KARACHI, March 11: Deposits of all local and foreign banks operating in Pakistan increased from Rs1,993 billion at the end of June 2004 to Rs2,208 billion at the end of February 2005, showing a growth of Rs215 billion in eight months of this fiscal year, data released by the State Bank show. This increase is much larger than that of Rs125 billion between July 2003 and February 2004.

Senior bankers attribute this phenomenal growth in bank deposits to a number of factors including a pickup in economic activity, larger inflow of workers’ remittances and faster documentation of the economy.

“Bank deposits have grown as the economy itself has picked up,” said Shaukat Tarin who heads Pakistan Banks Association. During this fiscal year ending in June next, the economy is expected to grow by 7pc, against 6.4 per cent in the last year.

Workers’ remittances rose to $2.267 billion in eight months to February 2005. This translates into more than Rs136bn in total deposits of the banking system.

“Besides, as the economy is getting documented at a faster pace than in the past, this also has helped banks raise the deposit base,” said Mr Tarin while talking to Dawn.

One of the factors that have helped in documentation of the economy in a big way has been the offloading of government-held shares in state-run entities such as Oil & Gas Development Corporation (OGDCL), Pakistan Telecommunication Company Ltd. etc.

Banking analysts say as the government offered its shares in state-run entities to the general public through stock exchange, this prompted many to take out cash from under their pillows and invest in the stocks.

What surprises a layman is the fact that bank deposits have been growing despite the fact that banks are offering very low rates of return to the depositors. But those who link the rates of return on deposits to the growth in total deposits of the banks forget the fact that overall deposits of the banking system include all types of funds, which on their own, offer higher returns.

Mutual funds are one such example where rates of return are as high as 24 per cent.

The total deposits of the banking system is the sum total of deposits made not only by individual savers and investors but also large corporates, stock brokers, financial institutions etc. Corporate profitability through core functions also increases deposits of the banking system even if banks are not offering handsome returns. If a company is making more profits, its bank account will grow. It can switch over its investment from one mode to another and from one institution to another, but at the end of the day the money will remain in the banking system. Hence, a huge growth in bank deposits.

But this does not mean that here is absolutely no link between the rates of return offered by the banks and the growth in their deposits. When banks offer a higher return, this attracts more deposits from certain classes of savers including individuals and those who have previously been holding cash.

The weighted average rate of return on fresh bank deposits was 1.19 per cent at the end of June 2004 which rose to 1.75 per cent at the end of January, according to provisional data released by the State Bank. February figures are still

awaited.