05-money and credit

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61

5

Money and Credit

Introduction

Monetary policy as an important stabilizing toolensures the sustainable economic growth as wellas significantly influences the expectations aboutthe future direction of economic activity andinflation through the channels of financial marketsand bank-based intermediation. Therefore a stablefinancial system is a pre-requisite for strongereconomic growth, as it enables the financialintermediation process to facilitate the smooth andefficient financial intermediation that allocatesavings to profitable investment opportunities, andproper transmission of monetary policy, whoseeffective conduct and implementation in turnensures price stability. Thus a strong and efficientfinancial system plays a vital role in improvingthe performance of the economy.

Global financial stability has improved during2010-11 on the back of better macroeconomic

performance and continued accommodativemacroeconomic policies but improvement remainfragile as the health of financial institutions hasnot recovered in tandem with the overalleconomy. The challenge for governmentsremained un-addressed as to how the financialsector should intersect with the broader economyto avoid future crises. The confidence in thebanking systems of many advanced economieshas not been restored and continues to be a sourceof the sovereign risks in advance economies.There is a need to restore market confidence and

reduce excessive reliance on central bank funding,considerable further strengthening of bank balance sheets and capital buffers will benecessary. Financial systems must enhancetransparency through more rigorous and realisticstress tests and recapitalize, restructure, and eveneliminate weaker institutions. Without thesefinancial sector reforms funding difficulties maylead to another systemic liquidity episode.

Pakistan is living in a highly integrated world anda major turmoil of this magnitude certainly hadimplications for Pakistan economy. The rippleeffects of this financial crisis had not hit withsame intensity or severity as it had done to thedeveloped world but still there are variouschannels through which the crisis had impactedfinancial sector in particular and Pakistan

economy in general. Pakistan sensitively reactedto the structural changes in the financial space.The banking and the entire financial system isstronger after years of restructuring, de-regulationand improved supervision by SBP. BankingCompanies Ordinance has been amended recentlyto enhance surveillance and vigilance mechanismof the SBP. Pakistans financial institutions hadnot invested in derivatives that had exposure torisky investment bankers.

Pakistans financial markets witnessed slowdownin the deposit mobilization and profitability in thesector, however, generally financial sectorremained immune against contagion of thefinancial sector. Credit to private sector registeredmarked slowdown in the aftermath of the financialcrisis but it is more to do with domestic peculiareconomic conditions. The government sectorremained the major client for the financial sector.Non-performing loans (NPLs) surged but stillNPL-to-deposit or credit ratio remainedcompetitive versus developing economies.

The drastic curtailment of external demandduring the last two years has helped shaving off external demand, however, security andintensification of war on terror kept thegovernments demand for resources underpressure. On the other hand, lower than expectedGDP growth, acute energy shortages and a highcost of doing business contributed to the revenueshortfall. Thereby, fiscal deficit sharply increased


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Economic Survey 2010-11

62

from 5.3 percent in fiscal year 2008-09 to 6.3percent in fiscal year 2009-10. This kept monetarypolicy under enormous pressure to strike abalance between support to growth and keepinflation under check.

Monetary Policy StanceGovernments heavy reliance on SBP borrowingto finance the fiscal deficit has created a relentlessincrease in demand pressures. Consequently,inflationary pressures were quite severe in thebeginning of fiscal year 2010-11 and becomeworse by the devastating floods. Moreover, thedried up external financing flows due todifficulties in IMF program and insufficient fundsfrom non-bank sources raised the pressures onSBP borrowing to finance the fiscal deficit

through most of first half of fiscal year 2010-11.A proactive policy response from the SBP toshave-off additional demand from the economywas required. To target the inflation and tocontain the aggregate demand induced risks tomacroeconomic stability, SBP raised the policyrate by 150 basis points (bps), staggered in threestages of 50 bps each, since July 2010. SBP raisedthe policy rate by 50 bps to 13 percent on 2 nd August 2010. Soon after which countryexperienced an exogenous shock in the form of Floods. Consequently, the rate was furtherincreased by cumulative 100 bps points to 14percent up to 30 th November 2010. While keepingin view the risks to inflation and economicgrowth, SBP has decided to keep the policy rateunchanged at 14 percent on 29 th January 2011.Implementation of this policy stance entailedmopping up of liquidity while remaining aware of macroeconomic conditions affecting day to dayavailability of liquidity. Consequently theweighted average overnight money market reporate has also increased by 124 bps on average, up

till 27th

January 2011, compared to the periodwhen policy rate was kept unchanged.

Despite recent improvement in the externalcurrent account, restrained governmentborrowings from SBP and stable financialmarkets, the focus of both monetary and fiscalpolicy remained on addressing the structural fiscal

weaknesses, reducing inflation for sustainableeconomic recovery and supporting revival of growth momentum in 2011-12.

Table-5.1: Policy Rate ChangesEffective Date Policy Rate (%)

21-Apr-09 1417-Aug-09 1325-Nov-09 12.530-Jan-10 12.527-Mar-10 12.52-Aug-10 1330-Sep-10 13.5

30-Nov-10 till date 14

Recent Monetary and Credit Developments

During first nine months of the current fiscal year(Jul-April 2010-11), broad money (M 2) has

witnessed a robust growth underpinned byexternal sector buoyancy led increase in NetForeign Assets (NFA) and government budgetaryborrowing in NDA. Net expansion in M 2 increased by 9.6 percent during July- April, 2011as compared to 8.1 percent during the same periodlast year.

Net Domestic Assets (NDA) during July-April2011 reached at Rs 402.5 billion against Rs 446.1billion during the same period last year. Theexpansion in NDA mainly attributed by a rise in

demand for private sector credit and governmentborrowings.

On the other hand the NFA of the banking systemduring the period under review had increased byRs 153.2 billion after registering a significantdecline of Rs 31.3 billion during the same periodof last year. The increase is due to record inflowof worker remittances worth $9 billion which areexpected to cross historical $11 billion mark bythe end of current fiscal year. The improvement inthe current account deficit has played critical rolein NFA improvement amidst sluggish inflows inthe financial account. NFA witnessed acontraction in its stock which started in October2009 continued during Jan-Apr 2010. The declinewas mainly due to persistent pressures on externalaccount as a result of lower than expected externalinflows. Whereas in the remaining two month of fiscal year 2009-10, the expansion in scheduled


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bankscurrent aworkerstrade bacontractio

During JenterpriseRs72.5 bito the retowned oireflects th

Table-5.2:

1.Net gova .Borrob.Commc.Others

2.Credit t(d+e+f+g)

d.Credite.Creditf. PSEsg.Other

3.Other It4.Net Do 5.Net For6.Moneta *Pertains

200

100

0

100

200

300

400

500

600

700

800

R s .

B i l l i o n

FA camecount deficiremittanceslance. Then and expan

ly-April, 20s (PSEs) regllion in 2009irements byil marketinge profile of

Profile of M

rnment sectoing for budgodity operatio

Non-govern

to Private Sectto Public Sectpecial Accouinancial Instit

ems(net)estic assets (

ign Assets (Ny Assets(M2)

to 30 th April fo

2007 08 2008 09

Fig-5.2: Gov

rom a contt; due to roand an impr

figure 5.1ion trends of

11 Credit toistered a shar-10 to Rs 26.an oil refincompany .onetary indi

netary Indic

r Borrowing(tary supports

ment Sector

orr Enterprisest-Debt repayutions(SBP cr

DA)

FA)

r FY10 & FY1

2009 10 July A2010

rnment Borrow

From SBP

From Scheduled bank

Total borrowings

raction in tust inflowsvement in tpresents t

NFA.

private sectp decline fro

billion owiry and a stThe table 5cators.

tors

+b+c)

PSEs)ent with SBP

edit to NBFIs)

1

50

15

25

35

45

55

pr July Apr 2011

ings

s

eof ee

ormgte.2

Gove

ThesysteoperatApril,

Gove

the Stbilliobanksthan ebudgegoverschedbankirequir

-4

-3

-2

-1

1

2

R s .

B i l l i o n

0

0

0

0

0

J

nment Ban

overnmentfor budg

ions stood2011 on acc

nment has b

ate Bank of has beenduring July-xpected non-tray suppment toled banks sg system,

ements durn

0

0

0

0

0

0

0

2007-08 2

Fig-

l-April*009-10

325.4361.8-35.6-0.7

217.6

144.272.50.00.8

-97.0446.1

9.61%)--31.3414.8

(8.1%)Source: Stat

Borrowing

borrowingtary support Rs342.2 biunt of weak

orrowed Rs

akistan (SBborrowed frApril, 2011[bank and extrt haveorrow fro

ince Octoberthe bul

July-April

008- 09 2009-10

.1:NetForeign A

Money and

(Rs BilJul-Apri

2010-11

342.2472.2-134.2

4.2183.6

156.726.7-0.20.4

-23.3402.5

(7.69%153.2555.7

(9.62%Bank of Paki

rom the baand com

illion duringfiscal positio

196.3 billion

) , while Rsm the scheSee Fig-5.2].ernal financi

compelledthe SBP

2010. Withiof bud

2010-11 wer

Jul-Apr 2010 Jul-Apr

ssets

redit

63

lion)l*

)stan

nkingodityJuly-

n.

from

275.9duledLessg for

theand

in theetary

e met

2011


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Money and Credit

65

Table-5.3: Credit to Private sector (Rs Billion)

SectorsJuly-March Growth Rates

2009-10 2010-11 2009-10 2010-11Overall Credit (1 to 5) 141.4 230.1 5.3 7.11. Loans 2/ to Private Sector Business 147.7 222.1 6.9 8.4A. Agriculture 6.5 3.3 4.0 2.0B. Mining and Quarrying 1.7 0.4 9.5 2.3C. Manufacturing 95.0 205.3 7.7 16.2

Textiles 32.9 105.5 6.8 22.4D. Electricity, gas and water supply 46.6 28.1 30.2 13.1E. Construction -2.0 -0.9 -2.8 -1.4F. Commerce and Trade -4.3 -18.1 -1.8 -7.9G. Transport, storage and communications 6.4 -0.6 6.6 -0.6H. Services 2.9 -6.3 6.9 -13.0I. Other private business n.e.c -3.8 3.6 -83.2 -80.92. Trust Funds and NPOs 0.8 3.4 6.4 25.73. Personal -35.2 -17.6 -9.7 -5.54. Others 1.3 8.5 9.2 60.65. Investment in Security & Shares of Private Sector 26.9 13.6 23.8 9.41/ Credit is equivalent to "Advances plus Bills Purchased & Discounted plus Investments"

2/ Loans is equivalent to "Advances plus Bills Purchased & Discounted"

Table-5.4 Targets and Actual Disbursement of Agriculture Loans

Name Of BanksTarget Actual DisbursementJuly-April

2009-10 2010-11July-March

2009- 10 2010-115 Big Comm. Banks 124 132.4 85.2 93.3ZTBL 80 81.8 49 37.4DPBs 50 48.9 28.6 33.7PPCBL 6 6.9 3.5 4.4Total 260 270 166.3 168.7

Source: SBP

Manufacturing sector availed almost 92 percent(Rs205.3 billion) of total PSC followed byelectricity, gas and water sector (13 percent),agriculture and other sectors (3 percent each).However, the impact of credit growth in thesesectors was partly offset by credit contraction incommerce and trade sector (-8 percent).

The break-up of agri-credit disbursement showsthat during the period under review five majorbanks disbursed Rs 93.3 billion against the targetof Rs 132.4 billion. The low disbursement ismainly due to the devastating effect of floods

which badly affected the performance of commercial banks in general and ZTBL inparticular. Net decline in consumer financingduring July-March 2010-11 stood at Rs 17.4billion as compared to Rs 40.4 billion decrease inthe same period last year, thereby, registered anincrease of 7.1 percent against the decline of 9.0percent in 2009-10. Loans for consumer durableswitnessed a net expansion of 13.9 percent duringJuly-March, 2010-11. However, a decline of 16.4percent in net retirements of auto loans waswitnessed that was mainly due to a significantincrease in both cars and motorcycles followed by


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66

12.2 percent negative growth in credit card financing, implying net retirement.

Table-5.5: Consumer Financing (Rs Billion)

DescriptionJuly-March Growth(%)

2009-10 2010-11 2009-10 2010-11Consumer Financing -40.4 -17.4 -13.7 -7.1

1) For house building -5.5 -5.4 -9.0 -10.02) For transport i.e. purchase of car -9.1 -10.6 -11.6 -16.43) Credit cards -6.2 -3.4 -17.4 -12.24) Consumers durable -0.2 0.03 -41.4 13.95) Personal loans -19.7 0.4 -17.0 0.46) Other 0.3 1.6 10.2 55.7

Source: SBP Monetary Assets

The component of monetary assets (M 2) include:Currency in circulation, Demand Deposit, TimeDeposits (Excluding IMF A/C, counterpart) and

Residents foreign currency.

Currency in Circulation

During July-April, 2010-11, currency incirculation increased to Rs 196.8 billion ascompared to Rs 129.8 billion in the same periodlast year. Similarly the currency in circulation

(CIC) as percent of money supply (M 2) has alsoincreased by 23.5 percent in 2010-11 as against23.1 percent during the same period in 2009-10.

Issuing of currency notes resulted in increasedcurrency in circulation and broad money supply(M2) in the economy. Broad money (M 2) grew by9.6 percent during July-April 2010-11 against anincrease of 8.1 percent during the same period lastyear. The increase in money supply is shared byboth currency in circulation and deposit money.

Table-5.6 Monetary Aggregates (Rs. Billion)

ItemsEnd June July-Apr

2,009 2,010 2009-10 2010-11A. Currency in Circulation 1,152.2 1,295.4 1,282.0 1,491.2

Deposit of which:B. Other Deposits with SBP 4.7 6.7 6.3 10.4C. Total Demand &Time Deposits incl.RFCDs 3,980.4 4,475.2 4,263.6 4,831.3of which RFCDs 280.4 345.4 334.2 368..2Monetary Assets Stock (M2) A+B+C 5,137.2 5,777.2 5,552.0 6,332.9Memorandum ItemsCurrency/Money Ratio 22.4 22.4 23.1 23.5Other Deposits/Money ratio 0.1 0.1 0.1 0.2Total Deposits/Money ratio 77.5 77.5 76.8 76.3RFCD/Money ratio 5.5 6.0 6.0 5.8Income Velocity of Money 2.6 2.7 - -

Source: SBP

DepositsDuring July-April, 2011 demand and timedeposits has increased by Rs 356.1 billion ascompared to Rs 283.2 billion during the sameperiod of 2009-10. Similarly Resident ForeignCurrency Deposits (RFCDs) has increased by Rs22.8 billion as compared to Rs 53.8 billion duringthe same period last year.

Monetary ManagementPakistans economy has been slowed down since2008, as the macroeconomic situation deterioratedsignificantly owing to multiple factors includingsecurity issues, rise in international food and oilprices, global financial turmoil, and energy crisis.Furthermore, recent unprecedented floods andheavy rains in the country to some extent have


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Economi

68

amount o

Table 5.9

3-Months6-Months12-MonthTotalAverage o

With dryiin non-bchoice bHowever,externalrejected adue to hig

On the oincrease iinterestedthat in tinvestmeconstituteaccepted

A PIB auJul-Febru27.4 billi

1

1

1

1

Survey 201

f Rs 4018.5

Market Trea

Offered570.3865.9

1765.13201.3

f maximum an

ing up of theank sources,t to borrowearlier in t

financing wll bids in auch rates dema

ther hand,n interest ratin shorter te first sixt was ind almost 5mount.

ction target oary 2010-11on. The gov

11

1.5

12

2.5

13

3.5

14

4.5

J u n - 0 8

-11

billion durin

ury bills AucJUL-JUN2009-10

ccepted W.237.8404.5931.3

1573.6d minimum ra

external fingovernmen

from the be year, where good, gtions of longnded by ban

anks werees and thererm papers.months of 3-months

8.7 percent

f Rs 105 billagainst ma

ernment, ho

-

D e c - 0

8

Fig-5.

the first ni

ions

A Rate* 2012.0 312.0 512.0 11

- 2tes

ncing and f t had leftnking systen prospectsvernment h

er tenure paps.

nticipatingore were mos it is evide010-11 hea

T-bills whiof the tot

ion was set f turities of ever, reject

M a r - 0

9

J u n - 0 9

: Weighted A

e month

Offered9-10 2010-11.5 2479.

32.9 1101.88.2 437.62.6 4018.

llo.

of d

er

nrentyhal

orsd

all biAugubanks

0

20

40

60

80

P e r c e n t

Fi

S e p - 0

9

D e c - 0

9

verage Inter

6-Months

s of 2010-11

Jul-Acce

1 2009-105 131.34 232.9

634.85 999.0

s in the first 2010 dueas mentione

13.1

58.7

3-Months

- 5.7: Contribut

M a r - 1

0

J u n - 1 0

st Rates

12-Mont

.

Marchpted W.2010-11 200

1484.2 1809.2 1234.1 1

2527.5

two auctionto high retud earlier.

23.332.0

6-Months

ion of T-bills

FY 10 F

S e p - 1

0

D e c - 1

0

s

(Rs Bil

.Rate*9-10 2010-11.9 122.0 12.0 13- -

Sourc

s held in Julrns demand

63.5

9.3

12-Months

Y11

M a r - 1

1

lion)

1.8

.2

e:SBP

y andd by


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Table-5.1

PIBs

3 Years

5 Years10 Years15 Years20 Years30 YearsTotal

Althoughretire SBRs 53 bilThe SBPprimary

During thwas in 10percent o

Weightedmark-up)percent(includinMarch 2percent2010, wincreased

During Jauctionstarget of offers of liquidityinvestme

: Pakistan InOffered Ac

21.2

13.469.83.6

12.114.6

134.7

in subsequeP borrowinglion, this wa

mopped uarket of PI

e period und-years PIBstotal accept

average leon outstanhile weighzero mark-

11, thus, reuring Marceighted avedue to tight

uly-FebruarRs 89 billioRs 80 billion

Rs 122.5position of t desire for t

0.0

15.0

30.0

45.0

60.0

75.0

P e r c e n

t a g e s

vestment Bonepted *W.Aul-Jun009-10

11.6 12

7.2 129.4 12

1.0 121.5 131.8 132.6

nt auctionss the govern

still lowerRs.83.4 bi

s during Jul

er review hehich constit

d amount.

ding rate (ing loans

ted averageup) stood atsulted in a, 2011. Si

rage lendinonetary poli

2010-11 in were acce. The goverbillion, sho

Islamic bahis asset clas

3 Years

ig-5.9 :Cont

ds AuctionsRate

2009-.30 16.

.40 11.

.60 57.

.10 3.1

.50 8.6

.60 11.- 109

in an effortment accepthan the targllion from t

-March 201

vy investmeuted almost

including zestood at 13

deposit r7.9 percentpread of 7.ce Septemb

g rates haicy stance

n two Suk pted againstment receiving a stro

nks and th.

5 Years

ribution of

fferedJul-

10 2010-1142.2

18.7111.2

2.06.5

11.1.2 191.7

todt.e

0-

11 asperiodtotalmonthbillio

nt9

ro.6tein8

ere

k adgir

Table-

Jan-10Feb-1Mar-1Apr-1May-1Jun-10Jul-10Aug-1Sep-1Oct-10Nov-1Dec-1Jan-11Feb-11Mar-1*Lend

10 Years 1

IBs

Acceptarch2009- 10 2

8.2

5.732.71.01.51.8

51.0

comparedof fiscal y

mount of Rs of 2010-1in the same

5.11: Lendin

1111

0 1111111111

1 1ng Rate, Dep

5 Years 20

FY 10

d

10- 11 200918.7 12

6.7 1257.5 12BR 120.5 13BR 1383.4 -

to Rs.51 bilar 2009-10.191.7 billio

1 as compperiod of las

& Deposit RR* DR

3.35 6.13.38 6.03.40 6.13.42 6.0

13.4 6.03.39 5.73.35 5.83.38 5.83.34 5.73.32 5.83.42 5.83.52 5.93.62 6.03.55 6.03.55 5.9sit Rate

Years 30 Y

FY11

Money and

(Rs Bill*W.A Rate

- 10 2010.3 14.

.4 13.

.6 14.

.9 Ni

.2 14.

.7 Ni-

Sourc

lion in theMarket offen in the firsred to Rsyear.

ates(W.A)* Spre0 7.27 7.30 7.33 7.35 7.39 7.64 7.52 7.57 7.53 7.48 7.51 7.62 7.64 7.57 7.5

ears

redit

69

ion)

110

31l2l

e:SBP

samered a

nine109.2

ad51

5

16

1

18


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Economi

70

Financialfinancial s

to all levmeans anrefers to lieconomy.the size oexist for cfinancial d(M 2) as peused indiclevel of ac

Financialfinancial i

of the finathe financito the volfinancial cmainly beresponse t

As it is ev1999-00percent ingraduallyM2-to-GDanother si

shown decpercent infrom accothe ratio st

Financialcontrast windicator.With wearemainedcapacity iinstrumentThe tightcapital for

The fallinintermediarecourse tresourcescome ulti

Survey 201

eepening ref ervices with a

ls of society.increased ratiquidity in theHigh level of f the economontinued groeepening on trcentage of Gator to measuess to financi

deepening mtermediaries i

ncial sector, aal assets are gtility in globarisis, the finanause of the lthe ongoing

ident from thith growing2006-07. H

nd reached atratio has fu

nificant ratio

lining trend si2009-10. Thimmodating toood at 70 perc

eepening inith the rest of The banking sening econo

the only entitthe economy

s and prosperimonetary poli

ation witnes

g ratio of btion i.e, effici

the SBP finor the privateately as appro

-11

Box-1:

rs to the incrwider choice

. Financial do of moneymarket in relonetary expameans, theth. It reflecte larger econP is one of t

ring the finanal services.

easures then an economy

rising M 2 /GDrowing faster tl financial macial markets iw integration

eform process

Table 5.7,conomic actiwever, since39.4 percent

rther weakenDD+TD/M 2 w

nce 2004-05 bis the periodtightening. N

ent.

akistan durinthe world. Sl

ystem remainic activity thto provide

which financng on highesty stance of led inordinate

oad money tent allocationancing and thsector. Thispriate policies

Financial

eased provisioof services ge

epening geneupply to GDtion to size o

nsion in relatiore opportunmacro effec

my. Broad me most commial deepening

volume of fi. Considering

P ratio indicahan the non-firkets since th

Pakistan havwith global

.

2 /GDP has sity and rose2007-08 the

in 2009-10. Dd to 37.2 peich also repr

y decreasing f when monetaevertheless, d

2007-2011 rowdown in thd risk averse

private sectupport to moial sector is uspread in notst six years h

shrinkage.

o GDP hasof resources.e governmentill impact posand incentive

evelopm

n of ared

rallyP. Itf then toities

ts of ney

onlyand

nancial interM2 as a proxy

tes that in nonancial assets.

beginning oe continued tofinancial mark

own a risingfrom 36.9 peratio started

uring July-Apcent. On thesents monetar

rom 77.6 perry policy stanuring July-Ap

mained at loe economic aand always pr shied away

netary assetsnable to covenly in the regas proved co

important imUnder the pros commitmeitively to finas have to plac

10

20

30

40

50

6070

80

%

Fig

ent in Pak

ention byfor the size

inal termsIn contrastthe globalstrengthenets, and in

trend sincercent to 47to decline

ril 2010-11other handy depth has

ent to 71.5ce changedril 2010-11

er level intivity has tak

refers to provifrom the fin

to GDP ratio.r. The financiion but also anter-producti

plications forposed new let to lower ficial penetrati

d to use this f

B a n g l a d e s h

I n d i a

-1: Comparision

istan

ing its toll onde financingncial marketThis also iml market is c

mong peer coue as the priv

financial staislation, the

scal deficit mn and depth.r productive p

Table-1:.Key InFinanci

Years M2

1999-00 3

2000-01 3

2001-02 4

2002-03 4

2003-04 4

2004-05 4

2005-06 4

2006-07 4

2007-08 4

2008-09 3

2009-10 3July-Apr

2009-10 3

2010-11 3

I n d o n e s i a

I r a n

of M2-to-GDP R

1991

this very imor the fiscaland the goverplies enormoptive to onlyntries in all rete sector cred

ility and finovernment wans releasing

However, it wurposes.

dicators of Pakil DevelopmentGDP DD+T

6.9

6.7

0.0

3.1

4.9

5.1

5.0

6.6

4.7

9.2

9.4

6.5

5.0

P a i s t a n

S r i l a n k a

T u r k e y

atio

2009

ortanteficit.nments idlea fewgions.it and

ancialill notmore

ill not

tan's

/M2

74.6

75.4

75.4

76.2

76.8

77.6

72.5

74.1

73.3

72.0

71.5

70

70


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Money and Credit

71

Pakistans Financial Sector

Financial sector is a crucial building block for theprivate sector development as it facilitatestransactions and ensures the availability of credit

and other financial products to consumers,

businesses and other financial institutions. Itincludes banks, stock exchanges and insurer,credit unions, microfinance institutions andmoney lenders. It is important to have a sound andwell functioning financial sector in order tosupport economic growth of a country.

Commercial Banks

The banking sector has recently witnessed a sharpgrowth in non-performing loans (NPLs) inparticular during Jul-Dec 2011 on the backdrop of unprecedented floods that has intensified theeffect of an already fragile economy. Thus itreflects the heightened credit risk. NPLs reachedat Rs548 billion during Jul-Dec, 2011.

The asset base of the system grew by 3.8 percentduring Jul-Dec, 2011 and reached at Rs 7,138

billion. Bank deposits during July-Sep 2011witnessed a decline on account of the Ramadanand Eid related enhanced demand for currency inconfluence with a slower growth in monetaryaggregates. However, the situation reversed in

following weeks with the replenishment of deposits forcing SBP to conduct mop- ups tocheck excess liquidity in the market. Hence, totaldeposits of all banks stood at Rs5,450 billionduring July-December 2010.

Table-5.12a: Highlights of the Banking System (Rs billion)

5.75

5.805.855.905.956.006.056.106.15

13.30

13.35

13.40

13.45

13.50

13.55

13.60

13.65Fig-5.10: Lending & Deposit Rates

LR DR

2005 2006 2007 2008 Sep-09 Dec-09 Jun-10 Sep-10 Dec-10Total Assets 3,660 4,353 5,172 5,627 6,105 6,516 6,782 6,626 7,138Investments (net) 800 833 1,276 1,080 1,593 1,737 1,893 1,873 2,142Advances (net) 1,991 2,428 2,688 3,183 3,119 3,240 3,231 3,167 3,349

Deposits 2,832 3,255 3,854 4,217 4,483 4,786 5,128 5,021 5,450Non-Performing Loans 177 177 218 359 422 446 460 494 548Non-Performing Loans(net) 41 39 30 109 128 134 123 143 182

Base-I Base-IICapital Adequacy Ratio (allbanks) 11.3 12.7 12.3 12.3 14.3 14.0 13.9 13.8 14.0

Source:SBP


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During the first quarter of fiscal year 2010-11, thecapital adequacy ratio stood at 13.8 percentagainst 14.3 percent during the same period lastyear, because the higher regulatory deductionsfrom Tier-1 capital reduced the eligible capital aswell as risk based capital adequacy ratio (CAR),which deteriorated to 13.8 percent. However, thecontraction of the asset base mainly advances, ledto a decline in size of the risk-weighted asset(RWA) over the quarter.

As on December 2010, total number of branchesof banks stood at 9,908 as compared to 9,673 on30 June 2010. Hence there is an increase of 235branches in six months of 2010-11 [Table: 5.12b].

Assets of all banks showed a net expansion of Rs

355.4 billion during the first six months of 2010-11 and stood at Rs 7,137.7 billion. Hence, theasset base of the banking sector increased by 5.2percent during July-December 2010.

Table - 5.12 b: Total Number of Branchesof Schedule Banks

30-Jun-10 31-Dec-10

1.No. of Branches 9,673 9,908

Public SectorCommercial Banks

1,777 1,791

Local Private Banks 7,292 7,511Specialized Banks 544 546Foreign Banks 60 60

Islamic Banking

A sustainable growth momentum has beenmaintained by the Islamic banks (IB) in the faceof prevailing fragile economic condition. TheIslamic banking assets, deposits and financingcontinued showing strong growth with total assetsincreasing to Rs 477 billion in 2010 from Rs366.3 billion during the same period last year. Theyear-on year (YOY) growth in the assets was 30percent.

Table- 5.13: Islamic Banks (Rs Billion)CY04 CY05 CY06 CY07 CY08 CY09 CY10*

Assets of the Islamic banks 44.1 71.5 119.3 205.9 276.0 366.3 477.0Deposits of the Islamic Banks 30.2 49.9 83.7 147.4 201.6 282.6 390.1Share in Banks Assets (%) 1.45 1.95 2.79 3.98 4.90 5.60 6.68Share in Bank Deposits (%) 1.26 1.75 2.62 3.82 4.78 5.90 7.16*Provisional data Islamic Banking Department, State Bank of Pakistan

Whereas the share in bank assets increased by 6.7percent from 5.6 percent during the period underreview. On the other hand, the total deposits of IBreached to Rs 390.1 billion from Rs 282.6 billionin CY09, thus it contributed to 7.2 percent in bank

deposits as compared to 5.9 percent in CY09. Thebreak-up of financing show that apart from

Murabah, Musharaka and Salam, all othercomponents of Islamic financing declined inCY10.

Table- 5.14: Financing Products by Islamic banks %ageMode of Financing CY04 CY05 CY06 CY07 CY08 CY09 CY10*Murabaha 57.4 44.4 48.4 44.5 36.5 42.3 44.9Ijara 24.8 29.7 29.7 24 22.1 14.2 12.7Musharaka 1 0.5 0.8 1.6 2.1 1.8 2.9

Mudaraba - - - 0.3 0.2 0.4 0.2Diminishing Musharaka 5.9 12.8 14.8 25.6 28.9 30.4 29.5Salam 0.7 0.6 1.9 1.4 1.8 1.2 1.4Istisna 0.4 1.4 1.4 1 2.9 6.1 5.8Others 9.8 12.1 3 1.6 5.4 3.6 2.6

*Provisional data Source :SBP


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Microfinance

Government of Pakistan played an important rolefor sustainable development of the microfinancesector as an important part of the overall financialsector development strategy. As a result of

strategic and regulatory initiatives, microfinanceis now gradually mainstreaming into the formalbanking system of Pakistan. The policy andregulatory environment is recognized as welldeveloped. Most importantly, the sectorsvisibility has increased globally due to the launchof transformational branchless banking initiativeswhich leverage telecoms and postal networks andmobile phone technology to expand cost-efficientfinancial services to the unbanked population.

Despite the challenging macroeconomic and law& order situation, microfinance has achievedimprovements in outreach, financial andoperational performance. Overall, the sector(including MFIs) is currently serving more than2.1 million active borrowers with a gross loanportfolio of Rs 25.5 billion as of 31 st December2010 .The deposit base increased by 45.5 percentduring the year 2010. The microfinance sectorsaw significant growth in almost last three yearsas evident from the table below. Importantly, thedeposits and loan portfolio saw a phenomenalgrowth in last three years.

Table-5.15: Micro-finance Industry Indicators

IndicatorsNumberof MFBs

Number of Branches

Total No. of Borrowers

Gross loanportfolio

AverageLoan Size

(Rs)

Total No. of Depositors

Deposits

(Rs. In '000) (Rs. In '000)Dec-07 MFBs 6 232 435,407 4,456,259 10,235 146,258 2,822,845

MFIs 24 870 831,775 8,293,724 9,971 - -Total 30 1,102 1,267,182 12,749,983 10,062 146,258 2,822,845

Dec-08 MFBs 7 271 542,641 6,461,462 11,907 254,381 4,115,667MFIs 20 1,186 1,190,238 11,952,000 14,940 - -Total 27 1,457 1,732,879 18,413,462 10,626 254,381 4,115,667

Dec-09 MFBs 8 284 703,044 9,004,000 13,576 459,024 7,099,206MFIs 21 1,159 1,123,001 12,719,000 11,326 - -Total 29 1,443 1,826,045 21,723,000 12,131 459,024 7,099,206

Dec-10 MFBs 8 284 717,141 10,528,000 20,151 780,294 10,289,000

MFIs 21 1,252 1,342,395 14,966,000 17,180 - -Total 29 1,536 2,059,536 25,494,000 18,385 780,294 10,289,000

Source: Investment Wing, Finance Division

The NPLs of MFBs exhibited negative trend asthey crept up to a level of 5.3 percent at the end of March 2011 as against 1.6 percent last year.Nonetheless, the current level of NPLs is wellbelow the estimates derived during the earlydamage assessment in face of heavy floods thattriggered severe losses to life and property of

millions during the 1st

half of fiscal year 2010-11.

Channel diversification is critical to increaseaccess to financial services in a cost-effectivemanner. A number of initiatives have been takento facilitate following innovations in deliverychannels:

a. The First Microfinance Bank (FMFB) enteredinto successful partnership with Pakistan Post(PP) to expand its lending operations in ruraland remote regions using PPs network.

b. Tameer Microfinance Bank under itsbranchless banking model Easy Paisa hasbeen facilitating the bills payment, domestic

/home remittances, and m-wallets. At the endof March 2010, the volume of paymentsthrough Easy Paisa reached 2.25 milliontransactions transferring funds exceeding Rs.8 billion.

c. United Bank Limited (UBL), a leadingcommercial bank is also operating its BBmodel by the name of Omni. So far, UBL


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has developed a network of more than 2600agents to provide payment services whichhave the potential to serve the financiallyexcluded segment.

Private sectors commitment towards

microfinance business appears promising fortransformational change to attain large scaleoutreach through innovative business models. Tosustain sector development and build on further,all microfinance institutions must assume primaryresponsibility for their own health and growthwhile the Government and donors may helpbridging resource gaps by putting in place amechanism of support/assistance which wouldsupport the long-term institutional buildinginstead of covering institutions operationalinefficiencies and leakages.

Insurance Sector

The insurance industry in Pakistan is relativelysmall compared to developing countries and eventhe region but huge potential for expansion. InPakistan, the insurance penetration stands at 0.7percent of the GDP and insurance density isUS$6.5 per capita. Efforts are being made todevelop the insurance sector which has long beenneglected.

The government encouraged liberalization and

100 percent foreign ownership and control of insurance companies was permitted by thegovernment in 2007, with the condition of bringing in a minimum of US$2 million in foreignexchange from abroad and raising an equivalentamount from the local market. There are twodedicated foreign health insurance companies inthe market, along with two foreign life and non-life insurance companies.

Despite its small size, the sector is supported bystrong accounting and actuarial infrastructure. The

leading listed insurance companies producetransparent financial statements. The reinsurancerequirements for the sector are very stringent. Aminimum of 80 percent treaty reinsurers must beA rated by internationally reputable ratingagencies and only 20 percent can be BBB rated.The market has witnessed introduction of newproducts like health, crop and livestock insurance.New distribution channels such as Bancassurance,

Websales and Telesales have also recentlyemerged.

Non-Life Sector

Currently there are 35 non-life insurance

companies operating in the market including state-owned National Insurance Company Limited,which has a monopoly over government businessincluding semi-autonomous entities. In non-lifeinsurance business, 3 large private companiesaccounting for approximately 65 percent of themarket share and approximately 93 percent stakebelong to only 10 insurance companies.According to recent reports, the non-life privatesector grew by 3.3 percent and the total premiumrevenue of the non-life insurance sector wasapproximately Rs. 43.6 billion. The main reasonfor this sluggish growth was worsening law andorder situation and the resultant politicalinstability. Additionally, the global recession alsohad an adverse impact on Pakistans economy.

Life Insurance Sector

There are 7 life insurance companies in the marketincluding state owned State Life InsuranceCorporation, which enjoys 68 percent of themarket share. According to latest reports, theprivate life insurance sector grew by 11 percentand the total premium stood at Rs. 41.9 billion.

Takaful Sector

There are 5 takaful operators in the market whohave commenced their business operations in therecent past and are therefore still going throughthe initial phase of development. Out of the total,3 general takaful operators are offering non-lifeinsurance business and 3 family takaful operatorsare offering life insurance. In 2009, the totalpremium of the takaful sector was approximatelyRs1.4 billion.

Reinsurance

A government-owned reinsurer, PakistanReinsurance Company Limited, continues tobenefit from a mandatory minimum 35 percentshare in the treaties of non-life companies.


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Box-2: Way forward for Insurance Sector

Revised solvency regulations shall be introduced in 2011, with an aim to reinforce the financial position of insurers over time and reduce the risk of volatility in the prices of certain assets (equities and properties)threatening their solvency.

SECP is determined to create a transparent and enabling environment thereby increasing the insurancedensity by making insurance costs affordable to low-income people, and alleviation of poverty, by thedevelopment of regulatory framework for micro insurance.

In order to ensure continued availability of comprehensive insurance cover for investment flow in thecountry and thus, to protect economic and financial sectors soundness, the SECP is working to develop aTerrorism Insurance Pool in Pakistan in line with international best practices and models in other

jurisdictions. To eliminate the issuance of bogus motor third party compulsory insurance certificates by unauthorized

persons/entities and to ensure that all vehicles on the countrys roads have proper insurance cover issued byregistered insurance/takaful companies, SECP, after detailed deliberations with the Insurance Associationof Pakistan, had agreed on a comprehensive proposal..

The Takaful Rules 2005 are being reviewed to remove the anomalies and addressing the areas which are

silent in Takaful Rules, 2005. A new set of Takaful Rules 2011 is being formulated and will be issuedshortly, repealing the 2005 Rules.

Source: Securities and Exchange Commission of Pakistan (SECP)

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