Today, as Pakistan turns 70, banks realise that in order to grow and prosper they need to help build a new economy.

Over the years, they have learnt to weather political storms smoothly. It is evident in the current, dramatically changing political situation.

“The banking business is going on as usual and news of heightening political tension in the country does not excite us in any unusual way,” says the head of a large local bank. “The reason is simple: banks now operate in a regulatory and operational environment that is not very vulnerable to shocks.”

Banks in Pakistan weathered the 1970s wave of nationalisation with patience but it stifled their growth, recalls a former chairman of the board of directors of another local bank. In subsequent years, banks kept operating in an environment that was too tough and left little room for them to grow.

“We had the central bank and we also had the PBC [Pakistan Banking Council], a government-controlled entity that governed our credit policies. Coercing state-owned banks to lend to political favourites was quite common,” he says.

However, in the 1990s “our policymakers, in order to catch up with global trends, let banks spread their wings to set the stage for the financialisation of the economy (a reference to the IMF and World Bank-supported financial sector reforms)”, he says.

All developments that took place in the banking sector afterwards could be explained keeping this premise in view. “Even today, much of what is happening is contributing to maintaining the status quo of financialisation of the economy.”

He laments that the need for belt-tightening in the banking sector, following the change in global security order after the September 2001 attacks in the US, attracted a delayed response from policymakers.

“It took us far more years to enforce a KYC [know-your-customer] regime and tighten anti-money laundering laws than other nations. Small wonder that terror financing has only recently started dying in Pakistan after taking a heavy toll on the country’s society and culture,” he says.

“Although the SBP quickly developed some shock absorbers after the global financial crisis and the 2007 recession to save banks from the event’s spillover effects, we still lack an integrated response to global or regional market eventualities,” he adds.

They ought to boost SMEs lending dramatically, particularly in agriculture and service sectors, and fund tech start-ups which are mostly arranging finance from abroad, says a senior central banker

That, along with poor planning on execution of CPEC projects, explains in large part why our exports are not growing and imports are swelling, creating an unmanageable level of trade deficit.

A flux of machinery imports related to CPEC projects is often blamed for an unusual increase in imports, while exporters’ inability to produce high-end products at competitive prices is cited as a key reason for stagnant export earnings.

Things are, however, changing. “A new mixed economic model is emerging in which there is room for growth of a people-centric, forward-looking, economy with the ability to keep growing in the fast-changing global economic order with the financialisation of the economy showing no immediate signs of weakening,” he said.

The salient features of this evolving economic model include a focus on modernising agriculture, renovating the service sector and shaking up industrial production and marketing policies.

Some gains made in financial inclusion, technological innovation and higher reliance on educated youth for economic growth are also key elements.

“Such big developments like banks’ Rs700bn-plus lending to the private sector and an equal gross lending to agriculture (in FY17), several-fold rise in disbursement of microfinance in recent years, innovation in the payment system, opening of the floodgate of e-commerce, slow but steady growth of tech start-ups—and remarkable beginning of CPEC projects—all indicate our resolve to build a new economy,” says a senior official of the Ministry of Finance.

As the evolution of democracy keeps throwing challenges after challenges, building a new economic order, or even straightening the existing one, is a herculean task. It’s time for banking companies to come out of their comfort zone, increase financial intermediation, ensure sustained profitability amid fuller observance of regulations and be futuristic in their vision.

“They have a long way to go. The advances-to-deposit ratio is less than 50pc. It must rise to 70pc if we want to unleash the potential of the private sector,” says a senior central banker.

“Tech start-ups are mostly arranging finance from abroad. Banks can explore the opportunity to lend to them and develop the expertise to do so.

“And above all, they ought to boost SMEs lending dramatically, particularly in agriculture and services sectors, without which the economy can neither grow on a sustainable basis nor can banks see their profits growing very fast.”

Central bankers foresee the need for greater risk management on the part of banks as the country’s economy is poised to grow in the CPEC era and amid an expectedly charged political environment.

“More complex banking transactions will keep coming as CPEC gains momentum and the political environment remains uncertain — not only due to internal factors but also because of regional cooperation and confrontation that CPEC is going to create,” predicts a former advisor of the SBP.

“Risk management of all kinds — from economic and market risks to operational and compliance risks —will become more crucial, demanding dedicated policies and action responses from banks.”

Most bankers say they are readying themselves to measure up to these and similar challenges in the future.

They also say they realise that fiscal and monetary coordination may remain poor (as it is now) in the near future due to the peculiar nature of our political system and that this may keep creating difficulties for banks to pick up the right signals from their sole regulator i.e. the central bank.

“The recent rupee slide saga, occasional breach of the constitutional requirement of keeping government borrowing within specified limits, launching of populist, poorly designed schemes involving banks; are not just today’s realities. We anticipate these will continue”, says former head of a state-run bank.

“But we’ve come a long way experiencing such things and we’ve learnt how to remain focused on business. I am sure banks will keep doing their best in the future.”

Published in Dawn, The Business and Finance Weekly, August 14th, 2017