introduction to Investment Banking
Pakistan's Banking Reform
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three ways of earning their professional fees:
Commission provider of financial products - conventional, this has been the most common method of paying for the services of Independent Financial Adviser. Today, however, the amount of commission received should be disclosed by the adviser, who also explain whether the commission will be deducted from the amount being invested by the customer or if included in the cost of investment.
Here's a news brief from the BBC about honors for the founder of BRAC, which also operates in Pakistan:
The founder of one of the world's largest non governmental organisations, the Bangladesh Rural Advancement Committee, has been honoured in the UK.
Fazle Hasan Abed - who holds dual British and Bangladesh citizenship - will be knighted by Queen Elizabeth in 2010 for services in tackling poverty.
He has also been awarded for empowering the poor in Bangladesh and globally.
Mr Abed's name was included in the Queen's New Year's Honours List released on Thursday.
'Multi-dimensional approach'
"I feel very humbled to receive this award," he told the BBC from his office in Dhaka, "which I am delighted to accept on behalf of all Bangladesh Rural Advancement Committee (Brac) workers across the world.
"I now want to build on this success to continue Brac's fight against poverty not only in Bangladesh but in eight other countries in the world where we are involved - Afghanistan, Uganda, Tanzania, Southern Sudan, Pakistan, Sierra Leone, Liberia, and Sri Lanka."
Brac also has plans to expand into Haiti.
Mr Abed says that Brac's success was because of a "multi-dimensional approach" to fighting poverty such as improving education, healthcare and financial services.
Here is a recent blog post by Babar Bhatti about mobile financial services in Pakistan:
In Pakistan, the widespread infrastructure of mobile operators provides them strong advantages to serve as an important link in the financial services value chain. As we have seen in Pakistan, banks and mobile operators have partnered up to start MFS. This generated a wave of marketing activity (see these commercials) which also extended to social networks such as Twitter and Facebook, highlighting the competition among mobile network operators.
One may ask why did it take so long for MFS to start in Pakistan? Well, unlike entrainment or information services, financial and commerce related services require coordination of multiple institutes and approval of government regulatory agencies. Security, accuracy and establishment of trust of users is also very important.
Easypaisa. An example of this is ‘easypaisa’ from Telenor Pakistan and Tameer Microfinance Bank. Interesting thing about this service is that money can be sent and received without a mobile phone. However, using a mobile phone provides convenience as confirmations are sent as sms. Any person with a valid Nadra CNIC can send money or receive money. Sending/Receiving can be done from more than 4,000 easypaisa shops all over Pakistan. The transaction is encrypted and the process has been approved by the State Bank of Pakistan. Details on how this works are available at easypaisa website and on YouTube.
Regardless of one’s opinion on the convenience and the fees, one must admit that introduction of MFS such as easypaisa changes the status quo for payments which has been around till now in Pakistan.
Telenor is not the only company with plans for mobile financial services. Ufone started premium banking service for customers of Ufone who have account with one its partner banks. This is a different approach where an application on the handset allows eligible customers to carry out financial and non-financial transactions. Mobilink, the largest cellular company by subscribers, is also gearing up for MFS. In July, Orascom announced its plans for MFS:
Mobilink and Citibank will utilize Mobilink’s extensive retail infrastructure to extend the reach of financial services to the previously un-served masses. Using Mobilink’s cutting edge technology, Mobilink users will be able to open branchless bank accounts through a simple and convenient registration process via authorized agents across the country. The service will allow users to maintain their accounts through their phones and make secure peer to peer money transfers to any Mobilink number simply via SMS.
At telecompk.net we have extensively covered the potential, opportunities and market size of MFS.
Here are excerpts from an interesting article on Chowk about financial systems:
A financial system is a structure that channels funds from agents with surplus to those with a deficit. Financial systems are crucial for the allocation of resources in a modern economy. A powerful question to ask then in the context of developing countries is what the relationship between growth and
the financial system is. Does growth lead to the development of the financial sector or do financial systems create growth? What can be concluded is that there is a positive correlation between growth and financial structures. The more important debate lies in the relative contribution of banks and financial markets in stimulating growth.
The modern financial system debate can be broken down into two opposing views. The first is that of Gerschenkron, who holds the view that bank based finance plays the key role in development. It is open to state intervention. This view was largely held throughout the 1960-1970’s. Stiglitz was another supporter of this bank based system. However during the 1990’s a new point of view emerged that wanted to remove the distinction between bank based and market based systems and proposed the need for a “modern financial system” for development. This argument was in favor of a market based system which took precedence in the 1990’s. It became associated with modern finance. Thus modern finance closely resembled market finance. This as we will see later can have quite a detrimental affect on the process of development for developing countries as is supported in the Singh 1997 paper which states that, “general financial liberalization and the associated expansion of stock markets in DCs is likely to hinder rather than assist their development.
The emergence of the stock markets has been a major new development in the financial systems of developing countries but its impact has been less than ideal. In an attempt to assist with the liberalization process developing countries have seen a remarkable growth in their stock markets. Stock markets allow financial services in addition to banks. Not only is risk reduced in areas of long term risk but they are also supported by the transparency argument. This has very important implications on developing countries, where corruption, crony capitalism and lack of accountability institutions lead to inefficient financial systems. Stock markets provide information on what a company is and how it is performing. This creates transparency of information for investment decisions.
So far the poor have been excluded from lending within this modern financial system. This is a very important area of discussion when designing the financial system for developing countries. The majority of the population in these countries is poor. They remain excluded despite the deregulation of finance because transaction costs are very high in lending to the poor. These transaction costs include on part of the lender screening costs, disbursement costs, monitoring and ensuring payment. For the borrower these costs involve the cost of lodging applications, obtaining and securing loans. These transaction costs are pronounced with the absence of institutions such as tax collection systems, legal systems, rating agencies, insurance systems and education. The poor form the majority of the population in most developing countries. Thus this may be an oversight on part of the financial system proposed for these countries. One solution put forth is that of micro finance. The precursor to this system was the ADB. These suffer from the problem of sustainability and the result of such efforts has been disappointing based on the results in the last few decades. The answer then is still greater formal involvement and not MFI’s.
According to Forbes, Mian Muhammad Mansha is “worth USD 1 " after selling half his shares in Pakistan's Muslim Commercial Bank.
He is Pakistan’s first billionaire. His Nishat Group is now his country’s largest private employer and the biggest exporter of cotton clothes (for brands like Gap). He sold more than half his shares in MCB for USD 900 million in 2008.”
Mansha has probably been a billionaire (US$1,000,000,000+) for a while now. But he has finally been ‘officially’ recognized for being one in the latest Forbes magazine “Billionaires’ list” for 2010. He becomes the first Pakistani to make it to the Forbes list.
Mian Mohammad Mansha, from Pakistan, is ranked as being #937 on the Forbes list of billionaires (with a total of 1011 billionaires listed), with an estimated net worth of US1.0 billion (Pak. Rs. 85,000,000,000+ or Pak. Rs. 85 arab!).
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