A disproportionate share, almost 90 percent, of the non-performing loans have been provided by the nationalized commercial banks and the development financial institutions. These institutions also have high administrative costs and inefficient branch structures. Previous experience with bank privatization provides clear evidence that privatization works. The first two privatized banks increased substantially their recovery ratios and were able to practically freeze administrative costs and accelerate deposit growth. The government should accelerate the privatization of the three nationalized banks, in particular of UBL and Habib Bank.
Further deregulation is needed to promote the creation of a modern financial infrastructure.
At present, significant restrictions remain which segment the market and limit the private sector's access to term financing. For example, the access to external finance is made difficult by the small range of available financial instruments . Basic instruments like preferred stocks and stock options are non-existent in the equity markets. This raises the cost of capital thus reducing the international competitiveness of Pakistani manufacturers. The access to foreign credit financing is restricted by existing imperfections in the market for forward cover for credit related transactions.