ISLAMABAD, 6 September 2004 — New instruments and modes of financing as well as larger business are enhancing profits of Pakistani and foreign-based banks.
This trend is likely to strengthen, bankers and financial market leaders forecast, as various banks reported larger deposits, advances and profits.
State Bank of Pakistan (SBP), the central bank, last week allowed commercial banks and development finance institutions (DFIs) to issue three new types of banking instruments. These are: Interest Rate Derivatives (IRDs), FRAS and Swaps that include cross currency interest rate swaps and currency options purchased. SBP said it would be announcing “specific guidelines for the start of derivatives”.
As part of SBP’s continued reform and upgrading of the banking system and to adopt international standards that are part of Basel Capital Accord-2, SBP has also directed all commercial banks and DFIs to enhance their minimum paid up capital from the present level of Rs.1 billion to Rs.2 billion by the end of calendar year. It said the banks have to enhance their paid up capital by Rs.500 million by December 2004, and the balance by December 2005.
The banks that fail to raise their paid up capital by the given dates will be penalized, and will not be allowed to undertake full range of financial services. They will also be not allowed to carry on forex business, and from collecting deposits. However, they will be allowed to operate only in the inter bank market.
The central bank has laid down these provisions in order to ensure the level of transparency and maximum disclosure in the banks’ balance sheets. The capital adequacy ratio standards have also been brought in line with international standards. “These provisions will improve both quality of investment decisions of the bankers and improve the market value of investment portfolios of the banks,” SBP said.
The central bank has enforced International Accounting Standards (IASs) on the general reserves of banks and DFIs, undisclosed reserves, revaluation reserves, and subordinate debt.
As these reform measures go ahead, banks are reporting good business. The overall deposits of banks rose 14.19 percent, while their advances were up 10.37 in the first seven months — January-July, of calendar year 2004, SBP data indicate.
The banks report a slow, 6.67 percent, increase in their investment in fixed income securities and shares of companies listed on the bourses, compared to an increase of 19.7 percent in the like period of 2003. In the like seven months of calendar 2003 advances were up only 4.2 percent, while these had declined 4.1 percent in 2002. Advances, in July this year alone rose Rs.22.6 billion — a good sign for the economy.
The 14.19 percent growth in deposits raised the amount by Rs.254.9 billion. The advances moved up by Rs.126.6 billion, and investments by Rs.48.8 billion. The deposits are moving up in spite of rising inflation that was feared to adversely affect them.
Savers, meanwhile, are not getting a reasonable return, which is far below even the current official inflation rate of close to 5.0 percent. In a low-interest rate environment initiated by SBP in November 2002, the savers have suffered, as the profit on their deposits has steeply gone down.
