Moreover, the financial sector is experiencing serious difficulties and is not well positioned to provide adequate support for private sector expansion. Especially severe are the problems faced by the banking sector. Due to excessive political interference in the past, non-performing loans amount to 30 percent of the banking system's total portfolio. Furthermore, numerous restrictions and market imperfections are limiting the access to domestic and foreign investment resources. Further deregulation in the financial sector and bank privatization are necessary to improve the efficiency of the financial system in resource mobilization and savings transformation.
Privatization is a very important step towards improving the performance of the banking sector.
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.