shamshad akhtar : reflections on global and domestic developments speech by dr shamshad akhtar, governor of the state bank of pakistan, at the formal launching of samba bank ltd. in pakistan, karachi, 1 november 2008. * * * year 2008 is and will be remembered as one of the most turbulent years in world ’ s economic history. impact of the sequence of global events, ranging from global financial market turmoil to surge in global commodity prices, has impacted regions differently and unevenly. united states being the epicenter of the tsunami of financial market upheaval, has witnessed deeper and steeper reverberations whose tremors have impacted all of europe. from what started as turmoil in one segment of financial markets i. e. subprime mortgage market and the cdos etc., which constituted a very small part of the global financial assets, the ravaging fire has spread across all segments of financial sector, and across continents. flight to safety also put pressure on commodity prices which appeared to be an alternate avenue to hedge investors from financial market upheavals. financial markets ’ indulgence in over - leveraging and reckless issuance of mortgage securities without due diligence, with resetting of pricing in a rising interest rate environment, overwhelmed both the issuer and the investor. major money and interbank markets witnessed liquidity crunch as counterparties faced settlement difficulties and defaulted, adversely impacting credit markets. the problem magnified as the global liquidity crisis eventually hurt global financial institutions that one after the other collapsed under the stress. this was marked by falling share prices of financial institutions, rising cost of funding and credit default protection, and depressed asset prices. from a liquidity crisis, world financial markets faced a host of insolvency of global financial houses as the deleveraging gained momentum. amidst all this, equity markets fell across continents and lost sizeable market capitalization with severe wealth effects at both industry and household levels. financial markets and housing problems have significantly impacted global economic outlook that is now expected to slow down to 3 % with advanced economies already in recession. central bankers and regulators have been now firefighting for over 15 odd months. aside from the steady easing of monetary policy, liquidity injections of unprecedented levels through offers of rounds of term facilities and specialized arrangements, and taking off illiquid securities off the financial institutions ’ books etc., to a range of fiscal tax breaks and financial market revival packages that aim to rec

robust and stronger system, ( iii ) mobilize the domestic and foreign resources for private investment ( which has to be the key driver of the economy ), and ( iv ) deepen financial penetration for poor and underserved regions. the major areas of reforms advocated in the financial sector strategy are : ( i ) central bank governance : no reform can be complete without also further strengthening of the central bank. in this context, sbp has launched work to modernize the central bank legislation in line with the international best practices. ours is one of the oldest laws in the world and as such it includes some outdated provisions, even though the law has served the central bank well in delivering several of its function. the new sbp act ought to provide more autonomy of sbp, along with proper accountability, to pursue clearly defined goals of monetary and financial stability and would make explicit how the sbp has to report on its performance to the cabinet and parliament. ( ii ) adoption of a holistic financial inclusion program which is quite far reaching both in its depth and breadth. recognizing how underserved people and the regions of pakistan are by financial markets, sbp has advocated commercialization of the microfinance industry which will help provide financially and socially sustainable financial services. under this program, effort will be made to enhance outreach to initially 3 million people relative to fewer than one million a year back. ultimate goal being to raise it to 10 million. in the same view sbp is steering the islamic finance industry to also deepen financial penetration to serve the requirement of that segment of population and industry which has self excluded itself for faith reasons. sbp is planning to launch several initiatives to enhance sme financing and such initiatives include, among others, development of credit scoring, credit enhancement mechanism and innovative product and modalities etc. plan is to also meet 75 - 80 % of agriculture requirements and sbp is steering several initiatives ranging from crop loan insurance to offering guidelines for financing livestock, fisheries and horticulture etc. ( iii ) strengthen consumer protection and financial education. under this rubric, sbp plans to introduce a consumer protection bill, requires pba to adopt a banking code to commit banks to fairness, disclosure and ethical standards, while nurturing competitive pricing of products, strengthen the consumer protection department which was recently established in sbp, transforming banking sector ombudsman, introduce the small depositor protection scheme and launch campaign of financial literacy. ( iv ) consolidate and strengthen the banking sector by promoting