KARACHI: The economic slowdown may further impede the growth of the financial sector that moderated last year, but the IMF-backed reform program is expected to help introduce stabilization in the economy, the central bank said Thursday.
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“External account imbalances and related uncertainties are likely to have an impact on financial markets,” the Pakistan State Bank (SBP) said in its 2018 financial stability review. “The performance and stability of the financial sector will depend on largely of the improvement in macroeconomic conditions. “
However, the SBP said that the successful implementation of the International Monetary Fund (IMF) program is expected to foster macroeconomic and financial sector stability in the country.
“The necessary stabilization measures can further reduce the pace of economic activity.” The SBP also said that the monetary adjustment may affect the borrower’s debt repayment capacity with some delay.
“Under the challenging macroeconomic environment, the corporate sector, which already shows signs of lax performance, can perform below its maximum potential,” he added.
The SBP said that last year was a challenge for Pakistan’s financial sector, as the sector’s growth moderated to 7.5 percent last year, while the financial depth, measured by the relationship between financial assets and GDP , decreased to 73 percent from 74.5 percent the previous year. “The financial markets, in particular, the currency and stock markets have had a downward trend with greater volatility.”
The SBP, however, said that financial institutions and financial market infrastructure have remained largely resilient and performed steadily during the year under review.
The SBP said that the slowdown in the growth of deposits is a key challenge for the banking sector despite all its resistance and that “it can present a financing risk for the expansion of assets.” “However, the resilience analysis indicates that the banking sector has the ability to absorb internal and global adverse stress in the medium term,” he added.
The SBP said that financial intermediation has improved with an increase in the proportion of deposit advances to 55.8 percent, the highest in the last eight years.
“Increasing advances have helped reduce the proportion of gross loans to delinquent loans (non-profitable loans), but other asset quality indicators have deteriorated slightly due to the increase in the amount of delinquent loans over the past year.”
The SBP said banks have posted reasonable earnings. “However, higher provisioning expenses along with an increase in administrative costs and extraordinary extraordinary expenses have kept profitability slightly below last year’s level,” he added. “Encouragingly, the increase in the share of interest income from financial activity has improved the net interest margin, which has been declining for the past 3 years.”
The SBP said that the concentration of banks’ exposure to the public sector, although reduced due to net retirement in Pakistan’s Investment Bonds in 2018, “remains significant.” “In addition, the risks related to money laundering and the fight against terrorist financing and cybersecurity require continued attention for mitigation,” he added.
The State Bank also said that Islamic banking institutions (IBI) have maintained a rapid growth trajectory and now constitute 13.5 percent of the total assets of the banking sector. “This growth is mainly driven by a broad-based financial activity to various economic sectors, with most of the financing extended under Musharika’s profit and loss sharing and Musharika’s decline,” he added. “While the financial health of IBIs is still strong, they continue to face the shortage of investment paths that meet the shariah that limit their ability to effectively manage their liquidity and mobilize deposits.”
The SBP said that risk aversion in non-bank financial institutions (NBFIs) linked to the stock market, such as mutual funds, has increased due to increased volatility in financial markets, “which has led to the contraction of assets under management and the flight to safer money market instruments. “
“However, to allow NBFIs to facilitate financial deepening, FSR 2018 suggests that issues such as the small size and limited scope of the capital market, the