Pakistan’s financial sector started to feel the impacts of economic slowdown. Pakistani economy continues to fall and economic growth rate fell below 3%. Economic slowdown has affected the growth in the financial sector. The State Bank (SBP) in its latest report pointed out that the Economic slowdown may further impede the financial sector’s growth that moderated last year, but IMF-backed reforms program is expected to help introduce stabilisation in the economy.
The State Bank of Pakistan (SBP) in its financial stability review for 2018 said that “The external account imbalances and related uncertainties are likely to have repercussions for the financial markets. The financial sector performance and stability will largely hinge on the improvement in macroeconomic conditions.”
The SBP in its review report said that “the necessary stabilisation measures may further slowdown the pace of economic activity.” The further slowdown in the economic activity means more challenges for financial sector. The demand for loans from private sector will decrease. The recovery of old loans might also affect due to economic slowdown.
The banks have already halted their expansion plans. There are very few new banking branches coming up. There are hardly any new hiring taking place in the banks and other financial institutions. Banking sector was one of the fastest growing sectors of Pakistani economy from 2004 to 2014. But some adverse policies implemented by former finance minister Ishaq Dar as finance minister affected that growth. The banking sector has not been able to recover yet since then.
When government decided to allow access of accounts to FBR, the big number of small medium traders and businessmen stop bank transactions. They even withdraw their bank deposits. This policy send wrong signal to business community. The FBR started to deduct tax money directly from bank accounts. This measure created mistrust between bank customers and banks. This policy slowed the growth in bank deposits.
The SBP further said the monetary tightening may affect the debt repayment capacity of the borrowers with some lag. Under the challenging macroeconomic environment, the corporate sector, which is already showing signs of slackness in its performance, may perform below its full potential.”
The SBP said last year was challenging for the financial sector of Pakistan with the sector’s growth having moderated to 7.5 percent last year, while the financial depth, as measured by financial assets to GDP ratio, subsided to 73 percent from 74.5 percent a year earlier. “The financial markets, particularly, the forex and equity markets have trended downwards with increased volatility.”
The government measures to increase tax filers and to expand the tax base resulted in the slower growth in the bank deposits. Many people withdraw their money from bank accounts to avoid tax notices. The banks are facing difficulties to increase the deposits. The fear factor is playing its role as many traders stopped financial transactions through banks. They prefer to deal in net payments and through prize bonds.
The SBP said the deceleration in deposit growth is a key challenge to banking sector despite all its resilience and that “may pose funding risk for asset expansion”. “However, the resilience analysis indicates that the banking sector has the capacity to absorb adverse domestic and global stress in the medium-term.”
The SBP said in its report that banks have posted reasonable profits. “However, higher provisioning expense along with rise in administrative cost and one-off extra ordinary expense has kept the profitability slightly below the last year’s level,” it added. “Encouragingly, increase in the share of interest income from financing activity has improved the net interest margin, which has been falling for the last 3 years.”
The SBP said the concentration of banks’ exposure to public sector, though reduced due to net retirement in Pakistan Investment Bonds in 2018, “remains significant”. “Further, the risks related to anti-money laundering and combating the financing of terrorism and cyber security need continuous attention for mitigation,” it added.
The State Bank further said the Islamic banking institutions (IBIs) have maintained fast growth trajectory and now constitute 13.5 percent of the total banking sector assets. “This growth is, primarily, driven by broad based financing activity to various economic sectors, with majority of financing extended under profit and loss sharing modes of Musharika and diminishing Musharika,” it added. “While financial health of IBIs remains sound, they continue to face dearth of shariah-compliant investment avenues that limit their ability to effectively manage their liquidity as well as mobilise deposits.”
The SBP said risk averseness in equity market linked non-bank financial institutions (NBFIs), like mutual funds, has increased due to higher volatility in the financial markets, “that has led to contraction.
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10 April, 2020