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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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Economic Survey 2010-11
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
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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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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)