Commercial banks account for more than 80% of Pakistan’s financial sector assets — Dawn
In Pakistan, commercial banks account for more than 80% of financial sector assets, while alternative channels for savings and business financing remain underdeveloped. As Dawn writes, a significant share of institutions that should compete with banks are economically or financially linked to them.
Banks have large capital bases, extensive branch networks, access to millions of small deposits through current accounts, as well as long-standing ties with the state and borrowers. This gives them advantages through scale, cheaper funding, the ability to require collateral and assess credit risks.
Deficit financing
According to the publication, a key factor in banks’ dominance is the government’s constant need to finance the budget deficit. About 62% of banking sector assets are held in government securities, while lending to the private sector accounts for only 22% of assets.
Government securities provide double-digit returns and, in the author’s assessment, are virtually risk-free. Lending to private companies, by contrast, requires assessing solvency, preparing documents, collateral and monitoring. Under such conditions, banks have fewer incentives to develop bond placements, other financial instruments or support new stock listings.
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Weak alternatives
Public participation in the stock market is low: fewer than 0.5% of the country’s population hold accounts there. Households more often choose cash, bank deposits, real estate and physical gold. Listing on the Pakistan Stock Exchange or issuing corporate bonds requires disclosure, audits, compliance with corporate governance requirements and obtaining credit ratings.
Corporate debt accounts for less than 3% of Pakistan’s debt market. For many companies, a bank loan is a faster and simpler way to raise funds than entering the capital market. Large family-owned companies also have little incentive to list, as this entails greater openness to tax and regulatory authorities.
Regulatory barriers
Pension and insurance assets in the country remain insignificant relative to GDP. Non-bank financial institutions cannot accept current or retail deposits, so they must attract voluntary investments, equity capital or borrow from banks at commercial rates.
Dawn also notes that the largest asset management companies and mutual funds are mostly owned or controlled by banks. In the absence of a deep corporate bond market, they invest funds in treasury bills, government sukuk or bank deposits, returning a significant share of savings to the banking system.
