ishrat husain : pakistan ’ s financial sector - a roadmap for 2005 - 2010 keynote address by mr ishrat husain, governor of the state bank of pakistan, at the 54th annual general meeting of the institute of bankers, pakistan, karachi, 14 october 2004. * * * the first generation of reforms in the financial sector of pakistan is about to be completed successfully and we have to lay down the proposals for eliciting wide discussion on the second generation of reforms. the reforms should be implemented in the next five years, although they have to be reviewed continuously to adapt them according to the changing circumstances both domestically and internationally. the objective of the second - generation reforms is to further deepen the financial sector and integrate it into the global economy. before we lay down the proposed road map, let me recapitulate briefly as to what we have learnt from our experience so far and what we have accomplished so far. lessons learnt : first, financial sector functions effectively and efficiently only if the macroeconomic situation is favourable and stable. the need to maintain macroeconomic stability will thus remain imperative for the coming period too. second, reforms can be successfully implemented only if there is consultation, involvement and consensus building among all the stakeholders throughout the process. an institutionalized mechanism for this interaction and collaboration has to remain in place. third, there has to be an active champion for conceptualizing, formulating, sequencing, implementing and monitoring reforms. in the absence of such a champion, there is a serious risk of derailment, reversal or abandonment. fourth, application of technology, intensive use of human resource competencies and managerial skills are the key tools for achieving results and have to be carefully nurtured and upgraded continuously. fifth, the regulators have the responsibility to communicate and explain the rationale, progress and outcomes of their policies and keep the market players fully informed. results accomplished : ( a ) financial markets in pakistan have been liberalized and have become competitive and relatively efficient but still remain shallow. ( b ) the array of financial instruments available for various types of transactions in the market has widened but the evolution of new instruments has to remain on track. ( c ) financial infrastructure has been strengthened but the legal system is still too time consuming and costly for the ordinary market participants. ( d ) regulatory environment has improved and the capacity of regulators to oversee and monitor is much better today but the enforcement and prompt corrective action capabilities need to be further enhanced. ( e ) financial

##unication sector in pakistan, the opportunities for further value added services to underpin banking transactions have multiplied manifold. while small and medium banks can now offer on - line services to their customers, the large banks have to move more expeditiously so that the e banking network can be utilized optimally. transaction costs will become lower and customer service will improve. a variety of new services can then be offered. our atm penetration ratio is still quite low and we should expand atms more aggressively while maintaining them in good stead. ( f ) private equity, pension and provident funds : there is still a mismatch between the growing appetite of institutional and contractual saving institutions for long term investment vehicles and the demand for long gestation mortgage, infrastructure, real estate and project financing. private equity and venture capital funds, private pension and provident funds and insurance companies can play an important role in filling in this market segment. i would very much urge those who are always so keen to obtain a traditional banking licence to exploit the vast potential by setting up these new types of funds which are almost non existent in the country but are badly needed. i can assure you, on the part of the secp and sbp, that we will render all possible assistance to those who wish to move into the fields of private equity funds, venture capital funds, private pension and provident funds, real estate investment trusts and similar other vehicles. ( g ) investment banking : the role of investment banking in pakistan has remained quite murky so far. the spread of universal banking model in the country has led to a certain degree of ambiguity as far as the market niche in which investment banks can operate. in my view, the corporates will always require investment banks to render services such as investment advisory, corporate restructuring, distressed assets acquisition and disposal, mergers and acquisitions, equity and debt financing. the investment banks have to get away from their aspiration to mimic commercial banks and build up their capabilities in the areas, which are begging for help. commercial banks will never be able to compete with them either on costs or customer satisfaction even if they all profess that they can provide total banking solutions to all the clients needs. several investment banks have merged into commercial banks but those who are serious players in this field should re - examine their strategies and direction and build up their human resource capabilities. ( h ) human resource development : i wish to thank all the chief executives of banks who have put in place transparent and merit based system of