A review of Pakistan Financial System:

Financial system of Pakistan has in past two decades has increased efficiency of financial
intermediation and also growing economy with stability. The structure and function of financial
system is vastly different then before the politics empowering financial system has been
immensely decreased due to which solvency problems are diminishing.

Now the focus of financial development leads towards restructuring for activity based financing
not institution based, the financial system is emphasizing now on

1. Efficiency of resource transactions

2. Equal distribution of resources
In this rapidly changing scenario, it’s a challenge to maintaing economic growth with stability,
this stability provision is very difficult for the capital markets just normal monitory policies can
be implemented. The govt seems to be fairly confident and persisting with the existing
philosophy to just regulate the business with in the international standards.
Banks as well as NBFI has gone through major changes in their structure and working basically
due to privatization, deregulation and liberalization. The share holding in past 2 decades have
shifted, now private sector holds majority assets. But these also have enhanced challenges to
SBP, because its an open market and rules and regulations has to be very smart and maintain a
balance
Recently the no. of financial institution has increased, but this increase does not make the system
efficient because some small institutions are in loss due to their mismanagement and
inefficiency. Financial systems must diversify itself not by institution but by activities like micro
financing, Islamic financing. Pakistan banking sector is in an oligopoly state, with five major
banks are price setters, and hold majority assets in banking sector.
Banking institution has captured the market then as compared with NBFI, mainly due the faster
commercial banking growth. In this volatile economic situation SBP has managed to keep the
interest rate stable and established its discount rate as the anchor rate. Recently the NSS has
incurred losses as compared to the banking systems due to its inefficiency and it is expensive
nature,
The credit market has growth tremendously in Pakistan in last two decades, share of private
sector has grown upon 80% in credit issuance, and lately credit growth has declined due to rising
interest rates. Banks are always try to play safe by giving huge loans to premium borrowers to
reduce risks and costs but on the other hand it is disturbing the SMEs and majority of middle and
lower class are dissatisfied.
Sustainability of financial system is concerned with stability and growth( eliminating financial
system weakness) , soundness and solvency(banking systems), keeping lower prices increasing
credit borrowers, focusing on the currency value and exchange rates(financial market volatility)
problems and regulations are discussed and elaborated in the monetary policy by the SBP. For
the stability SBP is very useful as interest rates over the last few years are moving along the
SBP guidelines, this help to have prices, inflation in control and foreign reserves have increased.
But SBP can not control exchange rate through currency market manipulation all the variables
can not be controlled
Increased regulation and supervision by the SBP and banking sector solvency problem is very
much solved , transparency is the thing that change the shape of the banks , now the banks are
very smart have right and correct information and are well energized to handle any threats or to
take advantages of opportunities.
Soundness of banking sector is analyzed and regulated by the SBP itself by viewing the BSR
reports the capital adequacy of the banks is checked and risk assessment is done for the
sustaining the bank soundness, by imposing minimal capital requirements. Asset quality is an
indicator which identifies the proportion of non performing loans in the system, but now there
are no solvency problems due to NPLs. As well as due to increasing regulation policies these
NPLs are declining
Efficiency, the intermediation costs has declined over the years, but it is still very high in
Pakistan as compared to other countries. Spreads are high due to the open markets nothing much
SBP can do about it. The banks profitability is started to be in positive figures after years of
losses due to declined bank expanses, better packaging, better business practices, and are hugely
influenced by the reducing taxes.