owned banks. • restructuring operations and elimination of excess or redundant manpower. we should also be cognizant that a liberalized system described above would also be more vulnerable including possible systemic breakdown in which many financial firms and businesses may go out of business. if the political leadership have cold feet and do not allow terminally sick and financially unviable firms to die their natural death then the financial sector would always remain saddled with unnecessary burden exacerbating the event risk of banking crisis at some unknown time in the future. • having discussed the pre - requisites of a market structure that will improve the efficiency of financial intermediation let us now turn to describe the essential elements of a desirable regulatory framework. banking regulation should ensure that : • adverse selection in bank entry is avoided by making certain that individuals more likely to misuse banks do not get bank charters, banks have adequate capital investment, cross ownership is proscribed and character stipulations for bank ownership are enforced. • the incentives of bank owners remain aligned with those of the depositors so that bank owners stand to make substantial losses in the event of insolvency. loans loss provisions and capital adequacy regulations play a key role in bringing about such as alignment. • excessive risk taking by bank managers is prevented by close scrutiny and supervision of their asset management. this includes measures limiting bank holdings of excessively risky assets, preventing lending to related parties, requiring diversification and making that banks have appropriate loan appraisal, documentation, follow up and classification procedures. along with the issues of harmonization of market structure and regulatory environment in the saarc region there is another issue that impinges upon the efficient functioning of financial sector i. e. autonomy and independence of the central banks among various countries. assuming that the countries in the region are able to implement the measures required to achieve harmony in the market structure and regulatory environment the capacity of the central banks to taking appropriate actions on right time without interference, approval or reversal by another layer of decision makers will be quite critical. thus the imperative of attaining central bank independence at an even keel in each country assumes an important dimension. after laying out the analytical framework and specifying the characteristics essential for harmonization of banking sectors in the region it may be useful for me to narrate the progress pakistan has been able to make in respect of each of the three dimensions discussed above. i do not wish to imply by presenting the experience of pakistan that this should be

ishrat husain : harmonization of the banking sector in saarc region keynote address by mr ishrat husain, governor of the state bank of pakistan, at the south asian federation of accountants conference held in new delhi, india on 28 august 2004. * * * harmonization of the banking sector should not be seen as an objective in itself for the member countries of saarc region but it should be considered as a tool for achieving a large objective. south asia has the largest number of poor people in the world. any objective must therefore aim to address this particular issue in a perceptible way. thus there must be a broad agreement and consensus that the objective should be greater production and exchange of goods and services among the regional countries so that the larger market achieved through intra - regional trading is able to generate economies of scale, lower cost of production, increase efficiency and lead to higher growth rate and reduce the incidence of poverty. unless all the stakeholders in the countries of the region strike a consensus, forge a strategy and action plan in a sequenced and structured way the likelihood of an enlarged south asian market becoming fully effective will remain low. • leaders of saarc region have, after a long hiatus and slow start, agreed to weave together the south asia free trade agreement ( safta ) in 2006. the practical implementation of safta is therefore a priority for all the member countries. careful planning and sequencing will be required along with strong political will to move in this direction. some of the preparatory steps for making safta take off in a meaningful way are : • trade facilitation through expeditious border crossings, quick custom clearance, efficient port facilities, improved transport links should precede or take place simultaneously with the expansion of volume of cross border trade. • domestic tax, tariff and subsidy policies that affect production and trade incentives should be harmonized to avoid recurrence of trade disputes and frequent use of anti dumping laws. as india provides a lot of subsidies to its producers in various forms and shapes the smaller countries are hesitant to allow mfn status to india. the recourse to a long negative list that restricts the volume of trade should be avoided at all costs. • macroeconomic policies such as fiscal and monetary policies should be harmonized to achieve a stable, non - discriminating macroeconomic environment for all the countries in the region. • supporting institutions to manage and facilitate integration, for example, setting standards