Pakistan faces tough
challenges on developing its financial markets
Financial systems across the world are stagnating, leading to
challenges for a global economic recovery, according to the fifth edition of
the World Economic Forum’s Financial Development Report 2012 released today.
“The Financial Development Report shows
that financial systems in advanced and emerging economies are stalling”, said Giancarlo Bruno, Senior Director at
the World Economic Forum. “Macroeconomic uncertainty, as well as concerns
related to regulation, contributes to inhibiting the financial industry from
funding much-needed growth.”
Amir Jahangir, Chief Executive Officer
- Mishal Pakistan, a country partner institute of the Center for Global
Competitiveness and Performance, World Economic Forum said that “the Financial Development Report 2012 ranks
62 of the world’s leading financial systems and capital markets, analysing the
drivers of financial system development in advanced and emerging economies to
serve as a tool for countries to benchmark themselves and establish priorities
for reform”. The rankings
are based on more than 120 variables spanning institutional and business
environments, financial stability, and size and depth of capital markets, among
other factors, he added.
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| Top 10 performers on the Financial Development Index 2012 |
The Report also shows an improvement
in the total number of active borrowers from microfinance institutions per
1,000 adults, where Pakistan has improved its position of 12 in 2011 to 9th
in 2012.
Pakistan has shown slight improvements
on the strength of auditing and reporting standards, where it is ranked 48 in
2012 as compared to 52 in 2011.
On the pillar of legal and regulatory
issues Pakistan has shown significant gains, by improving the burden of government
regulations, securing 21 rank as compared to 32 last year. The regulation of
securities exchanges has also improved 5 points with a rank of 37 out of 62
economies globally.
The current account balance to GDP, a variable,
which is the three-year average of current account balance to GDP, indicates the
difficulty Pakistan had in mobilizing the foreign exchange necessary for debt
service (from 2009 to 2011) has also improved from 53 last year to 40 in the
current year.
The economy has also shown improvements
in the “aggregate profitability indicator”, which is based on a three-year
average of three measures of profitability: net interest margin, bank return on
assets, and bank return on equity, this was measured on an average from 2008 to
2010, Pakistan improved 8 points on this, securing 41 rank on the Financial
Development Index 2012.
Other area where Pakistan showed
improvement of 14 ranks was the real growth of direct insurance premiums, where
Pakistan stands at 30th rank.
However Pakistan showed discouraging
performance on various key indicators, where it lost it development advantage
on multiple factors, whereas; intellectual property protection (53) and
effectiveness of law-making bodies (47) as compared to 48 and 43 from last
year.
The distortive effect of taxes and
subsidies on competition, which is to what extent does government subsidies and
tax breaks distort competition, Pakistan lost its rank from 46 in 2011 to 53 in
2012.
In terms of internet users, Pakistan
has seen a decline in its internet penetration, where it lost its position of
54 to 61 as compared to 2011 and 2012 respectively.
On the external vulnerability
indicator, which is the sum of several measures of external exposure as a
percentage of foreign exchange reserves, Pakistan has lost an alarming 14
points and it stands at 20 in 2012. However Pakistan still maintains a
development advantage in this area.
Whereas the world has shown improvements
in the banking system, such as Tier 1 capital ratios and non-performing loans
to total loans, Pakistan has declined in these two indicators, securing 26 and
57 out of 62 economies in 2012.
The decline in deposit money bank
assets to GDP (52); the private credit to GDP which is a variable showing
private credit by deposit-money banks and other financial institutions as a
percentage of GDP also declined from 48 in 2011 to 56 in 2012.
The Financial Development Report (FDR)
shows an alarming increase in banks overhead costs, which is the bank overhead
costs as a percentage of total assets has increased from the rank of 22 in 2011
to 45 in 2012, impacting a probable profitability of the banks in the coming
years.
On the equity market development
pillar Pakistan has shown discouraging performance, where stock market
capitalization to GDP has slipped from 43 to 50, stock market value traded to
GDP from 33 to 43 and Pakistan’s rank on number of listed companies per 10,000
people has dropped from 36 to 43.
The worst news for Pakistan on the FDR
is the commercial and retail access finance, where ease of access to credit has
been deteriorated to 43 from 30 last year; similarly ease of access to loan has
also become difficult, where the Report has ranked it 40 this year as compared
to 28 in 2011.
The market penetration of bank
accounts, which is the number of commercial bank accounts per 100,000 adults
has also declined 19 points in 2012, where Pakistan stands at 59 now,
simultaneously debit card penetration has also lost development advantage from
a rank of 37 in 2011 to 59 in 2012, showing staleness on part of the growth in
the banking system in Pakistan.
On the global front, the Report shows
that liquidity appears to be stabilizing in a number of top economies, as
highlighted by the fact that turnover velocity rebounded in 2011, moving closer
to 2006 levels. However, such gains are offset by considerably weaker domestic
market capitalization levels across the world’s stock exchanges.
Topping the Index, Hong Kong SAR came
in 1st for a second consecutive year as a result of benefits from a large and
efficient banking system, well-developed infrastructure and robust equity
markets. Despite these strengths, Hong Kong has a relatively underdeveloped
bond market and its financial sector has yet to be fully liberalized.
The United States and the United
Kingdom also remain in the same positions as last year, 2nd and 3rd,
respectively. Both countries have highly developed financial markets,
particularly their foreign exchange and derivatives markets, but they struggle
with relatively inefficient banking systems. Banking system stability and
currency stability are also areas of weakness. The US, however, has more
developed equity and bond markets, while the United Kingdom has stronger
corporate governance and legal and regulatory mechanisms. Japan and Switzerland
each moved up one spot to 7th and 8th space overall. Both countries have improved
the size and efficiency of their banking and financial services and have shown
improvements in their legal and regulatory framework.
Mishal Pakistan is the country partner
institute of the Center for Global Competitiveness and Performance, World Economic
Forum. The World Economic Forum is an independent international organization
committed to improving the state of the world by engaging business, political,
academic and other leaders in partnerships to shape global, regional and
industry agendas.
The Financial Development Report 2012
The Financial Development Report 2012
