Banking Sector's Role in Pakistan's Economic Growth

KARACHI: The banking sector in Pakistan plays a crucial role in the country’s economic growth and development. Recent analysis by the Centre for Economic Research in Pakistan (CERP) and Alchemy Technologies, with support from the Pakistan Banks’ Association (PBA), emphasizes the importance of innovation, financial inclusion, and small and medium-sized enterprise (SME) lending. These elements are essential for enhancing the efficiency of banks in Pakistan.

During the launch of the report titled "Banking on our Banks: Aligning Growth with Development" in Karachi, industry experts discussed the significant impact of the banking sector on the overall economy. While there have been notable improvements in the sector, it is vital to look beyond mere profitability and growth figures. The analysis points out that the performance gap between Pakistani banks and their regional counterparts is widening. Factors such as overdependence on certain economic sectors, regulatory challenges, and limited incentives for using formal banking channels hinder innovation and growth.

Mr. Jameel Ahmad, the Governor of the State Bank of Pakistan, highlighted that the banking sector is well-equipped in terms of solvency, asset quality, and profitability. He stated, "Our banking sector is well positioned to contribute to the economic growth and development of Pakistan by embracing technology and fostering innovation." He emphasized the need for a focus on governance and risk management to enhance the sector's capacity to serve all economic segments.

Mr. Zafar Masud, Chairman of the PBA, pointed out the challenges faced by banks, noting that 52% of the economy remains undocumented, with many sectors avoiding taxes. Despite these hurdles, he praised the banking sector for its significant contributions to the national exchequer and fiscal deficit. He remarked, "This level of commitment is rare, especially in emerging economies like ours, and deserves recognition and applause."

The analysis also revealed that banks tend to lend to traditional sectors such as energy, agriculture, logistics, and textiles, often overlooking industries with greater long-term potential. The lack of competition stifles innovation, making it difficult for banks to develop new products or explore emerging sectors. Maroof A. Syed, President and CEO of CERP, stated, "The truth is that changing rules doesn’t change behaviour, incentives do. With the right data and solutions, we can build a unified banking ecosystem ready to fuel Pakistan’s economic recovery."

Panel discussions at the event included insights from various industry leaders, who addressed regulatory challenges, the high costs of digitalization, and the overreliance on unprofitable sectors. They agreed that strategic reforms could alleviate these issues, reduce costs, and enhance the long-term competitiveness of banks. Jawwad Farid, CEO at Alchemy Technologies, emphasized the need for market-driven incentives and robust regulatory frameworks, stating, "Otherwise, banks will continue to prioritize comfort lending over bold decisions necessary for economic transformation."

To ensure sustained growth, it is essential to incentivize participation in the formal economy. For banks to effectively support small businesses, regulatory frameworks must reconsider tax strategies. Additionally, banks should evolve their boards to be more diverse and open to new ideas. The collaboration between the banking sector, government, and businesses is vital for driving the necessary reforms to make Pakistan’s economy competitive and resilient against global challenges.

The discussions at the event underscored the importance of a proactive approach in the banking sector. By embracing innovation and fostering collaboration among all stakeholders, Pakistan can pave the way for a more robust and dynamic economy. The commitment of the banking sector to stimulate economic activity, as reaffirmed by Mr. Muneer Kamal, CEO and Secretary General of PBA, is a promising step towards achieving sustainable progress and long-term growth for the nation.