Pakistan's financial sector grows to Rs 6.9 trillion by June 2007
KARACHI: The size of Pakistan's financial sector, which has grown rapidly in the last few years has increased by almost Rs 900 billion (32 percent growth over December 2005) and reached Rs 6.9 trillion by June, 2007.
Banks, with a share of 72 percent in total assets, continue to dominate the asset base of the financial sector, disclosed in the Financial Stability Review 2006, a new annual publication released by the State Bank of Pakistan on Monday.
The FSR has upgraded the analytical content of the "Financial Sector Assessment Report," which the SBP had been publishing since 2002.
On-going mergers and acquisitions (M&As) have exerted a profound impact on the ownership structure of the financial sector. The financial sector is predominantly led by the private sector, constituting of both domestic and foreign financial institutions, controlling 64.9 percent of overall assets. Within the banking sector, private ownership has grown to 78 percent of assets, and entry of foreign banks, Islamic banks and microfinance banks are adding depth to the financial sector. In terms of asset holdings, the insurance sector is still dominated by public sector entities and lacks dynamism.
In the last three years, commercial banks have operated on a sound capital base with an enviable record of financial performance. The quality of the risk-based capital provides further comfort as the share of core capital in the overall risk-based capital has reached 80.3 percent by June 2007, compared to 73.7 percent in calendar year 2005. These changes in the capital adequacy ratio, together with the improved quality of capital, have enhanced the resilience of the banking sector to withstand shocks.
The report says banks have made inroads into the previously under-served segments. The diversification of bank credit in recent years is evident in the rise in share of SME, agriculture and consumer finance in outstanding credit to 15.4, 5.8 and 14.3 percent respectively at end June 2007.
The report claims that with SBP's moral suasion, commercial banks have floated new high yielding deposits and Pakistan Banks' Association introduced the Enhanced Savings Deposit in November 2007. In addition, the process of a gradual shift towards fixed deposits has already started, as evidenced by the gradual narrowing of banking spreads. These will generate more pronounced impact on curtailing banking spread.
The NBFIs have been unable to create an impact as well-functioning, specialized financial intermediaries, it says. As banks have made rapid inroads into business segments traditionally serviced by NBFIs, market share of NBFCs and Modarabas has eroded considerably, so much so that investment finance and discounting are likely to disappear as stand-alone activities in the non-bank financial sector while leasing and Modaraba sectors are faced with the dilemma of 'diversify or die'. In addition, housing finance and venture capital industries have failed to take off despite significant demand potential. The success story among NBFIs is that of mutual funds, it adds.
The ownership structure of the insurance industry is in sharp contrast to the private sector-led nature of the rest of the financial sector. The insurance industry, comprising of 53 companies, is largely owned and operated by government-based entities. However, private sector entities in both the life and non-life insurance sector have a dominating share of the insurance business, with an 86.7 percent share of total premiums of the industry. Despite fewer companies in the life insurance sector, it accounts for 67 percent of total insurance assets. Concentration of business among the top 10 players, though still high, reduced by 9.0 percentage points in 2006, from 91.6 percent of gross premiums in 2005 to 82.6 percent in 2006.
Capital markets continue to perform well, with market capitalization of the Karachi Stock Exchange reaching Rs 4 trillion at end-June 2007, and the KSE-100 index at 13,772 points, depicting a growth of 38 percent over end-June 2006. The salient feature of the year was the volume of capital inflows, and of foreign investment in the equity market. Foreign participation as measured by SCRA flows reached a level of 6.8 percent of the market capitalization by end-June 2007. KSE is one of the best performing markets in the region, and continues to trade at a discount in comparison with regional economies, which is a reflection of its growth potential.
The report says that Pakistan continues to be categorized among the low savers of the world. The analysis suggests that the financial system now needs to focus on providing innovative liability products to give the investor and saver various options to choose from, according to his own risk/return preference.
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