Restructuring of financial sector By: - Articles Detail
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Restructuring of financial sector  Back
One may accept it or not but Pakistan's financial sector mainly comprises of commercial banks. Al other sub sector have either become extinct of which shortly become extinct because of the prevailing regulatory infrastructure. The guru of developing 'financial super markets' was Mohammad Ali Khoja, the then Managing Director of PICIC. He had also developed a strong following but his exit crumbled the infrastructure at budding stage.
The system he proposed has not completely collapsed because commercial banks have effectively become holding companies that hold majority or substantial stake in asset management companies, insurance companies and even Modarabas. Besides, banks also have invested considerably large amounts in shares of listed companies as well as government securities. Therefore, it may not be wrong to say that commercial banks have the largest stake in all the other entities that are required to help in formation of capital. The added disadvantage is that DFIs and investment banks may be exist on paper but are of no consequence.
Lately, the Securities and Exchange Commission of Pakistan (SECP) has become a little active and wishes to make non-banking financial institutions (NBFIs) a little robust so that pressure on commercial banks can be reduced. The initiative may be good but will require a lot of efforts to segregate different functions and then trying to develop separate enteritis. It may not be wrong to say that both the regulators as well as the players are responsible for the prevailing mess.
On can still recall that there was a suggestion to make it mandatory for commercial banks to create separate entities to undertake leasing business, they way they has created Modarba companies. Unfortunately the central bank didn't pay any attention fearing part of the funds will go to those enteritis to be supervised by the SECP. There was also a suggestion to give regulatory mandate of leasing companies to the central bank, which was blatantly refused by the leasing companies. After 2008 leasing companies approached the central bank to become their regulators but the request was turned down.
One can still that in the past a large number of leasing companies, Modarabas and investment banks were allowed to operate but soon went bankrupt. Almost the same fate was met by IDBP, NDFC, ICP and PICIC as the commercial banks started extending medium to long term loans. It may not be wrong to say that after the privatization of commercial banks almost all the sponsors indulged in 'you scratch my back and I scratch your bank' or 'all within the family. This is not an allegation but a hardcore fact if one examines balance sheets of the commercial banks.
While one may say that since level of delinquency is low technically there is nothing wrong with following the practice but in fact this has become mother of all evils. The number of beneficiaries of banking system is on the decline. The government takes away bulk of the deposit at a borrower offering higher and risk free return, the remaining paltry amount is shared 'all within the family' a general public has been completely excluded. Though, the central bank claims to be following 'financial inclusion program' which has not gone beyond consumer paying their utility bills under a new system, as such borrowing from banks remains next to impossible.