ishrat husain : banking sector reforms in pakistan article by mr ishrat husain, governor of the state bank of pakistan, reproduced from blue chip - the business people ’ s magazine, january 2005. * * * why did we need reforms in the banking sector in the first place? why is it so important to have healthy and buoyant banks? what is the exact role of state bank of pakistan and how does it go about performing this role? where does the government come in this picture? how do these reforms serve the interests of a common citizen as a consumer, depositor, and businessman? these and a host of other questions arise in the minds of a layman who is not so familiar with all the jargon and specialized terminology of finances. we start with the simplest proposition : financial sector development and economic development are inter - related. no economy can grow and improve the living standards of its population in the absence of a well functioning and efficient financial sector. banks in pakistan account for 95 percent of the financial sector and hence good health of banks is directly related to economic growth and development of pakistan. what was wrong with the pakistani banking system that such massive reforms had to be undertaken? banks in pakistan have been catering basically to the needs of the government organizations, subsidizing the fiscal deficit, serving a few large corporations and engaging in trade financing. there was no lending to small and medium enterprises, to the housing sector or to the agricultural sector, which create most of the growth and employment in pakistan. most important, the financial system suffered from political interference in lending decisions and also in the appointment of managers. the middle class which is the backbone of any economy was not given due attention by the banking sector. there were legitimate reasons for such an errant behaviour. first, the government ’ s fiscal deficit was so high that most of the deposits the banks used to get, were loaned to the government and government corporations. this was safe lending which fetched good returns and the banks made good profit out of it. naturally, there was little incentive for them to do anything else except lend to the government which was both risk free and highly remunerative. secondly, the government owned most of the banks. in the government banks the staff worked like typical government employees, coming to office at 9 : 00 a. m., checking files ; having nothing important to do and leaving at 5. 00 p. m. without doing much work. these banks suffered from

shamshad akhtar : financial sector of pakistan – the roadmap inaugural address by dr shamshad akhtar, governor of the state bank of pakistan, at the dawn asia finance conference - asian banking : a paradigm shift, karachi, 13 may 2006. * * * the financial system in pakistan has grown substantially, benefiting from multi - pronged financial reforms. these reforms have been pursued persistently and vigorously over a decade or so and have supported economic growth. the inefficiencies and weaknesses, which were typical of banks ’ operations in the pre - reforms era, have been reduced radically. we have now started to realize the dividends of reforms in the form of a healthier, sounder and stronger banking system. liberalization and deregulation, core pillars of the reform measures, have served to enhance the size of the banking system both in terms of the number of banks and growth in credit, besides instilling a degree of competition in the banking industry. however, the task of financial sector reforms is far from accomplished. given the changing dynamics of the economy and its growing complexities and accompanying associated risks, the financial industry has to remain responsive and supportive of the broader economic ambitions and agenda. the country can neither afford slippages nor can we visualize the future dispensation of the banking system of pakistan. all the major players and stakeholders in the banking system will have to strive for continuity, broadening and deepening of reforms, build and sustain the already implemented reforms and fill the remaining fissures. the growing competition along with increasingly diversified services, both across the regions and sectors, and improved access to customer - base on the back of progressive reliance on technology, are the harbingers of the changing and efficient intermediation role of banks in the days ahead. in order to develop the future outlook, i will now examine both the emerging domestic and external trends, which potentially impact the future financial sector architecture : its structure, texture and the operations of financial institutions. in this respect, eight factors are generally believed to have been the major drivers of change in the financial industry the world over. they include : 1 ) macroeconomic performance and priorities 2 ) deregulation and market forces 3 ) product innovation 4 ) globalization 5 ) technological advancements 6 ) universal banking 7 ) risk management and mitigation 8 ) changing role of and demands on the regulator these forces, to a varying degree, will play a more dominant role in shaping