KARACHI, Feb 23: The financial sector experienced an extraordinary growth, accumulating its assets up to $180 billion, but the State Bank of Pakistan warns that the growing macroeconomic imbalances could threaten stability of the sector.

Speaking at the convocation of the Institute of Bankers on Saturday, SBP Governor Dr Shamshad Akhtar said that the assets of the financial sector have grown to $180 billion or 125 per cent of the Gross Domestic Product, compared to 95 per cent of the GDP at the end of 1997.

However, she was cautious to warn that macroeconomic imbalances were against the stability of the sector.

“Although it is comforting that financial risks are well contained, growing macroeconomic imbalances, unless addressed urgently, can threaten the financial stability,” said Dr. Shamshad.

She said one of the major risks to Pakistan’s financial stability was its overall lack of financial sector diversification.

“Of particular concern is the size and issues surrounding non-bank sector,” she said and added that of the total financial sector assets, insurance companies account for barely three per cent, mutual funds three per cent and are largely sponsored by banks, while other non-bank financial companies account for two per cent of the system and holders of listed private bonds less than one per cent.

The SBP governor laid stress on greater credit diversification which helps stabilise the financial sector.

She said over 50 per cent of the bank credit portfolio is concentrated in corporate sector serving fewer industries.

“Diversification of banks’ loan portfolio to support more retail and infrastructure financing will be critical for growth of the banking sector,” she said.

The State Bank also needs to develop its capacities to monitor financial position and probability of default of the corporate and household sector within the stability framework, she added.

The governor said that the financial sector stability has been further fostered by the strengthening of banks’ system-wide capital base to Rs372 billion.“Process of consolidation has been catalysed by 30 odd proactive mergers and acquisitions (both domestic and foreign-led), moratorium on licensing of conventional banks, and rise in minimum capital requirement for banks and DFIs,” she said.

She said the financial sector is now predominantly owned by the private sector that presents some new challenges.

The SBP is now working to develop an adequate policy framework for consumer protection, development of financial safety nets, such as deposit insurance, and a well laid out ‘Lender of Last Resort’ procedure which strikes a balance between enhancing consumer protection and minimising moral hazard concerns, she said.

The State Bank has also set up a consumer protection department to safeguard interests of consumers, she added.

“At the same time, there is a need to encourage improvements in efficiency of financial intermediation by reducing banking spreads,” she said.

The State Bank is further developing capacities to monitor operational risks associated with weak internal control systems, delays in adoption of information technology solutions and outsourcing of processes.

She stressed that there was a further scope for enhancing banking sector stability too. “Although competition is emerging with the growth of mid-size banks and foreign acquisitions, five largest banks hold 50.6 per cent of total banking sector assets; though there is a clear reduction in the level of concentration which was at 63.2 per cent in 2000,” she added.

The governor said that presence of undercapitalised small banks is likely to pose risks, particularly during periods of adverse economic cycles.

“Entry of foreign presence and Islamic banks and mergers and acquisitions will enhance competition, diversify business sources and facilitate further consolidation,” she remarked.

The governor said that there was now a survey underway to assess the compliance of banks’ corporate governance with SBP regulations.