the stiffening licensing policy and regulatory capital requirements are already posing a great challenge to the small banks, and with gradual enhancement of the minimum capital requirements in the coming years, they will have to either inject more capital to become compliant or amalgamate with other financial institutions, or as a last option, exit the market. the current trend depicts that new entrants, only allowed by way of strategic partnership in existing banks and / or new islamic banks, are coming in with higher capital. more so, consolidation of financial institutions is well underway and is likely to lead to the emergence of fewer but stronger institutions to meet the challenges of the increasingly complicated financial environment of the future. the competitive environment might also force financial institutions to specialize in offering certain types of services based on their respective expertise and market niches. product innovation in a sharp contrast to international trends, the financial system of pakistan has been lacking in developing innovative products to meet the diversified needs of different customers. however, the emerging financial scenario characterized by intense competition leaves little room for complacency in developing new and attractive products on both the asset and liability sides. product innovation and developing brand loyalty by creating specialized products will decide the volumes of business and market shares in the future. presently, the absence of specialized liability products is most conspicuous. the growing awareness among investors and the expected development of other avenues of funds ’ deployment e. g. the long term fixed income and mutual funds market provide attractive alternatives. thus the financial institutions which take initiative of these kinds are likely to grab greater market share of funds in the future. ideally, greater liberalization with ensuing competition should have led to a narrowing down of spreads. however, in case of pakistan, there appears to exist a somewhat paradoxical situation, where banks are able to widen their spreads mainly because they enjoy comparative advantage in offering unique banking services, primarily because of the almost non - existent competition from nonbank finance companies and a dormant institutional finance industry as pension and insurance sector reforms have yet to catch up with other financial sector reforms. however, the future promises emergence of competitive non - bank companies which offer alternative sources of investments. and banks will need to generate fee - based income to fill the gap created by declining interest incomes. pakistan ’ s market has a huge room for the development of derivatives and synthetic products. the growing financial engineering of services and products requires greater attention to the hedging of risks. financial institutions need to increase their role as risk managers to corporate and other entities by

that central bank ’ s independence is not compromised in terms of the conduct of monetary policy as well as the oversight of the financial sector. in all contexts, it has to be recognized that independence has to be accompanied by effective accountability of the central bank. the institution has to be accountable to the parliament and the senate, and work in conformity with the federal government ’ s goals, as the central bank, among other functions, also serves as an advisor to the government. second, sbp needs to examine where there is further need for internal strengthening. few areas where sbp will gear itself further would be in terms of increased responsive to industry changes in order to align prudential regulations accordingly. among others, sbp needs to be equipped to assess banks when they adopt higher standards of risk management which will be promoted when basel ii is introduced. another area would be for the central bank to strengthen its oversight and supervision, with particular emphasis on closer supervision of the emerging conglomerate structures in the banking industry as some of the commercial banks are now owned by industrial groups and brokers. third, in conclusion, the central bank should energize itself to finance the under - served areas, regions and segments. and, the central bank would like to promote the islamic banking industry, as it has the potential to introduce innovations in the market. as part of the reorganization of the central bank, which is currently in process, we plan to set - up a separate department for development finance, which will push for this objective. having assumed office in january, i am in the midst of developing a strategy for the next ten years of the financial sector, and my talk today presents some ideological thoughts on the long - term vision paper for the central bank, which will be developed in consultation with the stakeholders. we then need to set up an implementation task force, which will be a combined effort of the banking industry and the central bank to take forward these reforms. there has been tremendous change in the banking industry in the last few years and we need to fine - tune our strategic direction as we go forward.