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EFFECTSOF STRUCTURAL REFORMS IN FINANCIAL
SECTOR OF THE ECONOMY
SYED MOHAMMAD HASSAN
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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.
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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.
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FINANCIAL SECTOR IN PAKISTAN
Commercial banks.
Development finance institutions.
Stock market
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FINANCIAL RESTRUCTURING IN PAKISTAN
Privatization
Corporate Governance
Liberalization of Foreign Exchange Regime
Consumer financing
Taxation Reforms
Interest Rate Policies
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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
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PRIVATIZATION TRANSACTIONS IN PAKISTAN
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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.
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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.
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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.
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Large segments of the banking system have been transferred to private sector.
Private sector owns and operates most of the banking sector.
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( 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
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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
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(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.
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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.
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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.
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FOREIGN DIRECT INVESTMENT (FDI) TO GDP RATIO.
FDI is an integral part of a country’s GDP.
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(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)
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SHARE OF PRODUCTS IN TOTAL CONSUMER FINANCING.
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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
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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.
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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.
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(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.
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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
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SME sector contribution to GDP
SME sector contribution towards GDP has increased over the years.
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(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.
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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.
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(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
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FLUCTUATIONS IN INTEREST RATES.
The current interest structure of banks is market determined
SBP has removed all kinds of interest rate controls.
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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
RECOMMENDATIONS.
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THANK YOU.