According SBP's Financial Stability Review (FSR) for year 2017 the purpose of creation of DFIs in Pakistan, majority of whom are jointly owned by government of Pakistan and other sovereigns, was to contribute to economic development by channelising funds to economically significant sectors, industrial and infrastructure projects, and to facilitate trade flows between Pakistan and other jurisdictions. However, even after lapse of decades, DFIs are still to assume the developmental role.
DFIs have yet to achieve the performance maturity that triggers the next phase of fund deployment focusing on countercyclical financing and reliance on financial institutions for funding confines their asset expansion and diminishes their possible role in scaling up lending, it added.
"Integration of DFIs in national level planning of the government, enhanced engagement of stakeholders to broaden their scope of activities, and operational support from the regulators could enable them to measure up to their due role in financial intermediation from a developmental perspective," the SBP said and added that this effort would further reflect upon the national commitment of ensuring economic and financial stability in the country.
DFIs' assets of Rs 228 billion as of end CY17 and it account for only 0.92 percent of total financial sector's assets. Advances have observed growth of 16.5 percent over the last three years on average graduating their share in total assets from 26.7 percent in CY14 to 33.6 percent in CY17.
"The DFIs are more active in the capital and money market activities as investments account for 53.6 percent of their assets. The massive some 34.4 percent of investments in government securities undermining the developmental finance objective of DFIs, but supported the soundness indicators of DFIs", the FSR said.
DFIs' advances to strategic sectors remain insufficient and DFIs gross advances to private sector constitute only 1.72 percent of the advances of the banking sector.
The inadequacy of their advances is also apparent from the fact that in CY17, they have made disbursements of Rs 4 billion to key sectors of the economy such as textile, sugar, cement, agribusiness and energy against Rs 397.2 billion by the banking sector, the review revealed.
Therefore, SBP said that, the current profile of DFIs is insignificant to build sufficient economic momentum that the DFIs aspire to achieve.
One of the DFIs is also a licensed Primary Dealer of government securities. To maintain its license status the DFI must remain active in market making of government securities. In CY17, this DFI alone has accounted for 45.3 percent of the total investments of the sector in government securities funding them through borrowing from financial institutions (44.4 percent of the sector's borrowing).
According to SBP, as one of the core objectives of the policy-makers is to achieve sufficient depth in the financial sector enabling it to sustain shocks, it is imperative that alternative lending institutions exist to plug the gaps and provide back up. Therefore, there is a need to establish a significant role of DFIs.
"On the policy front enhanced engagement with the DFIs, development of medium to long term plan for enhancing the scope of activities, discussions at bilateral level and encouraging participation of the private sector in shareholding of DFIs are some possible measures," it suggested.
Government may consider DFIs role in national level long-term development planning. In addition, DFIs may need to be supervised separate from commercial institutions, it added.
The current solvency indicators Capital Adequacy Ratio at 47.04 and Non-Performing Loan Ratio at 17.2 percent180 in CY17 reveal sufficient cushion to scale up lending. With the required boost from the stakeholders, DFIs, as representative of governments, can play their role in providing countercyclical financing, if ever there is a need to safeguard financial stability.