World Bank approves US$ 300m to Pakistan for banking reforms


25th October, 2001.

The World Bank has approved a US$300 million credit for the Pakistan Banking Sector Restructuring and Privatization Project to assist the country with its ongoing banking reform program.

Pakistan is working to develop a competitive private banking system, free from the interference of vested interests and operating under a strong regulatory framework. It is also developing a more effective banking court system.

The bank said in a press release that the main objective of the Bank's work in Pakistan is to reduce poverty. Recent cross-country empirical research by the Bank has shown that a sound and efficient financial system leads to higher growth, by as much as 2 percent annually. A healthier and more efficient banking system would contribute greatly to poverty reduction by improving the country's prospects for growth, enhancing its capacity to deal with volatility, mitigating the risk of financial crisis and improving the access of poor people to financial services.

"Pakistan has made good progress in reforming its banking system over the past four years," said Joe Pernia, World Bank Lead Financial Sector Specialist for the South Asia Region. "However, due to weak market conditions, a poor foreign investment climate and weak financial position of banks, bank privatization has not yet materialized. The government is now promoting the expansion of private financial institutions. At the same time, it is strengthening regulations needed to shield state-owned financial institutions from political interference and to protect consumers rights."

"All Pakistan's citizens, from important business interests to the smallest personal account holder, deserve to have access to secure banking and credit. Achievement of the country's vision for a healthy and efficient banking system will give them that while eliminating abuses in the system," he added.

The project follows a US$250 million World Bank loan in 1997, (co-financed with another US$250 million by Japan) which supported the initial stages of Pakistan's national banking reform program that year.

By 1999, the reform program had advanced significantly. Around one third of the value of defaulted loans had been recovered. Nationalized commercial banks, which still account for the majority of loans in the country, had stemmed operating losses. A new banking court system had processed nearly half of pending loan default cases at an unprecedented rate. Higher quality new loans combined with improved loan recovery and resolution of problem loans had helped the banking system achieve improvements in capital adequacy, asset quality, efficiency and profitability. Disclosure standards, fundamental to the reform program, had become much more stringent.

Reforms slowed somewhat in 1999. In September 2000, Pakistan requested the World Bank to help revive their implementation, focusing on bank privatization as the next critical step in the process.

"We are immensely encouraged by Pakistan's commitment to reform the institutional workings that underpin a healthy economy," said John Wall, World Bank Country Director for Pakistan. "The government has demonstrated that it understands the essential links between putting in place all the fundamentals--a safe and sound banking system in this case--and its ability to create the conditions for sustainable growth in Pakistan and thus a better life for its 138 million people. Banking reform specifically dates back to 1997 in Pakistan but a wider national reform program was launched in 1999 and we have already supported that with loans of US$374 million. Later this year we will bring to the Bank's Board of Directors further lending, which will deepen our support to this national program."

The banking reform project will focus on: Reducing the cost structure of the state-owned banks for efficiency and to facilitate their sale.

· Completing the privatization of partially privatized banks.

· Liberalizing bank branching policy to allow private banks to grow faster and increase their market share.

· Reducing tax on banks to attract private capital into the sector.

· Facilitating loan collateral foreclosure to reduce the cost of default and to expand lending to lower tier markets, including consumer lending.

· Reform of national savings schemes to integrate it with the financial market.

· Discontinuance of the mandatory placement of foreign currency deposits by the commercial banks with the central bank to prevent repeating the foreign currency deposit crisis and allow banks to place these deposits abroad.

· Strengthening the central bank to play a more effective role as regulator and guardian of the banking sector.

The World Bank's International Development Association (IDA) is providing the credit, an interest-free loan that will mature in 35 years with a 10-year grace period.