*KARACHI: **State Bank of Pakistan Economic Review 2018-19 unveilschallenges to the economy in coming years and times.*
*The State Bank of Pakistan (**SBP), in its flagship annual publicationtitled Financial Stability Review (FSR) year 2018 issued here on Thursdaysaid the macroeconomic imbalances impacted some segments of financialsector.*
The review presents performance and risk assessment of various segments ofthe financial sector including banking, non-banking financial institutions,financial markets, exchange companies, non-financial corporates andfinancial market infrastructure.
In addition, it discusses the possible implications of the appraised risksto the overall stability of the financial sector.
FSR suggests that the calendar year 2018 had been a challenging year forthe financial sector of Pakistan.
The macroeconomic vulnerabilities emerging from twin deficits and elevatedinflation level have necessitated the stabilization measures that haveslowed down the pace of economic growth.
The financial markets, particularly, the forex and equity markets havetrended downwards with increased volatility.
Accordingly, the growth of the financial sector has moderated to 7.5percent in the year 2018. Similarly, the financial depth, as measured byfinancial assets to GDP ratio, has subsided to 73.0 percent in the year2018from 74.5 percent a year earlier.
However, the financial institutions and financial market infrastructurehave largely remained resilient and performed steadily during the yearunder review.
Among the financial institutions, banking sector has remained resilient,with strong Capital Adequacy Ratio (CAR) of 16.2 percent—well above theminimum regulatory level of 11.9 percent—and high fund-based liquidity.
Among various factors, rise in rating culture in the corporate sector hasfacilitated enhancement in CAR.
The financial intermediation has improved with a rise in advances todeposit ratio to 55.8 percent, highest in the last eight years.
Growing advances have helped reduce the gross loans to NPLs ratio, butother asset quality indicators have slightly deteriorated due to rise inthe quantum of NPLs during the year 2018.
The banks have posted reasonable profits; however, higher provisioningexpense along with rise in administrative cost and one-off extraordinaryexpense has kept the profitability slightly below the last year’s level.
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Encouragingly, an increase in the share of interest income from financingactivity has improved the Net Interest Margin (NIM), which has been fallingfor the last 3 years.
The FSR has also highlighted a few challenges facing the banking sector.The deceleration in deposit growth that is continuing over the last fewyears may pose funding risk for asset expansion. The concentration ofbanks’ exposure to the public sector, though reduced due to net retirementin PIBs in CY18, remains significant. Further, the risks related to AML/CFTand cybersecurity need continuous attention for mitigation.
Encouragingly, resilience analysis indicates that the banking sector hasthe capacity to absorb adverse domestic and global stress in themedium-term.
The Islamic Banking Institutions (IBIs) have maintained fast growthtrajectory and now constitute 13.5 percent of the total banking sectorassets. This growth is, primarily, driven by broad-based financing activityto various economic sectors, with the majority of financing extended underprofit and loss sharing modes of Musharika and Diminishing Musharika.
While financial health of IBIs remains sound, they continue to face dearthof Shariah compliant investment avenues that limit their ability toeffectively manage their liquidity as well as mobilize deposits.
External Relations Department Page 2 Due to higher volatility in thefinancial markets, risk averseness in equity market linked NBFIs, likeMutual Funds, has increased, that has led to contraction in assets undermanagement and flight to safer money market instruments.
On the other hand, financing based NBFIs, have observed growth andexhibited relatively better performance. Nevertheless, to allow the NBFIsto facilitate financial deepening, FSR 2018 suggests that issues like thesmall size and limited outreach of the capital market, difficulty NBFIsface in mobilizing low cost funds and attracting quality human resourcesneed to be addressed through development of an industry level strategy.
Similarly, the role of Development Finance Institutions (DFIs) in long-termproject financing remains less than encouraging and progress on this frontrequires concerted efforts for mobilization of affordable long-term funding.
The insurance industry has witnessed higher asset growth due to reasonableincrease in gross premium, though its profitability indicators have sliddown owing to increase in net-claims. Moreover, the insurance penetrationremains quite low, indicating sufficient room for expansion in this sector.
The Review highlights that the Financial Market Infrastructures (FMIs)remains resilient and continue to perform efficiently without any majordisruption. Both large value and retail payments have registered an uptrendin volume and value of transactions. The increasing adoption of electronicmodes for payment indicates growing consumer trust. Wider use of digitalfinancial services is also facilitating in furthering the objective ofFinancial Inclusion, which is one of the key priority areas for SBP.Particularly, the branchless banking and m-wallet accounts have enabledaccess of financial services to the underserved areas of the country.
However, with an upsurge in technology-based financial services, cybersecurity threat has emerged as the key risk for FMIs. During CY18, thesupervisory authorities have enhanced focus on this category of risk andhave fortified the mitigation measures jointly in collaboration with themarket players.
Commenting on the outlook of the financial sector, the Review highlightsthat the necessary stabilization measures may further slowdown the pace ofeconomic activity.
