MAJOR multilateral lending agencies want the government to minimize “official interference” in the financial sector by granting more autonomy to the regulators. “The granting of more autonomy to the regulators will ensure promoting professional management at all levels of decision making in the financial institutions”, a concerned official said.
He conceded that the World Bank and the Asian Development Bank have expressed their concern over “government’s interference” in the affairs of the banks and other financial institutions.
The government agrees with the donors that a comprehensive legal and regulatory framework, which is equitable and transparent, is essential for stimulating growth.
The IFIs have been informed that the future agenda for reforms include such regulatory design, market incentives and goal based approaches that are flexible, simple and effective.
The aim would be to reduce regulatory costs, to boost efficiency especially of the banking sector, reduce prices, stimulate innovation and improve the ability of the economy to remain competitive.
Although a number of measures taken by the government have led to an improvement in the financial system, much more is still needed to transform the financial sector into an efficient and market-driven financial system.
The government needs to remove these inefficiencies which will be good both for the banking sector and the industrial growth”, a source said adding that the role of the central bank was also needs to be improved, if at all, the objective of stabilizing the financial sector was to be achieved.
One of the major indicator that the banks are not operating efficiently is the widening spread between deposit and lending rates.
The World Bank and the ADB believe that Pakistan should increasingly integrate itself into the global financial system, following the liberalisation of financial markets.
Both the donors want the government to further encourage and facilitate the commercial banks to develop new products and services in such areas as mortgage financing, SME, rural financial services, consumer loans and micro finance. At the same time Islamic banking should also continued to be encouraged to run parallel with conventional banking.
The government is understood to have informed the donors that the SBP continues to pursue growth accommodative policy stance since 1999 that has helped promotion of competition and deepening of the financial sector while broadening its coverage to include the middle and lower income groups. But the central bank also needs to closely monitor the quality of service of banks to their customers in the light of increasing complaints received by the banking ombudsman.
The impact of the broad based access to institutional credit on the economy was found to be direct as well as indirect, as it has diversified the client base from a narrow focus on government, corporate and foreign trade financing to larger spectrum of financial services extending to consumer finance, small and medium enterprises (SMEs), agriculture, housing, construction and micro-finance.
But there are also fears that the fast rising consumer credit also carries risks because of lack of banking expertise and prudent by the banks. Credit risks has become a major issue of new products and changing economic scenario.
