Banks occupy a central role in any economy, and their alignment with broader goals of economic stability and development can catalyze sustainable growth. However, when banks prioritize profits over progress, the economy suffers from instability, slow growth, and unsustainable practices. In Pakistan, this alignment has been elusive, with the banking sector often failing to contribute meaningfully to the country’s economic progress.
The State Bank of Pakistan (SBP), as the regulator, shoulders the responsibility of ensuring that banks operate in the national economic interest. Simultaneously, the government, guided by parliamentary oversight, is tasked with collaborating with banks to implement economic policies that support growth without undermining the sector. Yet, this critical cooperation has remained largely absent, contributing to Pakistan’s vulnerabilities to internal and external economic shocks.
Under the current hybrid regime, significant strides have been made to stabilize the economy, largely due to adherence to a strict International Monetary Fund (IMF) reform program and financial support from allies like China, Saudi Arabia, the UAE, and Qatar. However, transitioning from stability to growth requires greater political will and a focus on long-term strategies.
In the coming months, banks must play a more constructive role in economic development. This includes balancing their profit-driven motives with the need to lend more actively to private sector businesses, especially in transformative sectors such as energy, technology, and agriculture. Additionally, banks should prioritize underserved segments like micro, small, and medium enterprises (MSMEs) and women-led businesses. These sectors are critical for job creation and fostering societal well-being, making their growth essential for sustainable development.
Recent data underscores the evolving dynamics in Pakistan’s banking sector. According to a report by Topline Securities, the gross Advances-to-Deposit Ratio (ADR) of banks rose to 44% as of October 25, 2024, up from 39% on September 27. This increase was primarily driven by banks’ efforts to avoid a 15% incremental tax on ADRs below 50% by year-end. While this shift is welcome, it reflects a reactive mindset, where institutions act under compulsion rather than proactively recognizing their role in economic progress.
A similar pattern can be observed in the government’s approach to reforms. For instance, power sector reforms were initiated only after the IMF made them a condition for funding. By then, the sector’s circular debt had ballooned to over Rs. 2.4 trillion, with Rs. 1.8 trillion of this burden carrying high-interest rates. Such delays in addressing systemic inefficiencies exacerbate economic challenges, including a projected Rs. 637 billion cost of power theft and low recoveries in the current fiscal year.
Despite the recent rise in ADR, the banking sector’s excessive reliance on risk-free government securities remains a concern. The Investment-to-Deposit Ratio (IDR) has climbed from 33% in 2007 to a staggering 94% by June 2024. This trend highlights the government’s reliance on banks to finance fiscal deficits, diverting funds from private sector credit needs.
While the government’s decision to tax low-ADR banks has prompted some corrective action, a more disciplined approach is needed. Encouraging banks to diversify their lending portfolios and reducing reliance on treasury bills and bonds are critical steps toward fostering a more balanced and growth-oriented banking sector.
Building better banking practices requires collective action from regulators, the government, and the banking industry. Only through a shared commitment to aligning goals can Pakistan achieve the sustainable economic growth it urgently needs.