Banking Sector And Economic Growth in Pakistan
Banking sector plays a critical role in economic growth and development performance in any economy. But this critical link is largely missing in Pakistan. Banks in general have done well as an industry but they are far from an integral part of an economic growth strategy which ensures greater availability of and access to credit.
This can be clearly understood if the role of banking sector in development and growth performance is discussed in context of our extremely fragile existing economic conditions especially relating to the persistence of uncontrolled government borrowing banking sector profits and competition
General economic conditions in the country are characterized by low growth, high inflation, large fiscal deficit, dwindling foreign direct investment and a ballooning debt level as well as by precarious security situation, poor law and order political instability, growing energy crisis are also weighing negatively on the growth prospects
In a generally low economic environment and large budgetary commitments including the expensive commodity operations and losses of public enterprises, the government heavily relies on the banking sector to borrowing
It is the uncontrolled government borrowing to finance its fiscal deficit that is fuelling high inflation while “crowding out” private sector credit and investment. It is also responsible for the persistence of ultra-tight monetary policy, high interest rates…
We believe that banking sector in Pakistan is not geared to support high long term growth averaging 7 percent per annum for at least a decade and half to really make a dent in abject poverty levels and for meaningfully lifting living standards of the majority of population.
This is because in an environment of high interest rates banks hesitate to bend.
We believe the banking sector is mainly being used to finance government borrowings and not to support economic growth that depends on investment.
High cost of borrowing is constraining new investment without which economic activities and job creation cannot be promoted.
Despite low growth and weak real sector, banking industry continues to enjoy healthy profits due to lack of competition and unchecked cartelization.
Banking sector needs to be encouraged especially with the help of consolidation. Pakistan needs at least 5 big investment banks to support capital markets development and economic growth.
Banking need to play a bigger role in mobilizing domestics’ savings which are critical to increase the overall investment levels.
SBP needs to ensure prudential regulations are in line with the need of the economy.
SBP can play a critical role in promoting venture capital also known as risk finance for greater entrepreneurialism especially in the SME sector.