ISLAMABAD - Pakistani banks are operating on sound footing, despite the domestic rush for dollars, cash withdrawals and the international financial turmoil.
The health of the banking system was illustrated by the fact that bank mergers and acquisitions are going apace, and profits stay good. It’s a sound sector for foreign and domestic investment. This contrasts with the government’s ongoing efforts to internationally mobilise $4 to $5 billion, and the talk of an economic downturn.
The banking system escaped serious raging effects of the current turmoil emanating from United States which also infected the European financial institutions and business. Besides the banking system, practices and the bankers themselves being still somewhat conservative and looking more to United Kingdom and Europe, they stayed away from practices that had led to the US sub-prime crisis, derivatives and the related happenings.
While the banking system is performing alright, there have been some recent hiccups. “In my assessment, Pakistan’s economy, to date, has been affected mainly by the indirect impact of the international events which led to the rise in the global commodity prices.”
This is how Dr. Shashmad Akhtar, Governor State Bank of Pakistan (SBP), the Central Bank sees the situation. “Pakistan is perhaps the worst-hit economy by the surge in the global commodity prices as it has been a predominant factor in derailing the macro-economic fundamentals,” she told a large group of Asian bankers meeting in Karachi. The gathering was discussing “The Banks We Like: and the impact of the Global Financial Crisis On Pakistan’s banks.”
How deep is the impact of international commodity prices, soaring until recently?
Nearly 80 per cent of the external current account deficit in fiscal 2008 that ended June 30, is equivalent to the oil import bill that shot up beyond $11 billion. Until two or three years ago it used to be just $3 billion annually. At the same time a large increase in fiscal 2008 budget deficit was on account of the delay in pass-through of international prices rise at retail level.
While the Central Bank was worrying about the depleting forex reserves, and the government was trying to cope with the growing fiscal deficit, the SBP enforced financial sector reforms, in July this year, which saved the banks from coming into the harms way. The reforms laid the foundations for still more enhancing the robustness of the financial system to face up to the emerging challenges.
Dr. Shamshad Akhtar supports the positive impact of the reforms by pointing out to the fact that the capital adequacy ratio of the banking system is 12.1 per cent — as of June 2008 — which is well above the internationally acceptable minimum requirement of 8 per cent. The core capital constitutes nearly 80 per cent of the total capital and Tier-1 to risk-weighted assets ratio of the banking system is 9.7 per cent — more than double the 4 per cent minimum international standard.
The SBP Chief also unveils several other performance features that have kept the banking system on a sound ground. The balance sheet footing of the banking system, for instance, on October 4 this year was nearly Rs5.1 trillion. The loans advanced by banks, at the same time, were Rs2.8 trillion. The deposits totalled Rs3.8 trillion.
The banking system faced a liquidity crunch for several reasons including a heavy borrowing by the government to meet its fiscal deficit and to pay for the subsidies it was providing to consumers on high-cost imported oil, and other commodities.
At the same time, people rushed to banks to cash cheques so that they can buy the rapidly rising greenback and a depreciating Rupee, the Central Bank repeatedly injected liquidity in the financial system. Since August this year, the SBP has injected liquidity on 13 occasions and provided temporary liquidity in excess of Rs300 billion.
The banks also have been provided cash from the SBP’s discount window.
The banks have benefited, too, from the SBP lowering its Cash Reserve Ratio (CRR) and the Statutory Liquidity Requirement (SLR). It helped infusing Rs270 billion liquidity, which was more than the withdrawal of deposits from the banking system.
It shows that any speculation or refusal by any domestic or foreign-based bank is groundless. Such unfounded speculation involved a handful of banks, including a Dubai-based bank. The problem temporarily had arisen when some banks were briefly faced with a liquidity shortage, but liquidity was quickly provided by the Central Bank. As of now, the liquidity stays for more than the withdrawals.
The SBP, additionally, is working at individual bank level to ensure that each one of them is positioned to tackle the emerging challenges. The Central Bank is also exploring avenues to ease the bank-specific liquidity constraints,” Dr. Akhtar says. The banks, meanwhile, have been advised to launch more aggressive efforts to mobilise deposits, besides expanding their outreach to rural areas which are still under-served.
One of the key reasons for large cash withdrawals from the banks was people buying dollars. The SBP and other analysts attribute part of the situation to speculation prompted by private foreign exchange companies and open market operators. Its still stays so despite depletion of the official forex reserves.
Because of the excessive speculation that has depreciated the rupee by 24.3 per cent since January 1, the SBP, this week, ordered an investigation against private foreign exchange companies to check whether they are manipulating the forex market. It had directed the forex companies to “minimise the value difference of dollar between inter-bank and open market rates,” officials said.
The depreciating value of the Rupee has forced the SBP to check, seek reasons and fundamentals of dollar manipulation.”
It has established investigation teams to overcome the big decline in value of the Pakistani currency.
SBP teams will inspect forex companies to investigate their transactions and operations. It also has asked some of the major forex companies to submit details of their dollar trading taking place during the last one month.
The Central Bank’s intervention into the forex market has been very limited because it had not much cash dollars to play around.
One source said it provided the exchange companies around $25 million at the rate of Rs80 to a dollar in ten days to October 20 to stabilise the rupee. It was a small intervention. The market responded negatively, as the dollar-buying frenzy by customers and currency hoarders went on, and the local currency depreciated to Rs87-87.20 to a dollar in the open market on October 18.
“The Central Bank has received complaints that some exchange companies have acquired dollars from the SBP at the rate of Rs80 and sold these at higher rates in the open market, specially in Peshawar where the demand for greenbacks was high due to its smuggling to Afghanistan,” SPB sources said.
The Central Bank authorities were also upset because while the SBP is trying to stabilise the Rupee, the exchange companies have increased the difference between their buying and selling rate from Rs0.30-Rs0.50 a dollar to Rs1-Rs2.
At the same time the difference in the dollar rate of inter-bank and the open market has also been increased from 0.50-0.80 that prevailed in September to Rs2.80 a dollar this month. However, SBP intervened in the market and disbursed $200 million on October 20, which helped the rupee appreciate against the dollar by Rs2.0 in the inter-bank market.
But everyone knows that rupees’ travails against the dollar, and other hard currencies, will not be over until a significant inflow of foreign exchange into Pakistan takes place. The newly appointed Advisor to Prime Minister Shaukat Tareen estimates this amount at $3.5 to $4.5 billion within the net 30 days.
The health of the banking system was illustrated by the fact that bank mergers and acquisitions are going apace, and profits stay good. It’s a sound sector for foreign and domestic investment. This contrasts with the government’s ongoing efforts to internationally mobilise $4 to $5 billion, and the talk of an economic downturn.
The banking system escaped serious raging effects of the current turmoil emanating from United States which also infected the European financial institutions and business. Besides the banking system, practices and the bankers themselves being still somewhat conservative and looking more to United Kingdom and Europe, they stayed away from practices that had led to the US sub-prime crisis, derivatives and the related happenings.
While the banking system is performing alright, there have been some recent hiccups. “In my assessment, Pakistan’s economy, to date, has been affected mainly by the indirect impact of the international events which led to the rise in the global commodity prices.”
This is how Dr. Shashmad Akhtar, Governor State Bank of Pakistan (SBP), the Central Bank sees the situation. “Pakistan is perhaps the worst-hit economy by the surge in the global commodity prices as it has been a predominant factor in derailing the macro-economic fundamentals,” she told a large group of Asian bankers meeting in Karachi. The gathering was discussing “The Banks We Like: and the impact of the Global Financial Crisis On Pakistan’s banks.”
How deep is the impact of international commodity prices, soaring until recently?
Nearly 80 per cent of the external current account deficit in fiscal 2008 that ended June 30, is equivalent to the oil import bill that shot up beyond $11 billion. Until two or three years ago it used to be just $3 billion annually. At the same time a large increase in fiscal 2008 budget deficit was on account of the delay in pass-through of international prices rise at retail level.
While the Central Bank was worrying about the depleting forex reserves, and the government was trying to cope with the growing fiscal deficit, the SBP enforced financial sector reforms, in July this year, which saved the banks from coming into the harms way. The reforms laid the foundations for still more enhancing the robustness of the financial system to face up to the emerging challenges.
Dr. Shamshad Akhtar supports the positive impact of the reforms by pointing out to the fact that the capital adequacy ratio of the banking system is 12.1 per cent — as of June 2008 — which is well above the internationally acceptable minimum requirement of 8 per cent. The core capital constitutes nearly 80 per cent of the total capital and Tier-1 to risk-weighted assets ratio of the banking system is 9.7 per cent — more than double the 4 per cent minimum international standard.
The SBP Chief also unveils several other performance features that have kept the banking system on a sound ground. The balance sheet footing of the banking system, for instance, on October 4 this year was nearly Rs5.1 trillion. The loans advanced by banks, at the same time, were Rs2.8 trillion. The deposits totalled Rs3.8 trillion.
The banking system faced a liquidity crunch for several reasons including a heavy borrowing by the government to meet its fiscal deficit and to pay for the subsidies it was providing to consumers on high-cost imported oil, and other commodities.
At the same time, people rushed to banks to cash cheques so that they can buy the rapidly rising greenback and a depreciating Rupee, the Central Bank repeatedly injected liquidity in the financial system. Since August this year, the SBP has injected liquidity on 13 occasions and provided temporary liquidity in excess of Rs300 billion.
The banks also have been provided cash from the SBP’s discount window.
The banks have benefited, too, from the SBP lowering its Cash Reserve Ratio (CRR) and the Statutory Liquidity Requirement (SLR). It helped infusing Rs270 billion liquidity, which was more than the withdrawal of deposits from the banking system.
It shows that any speculation or refusal by any domestic or foreign-based bank is groundless. Such unfounded speculation involved a handful of banks, including a Dubai-based bank. The problem temporarily had arisen when some banks were briefly faced with a liquidity shortage, but liquidity was quickly provided by the Central Bank. As of now, the liquidity stays for more than the withdrawals.
The SBP, additionally, is working at individual bank level to ensure that each one of them is positioned to tackle the emerging challenges. The Central Bank is also exploring avenues to ease the bank-specific liquidity constraints,” Dr. Akhtar says. The banks, meanwhile, have been advised to launch more aggressive efforts to mobilise deposits, besides expanding their outreach to rural areas which are still under-served.
One of the key reasons for large cash withdrawals from the banks was people buying dollars. The SBP and other analysts attribute part of the situation to speculation prompted by private foreign exchange companies and open market operators. Its still stays so despite depletion of the official forex reserves.
Because of the excessive speculation that has depreciated the rupee by 24.3 per cent since January 1, the SBP, this week, ordered an investigation against private foreign exchange companies to check whether they are manipulating the forex market. It had directed the forex companies to “minimise the value difference of dollar between inter-bank and open market rates,” officials said.
The depreciating value of the Rupee has forced the SBP to check, seek reasons and fundamentals of dollar manipulation.”
It has established investigation teams to overcome the big decline in value of the Pakistani currency.
SBP teams will inspect forex companies to investigate their transactions and operations. It also has asked some of the major forex companies to submit details of their dollar trading taking place during the last one month.
The Central Bank’s intervention into the forex market has been very limited because it had not much cash dollars to play around.
One source said it provided the exchange companies around $25 million at the rate of Rs80 to a dollar in ten days to October 20 to stabilise the rupee. It was a small intervention. The market responded negatively, as the dollar-buying frenzy by customers and currency hoarders went on, and the local currency depreciated to Rs87-87.20 to a dollar in the open market on October 18.
“The Central Bank has received complaints that some exchange companies have acquired dollars from the SBP at the rate of Rs80 and sold these at higher rates in the open market, specially in Peshawar where the demand for greenbacks was high due to its smuggling to Afghanistan,” SPB sources said.
The Central Bank authorities were also upset because while the SBP is trying to stabilise the Rupee, the exchange companies have increased the difference between their buying and selling rate from Rs0.30-Rs0.50 a dollar to Rs1-Rs2.
At the same time the difference in the dollar rate of inter-bank and the open market has also been increased from 0.50-0.80 that prevailed in September to Rs2.80 a dollar this month. However, SBP intervened in the market and disbursed $200 million on October 20, which helped the rupee appreciate against the dollar by Rs2.0 in the inter-bank market.
But everyone knows that rupees’ travails against the dollar, and other hard currencies, will not be over until a significant inflow of foreign exchange into Pakistan takes place. The newly appointed Advisor to Prime Minister Shaukat Tareen estimates this amount at $3.5 to $4.5 billion within the net 30 days.
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