being consolidated, sbp has been licensing both islamic and microfinance banks. the ultimate aim is to have fewer and well capitalized banks of sound repute having a broad based clientele and geographical reach. it is only the sound, and adequately capitalized banks that can take up the dynamic role required in a developing economy like pakistan. consolidation is also critical factor to deal with any effects of the reversal of business cycle. at the moment, the economy is enjoying high growth, and the future outlook is quite buoyant. sound policy making, however, demands that the institutions are strengthened during the boom period to make them resilient against cycle reversal. the rise in interest rates can become a forbearer of economic contraction or at least limited market correction. as such it is important to pursue policies that encourage creation of reserves on the balance sheets of the banks that will act as a cushion in the time of crisis. the recent step of tightening up of classification criteria of npls is very timely. 24. fourth, while banking sector ’ s profitability has improved, there is need to further enhance competitiveness in the industry currently, there is high sector concentration as the top five banks ( out of total 39 banks ) hold more than 50 percent of the industry assets, advance and deposits. the wave towards consolidation of banks is expected to enhance competitive pressures – for instance foreign banks are enhancing their outreach by acquisition of some strategic small banks which have a good branch network and few newer, relatively smaller, private banks have spread their reach to most major cities. these banks are now providing clients an option to diversify their business and not exclusively dependent on nationalized and large privatized banks that were the only sub - groups that had nationwide branch network. 25. fifth, adoption of new basel ii accord brings in a comprehensive risk management system and links economic capital with the risk assessments. banking industry worldwide today faces several issues and challenges which unless effectively addressed would impact the pace of adoption and implementation of basel ii. in pakistan the roadmap has already been given, and the standardized approach will commence from january 2008, while parallel run have been started from july 2006. the sbp ’ s strategy is to work very closely with the banking industry to ensure that basel ii implementation is well planned and formulation of a steering committee is already underway under the guidance of sbp. however simply upgrading banking sector will be quite impossible to undertake unless the allied / support entities ( e. g. credit rating agencies, it

number of cfa charter holders and expects the numbers to grow as more and more sbp officers pursue cfa certification. ladies and gentlemen, let me now shed some light on why it is necessary for all of us to equip ourselves with advance knowledge and tools proactively. the global financial crises ( gfc ) has aptly demonstrated the havoc that can be caused when profit taking motive combines with lack of transparency and disclosure standards, inadequate awareness of sophisticated financial products, optimistic expectations about asset pricing and lax regulatory standards. the global financial crisis forced the regulatory attention towards containing systemic risk and ensuring financial stability through strong capital and liquidity standards ( such as basel iii ), more stringent regulations, and introduction of macro prudential policy toolkit. financial stability demands timely identification of systemic vulnerabilities along with mitigating measures to limit page 2 of 5 the spillovers and keep the public confidence intact. appreciably, cfa institute has updated its curriculum to address the key lessons learnt from the global crisis. ladies and gentlemen ; not surprisingly, ensuring financial stability has now become the number one priority of many of the central banks around the world. sbp is also playing a pivotal role in ensuring stability of the financial sector in pakistan. in line with its vision 2020 ’ s focus on strengthening the financial stability regime in pakistan, sbp has established a separate financial stability department ( fsd ). an executive level financial stability executive committee ( fsec ) has also been constituted within sbp which is entrusted with the responsibility of discussing and monitoring financial stability issues. further, sbp and secp have formed a council of regulators, which will act as a forum for deliberating issues related to systemic risk, particularly those having cross market stability implications. work is also underway to form a national level financial stability council ( nfsc ) involving other stake holders such as ministry of finance. it is no secret that developed financial institutions act as a catalyst for enhancing financial intermediation, reduce information asymmetries and allow central banks to implement and achieve policy objectives. monetary policy is, generally, implemented through money and foreign exchange markets where financial institutions, particularly the banks, play a pivotal role. if financial institutions are fairly mature, markets are efficient and there is low uncertainty, the effectiveness of monetary policy increases as the monetary signals are smoothly transmitted to the entire spectrum of the yield curve. sbp, through its various policies and initiatives, has been endeavoring to create an enabling environment for the