Pakistan’s banking sector reforms have been employed over 1990s.These reforms have ranged
and refined much vulnerability of banking sector of the economy. You are required to discuss
the impact of these reforms on challenges faced by banking sector of Pakistan on the following
· Corporate governance
· Capital Strengthening
· Consumer Financing
· SME Financing
Please Discuss here about this assignment.Thanks
Our main purpose here discussion not just Solution
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I think yeh assignment kerne ka kisi ka mood nahi:) Or there is some one..Plz share ideas
read lecture number 18 carefully
Please someone give the idea for this assignment.
BANKING SECTOR REFORMS
Banking sector reforms were aimed at addressing these and other constraints. Although
there is no room for complacency and a lot needs to be done it is fair to say that substantial
progress has been made to improve the health and soundness of the banking sector in recent
years. There are still few weak and vulnerable institutions but overall the banking sector in
Pakistan is much stronger today compared to five years ago or in comparison to other
countries in the region. What are the factors responsible for this improvement? A large
number of reforms have either been undertaken or under way.
1. Privatization of NCBs
The nationalized commercial banks are being privatized and their domination of the
banking sector is likely to be reduced from almost 100 percent in 1991 to about 20 percent
by December 2003. The shares of Muslim Commercial Bank are all in the private sector.
United Bank has been sold to a consortium of private investors. Privatization of Habib Bank
Ltd., is under way and is scheduled to be completed by end December, 2003. 23.5 percent
of shares of National Bank have been floated through Stock Market mainly aimed at small
retail investors. The NCBs have been restructured and professional management inducted
which works under the supervision of independent Boards of Directors drawn from the
2. Corporate governance.
Strong corporate governance is absolutely essential if the banks have to operate in a
transparent manner and protect the depositors’ interests. The SBP has taken several
measures in the last four years to put in place good governance practices to improve internal
controls and bring about a change in the organizational culture. The salient features of this
a. Banking license of one of the commercial banks which was found in
violation of the prudential regulations and norms was cancelled for the first
time in the history of Pakistan after following the due process. This decision
was upheld by Peshawar High Court.
b. Ownership and management were changed at two private commercial banks,
one of which had committed breach through unauthorized transfer of funds
from the bank to associated companies.
c. A number of cases of willful bank defaulters were referred to National
Accountability Bureau (NAB) for taking legal actions and recovering the
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d. The appointments of Board members, Chief Executive Officers and key
Executives of all banks have to be screened so that they meet the fit and
proper test prescribed by the SBP.
e. Family representation on the Board of Directors of the banks where they
hold majority ownership has been limited to 25 percent of the total
membership of the Board.
f. To avoid possible conflict of interest and use of insider information the
Directors, executives and traders working in Brokerage companies will no
longer serve on the Boards of Directors of the banks.
g. External auditors are evaluated annually and classified in various categories
based on their performance and other prescribed criteria. Two large audit
firms were debarred from auditing the banks and only after showing
improvement in their performance placed in a category lower than they
originally belonged to.
h. A detailed set of guidelines for the Board of Directors to effectively oversee
the management of the banks and develop policies has been issued. A
training course on Corporate Governance was organized for the members of
the Boards of banks and their Chief Executives.
i. The disclosure requirements for banks have been strengthened and now they
are required to prepare their annual financial statements in accordance with
the International Accounting Standards. They are also required to publish
quarterly and half-yearly accounts to provide information to their
stakeholders for taking well informed decisions.
j. In order to institutionalize the decision making process and to provide
guidance to staff, the banks are required to formulate and implement welldefined
policies in credit, investment, recovery of write-offs, human
resources, audit and compliance, risk management, etc. k. To provide
guidance to banks in identifying, measuring, monitoring and controlling
various risks and to make them proactive, a detailed set of guidelines on risk
management has been issued.
3. Capital Strengthening.
Capital requirements of the banking sector have to be adequate in relation to the risk
weighted assets and conform to the Basle Accord. To further strengthen their competitive
ability, both domestically and internationally and to encourage the economies of scale, the
minimum paid-up capital requirements of the banks have been raised. The banks were
required to increase their paid-up capital from Rs 500 million to Rs 1 billion by 1st January
2003 failing which they will no longer be allowed to carry out full banking activities as
scheduled banks. This has resulted in mergers and consolidation of many financial
institutions and weeding out of several weaker banks from the financial system.
4. Improving Asset quality.
The stock of non-performing loans (NPLs) has been tackled in several ways. The gross
NPLs amount to Rs 252 billion and account for 22 percent of the advances of the banking
system and DFIs. However, there has been aggressive provisioning carried out during the
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last three years. More than 60 percent of the NPLs are fully provided for and net NPLs to
net advances ratio has thus declined to less than 10 percent. Efforts are being made to
further reduce this ratio through the active involvement of Corporate & Industrial
Restructuring Corporation (CIRC) and the Committee on Revival of Sick Units (CRSU).
The settlement reached between loss category loan holders and banks under State Bank
circular No.29 will further reduce the volume of NPLs and allow the sick industrial units to
revive while at the same time enable the banks to clean up their balance sheets. The positive
development is that the quality of new loans disbursed since 1997 has improved and
recovery rate is 95 percent.
5. Liberalization of foreign exchange regime
Pakistan has further liberalized its foreign exchange regime and ensured partial Capital
account Convertibility by allowing foreign exchange companies to operate and Pakistani
Corporate sector to acquire equity abroad.
6. Consumer Financing
The State Bank has removed restrictions imposed on nationalized commercial banks for
consumer financing. The positive experience of auto financing gives a lot of hope that the
middle class of this country will be able to access consumer durables through banks. This
will at the same time boost the manufacturing of TVs, air-conditioners, VCRs, washing and
drying machines, deep freezers etc. in the country. Credit and Debit Cards are also gaining
popularity and the numbers of card holders have doubled during the last two years.
Thanks zeeshan brother, plz also share ur quiz and exam files for this subject.
Why Corporate Governance Matters for Banks?
3. The need for corporate governance in Pakistan is unmistakable. The country has steadily responded to the corporate governance challenges and progress in the banking sector is particularly impressive. Before we consider the corporate governance reforms for banks and the outstanding agenda, let us first explore why corporate governance matters for the banking system!
4. Most importantly, the financial system in Pakistan continues to be predominantly bank based with bank assets to GDP ratio of 58.8 percent for 2007. Good corporate governance for banks, therefore, becomes critical in ensuring solvency and stability of the financial system as effectively governed banks are more efficient and prudent in directing their resources.
5. Secondly, banks are highly-leveraged: they lend money borrowed from depositors and must therefore be accountable to these depositors. The corporate governance framework should, therefore, ensure aligning the interests of the management with equity and debt holders. The corporate governance of banks is intricately tied to the corporate governance of firms with former enforcing discipline through proper due diligence of conduct of corporate and their
financial, while proper governance at corporate level help in safeguarding bank’s interests.
6. Thirdly, ownership and group structure of banks in Pakistan is highly varied. The banking sector comprises of foreign-controlled, family-owned and some state-owned banks, with each 2 type of ownership structure posing its peculiar governance challenges. Moreover, some banks operate as part of industrial/commercial groups while a large number of them have exposure to
the non-bank financial sector through ownership and control. In such a scenario, transparency
and fairness in banks’ lending and investment decisions, particularly those concerning group companies, becomes a crucial requirement.
7. Finally, banks need to adopt good governance practices and customer service standards in order to build public confidence in credibility of their operations. Banks operate in a highly vulnerable environment where bonafide or perceived impression of malpractices in a bank’s dealings could trigger a run on its deposits.