EFFECTSOF STRUCTURAL REFORMS IN FINANCIAL

SECTOR OF THE ECONOMY

SYED MOHAMMAD HASSAN

INTRODUCTION

An efficient financial system is essential to facilitate economic transactions.

Financial Sector Development and Economic Development are inter-related.

Well functioning and efficient financial sector improves the living standards of population.

Improves overall economic efficiency through the efficient allocation of resources.

Improves economic growth and the stability of the economy.

STRUCTURAL ADJUSTMENT PROGRAMS (SAP)

Started in early 1990’s.

It includes Fiscal consolidation. Reforms of the trade and exchange rate systems. Price liberalization. Deregulation of financial sector activities.

FINANCIAL SECTOR IN PAKISTAN

Commercial banks.

Development finance institutions.

Stock market

FINANCIAL RESTRUCTURING IN PAKISTAN

Privatization

Corporate Governance

Liberalization of Foreign Exchange Regime

Consumer financing

Taxation Reforms

Interest Rate Policies

PRIVATIZATION

Efforts began in earnest after the creation of Privatization Commission (PC)

Privatization of state owned enterprises; Banks Power utilities Telecommunications

167 transactions

Revenue of over Rs. 476,212.2million

PRIVATIZATION TRANSACTIONS IN PAKISTAN

TOTAL PROCEEDS IN PERCENTAGE

Banking sector has the highest share with 33 %.

Telecom has 28 % share. Energy and industrial sector has 20 % and 19

% respectively.

ASSET SHARE OF BANKS

All the Nationalized Commercial Banks except one has been privatized.

The asset share of government in nationalized banks have reduced from 100 percent to less than 20 %

Private sector now owns 80 % of the banking assets.

As a first step of privatization of banks twenty three banks were allowed to work.

Ten banks belongs to domestic sector and rests were international/foreign banks.

Large segments of the banking system have been transferred to private sector.

Private sector owns and operates most of the banking sector.

( I I ) CORPORATE GOVERNANCE Entrusting the directors/managers with

responsibilities.

Improving economic efficiency and growth.

Prevents mismanagement and infuses discipline.

Ensure transparency and accountability

Protects the depositors' interests

Brings change in the organizational culture

ICAP has drafted “Code of Corporate Governance”

It addresses the national requirements for good governance practices.

In March 2002, the SEC directed the stock exchanges to incorporate the Code.

The listing regulations were amended to include the recommendations of the Code

(III) LIBERALIZATION OF FOREIGN EXCHANGE REGIME. Setting up foreign exchange companies in the private

sector.

Allowing acquire of equity abroad.

No barriers to entry and exit of Foreign registered investors

Foreign exchange accounts in domestic banks were allowed for both residents as well as non-residents.

Foreign registered investors can bring in and take back their capital, profits etc without any prior approval.

FLUCTUATION IN FOREIGN DIRECT INVESTMENT (FDI)

FDI started to increase.

It has started to decrease over the years due to

• Global economic crisis, • Declining security situation • The flood situation.

FOREIGN DIRECT INVESTMENT (FDI)

FDI had its up and downs until late 1990’s. It started to flourish in early 2000. Over the years due to global economic crises

and security situation it started to fall.

FOREIGN DIRECT INVESTMENT (FDI) TO GDP RATIO.

FDI is an integral part of a country’s GDP.

(IV) CONSUMER FINANCING

It is an established financing product of mature economies having the following types.

Personal loans: payment of goods, services and expenses

Auto loans: to purchase a vehicle for personal use

Housing Finance: for purchase of land plus construction.

Credit Cards: include charge cards, debit cards, Stored Value Cards (SVC), and Balance Transfer Facility (BTF)

SHARE OF PRODUCTS IN TOTAL CONSUMER FINANCING.

FACTORE RESPONSIBLE FOR THE WIDESPREAD POPULARITY OF

CONSUMER FINANCING

1. The financial liberalization process led to the creation of a banking system owned by

the private sector. free allocation of resources as per market

based mechanism2.

The easy monetary policy  of the central bank

 providing  customers with financing options at low rates to meet demand.

3. The influx of liquidity in the banking sector motivated banks to diversify and  expand their 

earnings 

The State Bank of Pakistan has given a big boost to consumer financing.

Middle income groups can now afford to purchase on installment basis.

This has given a large stimulus to the domestic manufacturing of these products.

Bank’s consumer finance share in overall credit  of the banking system had risen to 3.8 percent.

TRENDS IN CATEGORY WISE CONSUMER FINANCE.

Banks now offer a wide range of products under  the consumer finance umbrella.

Personal loans, auto loans, credit cards and  mortgage finance are few of them.

Composition and growth of  these products in the last few years has been very high. 

(V) SME FINANCING. SME SECTOR CONTRIBUTION TO GDP

Government has restructured the key support institutions such as SMEDA and SME Bank.

They have been established to provide leadership in developing new products such as program loans, new credit appraisal and documentation techniques.

the SBP is also contemplating to set up Credit Information Bureau in the private sector for collection/compilation of data on the credit history of SMEs

Benefits Landless labor and poor women in the rural areas

The lending and deposit rates upward movement.  

Program lending is the most appropriate method to assist the SME financing needs.

Small and medium entrepreneurs are expanding their fabrication and manufacturing capacities and upgrading technology

SME sector contribution to GDP

SME sector contribution towards GDP has increased over the years.

(VI) TAXATION REFORMS.

Simplification of tax laws and procedures

Introduction of universal self assessment system

Intelligent use of IT tools.

Human resource development and Business Process reengineering.

Banking sector is one of 7 major taxpaying sectors

Reduction in the corporate tax rate on banks from 58 percent to 35 percent

Banks have earned about $ 1 billion of profits Such reforms has resulted in the increase in

collection of taxes over the years.

(VII) INTEREST RATE POLICIES.

Is a powerful policy instrument

Interest rates directly affect business conditions and economic activities

Before financial reforms, interest rates were set administratively

Liberalization of interest rate by removing caps and

ceilings on deposits and lending rates.

The current interest structure of banks is market determined

FLUCTUATIONS IN INTEREST RATES.

The current interest structure of banks is market determined

SBP has removed all kinds of interest rate controls.

Macroeconomic stability

A greater degree of consolidation Prudent regulatory and supervisory framework

Maturity and reorientation of financial industry

Diversified and competitive financial system Strong corporate governance

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