KARACHI, July 1: The State Bank of Pakistan launched on Tuesday a 10-year financial sector strategy to achieve higher and sustainable growth. However, its success is linked with the political and economic stability in the country. SBP Governor Dr Shamshad Akhtar announced the strategy while addressing the Development Finance Conference on ‘Expanding Frontiers of Financial Access in Pakistan’, organised by the SBP on the eve of its 60th anniversary.

The conference was inaugurated by Prime Minister Yousuf Raza Gilani.

Addressing the conference, Dr Akhtar said that the central bank was launching the financial sector strategy with an explicit objective to help the country achieve higher and sustainable economic growth; develop a dynamic, robust and stronger banking system; mobilise the domestic and foreign resources for private investment and deepen the financial penetration for the poor and underserved regions.

“This vision that we are articulating will take forward the banking sector to new heights, building on the outstanding performance of the sector in a short span of 4-5 years,” she added.

Dr Akhtar said that the prerequisite for financial sector growth, however, is macroeconomic and political stability and augmentation of the enabling policy environment in the real sector. “Assuming these preconditions are met, the 10-year strategy will stimulate sharper growth in financial assets and aims to double the private sector credit/GDP ratio,” she said.

“There is a need to reconsider the regulatory architecture. Our current regulatory architecture is not well-suited for consolidated supervision and no agency has powers to oversee both the financial and non-financial conglomerates.”

In addition, she pointed out, that commercial banks now have de facto moved into a conglomerate structure with or without a holding company’s framework. By and large banks have acquired stakes in Non-Banking Finance Institutions (NBFIs), including insurance, brokerage and financial advisory services, etc.

Financial conglomerates present major regulatory and supervisory challenges, as such structures are prone to contagion risk, she added.

She said the SBP had proposed to transfer all deposit and lending institutions for central bank’s oversight and to entrust it with the responsibility of lead supervisor for consolidated supervision.

“This has been a major omission in financial sector laws and regulations,” she said.

The governor said that some banks had acquired or merged NBFIs such as investment finance, brokerage, asset management and insurance companies into the banks, while others remain as subsidiaries.

Conglomerates have become the norm, as banks broaden their product offerings and seek cross-selling opportunities. Presently, five banks (and one DFI) own shares in insurance companies, 12 banks have interests in asset management companies and mutual funds, and many are involved in other areas like leasing, financial advisory and brokerage services, modaraba management and foreign exchange.

Financial conglomerates present a major challenge for the SBP. It is generally acknowledged that financial conglomeration makes good business sense, and that these developments should be regulated but not stifled by the regulators.

The main challenges that financial conglomerates pose for regulators are:

First, unless there is strict implementation of sound banking practices, there is a danger that a bank can become a cheap source of finance to other members of a group without proper recognition and management of the risks involved.

Second, failures elsewhere in the group can expose the bank to contagion risk.

Third, especially where the conglomerate group includes commercial businesses, there is a risk that the bank depositors end up carrying the residual risk for non-financial businesses.