Yaseen Anwar: Developing non-bank financial models while addressing
the risks of shadow banking
Address by Mr Yaseen Anwar, Governor of the State Bank of Pakistan, at the SECP
(Securities and Exchange Commission of Pakistan) Conference on "Non-bank financial
institutions", Karachi, 4 March 2013.
* * *
Mr. Muhammad Ali, Chairman, SECP,
Distinguished Speakers,
Ladies and Gentlemen - Good Afternoon!
I would like to thank the SECP for inviting me to join you and address this very timely
conference on Non-Bank Financial Institutions (NBFIs). I congratulate the organizers for
holding this pertinent event which has gained special prominence in the aftermath of the
global financial crisis. I sincerely hope that today's session will give further impetus to our
efforts in promoting NBFIs as an alternative source of funding for businesses and also as a
separate class of assets for investors in the country, adding to the financial sector's diversity,
stability and viability in the long-run.
Globally, NBFIs have gained a prominent position and role in the financial sector and
economy. However, the role of this sector has recently been scrutinized for its contribution to
financial sector fragility during the recent global financial crises. Therefore, at the November
2010 G20 Seoul Summit, while reviewing the new capital standards for banks (Basel III), the
G20 Leaders identified some remaining issues of financial sector regulation that warranted
attention. They highlighted "strengthening regulation and supervision of shadow banking" as
one of these issues and requested the Financial Stability Board (FSB), in collaboration with
other international standard setting bodies, develop recommendations to strengthen the
oversight and regulation of the "shadow banking system".
The "shadow banking system" is defined as "the system of credit intermediation that involves
entities and activities outside the regular banking system" in other words intermediation
through non-banks. The term started to be used widely at the onset of the recent financial
crisis. The emergence of the term reflected recognition of the increased importance of
entities and activities structured outside the regular banking system that perform bank-like
functions.1
The financial sector in Pakistan comprises of Commercial Banks, Development Finance
Institutions (DFIs), Microfinance Banks (MFBs), Non-banking Finance Companies (NBFCs)
(leasing companies, Investment Banks, Discount Houses, Housing Finance Companies,
Venture Capital Companies, Mutual Funds), Modarabas, Stock Exchange and Insurance
Companies. Under the prevailing legislative structure the supervisory responsibilities in case
of Banks, Development Finance Institutions (DFIs), and Microfinance Banks (MFBs) falls
within legal ambit of State Bank of Pakistan while the rest of the financial institutions are
monitored by other authorities such as Securities and Exchange Commission and Controller
of Insurance.
In Pakistan, while the overall assets of the financial sector have increased from
Rs. 5.202 trillion in 2005 to Rs. 11.107 trillion in 2011, the share of the financial sector in
terms of GDP is very low at 57.4 percent. In 2011, Banks held 74 percent of the financial
assets while the share of NBFIs was only 4.7 percent of the total financial sector assets
which was around 7.6 percent in 2005. The low financial sector to GDP ratio and NBFIs
declining share in financial sector assets clearly underscores the need for financial sector
development and diversification of financial sector assets to attract investors with different
return expectations and risk appetite and channelize financial resources for the economic
development of the country. Therefore, today's conference is very important and we should
use this opportunity to understand the key bottlenecks in the way of financial sector
development and also come up with concrete measures to address these shortcomings in a
sustainable manner.
Alan Greenspan identified the role of NBFIs in strengthening an economy, as they provide
"multiple alternatives to transform an economy's savings into capital investment [which] act
as backup facilities should the primary form of intermediation fail".2 On the other hand, the
NBFIs offer an alternative to typical commercial banking saving-investment products.
However, in Pakistan, NBFIs other than Investment banks and leasing companies which
offer saving and investment products on a relatively small spectrum need to develop
appropriate and affordable products to increase its market share. The key negative outcome
of this is that there remains limited access to funding resources and relatively higher risk
avenues to earn spreads.
Here I would like to briefly touch on the major constraints that the NBFI sector in Pakistan is
beset with:
First, although there has been an increasing effort by NBFIs to broaden the range of their
business activities and product base, thereby diversifying their revenue streams, the sector is
yet to make a breakthrough in this regard.
Second, the sector is fragmented and each NBFI is trying to create its niche market in pursuit
of establishing a sustainable revenue stream. In this regard, most companies are
concentrating on financial advisory and other fee-based income segments. Unfortunately, the
sector is yet to capitalize on the huge opportunities offered by previously relatively untapped
areas like SMEs, Consumer, and Agriculture segments to enhance avenues for fund
deployment.
Third, the sector needs to develop and diversify sources of funding for sustainable growth.
This would require a shift from the traditional sources such as commercial banks credit lines
etc for on lending to clients. The NBFIs need to develop capital market instruments to pool
funds from a diverse set of investors to ensure certainty to the source and cost of funding.
Fourth, we need to strengthen the oversight and regulation of NBFIs to reduce the risks
emanating from "shadow banking". As observed by FSB, the objective of this exercise should
be to ensure that shadow banking is subject to appropriate oversight and regulation to
address bank-like risks to financial stability emerging outside the regular banking system
while not inhibiting sustainable non-bank financing models that do not pose such risks.3 The
measures articulated today adhere those very regulatory issues going forward.
In conclusion, I would like to say that the financial system in Pakistan is yet to grow to its full
potential and play a more meaningful role in the economic development of the country.
Therefore, we definitely need to add to its diversification and depth. NBFIs can play a
meaningful role in this pursuit. In light of the global financial crises, we are better informed
about the various risks that the NBFIs/Shadow Banking carries with it. As regulators we need
to remain vigilant to ensure that those risks are mitigated without inhibiting sustainable
non-banking financing models.
Thank you.