This was stated by State Bank of Pakistan (SBP) Governor Dr Shamshad Akhtar while addressing the Deutsche Bank Annual Global Transaction Banking Seminar held at a hotel here on Wednesday.
The SBP Governor said: "Today, Pakistan offers a promising ground for financial experimentation and innovation. Pakistan's banking industry has seen brisk growth in banking assets which today stands at over $60 billion. The banks' profitability is at an all time high and unprecedented, reaching close to Rs 93 billion by 2005. Aside from higher efficiency gains in the industry attributable to benefits arising from significant banking sector restructuring and reforms, high profitability of banks has been achieved because of high interest margins."
She said that in the period ahead, however, the financial industry has to be positioned for a more competitive environment and has to cater for more diverse and complex requirements of Pakistan's consumers and infrastructure. Pakistan, like the rest of Asia, is growing fast and the rise in per capita income, emergence of the middle income group and relative wealth increases all together bring with them new demands for the retail banking industry.
Beside these real sector developments and requirements, she said, financial industry of Pakistan has to catch up fast with the global developments and achieve better financial diversification and strengthen its risk management systems.
She said that in Pakistan's context it has to be recognised that while large banks will continue to thrive on volumes of business, which they have traditionally captured, given their reach across the country. It is the foreign banks, with their competitive edge in global transaction banking, that can offer unique and new financial solutions and lead the way for the rest of the banking industry to provide to customers an integrated solution that caters for emerging consumer and industry requirements, she added.
About global changes in financial industry, the SBP Governor said that compulsions to go this route are mounting. World-wide financial landscape has changed driven by:
-- Changing macroeconomic factors such as economic growth and demography and institutional development as capital markets have matured and population demands for retirement funding and insurance has grown.
-- The phenomenal growth in financial markets and cross-border flows.
-- The ability of the financial industry to take advantage of the opportunities provided by the lending and mortgage markets, and development of credit risk transfer instruments which involves structuring and trading of credit derivatives and asset backed securities that allows risk inherent in a loan to be repackaged into two or three tradable components to offer optimal allocation of risks it is particularly relevant in the context of developing financial markets where the risk profiles of banks are still dominated by credit risk predominantly of the issuance of loans even though there are moves towards corporate bonds or transactions in over-the-counter markets, which involve the risk of a counterparty defaulting.
-- Adoption and adaptation of technological advancements in communication and information technology that has seen the explosion of financial innovation with service providers now offering multiple and diverse solutions that enhance efficiency and reach of products across boundaries and across national jurisdictions.
-- Need to globally integrate financial systems and encourage end-to-end straight through processing capabilities and development of payment, clearing and settlement systems to overcome time zone and currency constraints.
-- With globalisation of markets & businesses, there is greater need for global transaction solutions for effective cash management, trade finance, trust & securities services, and Continuous Linked Settlement (CLS).
Finally, there are now mounting regulatory pressures to seeking greater IT solutions to tracking money laundering as well as adopting the new risk management framework including the Basle II.
About the role of the central bank, SBP Governor said that recognising that Pakistan banking industry after its restructuring is now positioned to move to the next level of development, SBP has been focusing on promoting gradual migration from a predominantly cash and paper based system to electronic payments.
Regarding Clearing and Settlement Systems in Pakistan, she told the seminar that as a custodian of the Payment System of the country, SBP has nurtured and supervised the operation of the Clearing House for the member banks operating within its jurisdiction. Automated clearing services are now provided by National Institutional Facilitation Technologies (NIFT) under the supervision of SBP in nine major cities of Pakistan. The Local US dollar clearing system provides a low-cost and efficient clearing system for US dollar denominated local instruments. The new system has reduced the clearing time of US dollar cheques from three weeks to only four days and has reduced the cost to the account holders.
She said that Pakistan's Real time Interbank Settlement Mechanism (PRISM) is at an advanced stage of installation and is expected to be live by the Third quarter of 2006. It will automate the current interbank settlement systems for large value payments at SBP and will minimise the risks, like credit, liquidity and settlement risk, inherent in the end of the day settlement system. Its implementation will make the payments systems much more efficient and resilient, offering transactional features, which are hard to achieve under the current settlement systems.
She said PRISM will not only automate the InterBank funds transfer but will also facilitate the settlement of government securities transactions in Primary and Secondary Markets. After the implementation of PRISM, settlement of securities between the participants will be on Delivery vs Payment basis, thus reducing the risk in securities trading by minimising the settlement lag. SBP will also be able to settle the open market operation transaction through PRISM.
The SBP Governor said that to facilitate nation-wide RTGS and electronic fund transfer, Pakistan has now drafted 'Payments System and Electronic Funds Transfers Act 2005' that ensures conformance with industry demands and Bank for International Settlements Core Principals for Systemically Important Payment Systems. The proposed Act addresses issues like operation of payment systems, including the clearing and settlement obligations of the parties involved, supervisory role of SBP, documentation requirements by the participants, liabilities of parties in payment systems and legal proceedings in case of any conflict, finality and irrevocability of settled transactions etc. The Act also gives necessary legal coverage to PRISM. SBP is also framing the requisite rules and regulations for the smooth operations and participation in PRISM.
About the progress in of Electronic Payment System, she said there has been substantial improvement in payment system infrastructure and consumers' payment patterns over last few years, particularly in urban areas, which is evident from the exponential growth in Automated Teller Machines (ATM) Cards, Debit & Credit Cards, ATM outlets, Points of Sales (POS) accepting payments through cards and number of online branches of commercial banks providing SWIFT interbank account to account funds transfer facilities and the interconnectivity of the two ATM switches viz. the MNet and 1-Link. With strategic focus of SBP to develop a well functioning and efficient payment system in the country coupled with rapid technological changes, the pace of growth in payment system infrastructure will further accelerate in the medium term and its outreach will extend to even smaller towns.
She said that the online branch network is also expanding at a fast pace and reached up to 3,265 at the end of December 2005 from 2,475 at the end of the preceding year, indicating an impressive increase of 32 percent or 790 branches. The addition of 315 branches into the online network in the fourth quarter is signalling further acceleration in the pace of growth of the online branches. The coverage of online branches as a percentage of total branches (7,245 branches) has now reached 45 percent. At this pace, the whole branches network of the banking system will be online in the very near future, which will substantially improve efficiency of the payment system.
Dr Shamshad said that usage of cards at POS is expanding with the passage of time. This channel recorded remarkable growth of 62 percent in the number of transactions to 13 million transactions in FY05 from 8 million in the previous year. Value of transactions grew by 56 percent to Rs 42.8 billion in FY05 from Rs27.4 billion in FY04.5.3: Number of Cardholders
She said the Global Transaction Banking (GTB) concept, though new to Pakistani banks, will help service the ever-growing need for Pakistan's trade & finance and facilitate investors' awareness to the growing Pakistan's economy and markets. "We see inter-exchanges like this would further strengthen the transaction banking business in Pakistan. SBP is conscious of the need to further strengthen the payments and settlement systems in Pakistan to reduce inherent settlement risk and bringing efficiency to the financial system. We look forward to global banks, like DB, in performing their due role to facilitate in providing awareness and expertise in further strengthen the financial system."
The Governor said that the GTB will help in providing fully integrated risk mitigation, settlement, financing and information solutions, which help unlock working capital trapped in inefficient order-to-cash and purchase-to-pay cycles. It will also assist businesses to achieve greater integration of the supply chain, which facilitates greater efficiencies and streamlined work flows, whilst reducing operating costs and accelerating payment cycles. More efficient trade processes also mitigate risk exposure and help the businesses optimise returns from trade assets.
Werner Steinmueller, Managing Director, Head of Global Transaction Banking, Stefan Schneider, Director, Chief International Economist and Head of Macro-Trends, Paul Camp, Managing Director, Global Head of Cash Management Financial Institutions, Shahzad Dada, Managing Director, CCO and Head of Global Banking Pakistan, Nadim Nizam, Managing Director, Global Transaction Banking Head - MENA Region, Ahmed Jabran, Vice President, Cash Management FI MENA Region and Daniel Smaller, Managing Director, Asset Management Head - MENA also spoke on this occasion.