Banking Sector Reforms Lessons from Pakistan

BANKING SECTOR REFORMS LESSONS FROM PAKISTAN

ISHRA T HUSAIN

This paper is aimed at drawing lessons from the recent experience of Pakistan in the implementation of Financial Sector Reforms. Indonesia has also made many impressive strides during the past several years in strengthening its financial sector. I believe learning is a two way process and learning from each other's experiences is a very useful way of assimilating and adopting good practices and knowledge. Pakistan can learn a lot from Indonesia's experiences and I look forward to listening to your interventions this morning.

Before I get into the contents of the reforms I would like to begin b y addressing

the following three questions:

What are the benefits of a robust financial sector for the real economy?

Why did we need reforms in the banking sector in the first place?

What is the exact role of the Central Bank in the reform process?

a) Financial sector and real economy

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 a sound and healthy banking system is directly related to economic growth and development of Pakistan.

The modern growth theory identifies two main channels through which the financial sector might affect long-run growth in a country: first, through catalyzing the capital accumulation (including both human and physical capital) and second by increasing the rate of technological progress.

Financial intermediaries perform five basic functions that affect the real economy.

(i) mobilizing savings from domestic households and corporates

(ii) pooling and managing risk

(iii) acquiring and disseminating information about investment opportunities

(iv)...