Banks advised to tap new sectors

KARACHI (December 01 2002) : The Advisor to the Prime Minister of Pakistan on Finance and Economic Affairs, Shaukat Aziz, has said that all banks and financial institutions should tap the sectors ignored in the past to help boost credit off-take and broaden the base of banks by attracting retail investment by opening new avenues like mutual funds.

Shaukat Aziz, for the first time after becoming Advisor to the Prime Minister of Pakistan on Finance and Economic Affairs, met the presidents of banks, development financial institutions, non-banking financial institutions in Karachi on Saturday at the State Bank of Pakistan.

Aziz said that since ages banks are lending funds to corporate entities, charging interest rates on their financial footings. Now it is time to change the mindset of the financial sector. “The days are over when the banks would simply put their funds into government securities or treasury bills as the rates would continue to fall and they would not be getting in future what they have been making in the past”.

Banks should move from traditional banking to some other avenues which have immense potential and have depth. If much needed funds are provided to these sectors they could turn out to be an 'engine for the country's economy'.

He said that the neglected sectors are consumer credit, rural and agriculture sector, construction and housing industry, small and medium enterprises and mortgage sectors.

He said that the construction and housing was a multidimensional sector and employment rich field that can really make the economy cycle moving in much higher speed. He said that the prices of real estate have already registered increase of 30 to 40 percent following the sustained inflow of remittances from overseas Pakistanis.

In the four months ended October 31, the remittances from Pakistanis were nearly tripled, to $1.043 billion.

“Micro financing should be in the list of the financial operators as this have immense potential and demand for the financing,” Aziz emphasised.

Some institutions have introduced schemes for small scale enterprises and are catering for their demands but the pace is slow. Banks should expedite their services as emergence of projects from SMEs could help eliminate poverty, unemployment ratio will fall and above all this sector would have the lowest ratio of default.

Aziz said that the banks should also open up new windows or outlets for the 'Islamic Banking' for which the central bank has set criterion to open their subsidiaries.

Only one Bank, United Bank Limited, has launched a mutual fund recently. More banks should follow in its footsteps. Mutual fund could help attract small and retail investors who are the backbone of the developed world. Giving example, Aziz said that in neighbouring India they have 44 million investors at the mutual fund industry whereas in Pakistan only half a million investors are associated with this sector.

Aziz said that in three years the country has witnessed a sea change in the economic policies. Lending rates have been reduced and now it is the duty of financial sector to pass this benefit to private sector to help boost the economy. Fewer banks are offering interest rate in single digit; they should reduce the inter-mediation cost.

Aziz said that the government gradually reduced the tax rate on banks which boosted their profits. Floatation of bonds was allowed to help them clean their balance sheets and clearing of the past tax rebates would be accelerated.

He said that the government needs fewer banks but with strong balance sheets. Mergers should be the priority of the weaker banks so that they could emerge as strong institutions.

Financial sector has shown growth as the marco economic environment has improved a lot in the last three years. Inflation rate is below 4 percent; budget deficit has been contained; exports and imports have shown growth; foreign currency reserves are at comfortable levels; and rupee has gained appreciably; and reverse of capital flight and remittances have showed growth in the last two years.

In 1999, the foreign currency reserves were not enough for six weeks of imports but now the reserves are at $9 billion, enough for around 10 months of imports. The rupee, since September 11 2001, recorded an improvement of 9 percent whereas, in the past, average annual depreciation of rupee was around 8 percent. Imports, especially the machinery, have shown growth which indicates that economic cycles is moving and the local industry is heading towards expansion.

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