The State Bank of Pakistan (SBP) confessed that even with current reforms, the financial sector and policy makers continue to ignore the issue of credit access to underprivileged segments of society. Pakistan’s banking sector is still not able to carry out its basic and core function.
This was disclosed in a research paper “Bank Credit to Private Sector: A Critical Review in the Context of Financial Sector Reforms”. The SBP staff did a critical analysis of gross domestic production (GDP) and access to credit based on data from the World Bank (WB). The data took a look at 27 emerging countries from 1981 till 2015.
The report says that from 1981 till 1990, private sector credit to GDP ratio was at a reasonable level. At that point of time, Pakistan’s credit to GDP ratio was at 25 percent and Pakistan stood at 12th position. India, Bangladesh, Colombia, Turkey, Mexico were far behind Pakistan during those early years.
During the decade of 90’s Pakistan’s financial sector underwent reforms guided by the International Monetary Fund. The Central Bank switched over to market-based monetary and credit mechanism. This reduced the market segmentation and instilled competition.
The given data also shows that after the reforms, Pakistan’s private sector credit took a nose dive. During 2011-15, the credit to GDP ratio came down to 16pc. Pakistan was now at the bottom position after Argentina.
“The overall environment for private credit growth in Pakistan appears to have deteriorated over time, and banks in the country are not effectively performing their core function, i.e. channeling depositors’ savings into loans for creditworthy businesses and individuals.”
The report asks that during these reforms do policy makers deliberately ignore credit access to a big segment of society? It pointed to the example of Small and Medium enterprises (SME) and agriculture sector which were left out without any access to credit.
“The risk-based capital requirements imposed by SBP, in keeping with Basel Accords, played a part in narrowing the commercial banks’ lending focus to large corporations, at the expense of riskier sectors like agriculture and SMEs,” the report said.
The report suggests that to extend credit to the private sector, non-banking financial institutes (NBFI) must be encouraged. NBFIs have the ability to finance long term projects for SME sector. The report also suggests that reforms are a must in this regard.
“It may have been a better idea to introduce comprehensive reforms in the fiscal domain and domestic debt market prior to reforms in the financial sector.”
To serve the underprivileged segment of society, the report suggests implementing a financial inclusion program. The National Financial Inclusion Strategy (NFIS) aims to enhance access to formal financial services for 50 percent of the adult population by 2020. For underprivileged segment, branchless banking is the key.
“To consolidate these early gains, financial institutions must overcome the limitations of brick and mortar branches by tapping into the potential of branchless banking (BB). SBP is particularly emphasizing the setting up of a tier of simplified accounts – namely m-wallets – and extending the BB agent network,” the report says.