Financial System in Pakistan

A country's financial system consists of a number of institutions and mechanisms for

mobilizing, transferring and allocating financial resources between its suppliers and consumers.

Since financial resources represent the command over real-goods and services at the current

price level in the economy at any given time, therefore, dynamic, transition and allocation refers

to the real resources of the economy.

Pakistan's financial system is relatively sophisticated and diverse, although it is

dominated by commercial banks. There is an active stock market and a number of institutional

investors and other non-bank financial institutions, including Development Financial Institutions

(DFIs), Investment Banks, Mutual Funds, and Insurance, Leasing, Housing Finance, and Islamic

Financial Companies. The Department of Finance is responsible for overseeing and controlling

the provincial finances, preparation of the provincial budget, formulation of financial rules and

civil service rules relating to salaries of government employees, benefits and pensions,
management of government debt and management of affiliated entities, i.e. local fund audits. Is.

Department and Treasury and Accounts Inspector. Administrative departments need to consult

the finance department in all matters that directly or indirectly affect the finances of the province.

All important functions of the finance department, including the budgeting secretariat, are

performed.

History of Financial Control System

In history perspective Pakistan was a truly independent state at the time of its birth,

despite distribution responsibilities and at that time the people were ready for any sacrifice. In

1947, Pakistan gained independence from British rule. After independence, the State Bank of

Pakistan was established as the country's central bank, headquartered in Karachi. Before

independence, the Reserve Bank of India acted as the central bank for Pakistan. The newly

formed state had very little financial resources. State had no financial system to talk, and the

state had no currency and no bank of his own. Though, there were no financial markets and most

of all, there was no institutional mechanism to run the financial affairs of the newborn state. the

newly born state had no debt, no responsibilities left, neither domestic, nor foreign, nor any

shadow over its financial sovereignty.

Pakistan financial control system finds itself burdened with debt, with hardly any room

for tightening the ballot under tight standby agreements with the IMF in the imitation repetition

of the 1990s. During the National Financial Government in Pakistan for almost three decades,

1970s, 1980s and 1990s, major financial institutions lent money to Public Sector Enterprises and

influential lenders who failed in their obligations, thus lending institutions and its owner caused

immense damage to the state. These lenders obtained banking credit from state-owned

enterprises and left behind bad loans, which were dealt with by successive governments which

had no choice but to finance these obligations by borrowing through the banking system.
 Current Scenario Financial Control System in Pakistan

Financial stability reflects a situation in which the financial system, financial system

intermediaries, financial markets and financial market infrastructure, structurally and reliably

support the efficient flow of funds between savers and investors. Ensuring the stability of the

financial system is an important responsibility of central banks and regulatory authorities around

the world to ensure the stability and strength of the financial system, given the importance of

financial stability for the economy to function effectively.

The SBP plays a key role in ensuring the stability of the financial sector. As the Central

Bank and Banking Supervisor, it has been entrusted with the responsibilities under the State

Bank of Pakistan Act, 1956 to regulate Pakistan's monetary and credit system and promote its

development in the best national interest. The Strategic Plan SBP Vision 2020 also calls for

strengthening the financial system framework.

For this purpose, a separate department called Financial Stability Department has been

formed. In addition to integrating financial stability issues in the financial stability sector, the

SBP is working on some new and emerging areas to address financial stability concerns which

are the financial system stability framework, Crisis Management Framework, Review and

Update of the Comprehensive Monitoring Framework, and Identification and Monitoring

Framework for DSIBs in Pakistan. The SBP is playing its role in promoting the protection and

health of individual financial institutions, smooth functioning of the payment system and

effective resolution of problems of troubled institutions.

Pakistan's financial sector consists of Development Financial Institutions (DFIs),

Microfinance Banks (MFBs), Non-Bank Financial Companies (NBFCs), Mud-araba Companies

and other financial intermediaries. The latest financial sector asset structure is given below.
 The Executive Committee on Financial Stability is an internal committee of Bank Daulat

Pakistan. It is a forum for discussing issues of financial stability and oversight, making decisions

to address regulatory risks, and facilitating collaboration between different sectors to safeguard

and enhance the strength of the banking system. The members of the FEEC are: President

Governor, Bank Daulat Pakistan Members include Deputy Governor Policy, Chief Economic

Adviser, Executive Directors (BSG, BPRG, FMRM and Operations) and Director.

Structure of Financial System

The performance of financial system of Pakistan's has shown clear signs of recovery with

a growth of 3.94% during FY20-21 due to timely adoption of epidemic prevention measures and

targeted policy interventions to support economic activities in the country. The banking sector,

which is a large part of the financial sector, has shown resilience to the COVID-19 epidemic due

to strong capital and liquidity cushion. The sector's earnings remained stable during H1CY20-21,

although profit indicators showed some moderation due to the low interest rate environment. The

solvency of the banking sector remained strong at 18.3% with a capital adequacy ratio which is

more than the regulatory minimum of 11.5%. Financial markets, which saw significant

fluctuations in H1CY19-20, remained relatively calm during H1CY20-21, although the exchange

rate showed some fluctuations till the end of the revised period.

However, expressed confidence in the regulators' ability to ensure financial stability and

noted that the SBP's relief measures have been effective in mitigating the negative effects of

infectious diseases. Although economic activity has accelerated over the past year, it is still

sensitive to changing epidemics and changing geopolitical dynamics. Against this background,
banks need to constantly monitor and manage their risks and meet the banking needs of the

economy while carefully balancing the goals of growth and financial stability.

The challenges facing the financial system require that its partial institutions be efficient,

have a maximum size and have a relatively healthy portfolio and the financial system itself is the

best size. These requirements emphasize the need for sustained and sustained efforts for

privatization, strict restructuring of DFIs, tackling the problem of bad debts more effectively, and

eliminating redistribution, and final stabilization of the financial system. At state-owned banks,
we have a deteriorating history of governance and credit discipline, eventually depleting their

capital, largely offset by capital injections through state bank of Pakistan.

Therefore, remaining agenda of 'privatization' needs to be fulfilled as promised. These

banks, as is currently being done, should be sold through competitive bidding and listing on

stock exchanges. This will bring transparency in the process, give real value to the public

exchequer and help in deepening the capital market. Other issues include modernization of

payment system, prevention of bad debts, continuous improvement in corporate governance of

banks or DFIs, upgrade of risk management system.

Evaluation of Financial Institution in Pakistan

The financial sector in Pakistan has seen different stages. The first period spans from

1947 to 1974 and can be called the period of 'pre-nationalization. The other can be referred to as

the 'nationalized' period from 1974 to the late 1980s. The era of 'privatization and deregulation'

began in the late 1980s and lasted until 2004. The current era can be called the era of stability.

During all these years, in 1996, the total number of banks in Pakistan, including foreign banks,

reached 53. Due to the merger and acquisition, this number gradually decreased and by

December 31, 2020, their number was 34. The total number of foreign banks operating in

Pakistan also reached 28 in 1996 and then shrunk to only 5 by the end of 2020.
 The modern financial system has evolved and developed to the point where it can play a

vital role in economic growth and prosperity by making money from savers for investors to set

up and expand businesses. Performance testing requires numerical measurement of inputs and

outputs and their comparison which is called 'production function'. In the case of manufacturing

firms, input and output are easily considered.

Financial system performance is formally reviewed by all institutional stakeholders in

Pakistan. Such efforts result in the preparation of reports in which information is prepared

throughout the board and no single top actor is identified. Public access to such diagnostic

reports is available in at least three cases. Although there are several publications by the central

bank, the most comprehensive is the Financial Sector Financial Statement Analysis which covers

the entire financial sector on an annual basis based on data from the last five years (FSA, SBP,

2020).

Pakistan financial sector recorded a healthy growth of 12.2% in H1CY21, which was

mainly supported by a 10.4% increase in deposits. While the 18.7% increase in investment was

the biggest driver of asset growth, the 6.2% increase in advances also contributed significantly to

the expansion of assets and advances have been boosted by economic recovery, as shown by the
improvement in LSM growth and the rise in the business confidence index to a multi-year high

in June 2021, while SBP refinancing schemes have also helped lend. Improved performance of

key economic sectors and increased financing also boosted lending portfolio asset quality

indicators.

Challenges Faced

In Pakistan when the financial institutions are full of liquidity, it becomes a challenge for

them to carefully protect themselves from the growing effect of excess liquidity on their loan-to-

value ratio and to analyze the rigidity before making credit decisions. This will increase the

interest rate structure on their portfolio as well as help them accurately assess the impact of

shocks such as individual lenders' cash flow estimates, enhancing the effectiveness of

monitoring.

Strengthening the supervisory and regulatory capacity of governing bodies requires not

only enhancing their own capacity but also those of the institutions being monitored. This

requires the installation of good governance, the deployment of effective legal infrastructure, and

the clear delimitation of supervisory responsibilities in the event of an oversupply of supervisors.

Strengthening the legal infrastructure. Although legal and judicial reforms have facilitated the

settlement of financial agreement disputes, the implementation of judicial decisions is still

ineffective, partly due to weaknesses in the law and its enforcement.

Major challenges are the enforcement of the new law on foreclosure still has some dental

problems that need to be addressed. At the same time, the implementation of court decisions can

be facilitated by providing adequate resources to the courts to influence the recovery of debts.

Bankruptcy law is being drafted and needs to be implemented. Similarly, anti-money laundering

law needs to be approved. Another challenge is the reorganization of (DFIs). Pakistan have

failed to reach the target areas and achieve sustainability mainly due to major defaults. Other
issues include modernization of payment system, prevention of bad debts, continuous

improvement in corporate governance of banks or DFIs, upgrade of risk management system.

Overcome Challenges

Pakistan would be minimizing the financial institutions challenges at national level

through the biggest opportunity is to integrate into the international financial market. Foreign

investors in the banking industry are welcome in Pakistan as they bring not only valuable foreign

exchange but also the skills and techniques of modern banking system, modern products and

services and networking into the global chain. As competition in the domestic banking system

intensifies and profit margins on traditional methods of corporate and commercial financing

come under pressure, banks are moving to new business sectors - consumer loans, mortgage

financing, SME financing and agricultural lending. These new areas are needed. Skills, systems

and procedures, control, technology and risk management techniques. Banks need to strike a

balance between smart lending and rapid portfolio building. The gradual transition from a

precautionary framework to a guideline framework will require further elimination of in-house

risk management capabilities and system weak banks within the banks.

The Derivatives another best options to provide the best tools for risk management and

the central bank is encouraging banks to move in that direction. Although, creating awareness,

educating counter parties, enhancing local expertise, introducing appropriate controls and

disclosure standards are some of the prerequisites that must be met. In concluding, as the foreign

exchange system is gradually being liberalized and partial capital account transfers have been

achieved, opening up the market for cross-border risk products for private wealth managers and

well established corporate houses.

Current Position of Financial Institution in Pakistan

economy. It transfers financial resources to the real sector which helps in capital formation and

facilitates financial transactions. A stable and stable financial system is a prerequisite for

economic growth. Pakistan's financial sector consists of bank and non-bank financial

intermediaries. Banking intermediaries include commercial banks, Islamic banks, special banks

and microfinance banks, while non-bank intermediaries include development financial

institutions, non-bank financial institutions, and insurance companies. Total assets of the

financial sector constitute 75% of GDP as of December 31, 2021. The State Bank of Pakistan

and the Securities and Exchange Commission of Pakistan are the top regulators of the financial

system.

Now in the post-global financial crisis regulatory environment, the financial institutions

have adapted by strengthening its regulatory and supervisory framework. Within the watchdog

scenario, regulators around the world are gradually shifting their focus from compliance-based

surveillance to risk-based surveillance. SBP has also begun work on a transition to RBS to

further its existing oversight system and improve its oversight performance. Furthermore, SBP is

designing and implementing a comprehensive macroeconomic policy framework in the country

to ensure financial stability. In this regard, the establishment of the Deposit Protection

Corporation a wholly owned subsidiary of the SBP, is an important step towards strengthening

the financial stability system. In addition, the SBP has set guidelines for the financial industry to

facilitate the development and implementation of consumer protection frameworks.

The Way Forward

In the latest technological age, Pakistan's financial institutions are also facing obstacles

due to rapid technological advancement. SBP has long recognized the importance of technology

and risk management in enterprise technology governance and risk management, positioning of
payment systems, security of internet banking, prevention of cyber-attacks, outsourcing

arrangements through financial institutions. Various guidelines have been issued for It is

pertinent to mention that payment systems are an important part of the financial structure while

playing the role of facilitator in the process of financial arbitration.

SBP, in this regard, has a national payment system strategy to modernize clearing and

settlement infrastructure to reduce costs, improve efficiency, enhance security, and strengthen its

regulatory and oversight. Preparing practical. State bank of Pakistan is also facilitating the entry

of non-banks in the field of payments and has issued rules for payment system operators and

service providers. Finally, keeping in view the current challenges and emerging trends, SBP has

formulated a comprehensive action plan, namely SBP Vision 2021-22. The strategic goals

outlined in the plan emphasize on strengthening the overall, as well as improving the efficiency,

effectiveness and fairness of the banking system. Financial stability system to fulfill SBP's

mission of promoting a stable and dynamic financial system.

References

International Monetary Fund. (2005). Pakistan--financial sector assessment program--technical

Khan, A. H. (1988). Financial repression, financial development and structure of savings in

International Monetary Fund. (2004). Pakistan: Financial System Stability Assessment, including
Reports on the Observance of Standards and Codes on the following topics. Monetary
and Financial Policy Transparency, Banking Supervision, and Securities Regulation, 3-
28. Retrieved from https://www.imf.org/external/pubs/ft/scr/2004/cr04215.pdf

Mid-Year Performance Review of the Banking Sector. (2021). Financial Stability Department
State Bank of Pakistan, 2-24. Retrieved from
https://www.sbp.org.pk/publications/HPR/H1CY21.pdf
Institute of Bankers. (2000). Financial Sector in Pakistan:. The Way Forward, 2-5. Retrieved
from https://ishrathusain.iba.edu.pk/speeches/financialSector/ibpspeech.pdf
Riazuddin, R. (2000). Pakistan: Financial Sector Assessment. State Bank of Pakistan Research
Department, 1-85. Retrieved from https://www.sbp.org.pk/publications/fsa/Contents.pdf

Saeed, M. A., & Akhtiar , A. (2021). Performance Evaluation of Banks in Pakistan Based on
Market Value Ratios. Application of Data Envelopment Analysis, 1-11. Retrieved from
https://gmjacs.bahria.edu.pk/index.php/ojs/article/download/163/137

Year Book. (2020). Government of Pakistan Finance Division, 2-166. Retrieved from
https://www.finance.gov.pk/publications/YearBook2018_19.pdf