Pakistan
- Population – 156.7m (2006)
- Total labour force – 47.67m (2006)
- % of labour force in agriculture - 40% (2006)
- Average lending interest rate – 6.8% (2005)
- % change in consumer prices – 9.1% (2005)
- GDP at constant 1981 prices – PRs4800bn (2005)
- Agriculture sector as % of total GDP – 22% (2005/2006)
The financial sector underwent major liberalisation in the first half of the 1990s. Several new banks were licensed, exchange controls were all but eliminated, prudential regulations were tightened and monetary and credit policies were rendered more market-oriented. Previously, the state-owned banks had little incentive to be competitive or to manage their portfolios carefully. Political pressure to make bad loans and cease collection efforts resulted in high rates of default. With the onset of privatisation, however, the situation has improved substantially. Aggressive marketing, coupled with rising demand, helped banks to raise net credit sharply. The main demand for credit continues to come from the corporate sector. The textile sector has invested around US$1.5bn over the past three years in the modernisation of equipment. Trade finance is another important component of corporate borrowing. One of the main sectors requiring trade finance is cotton: if the domestic cotton crop performs poorly, necessitating higher imports, demand for trade finance increases sharply.
Although consumer loans currently account for around 5% of total bank lending, they are likely to increase in importance over the next few years. As yields on government short-term securities fell as low as 1% in 2004, the banking sector has improved its profitability by moving into consumer lending—something that was largely unavailable even five years ago. This trend continued in 2005 and 2006, with banks offering loans for purchases of property and cars as well as smaller consumer items. The interest rate on car loans, for instance, which stood at 16% in 2001, is now as low as around 8%. An estimated shortage of around 4m homes means that property lending is likely to become increasingly important for banks, although the move into consumer lending carries risks in the event that interest rates begin to rise.
One of the major problems for banks has been the lack of a long-term instrument to back long-term loans. The government's longest bond issue, the Pakistan Investment Bond, was a ten-year instrument. As such, banks could not hedge housing loans of 20 or more years. To counter this problem, in January 2004 the State Bank of Pakistan (SBP, the central bank) invited tenders for 20-year bonds, which could be used as a benchmark for corporate issues and housing loans.
Although non-performing loans (NPLs) are concentrated in the remaining three state-owned banks, as well as in specialised financial institutions, the Corporate and Industrial Restructuring Corporation will continue to take over NPLs from financial institutions, slowly improving banks' balance sheets. The number of NPLs has dropped substantially, but is still high. In March 2006 net NPLs represented 25.3% of net advances from specialist financial institutions. In state-owned banks the ratio was only 1.5%. Private (excluding recently privatised banks) and foreign banks are in much better shape, however, so that the overall net NPL/net advances ratio in June 2006 was just 2.2%.
Islamic banking services are becoming more common. The Supreme Court had ordered the government to ban the charging of interest from July 2002. However, a few days before the ruling was due to come into force the court overturned its earlier ruling, under pressure from the government and banks. The case has been sent back to the Federal Shariat Court (the main Islamic court, which ensures that rulings are in accordance with the Quran and Islamic sharia law). This is likely to delay a final decision by several years. It is likely that a dual system of both Western-style and Islamic financing will be maintained.
Source: The Economist Intelligence Unit
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