Pakistan: Financial Sector Assessment

Transcription

1 Pakistan: Financial Sector Assessment 2003 State Bank of Pakistan Research Department

2 The Team Leader Riaz Riazuddin Researchers Abid Qamar Abdul Faheem Adil Mahboob Asma Khalid Fida Hussain Iffat Mustafa Mahmood-ul-Hasan Khan Moinuddin Misbah Tanveer Muhammad Mazhar Khan Muhammad Shamil Akbar Safdar Ullah Khan Sahar Z Babar Salman Ahmad Tilat Anwar Research Assistance Mazhar Hussain Muhammad Omar Editorial Assistance Sahar Z Babar

3 Acknowledgements The team of this Report thanks the members of Advisory Group on Financial System especially Mr. Naveed A. Khan, Mr. Tariq Iqbal Khan, Mr. Aftab Ahmad Khan and Mr. Badar Kazmi who provided valuable comments and suggestions. We also thank Mr. A. Saeed Siddiqui, Mr. Zaigham Mahmood Rizvi, Mr. S. Farhan Ahmed and Mr. Ali Munir for providing useful comments. The team is especially thankful to Dr. Tariq Hasan, Chairman, SECP who ensured availability of information and data support from SECP. We are also thankful to his colleagues Mr. Itrat Husain Rizvi for providing valuable suggestions on insurance and NBFCs, Mr. Shafaat Ahmed for helping us in compiling the insurance data and Mr. Umer Hayat Khan for helping the team prepare the data on NBFCs. The team is greatly indebted to Dr. Ishrat Husain for his continuous guidance and support. The team bears the responsibility of all errors and omissions. The observations made in this report are entirely those of the working team and do not necessarily represent the views of the members of Advisory Group, SECP or those of the SBP management.

4 Preface This report is the third in our annual series of financial sector assessments covering primarily the calendar year ending 31 st December Since the latest audited balance sheets of banks are for end-december 2003 and those of many other institutions for end-june 2003, therefore the report presents an overall picture of the financial sector by consolidating the available data of these differing dates. Moreover, the report also assesses financial markets performance by analyzing the data for end-june This report gives an enhanced assessment coverage by including two important segments of the financial sector; a review of the insurance industry is presented, which was previously not covered in our earlier assessments. Similarly, social protection funds are also being reviewed for the first time. Assessment outline is built modularly, beginning with an overall picture of the financial sector, which highlights the major developments and moves towards assessment of individual segments. An overview of financial system credit is presented in chapter 2. Banks, NBFIs, insurance, NSS and social protection funds are covered in chapters 3 to 6. Chapter 7 reviews the performance of financial markets and the last chapter discusses the links between financial sector development, macroeconomic stability and economic growth. With the rapid pace of development in the financial sector, the need for independent and critical reviews is becoming greater both for the policy makers and financial sector stakeholders. It is hoped that this report will not only fill this gap but also induce independent researchers to undertake more critical assessments with the objective of making our financial sector more sound and strongly linked to the process of economic growth and development.

5 Contents Executive Summary 1 Chapters 1 Financial Sector and Regulatory Profile Structure of the Financial Sector Key Indicators of Overall Financial Sector Structure of the Financial Savings Payment System Profile Monetary and Exchange Policy Environment Regulatory Profile Regulations for Banks and DFIs New features of Supervisory Mechanism Regulations for NBFCs Insurance Regulations 34 2 Financial System Credit Agricultural Credit Consumer Finance Working Capital and Project Financingv SME and Micro Finance Penetration of Islamic Modes of Financing 54 3 Ownership, Spreads and Profitability of Banking System Structure of Banking System Ownership Structure Banking Sector Concentration Behavior of Banks Capital Stylized Facts Determinants of Banks Capital Behavior of Banking Spreads and Profits Banking Spreads Banking Profitability Performance Sustainability Issues 72 4 Performance of Non Bank Financial Institutions Structure of NBFIs Mergers & Acquisitionsv Development Finance Institutions Investment Banks Regulatory Environment Size and Consolidation Performance of Investment Banks Leasing Companies Business-wise break-up of Lease Finance Consolidation Process in FY Policy and Regulatory Developments Performance of Leasing Companies Modaraba Companies Performance of Modarabas during Housing Finance Companies Performance of Housing Finance Companies Mutual Funds 88 i

6 ii Open-end Mutual Funds Close-end Mutual funds Discount Houses Venture Capital Companies 92 5 Review of Insurance Sector Structure of Insurance Industry Overview of Non-Life Insurance Composition of Non-Life Insurance Capitalization Structure of Non-Life Insurance Structure of Premiums and Claims Performance Analysis of Non-Life Insurance Overview of Life Insurance Capitalization Structure of Life Insurance Structure of Premiums and Claims Investment Portfolio of Life Insurance Companies Performance Analysis of Life Insurance Postal Life Insurance Reinsurance Premiums and Claims of Reinsurance Investments and Profitability of Reinsurance National Savings Schemes and Social Protection Funds National Savings Schemes Deficit Financing through NSS Impact of NSS on Financial Sector Mobilization through NSS Interest Rate Distortions Review of Social Protection Funds Employees Old-Age Benefits (EOB) Fund Workers Welfare Fund (WWF) Workers Participation Fund (WPF) Activities of Financial Markets Performance of Money Market during FY SBP Interventions and Treasury bill Auctions Secondary Market Activity in Government Securities Government Bond Market Developments in Yield Curve Capital Market Supervisory Role of Securities of SECP Performance of Stock Exchanges Corporate Debt Market Foreign Exchange Market Interbank market Kerb Market Financial Development, Economic Stability and Growth Macroeconomic Environment Macro-financial vulnerability Financial Development and Economic Growth Financial Sector Development Indicators Correlation Between Financial Sector Development and Growth Indicators Financial Sector Contribution to Capital Intensity and Productivity 164

7 8.3.4 Financial development in Peer Countries 165 Conclusion 167 Annexes 173 Acronyms 185 iii

8 List of Tables Executive Summary E.1 Composition of Outstanding NSS 8 E.2 Amounts Released from WWF 9 E.3 Amounts Utilized from WPF 9 E.4 Key Fundamentals of Financial Markets Financial Sector and Regulatory Profile 1.1 Asset Dynamics of the Financial Sector Major Indicators of the Financial Sector Financial Savings Statistics on Automation Indicators of Turnover in Clearing House Prudential Regulations for Consumer Financing Evolution of NBFC Regulations Financial System Credit 2.1 Consumer Financing Distribution of Scheduled Banks Credit Outreach of MFIs Micro finance Institutions Islamic Financing in Pakistan Ownership, Spreads and Profitability of Banking System 3.1 Number of Banks as at end-period Herfindahl Index Coefficient of Variation Capital Position of the Banks Panel Regression With Ownership Dummy Panel Regression with Ownership and Time Dummies Regression Results Performance of Non Bank Financial Institutions 4.1 Assets of NBFIs Advances of NBFIs Deposits of NBFIs List of Mergers & acquisitions in the NBFI Sector Key Indicators of DFIs Performance of Investment Banks Key Indicators of Leasing Companies Key Indicators of Modarabas Housing Finance Companies Assets of the Mutual Funds Privatized Closed-end Mutual Funds Private Sector Closed-End Mutual Funds Review of Insurance Sector 5.1 Insurance Penetration in CY Number of Insurance Companies Asset Structure of Insurance Industry Non-Life Insurance Business in Pakistan Composition of Non-Life Insurance Investments and Assets 97

9 5.6 Capitalization of Non-Life Insurance Companies Company wise Share in Total Net Premiums Percentage Share of Net Premiums and Claims Ratio Analysis of Non-Life Insurance Industry Structure of Life Insurance Business in Pakistan Capitalization of Life Insurance Companies Share of Gross and Net Life Insurance Premiums Composition of Gross and Net Life Insurance Premiums Claims of Life Insurance Industry Composition of Investments and Investment Income Ratio Analysis of Life Insurance Industry Business of Postal Life Insurance Reinsurance Business in Pakistan National Savings Schemes and Social Protection Funds 6.1 Profit Rates on Major NSS and PIB Target Vs Actual Net Flows in NSS During FY PIB Holdings by Banks EOBI-Return on Investment Detail of Investment Portfolio/Income Share of Investment Portfolio/Income Investment made by the Workers Welfare Funds Shares in Investments the Workers Welfare Funds, to :Interest earned by WWF on its investment Consolidated Statement of Expenditure on account of Releases to Provincial Government Collection and Distribution of Funds under the Companies Profits (WP) Act, ( to ) Activities of Financial Markets 7.1 SBP Discount Window Treasury bill Auctions Summary Secondary Market Trading Pakistan Investment Bonds Auction Summary PIB Auction Performance Changes in PIB Coupon Rates Overview of Capital Market (KSE) Profile of Karachi Stock Exchange Performance of LSE and ISE New Floatation at KSE Top performing sectors of KSE during FY Corporate Debt Profile Major Forex Flows and Exchange Rate Management Structure of Exchange Companies during FY Status of Moneychangers Transformation at the end June Financial Development, Economic Stability and Growth 8.1 Major Macroeconomic Indicators CPI Inflation in Developing Countries Debt and Debt Servicing Indicators of Financial Deepening Correlation Matrix between Finance and Growth Indicators Indicators of Financial Depth and Efficiency vi

10 List of Figures Executive Summary E-1 Ownership Structure of Financial Sector 1 E-2 Ownership Structure of Banking Sector 1 E-3 Sectoral Distribution of Bank Credit at end-june E-4 Wide Definition of Spread 4 E-5 Profitability Indicators 5 E-6 Comparative Analysis of NBFIs Asset Shares 6 1. Financial Sector and Regulatory Profile 1.1 Asset Ownership of the Financial Sector Asset Composition of Financial Sector Liability Composition of Financial Sector National and Financial Savings Structure of Financial Savings Rate of Return Structure Current Account Balance and Exchange Rate Nominal and Real Interest Rates (in percent) Inflation Financial System Credit 2.1 Sectoral Distribution of Bank Credit at end-june Share of Agri Credit in Total Credit Agri Credit Disbursement during the year Share in Disbursement Recovery of Agri Credit Outstanding Agri Credit Ratio of Recovery to Outstanding Performance of Banks in Agri Financing Break-up of Consumer Finance Structure of Scheduled Banks Credit Short and Long-term Breakup of NBFIs' Investment and Advances in FY Outstanding SME Loans-FY Clients Gender Classification-CY Distribution of Advances NPL Classification CY NPLs of MFIs Performance of IBBs Ownership, Spreads and Profitability of Banking System 3.1 Asset Share of Public Sector Banks Lorenz Curves of Banking Variables Gini Coefficient of Macro Banking Sector Variables M-Concentration Ratios (in percent) Capital Position of the Banking Sector Risk Weighted Assets to Total Assets Banking Sector Spread Banking Spreads-(in percent) Profitability of the Banking Sector Investment in Federal Govt. Securities and Surplus on Revaluation of Assets Net Interest Income (NII) 73

11 viii 4. Performance of Non Bank Financial Institutions 4.1 Assets of Existing DFIs Outstanding Investments of DFIs Income Distribution for DFIs Assets of Investment Banks Break-up of Lease Finance Assets of Leasing Sector Structure of the Modaraba Industry Assets of Modarabas Asset Portfolio of Existing Modarabas Depreciation/Amortization to Total Expense Magnitude of Profits Assets of HFCs Performance of Stock Market NAV of NIT Break-up of NIT's Portfolio Realized/Unrealized Capital Gains Performance of Discount Houses Asset Share of Discount Houses Share of Assets of VCC Assets of Venture Capital Cos Net Profit of VCCs Review of Insurance Sector 5.1 Composition of Non-life Premiums Capitalization of Non-life Insurance Composition of Net Premiums National Savings Schemes and Social Protection Funds 6.1 Composition of Domestic Debt Flows in NSS NSS Stock & Rate of Return NSS as Percent of Budget Deficit Net flows: NBFIs Deposits Vs NSS Interest Rate Spread between SSCs & Fixed Deposits of over 6-months Gross Mobilization from NSS EOBI-Return on Investment Activities of Financial Markets 7.1 Key Interest Rates Open Market Operations T-Bill Auctions Summary Interest rate Differential (6-momth T-bill and 6-month LIBOR) PIB Secondary Market Activity Treasury Bills Trading Banks' Holdings of PIBs Yield Curves (end-june) Regional Markets v/s KSE KSE-100 Index and Turnover COT (Badla Market) Growth in TFC Market Cumulative App/Dep Since June Daily Exchange Rate Movement 137

12 7.15 Aggregate Nostro Foreign Currency Loans (against FE-25 deposits) Composition of Forex Loans Forex Loans Prior Maturity Adjustment Kerb Premium and Kerb Purchases Exchange Companies (A ) Transactions Remittances Flows Sales to Authorized Dealers Financial Development, Economic Stability and Growth 8.1 Real GDP Growth Trends in Monetary Sector Developments in Int'l Trade Prudence in Fiscal Sector Growth and Stock Market CPI inflation Twin Deficit Debt Burden and Interest Rates Current Account and Banks' Profits External Debt Servicing (EDS) and Liabilities (EL) Ratios Reserves and External Debt Exchange Rate Movements Weighted Real Interest Rates Interest Rate Differential Private Sector Credit (flows in billion Rs) Income Velocity of Money KSE-100 Index Financial Sector Development Indicators and GDP Financial Sector Development and Growth Indicators National Financial System by Size (FY72-04) Financial Sector Contribution to Productivity and Capital Intensity 165 ix