“The increasing home remittances sent by overseas Pakistanis working in the Middle East and North America are helping to boost banking as well as other sectors of the economy.”
ISLAMABAD, 24 February 2003 — The performance of the financial sector is improving in spite of the fact that commercial banks have accumulated large liquidity, and may face reduced profitability.
The results announced by a number of banks and financial institutions and the dividends they have declared indicate that the financial sector is doing well, even though the economy is lagging behind.
The increasing home remittances sent by overseas Pakistanis working in the Middle East and North America are helping to boost banking as well as other sectors of the economy.
The banks are now extending cheaper credit to corporate and consumer financing, loans for consumer durables, housing, small and medium enterprises, commodities, and other non-traditional users. The State Bank of Pakistan (SBP) has also eased conditions for the commercial banks to accept a variety of securities and collaterals to help credit takeoff. At the same time, banks report progress in collecting or rescheduling the old defaulted loans they claim were responsible for high lending rates for new borrowers.
The SBP has gradually reduced the lending rate for exports — the Export Refinance Facility (ERF) — down to 5.5 percent, over which commercial banks can charge a maximum spread of 1.5 percent, enabling exporters to borrow at 7.0 percent. The idea is to push beyond the $10.4 billion export target for fiscal 2003.
Export credits are also available from the Asian Development Bank-financed “Dollar Window” at the rate of LIBOR plus two percent, which comes to 4.57 percent, as of now. Credit for locally manufactured machinery for use in export production is also available at this rate.
At the same time, the World Bank’s affiliate for the private sector — International Finance Cooperation (IFC) — and ABN Amro Bank have signed an $80 million trade enhancement facility to finance Pakistani private sector for importing industrial raw materials and capital goods.
The central bank has also reduced the lending rate from 12 to 9.5 percent for purchase of commodities. The 12 percent rate, set on April 26, 2000, was both for the government and private sector engaged in the export of rice, wheat and other commodities. The central bank brought its discount rate down from 9.0 percent to 7.5 percent in November 2002, from a high of 13 percent on Oct. 5, 2000.
As part of its efforts to bring down the interest rate, the SBP has also slashed the benchmark 6-month Treasury Bills (TBs) rate from 7.2 percent in April 2000 to 3.2 as of now from a high of 14 percent on June 7, 2001.
The SBP launched Pakistan Investment Bonds (PIBs) on Dec. 14, 2000 to mop up money from the market. The PIBs have maturity periods of three, five and 10 years. All three started at a 14 percent yield that is now brought down to 7.5 percent.
