KARACHI, Feb 21: How have 4-5 years of financial sector reforms begun to impact on "pro-poor growth" was the theme of an address by State Bank Governor Dr Ishrat Husain at the annual general meeting of the Institute of Bankers Pakistan (IBP) here on Saturday.
His speech focused on "impact of reforms on improving income distribution," a topic rarely touched by the policymakers.
Dr Ishrat threw light on reform outcomes on credit flows to real economy, agriculture and small and medium size enterprises (SMEs) that provide 85-90 per cent of the country-wide employment. Till, very recently even credit figures for SMEs and micro-finance were not compiled.
Although financial sector reforms are an on-going process, it now appears that enough has been done to evaluate how it has begun to drive economic growth, create employment and reduce poverty.
The Institute's AGM and prize distribution ceremony was different from the previous meetings also in some other ways. So far, bankers have been criticized for a mindset that has just focused on corporate and trade financing and that too based on collaterals. Now leading bankers call for a change in the mindset of their staff.
Addressing the recipients of medals, prizes and diploma certificates, National Bank president Ali Raza advised the student-bankers to shun the traditional mindset that treated collateral as the anchor of guarantees to get bank money back. He emphasized: "Collateral is not asset. It did not prevent non- performing loans. It is the right mindset that is an asset. Collateral has to be substituted by use of mind and analysis. It would not be out of place to add that it is the small borrowers who do not have collaterals to offer."
In his report, new chief executive of the Institute, Muhammad Saleem Umar gave the performance of the organization in the outgoing year and presented a huge agenda with domestic and international reach to develop "a sound human base" by upgrading the knowledge and training for the benefit of the financial sector.
One of the highlights of IBP's annual meeting is the central bank governor's speech on the financial sector with particular reference to the banking system. This time, the topic was the outcome of the reforms on "pro-poor growth".
To quote Dr Ishrat Husain: "Agriculture credit increased by an annual average of 14.1 per cent over the past four years. But banking covers only 15 per cent of the farming community. The central bank has set a target for commercial banks to extend the coverage to 50 per cent or more than three million borrowers in next five years. Credit to small and subsistence farmers has gone from Rs25.5bn to Rs34bn and small non-farm sector from Rs1.5bn to Rs2bn during the fiscal 2001-2002."
Credit to SMEs rose by Rs32bn in one year ending December 2003, increasing the number of borrowers by 60,000 to some 180,000. SMEs contribute about 40 per cent of the GDP and 25-30 per cent of the employment.
Micro-financing for the poor is picking up with more players coming into the market. Khushali Bank has reached out to 100,000 customers. Pakistan Poverty Alleviation Fund is managing disbursement of $100 million provided by the World Bank. Then there is First Micro-Finance Bank, two commercial banks in mortgage-financing and other official bodies and NGOs. The average size of the loan given by micro-finance banks is Rs8,000. The loan recovery rate is 99 per cent.
Asking the banks to scale up their activities in catering to the needs of middle and poor income groups, Dr Ishrat set new directions, including funding of infrastructure projects of district and union council levels. This would fill in the community needs at the grass roots levels.