Opportunities and Challenges facing the Financial Sector in Pakistan

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1. Hypothesis Financial services sector in Pakistan has evolved from conventional and conservative through customer hungry competition during the last two decades much fueled by global deregulations resonated into Pakistan’s financial sector; influx of mushroom local banks in the private sector; and, opening of branches by many foreign banks. Ironically, the cost of transition far exceeded the envisioned advantages so much so that at a point in time smaller local banks and single branch multinational banks were either acquired by bigger ones or they merged amongst themselves to upscale their shock bearing thresholds. Citi Group recently retreated back to its earlier position, which is a clear acknowledgement of the scenario noted above. In short, on the whole every bank that enthusiastically embraced the impulsive competition posted very little to no sustainable advantage on their balance sheets. On the contrary, banks that approached the competition rationally and cautiously were able to do no harm to their balance sheets. Interestingly, the US financial melt down that truly turned into a global syndrome preempted the State Bank of Pakistan like many other Central Banks for strengthening laws and regulations that were in the interest of the depositors in particular and of the sector in general. Signing of Basel III agreement; enforcement of Corporate Governance; strengthening of risk management and compliance regulations; etc. are but a few measures taken by many Central Banks including State Bank of Pakistan. The result is now the consumer hungry competition has been harnessed within the bounds of prudent laws, regulations and practices that are technically aimed at protecting the banks’ from sliding into “havoc” situations. But the damage to banking culture that affected most of the banks as a by-product of consumer hungry competition entails bigger challenges for the much needed correction. In conclusion, to put the banks back on prudent lines is a humongous task. Each stakeholder in the sector has to play its role in this pursuit. The indicative interventions are summarized below: i. Re-regulations and their implementation in the letter and spirit by the Central Bank ii. Implementation of code of “Corporate Governance” in the letter and spirit iii. Implementation of international best practices in risk management, compliance, internal controls/audit at every level in banks iv. Intensive re-orientation and capacity building of employees at each level augmented by rigorous performance management system and policies v. Enforcement of depositor protection laws and regulations

Sohailuddin Alavi, March 12, 2013 (ccgroup.pakistan@gmail.com)

Indicative Research Questions i. You will agree that banking in Pakistan has changed at 360o during the last two decades. What on the whole have the banks gained and lost? ii. What in your opinion were the driving forces that fostered the change? iii. How do you rate the influence of international financial institutions in shaping the local banking culture? iv. How do you assess the role of State Bank of Pakistan in promoting the culture directly or indirectly? v. How do you see the re-regulations made of late to reverse the derail? vi. How do you make individual banks responsible in the emergence of the new culture? vii. What role do the banks must play to avert the dysfunctional effect of the new culture both internally on their respective productivity, organization structure, and cost of doing business, and externally on the competition, customer protection, compliance, etc.? viii. What challenges Pakistani banks are facing currently? ix. How do you envision the future of Pakistani banking industry’s future profile?

Sohailuddin Alavi, March 12, 2013 (ccgroup.pakistan@gmail.com)

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