KARACHI: The State Bank of Pakistan (SBP) has said that the financial system of the country remained resilient during the calendar year 2021.
The SBP on Tuesday issued its annual flagship publication, the Financial Stability Review (FSR) for CY21. The review presents the performance and risk assessment of various segments of the financial sector, including banks, non-bank financial institutions, financial markets, financial market infrastructures and non-financial corporates.
The assessment of the global dynamics highlights that due to the better management of the pandemic and an extensive vaccine inoculation drive, the ensuing recovery in the world economic activity that started in the second half of CY20 got further traction in CY21. However, the supply chain disruptions fuelled inflationary pressures and the recurring waves of the new Covid-19 variants continued to pose challenges to the global economic activities and financial markets.
The domestic economy navigated through two Covid-19 waves during CY21 without a significant impact due to effective management of the pandemic, which facilitated a strong revival in the economic activity. The GDP grew 5.7 per cent in FY21 (against one per cent contraction in FY20), and the momentum got further traction in FY22 to post an estimated growth of 6 per cent. However, the robust recovery in the demand and the rising international commodity prices, especially oil, led to external account pressures.
Accordingly, the SBP took a number of macro-prudential and monetary policy measures to stabilise the external account, moderate the domestic demand and address the associated risks.
In the context of strong economic expansion, the financial sector manifested steady performance, while its financial and operational resilience remained intact. The financial sector’s asset base expanded 15.6 per cent in CY21, while the financial markets observed a relatively contained volatility, compared with the last year.
The FSR indicates that the banking sector — the major part of the financial system — posted a strong growth of 19.6 per cent (CY20: 14.2 per cent), which was particularly aided by a surge in the private sector advances.
The expansion was well-supported by healthy deposits growth of 17.3 per cent, while the banks also increased reliance on borrowing from the banking system. Encouragingly, the credit risk of the banking sector remained contained as gross non-performing loans (NPLs) ratio declined 130bps to 7.9 per cent, while provisions coverage ratio improved 291bps to 91.2 per cent.
Accordingly, the net NPLs ratio declined to 0.7 per cent, indicating lower residual risk to the solvency from delinquent loans. On the performance front, the earning indicators observed improvement as the return on asset (ROA) stood at one per cent and the return on equity (ROE) improved to 14.1 per cent. Due, in part, to the improved earnings, the banks’ solvency remained strong as reflected in the high capital adequacy ratio of 16.7 per cent that stayed well above the minimum domestic regulatory benchmark of 11.5 per cent and the international benchmark of 10.5 per cent.
The Islamic banking segment also posted strong performance with a 30.6 per cent increase in its asset base during CY21, extending their share by 160bps to 18.6 per cent in the banking sector. Microfinance banks, which exhibited a reasonable growth, observed an inch up in the infection rate and deterioration in the earning indicators.
From the demand side perspective, the FSR reveals that the non-financial corporate sector showed a marked improvement in the profitability, business turnover, efficiency and debt repayment capacity. While this improvement bodes well for the credit risk of the financial system, it also signifies a likely boost in the corporate sector’s demand for financial products and services.
The report noted that the financial market infrastructures (FMIs) remained resilient and continued to perform efficiently without any major disruption. The SBP launched Pakistan’s instant payment system, Raast, which marked a major step towards implementing the national payment systems strategy. Since the launch of its P2P component in February 2022, the number of Raast IDs registration surpassed the 10 million-mark, with aggregated value of transaction crossing Rs36 billion.
Similarly, the Roshan Digital Account initiative, which was introduced in late CY20, to provide a convenient way of digital banking services to Pakistani Diaspora, crossed 416,000 accounts with cumulative inflows of over $4.4 billion by the end of May 2022.
Likewise, a comprehensive Customers’ Digital Onboarding Framework has been introduced to allow the resident Pakistanis to remotely open bank accounts. Such initiatives are also expected to play a key role in enhancing the financial inclusion in the country. To cater to the cyber-security risk, which is mainly associated with the increasing use of technology and evolving digital payment landscape, the central bank took various measures during the year to enhance the industry’s resilience against the risk.
The review also highlighted various measures taken by the SBP during the year to strengthen the regulatory and supervisory regime, including the introduction of a forward looking risk-based supervisory framework and lender of last resort (LOLR) facility to enhance its financial safety nets.
Importantly, the amended SBP Act 1956 has clearly delineated the financial stability as one of the main objectives of the SBP.
Going forward, risks to the financial stability are contingent upon the strength of external buffers, policy continuity and overall macroeconomic conditions in the context of developments on geopolitical front in Europe, global commodity prices and the global financial conditions.
Stress test results, in the meantime, show that the banking sector is expected to maintain reasonable resilience against various hypothetical adverse economic shocks over the projection period of three years. Amid the dynamic and challenging environment both at domestic and global fronts, the SBP, on its part, will continue to undertake initiatives to keep the pace with the evolving financial landscape and remains vigilant to the emerging risks, while standing ready to take necessary measures in pursuit of its statutory objectives of price stability, financial stability and economic growth.
