contents...islamic banking has gained popularity not only in the muslim world but in the west also....

November - December 2004BULLETINECONOMIC

Contents

§ Editor’s Corner ii§ Abstract of the Bulletin 4§ WTO & the Banking Sector 5§ WTO General Agreements on Trade in Services & Pakistan 13§ Banking Sector Quarterly Performance – 2004 at a Glance 17§ Market Analysis 18§ The Year 2004 20§ Book Reviews 22§ Key Economic Indicators 24

NBP Performance at a Glance

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Dear Readers,

With growing interest in Islamic banking in recent years, the scepticism that prevailed about its successis giving way to an increasing realization that it is here to stay and progress. While Islamic banks haveemerged as active players over the last two decades, but many of the principles upon which Islamic bankingis based have been accepted all over the world for centuries. Today, there are about 250 Islamic financialinstitutions operating in about 100 countries.

In the last fifty years or so, the first half of which was devoted mainly to theory and model building, Islamicbanking has established itself as an alternative to conventional banking. While the core ideal of commercialbanking, that of financial intermediation was retained, but the practice of interest was discarded.

Islamic banking received greater attention as a banking option in the international financial scene in the1970s. Its philosophies and principles are however, not new, having been outlined in the Holy Quran andSunnah of Prophet Muhammad (PBUH) more than 1400 years ago.

Islamic banking has gained popularity not only in the Muslim world but in the west also. We see that thereare Islamic financial institutions operating in the US, UK, India alongside Egypt, Iran, UAE, Malaysia,Saudi Arabia, Bahrain, Qatar, Pakistan, Turkey among others.

Today, Islamic banking is a growing sector, achieving mainstream relevance. For instance in Malaysia, themarket share of Islamic banks’ deposits is around 10%; Qatar and Kuwait 20%, Sudan 30%, Saudi Arabia15%, UAE, Jordan and Egypt 15%.

UK’s first purely Islamic bank, Islamic Bank of Britain opened in UK in mid 2004, offering financialproducts that comply with Islamic law. Some British banks offer products tailored for Muslims. Hong Kong& Shanghai Banking Corporation offers Shariah compliant pension, home loan scheme and stock brokingservice that comply with Islamic law (Shariah).

Citibank has set up an Islamic investment bank branch in Bahrain, while Chase Manhattan set up an Islamicbank in Bahrain as a separate entity, in collaboration with a local partner. Financial institutions like ABNAmro, Amercial Express, ANZ Grindlays Bank, Deutsche Bank and Union Bank of Switzerland haveestablished Islamic Banking Shariah compatible services in several countries.

Islamic banking has been adopted at the national level in Pakistan, Sudan and Iran, and these countrieshave decided to Islamise the whole of their banking systems.

In Pakistan, Islamic banking has gone through an evolutionary process during the last three decades or so.Still in a stage of infancy, work continues, to make the system competitive with conventional bankingpractices. Today it is better aligned to the needs of business, as for many conventional banking practicesthere is a corresponding Islamic banking alternate. For instance, for long term financing there is Ijarah,for working term financing there is Murabaha, for deposits there is Musharika based Savings Accounts,for Letter of Credit there is Letter of Credit, for Letter of Guarantee there is Letter of Guarantee.

Editor’s Corner


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Further, an enabling environment is being created to make the system sustainable. Tax laws, civil laws,corporate laws, accounting standards are being reviewed and amended to meet the needs of the emergingsystem.

Presently Islamic banking operates side by side with conventional banking system. It was in 2002, that theState Bank of Pakistan issued the first Islamic banking licence to Meezan Bank and later in September2004, a similar licence was issued to Al-Baraka Islamic Bank converting its operations to conform withSharia. Further 9 banks have been issued with Islamic banking licences to open 29 branches. One bankhas shown an interest to open a subsidiary and State Bank of Pakistan is looking into it.

The State Bank of Pakistan is playing a significant role in the development of Islamic banking in thecountry. As a regulator, it has a supervisory role to play, plus the role of policy maker and as the systemin its infancy, the regulator has to play a developmental role as well.

A full-fledged Islamic Banking Department has been set up at the Central Bank. Realizing that it needsan undivided focused attention, the Department sees to the growth of the system in Pakistan.

The State Bank of Pakistan is following a three pronged strategy to promote Islamic Banking in Pakistan:

§ establishment of full-fledged Islamic banks in the private sector;§ setting up of a subsidiary by an existing commercial bank;§ setting up of separate branches for Islamic banking by an existing commercial bank, which is not

touched by any conventional banking, so as not to conflict with the Shariah Board.

There is now a Shariah Board at the State Bank of Pakistan with a diverse group of experts to guide theIslamic banking industry.

As lack of qualified manpower is one of the biggest hurdles in the advancement of Islamic banking, bankstaff need an orientation in the Islamic framework. State Bank is developing special certification courses,has undertaken various Islamic banking awareness programmes to train local staff and make them conversantwith the details of Islamic financial instruments, accounting procedures etc.

Efforts towards Islamising the banking system in Pakistan has brought positive results in a short period.Total assets of Islamic banks has grown from Rs.12.9 billion (end-Dec ’03) to Rs.44 billion by the end of2004. Deposits in the period grew from Rs.8.4 billion to 30.5 billion. Meanwhile, market share of Islamicbanks/branches in terms of assets grew from a mere 0.5% (Jan ’03) to 1.36% (Dec ’04), while the sharein deposits rose from 0.8% to 1.37%.

The Islamic banks branches have done well in the last one to two years, and this growth needs to besustained. This would require investing in R&D, training of required personnel in the use of Islamic financialproducts, development/marketing of Islamic financial products by creating awareness among the muslimcommunity of the developments in Islamic finance, developing compatible Islamic financial productsamong others.


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WTO and the Banking Sector

§ Since the establishment of the WTO in 1995, anumber of agreements have been concluded betweenmember countries to liberalise trade and one suchagreement is the GATS.

§ GATS purpose is to create a reliable system ofinternational trade rules, which ensures fair andequitable treatment of all countries on the principlesof non-discrimination.

§ GATS covers all internationally traded services,including financial services, which includesinsurance and banking.

§ Liberalisation of trade in financial services bringsabout a number of improvements.

§ GATS provides for four modes of supply of services.

§ There are a number of implications of opening offinancial services.

§ Pakistan has a growing services sector.

§ It has a schedule of specific commitments in thefinancial services sector.

§ With liberalisation of the financial services sector,Pakistani banks will have to face increasedcompetition.

§ Financial sector reforms initiated in 1997 were laterstrengthened and continue to-date.

§ The reforms have strengthened the local banks tocompete with foreign banks both in the domesticmarket and internationally.

WTO General Agreement on Trade in Servicesand Pakistan

§ Services is a growing sector, offering a lot of exportpotential.

Abstract of the Bulletin

§ Pakistan has taken steps to liberalize its servicessector under GATS.

§ While making sectoral commitments, Pakistan hasplaced certain limitations and restrictions.

§ While adopting liberalisation, certain gains as wellas losses would accrue for the economy.

Banking Sector Quarterly Performance - 2004

§ The table shown in this section gives the keyfinancial figures of banks whose quarterly balancesheets were published and were available.

§ Profit of all banks has risen in the fourth quarterof 2004.

§ Deposit increase in the second quarter of 2004 wasmore than in the third quarter for most banks.

Market Analysis

§ November and December 2004 marked theresumption of bullish sentiment in the equitymarkets. The KSE-100 Index managed to close theyear at 6218 points, showing a gain of 39% for 2004overall. Going forward, the momentum is likely toremain positive on the back of continued strongcorporate earnings, easy liquidity, and the generallypositive macroeconomic environment.

The Year 2004

§ Through graphical representation the monthly trendfor the year 2004 of certain economic indicators isshown.

Book Reviews

§ There are some new books available in the marketon Pakistan’s economy, which have been introducedto our readers through a brief description of thecontents of each book.

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WTO and the Banking SectorBeginning January 2005, the internationaltrading system will change towards a regimewhich helps foster the free flow of trade ingoods and services between its membercountries. Trade has been progressivelyliberalized in both the developed and developingeconomies. With the establishment of the WorldTrade Organisation in 1995, a number ofagreements have been concluded to liberalisetrade in various sectors and one such agreementis the GATS – the General Agreement on Tradein Services. The GATS provides an internationalregulatory framework for administering globalliberalisation of trade in services. It’s majorcomponent is trade in financial services. Theincreasing importance of services trade led tothe establishment of the GATS as one of thenew areas in the Uruguay Round negotiations.

Financial services includes two broad categoriesof services; insurance and insurance relatedservices, banking and other financial services.Banking includes all the traditional servicesprovided by banks such as acceptance ofdeposits, lending of all types, payment andmoney transmission services, as well as servicesrelated to trading in foreign exchange andsecurities, money broking, asset management,settlement and clearing services.

Earlier to the Uruguay Round, services wereconsidered to offer less potential for tradeexpansion than goods, because of the existenceof technical, institutional and regulatory barriers.But with the gradual liberalisation of the hithertoregulated sectors, it has enhanced the tradabilityof services. Liberalisation in the services sectoris particularly important for developingcountries considering the fact that trade inservices has growth faster than trade in goodsover the past decade.

Services account for over 64% of world grossdomestic product, compared to 57% in 1990.Meanwhile, between 1990 and 2000, the growthof exports of commercial services fordeveloping countries (9%), exceeded that for

developed countries (5.5%). The 49% leastdeveloped countries also experiencedparticularly strong growth of commercialservices (6.3%).

There are a number of studies which show thegains that accrue from liberalisation of servicestrade. World Bank Report “Global EconomicProspects for Developing Countries 2001”,has shown that economic gains from servicesliberalisation greatly exceed the gains frommerchandise trade liberalisation. Liberalisationof services in developing countries couldprovide as much as $6 trillion in additionalincome in developing world between2005-2015.

Liberalisation of trade in financial serviceshelps strengthen the financial system and theeconomy in general by bringing aboutimprovements to the financial infrastructure.It also underpins efficient trade in goods. Thepresence of foreign financial firms encouragesa competitive financial services market whichin turn leads to increased efficiency, greaterinnovation, lower product pricing and increasedconsumer choice.

With the growing realization that the efficientsupply of financial services is a preconditionfor stable development, is leading to increasingderegulation and liberalization of the sector.Over the last two or three decades, the scopefor international trade in financial services hasgrown rapidly through the development of newtechnologies, especially in telecommunications,and the expansion of foreign direct investment.

Countries have taken steps, although at anuneven pace, to establish a framework of rulesto ensure that service regulations areadministered in a reasonable, objective manner.

The GATS Agreement defines trade in servicesas the supply of a service through any of thefour modes.

§ Mode-1deals with cross border supply of aservice. This category includes the taking of

GATSliberalisestrade

Growingservicessector

Gainsfromfinancialservicesliberalisa-tion

Modes ofsupply

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a loan or the purchase of insurance cover bya domestic consumer from a financialinstitution located abroad.

§ Mode-2 involves consumption abroad, thefreedom for the Member’s residents topurchase services in the territory of anotherMember. The purchase of financial servicesby consumers while travelling abroad fallsin this category.

§ Mode-3 is commercial presence, theopportunities for foreign service suppliersto establish, operate or expand a commercialpresence in the Member’s territory, such asbranch, agency, or wholly-owned subsidiary.

§ Mode-4 covers the supply of services throughthe presence of natural persons of a Memberin the territory of another Member. It includesthe possibilities offered for the entry andtemporary stay in the Member’s territory offoreign individuals in order to supply aservice.

A book by the WTO and the World Bank “TheInternationalization of Financial Services:Issues and Lessons for Developing Countries”has shown that with the elimination ofdiscriminatory treatment between foreign anddomestic financial services providers and theremoval of barriers to the cross-border provisionof financial services opens the door to the entryof foreign suppliers. There has beenconsiderable support for the view that thisfavours the building of financial systems thatare more stable and efficient by introducinginternational standards and practices.

Further, evidence exists which shows thatincreased competitiveness enhanced throughfinancial sector openness spurs economicgrowth. The increased number of foreignentrants in the market has a positive effect onthe functioning of the market.

The extent of the benefits depends largely onhow it is phased in with other types of financialreform, particularly domestic financialderegulation. Multilateral agreements likeGATS allows countries to add credibility totheir plans for financial system liberalisation.

A paper entitled “Financial Opening underthe WTO Agreement in Selected Asian

Countries: Progress and Issues”, by the AsianDevelopment Bank has examined theimplications and issues of financial openingwith focus on the banking sector for selectedcountries.

With the opening of the banking sector toforeign banks, the paper has shown that PeoplesRepublic of China for instance will have toimprove its legal and regulatory system toaddress existing weaknesses and prepare forfuture challenges, otherwise it would hamperfinancial sector development. Further thecountry would have to make its regulationsconsistent with its WTO commitment regardingopening up of the financial industry.

To strengthen domestic banks, the problem ofnon-performing loans have to be addressed;the private owned banking system has to bedeveloped by ending the monopoly of majorstate owned banks and better human resourceshave to be developed so that skilled profe-ssionals are there to respond to the changingenvironment.

In Korea, the paper states ‘foreign bankscontributed to higher competition andintroduction of new banking and financialtechniques and helped Korean companiesexpand foreign trade with new clients.’ Foreignequity holding of upto 100% in Korea is allowedfor any kind of financial institution, while othercountries restrict it to below 50% in general.There is evidence available which shows thatfinancial opening has had a significant positiveimpact on the domestic economy and financialmarkets in Korea.

In Malaysia, the share of foreign banks’ lendingin total lending increased steadily after theAsian crisis, which contributed to the country’seconomic recovery, employment generationand financial stabilization in the period. Asforeign banks generally enjoy more advancedbanking practices than local banks, theycontribute to introduction of new techniquesinto local markets.

Removalof barriersto bringpositiveresults

Implicat-ions offinancialopening

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Highlights of Individual Countries’ Opening ofFinancial Services within GATS

Country Banking Equity Holding(Financial institutions)

Presence ofNatural Persons

OtherRestrictions

Branch offices operateonly in 10 cities inprinciple. Foreign-Indonesian jointownership is allowedwith existing banks, buta new license is notallowed for GATS.

No restriction ingeneral. In 1998 afterthe crisis, mostrestrictions wereremoved to increasecommercial presence.

The 13 wholly foreign-owned foreign banksare permitted to remainwholly foreign owned.New licenses are notallowed.

One office only andcannot establish off-premise ATMs and newsub-branches. Moneyand foreign exchangemarket transactionsgenerally unrestricted.

Commercial presencegenerally has norestrictions for existingforeign bank branches.Foreign bank share:zero in 1997, 6% as ofDecember 2000.

Local existing bank:49% of the listedshares.Non-bank financecompany listed in thestock exchange:100%Others: 49%

100% for any kind offinancial institution.Stock investments inprivate companies:100% (May 1998).Bond markets are fullyopen.

Entry of foreign banksis limited to equityparticipation in localcommercial banks andmerchant banks.Aggregate foreignshareholding in a bankshall not exceed 30%.Securities company (alocally incorporatedjoint-venture): not toexceed 30%.

Banks: 40%Insurance: 49% oflocally ownedinsurance companies.Securities companies:unbound.

Foreign equityparticipation upto 49%in principle. But thefollowing only 25%:life and non-lifeinsurance, localincorporated banks,securities companies.

Expatriate directors,managers, experts,advisors can beengaged for 3 years andcan be extended.Manager or technicalexperts require twoIndonesian under-studies at a minimum.

Allowed. Korean bankscan recruit foreignnationals as directors(May 1998).

Not allowed except fortemporary presence ofsenior managers andspecialists in relation toestablishingcommercial presence.

Unbound, except forintra-corporatetransfers of managers,executives, andspecialist. Limited toa 3-year period thatmay be extended forupto two additionalyears.

Unbound, except forcorporate transfers atthe managerial orexecutive level, or forspecialists for a 1-yearperiod (altogether notmore than three years).

Cross-border supplyand consumptionabroad are generallyprohibited. Securitiesbrokers must establisha local company to runthe business.

Cross-border andconsumption abroadare partially allowed forbanking and investmentadvisory services.

For cross-border andconsumption abroad,similar to Indonesia.Offshore institutionsallowed in Labuan.

For cross-border andconsumption abroad,similar to Indonesia,but insurance isallowed.

For cross-border andconsumption abroad,similar to Indonesia.Foreigners are notallowed to purchase orown land.

Indonesia

Korea

Malaysia

Singapore

Thailand

Source: Financial Opening under the WTO Agreement inSelected Asian Countries: Progress and Issues

Asian Development Bank

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PAKISTANBanking (Financial Services)

Schedule of Specific CommitmentsModes of Supply: -(1) Cross border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons.

Sector or Subsector Limitations on market access Limitations on national treatment Additionalcommitments

Financial Services(excluding insurance)

Banking

(a) Acceptance of deposits andother repayable funds from thepublic in Pakistan

(b) Lending of all types includingconsumer credit, mortgage,factoring, credit and financingcommercial transaction

(c) All payment and moneytransmission servicesincluding traveller chequesand banker’s draft (butexcluding credit, charge anddebt cards)

The commitments in Financial Services are given to thenationals and financial institutions of the Members whoselaws and policies do not bar the provision of similarcommitments to the Pakistani nationals and financialinstitutions.

(1) Unbound

(2) Unbound

(3) (i) Bound for the volume of deposits andother repayable funds mobilized byforeign banks in Pakistan as at the timeof conclusion of the Negotiations on12 December 1997.

(ii) Foreign banks (other than those already operating their branches in Pakistan as on 12 December 1997) permitted to accept deposits andother repayable funds from public by setting up locally incorporated limited companies with foreignequity ownership upto 49%. Licence to undertakecommercial banking business required from the Central Bank. The Licence to foreign banks willbe issued on the basis of same eligibility criteriaas applicable to domestic commercial banks. Theminimum paid-up capital required to undertake banking business by foreign banks shall not be more than what is required by the domestic commercial banks, i.e. US$11.5 million.

(iii) Bound for the number of branches of foreign banksoperating in Pakistan as at the conclusion of the Negotiation on 12 December 1997. Change in thecontrolling shareholders of the foreign banks operating their branches in Pakistan may requirenew licence. Other foreign banks will be allowedupto three branches at the place of their choice. ATM’s installed at the branch premises not treatedas a separate branch.

(iv) Prior permission in writing of the Central Bank isrequired by any person for holding beneficial ownership of 5% or more of the paid-up capital of any bank/financial institution.

(v) Representation of foreign nationals on the Boardof Directors allowed in proportion to their shareholding.

(4) Unbound

(1) Unbound

(2) Unbound

(3) (i) Bound for the total volume of foreign banks’ assetsin Pakistan at the time of the conclusion of the Negotiations on 12 December 1997.

(ii) Investment in shares of existing domestic banks permitted to foreign nationals/ foreign financial institutions for trading purposes. Acquisition of management control of existing public sector banks considered on case-by-case basis under specific Sale-Purchase Agreements to be approvedby the Central Bank.

(4) Unbound except as indicated under horizontalmeasures.

Employment of foreign nationals in banks andfinancial institutions operating in Pakistan requireprior clearance of the Central Bank.

(1) Unbound

(2) Unbound

(3) Foreign banks branches operating in Pakistan at the conclusion of the Negotiation on 12 December1997 and banks incorporated in Pakistan permittedto undertake all payment and money transmissionservices.

(4) Unbound except as indicated under horizontal measures.

Provision of all banking and financial services inPakistan are subject to the injunctions regarding Islamicbanking as pronounced by the competent courts inPakistan.

(1) Unbound

(2) Unbound

(3) The shares held by foreign nationals and foreignfinancial institutions in their locally incorporatedsubsidiaries not transferable without the prior written approval of the Central Bank.

(4) Unbound

(1) Unbound

(2) Unbound

(3) Lending by banks to companies controlled by non-residents is subject to the borrowing entitlements of the foreign companies as determined by foreign exchange rules applicablefrom time to time.


(1) Unbound

(2) Unbound

(3) Unbound


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(1) Cross border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons.

Sector or Subsector Limitations on market access Limitations on national treatment Additionalcommitments

In the country’s schedule each country identifies the service sectors to which it will apply the market access and national treatment obligations of the GATS and any exceptionsfrom those obligations it wishes to maintain. The commitments and limitations are entered with respect to each of the four modes of supply which constitute the definition oftrade in services in Article 1 of the GATS: these have been mentioned earlier.

The national schedules all conform to a standard format. For each service sector or sub-sector, the schedule indicates, with respect to each of the four modes of supply, anylimitations on market access or national treatment which are to be maintained. A commitment therefore consists of eight entries which indicate the presence or absence ofmarket access or national treatment limitation with respect to each mode of supply.

§ Market access column: When a Member undertakes a commitment in a sector or sub-sector it must indicate for each mode of supply what limitations, if any, it maintainson market access.

§ National treatment column: The national treatment obligation under Article XVII of the GATS is to accord to the services and service suppliers of any other Membertreatment no less favourable than is accorded to domestic services and service suppliers. A Member wishing to maintain any limitations on national treatment – that isany measures which result in less-favourable treatment of foreign services or service suppliers – must indicate these limitations in the third column of its schedule.

§ Additional commitments column: Entries in this column are not obligatory but a Member may decide in a given sector to make additional commitments.

In essence, the entries which constitute a legally binding commitment in a Member’s schedule indicate the presence or absence of limitations on market access and nationaltreatment in relation to each of the four modes of supply for a listed sector, sub-sector or activity.

§ Where there are no limitations on market access or national treatment in a given sector and mode of supply, the entry reads NONE.

§ All commitments in a schedule are bound unless otherwise specified. In such a case, where a Member wishes to remain free in a given sector and mode of supply tointroduce or maintain measures inconsistent with market access or national treatment, the Member has entered in the appropriate space the term UNBOUND.

(1) Unbound

(2) Unbound

(3) Guarantees and commitments in foreign currencyand those undertaken in favour or on behalf of non-resident to be governed by foreign exchangelaws.


(1) Unbound

(2) Unbound

(3) (i) The issue, sale and purchase of foreign currencyand traveller cheques is allowed to commercial banks licensed as Authorized Dealer.

(ii) Foreign banks allowed to set up joint ventures with local persons with equity participation upto50% after obtaining Licence from the State Bankto undertake the sale and purchase of foreign currency and traveller cheques.

(iii) Transmission of permissible funds including foreign currency can be effected only through

authorized banking channels.

(iv) Commercial banks incorporated in Pakistan and the branches of foreign banks in operation as on

12 December 1997 allowed to operate in call money market.

(4) Unbound except as indicated under horizontalmeasures.

(1) Unbound

(2) Unbound

(3) Branches of foreign banks in operation as on 12 December 1997 and banks (including investmentbanks) incorporated in Pakistan permitted to arrange and participate in any public issue and underwriting of securities upto 30% of the total paid-up capital of the issuer or 30% of their respective paid-up capital which ever is less. Allinvestments in shares made as a consequence of underwriting commitments must be reported forthwith to the Central Bank, and is required tobe disinvested within 30 days of the investmentsas approved by the Central Bank.


(1) Unbound

(2) Unbound

(3) All commercial banks are required to be membersof the clearing system operated/ approved by Central Bank to effect interbank settlements.


(d) Guarantees and commitments

(e) Trading, for own accountonly of:

- money market instruments;

- foreign exchange;

- transferable securities;

- other negotiable instruments

(f) Participation in issues of allkinds of securities includingonly public underwriting andplacement as agent andprovision of services relatedto such issues

(g) Settlement and clearingservices for negotiableinstruments (cheques, bills andpromissory notes only)

(1) Unbound

(2) Unbound

(3) Unbound


(1) Unbound

(2) Unbound

(3) Unbound


(1) Unbound

(2) Unbound

(3) Unbound


(1) Unbound

(2) Unbound

(3) Unbound


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The significance of the services sector in theeconomy of Pakistan has grown over the yearsand today the sector constitutes over 52% ofthe GDP and accounts for around 45% of thetotal labour force employed in the country.Individual shares in the services sector sub-category shows that the wholesale and retailtrade sector claims the highest share (18.4%)followed by transport , storage andcommunication (11.1%) public administration& defence (6.8%), ownership of dwellings(3.1%) and finance & insurance (3.0%). Theremaining services grouped under other serviceshave a share of around 10%.

The preceeding Table gives the schedule ofspecific commitments Pakistan has made inthe financial services (banking) sector. EachWTO member is required to have a Scheduleof Specific Commitments which identifies theservices for which the member guaranteesmarket access and national treatment and anylimitations that maybe attached.

In the opening paragraph of the schedule ofspecific commitments, Pakistan has stated thatthe commitments laid down in the scheduleare subject to the availability of similarcommitments from other countries whose lawdoes not bar the provision of similarcommitments to our financial institutions.

The government improved its financial servicescommitments in the WTO Financial ServicesAgreement in December 1997. The followingare excerpts from a report “WTO Regime andits Impact on Pakistan”, by the Civil ServicesAcademy, Lahore.

The State Bank of Pakistan (SBP) has changedits branch licensing policy, and has eliminatedrestrictions on the number of branches forforeign banks. Currently foreign banks, likelocal banks, have to submit an annual branchexpansion plan to the SBP for approval. TheSBP approves new branch openings based onthe bank’s net worth, adequacy of its capitalstructure, future earning prospects, creditdiscipline, and the needs of the local population.Foreign brokers, like their Pakistanicounterparts, must register with the Securities& Exchange Commission of Pakistan.

Some other Commitments

§ Foreign banks have been allowed to undertakebusiness by setting up locally incorporatedsubsidiary with 49% foreign equity.

§ Other eligibility criteria including minimumcapital requirement, is the same as for domesticcommercial banks.

§ Investment in shares of existing domesticbanks is permitted to foreign nationals/IFIsfor trading purposes.

§ Representation of foreign nationals on theboard of directors has been allowed inproportion to their share holdings.

§ Employment of foreign nationals in banks andfinancial institutions operating in Pakistanrequire prior clearance of SBP.

§ Foreign banks are allowed to setup jointventures with local persons with equityparticipation up to 51%.

§ Transmission of permissible funds, includingforeign currency, can be effected throughauthorized banking channels.

§ All commercial banks are required to bemembers of the clearing system operated/approved by SBP.

§ Foreign leasing companies are permitted tosetup subsidiary leasing business withmaximum total share holding of 51%.

§ Foreign licensed entities are allowed toundertake portfolio management services bysetting up locally incorporated subsidiarieswith 51% share holding.

§ Prior written permission is required by SBPfor any person holding more than 5% of paidup capital of any bank/FI.

Liberalisation does not mean no checks andbalances. It is important to have soundregulations and controls in place for bankingsector, it means a more proactive role by SBP.In addition to Pakistan’s commitment, furtherliberalisation has taken place over the years.

The preferences for joint venture subsidiary,with foreign equity participation limited to49%. The banks from ECO countries and otherregional bodies such as SAARC would begiven preferential treatment in this regard.Foreign banks are allowed to operate up to 50branches. ATM’s installed in non-branchlocations are not treated as a separate branch.

Pakistanand theGATS

Proactiverole forSBP

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All prudential regulations are uniformlyapplicable to foreign banks as well as localbanks. There is no discrimination. In additionto authorized banks, license exchangecompanies are also allowed to transmitpermissible funds. Commercial banks areallowed to undertake leasing business, providedit should not be its major line of business.

As the agreement on GATS changes the textureof international banking substantially, thePakistani banking industry will have to competewith other banks domestically and also increasetheir presence on the international bankingscene, in accordance with the liberal policiesadopted by all countries under the WTO regime.They will have to benchmark themselvesagainst the best in the world. Liberalisationwould affect the banks’ profitability,development and market share, levels of riskand the quantity and quality of financialservices.

History has shown that banks that are notprepared can face financial crisis, as happenedin Mexico in 1996. Brazil and Venezuela facedsimilar experiences in 1996. In all three cases,financial crises occurred following intensiveliberalisation to the banking sector. Reasonscited were: excessive lending activity beforeliberalisation, lack of information available toinvestors about banking principles etc.

It is against the above background that weconsider the process of financial reforms inPakistan and how they have transformed thelocal banking scene.

Financial sector reforms began in 1997 andwere further strengthened in 2001. Bankingsector reforms were undertaken as part of acomprehensive package of structural reforms.In the early 1990s Pakistan’s banking sectorwas beset with a host of problems; dominanceof public sector financial institutions hadresulted in financial inefficiencies, crowdingout of the private sector, deteriorating qualityof assets, ineffective supervisory system, lackof governance in state-owned institutions, poorcredit discipline led to worsening level of non-performing loans. Inefficiencies due tooverstaffing and over branching werecontinuously adding to the administrative cost

Financialsectorreforms inPakistan

Increasedcompeti-tion

of public sector institutions. Data disclosurestandards were not resulting in conveying thefull picture of financial health of the institutions.Capital erosion was witnessed in the state-owned banks.

The financial sector reforms begun in the early1990s, liberalized the banking sector bypermitting private banks to operate. Four majornationalised commercial banks were privatised,governance of financial institutions wasstrengthened by amendments to the BankingCompanies Ordinance 1962. Loan recoveryprocess was streamlined, a number of state-owned banks and development financialinstitutions were downsized and restructuredthrough golden handshake and branch closureprogrammes in the later half of the 1990s.

Prudential measures were strengthened. Severalsteps were taken to enhance the effectivenessof the State Bank of Pakistan: autonomy wasgranted to SBP in matters related toadministration and conduct of business,formulation and implementation of monetarypolicy; regulatory function of SBP wasconsolidated and supervisory role wasenhanced. Banking laws also underwentsignificant changes to provide a supportiveframework for the reform process.

Financial sector reforms has brought markedimprovement in the financial health ofcommercial banks in terms of capital adequacy,profitability and asset quality as also greaterattention to risk management. Privatisation ofpublic sector banks and the ongoing processof mergers/consolidation brought visiblechanges in the ownership structure andconcentration within the sector. Banking sectorconcentration has declined, providing a levelplaying field for the participants. Further theoutreach of services to the underservedsegments of population has increased. Bydiversifying their lending portfolios the bankshave mitigated the risk and helped largenumbers an access to the credit market.

The Central Bank has also strengthened itsregulatory capacity. It is now more proactivein aligning its regulatory profile in a rapidlychanging domestic and global financial

Reformsbringpositivechanges

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environment. The banking regulation andsupervision are now fully compliant with theinternational standards and codes prescribedby Basle Committee. Commercial banks havebeen encouraged to adopt the best corporategovernance practices, Banks operating inPakistan how have in place, a code for corporategovernance for the benefit of all stakeholders.Introducing internationally followed bestpractices and observing universally acceptablestandards and codes is necessary forstrengthening the domestic financialarchitecture. In today’s globalised world,focusing on the observance of standard willhelp smooth integration with world financialmarket.

As a consequence of such reforms, Pakistanibanks have been strengthened to compete withforeign banks both in the domestic market andinternationally. As the process of closer externallinkages gathers momentum and competitionintensifies, domestic banking system couldexpect to face increased competition with anemphasis on improving customer services,reduction of costs and strengthening ofprudential norms, better risk management,higher level of professional expertise,technological up-gradation and overallefficiency.

Mention must be made of the emphasis banksare laying on training their staff to acquire new

skills and technologies in order to survive thecompetition that they will face. Should the freeflow of labour across national borders increasesubstantially, the need for skilled and trainedlocal labour force is of paramount significance.

Special skills in retail banking, riskmanagement, treasury, foreign exchange,development banking etc will need to becarefully nurtured and built to manage risksand meet the demand for specialized bankingfunctions.

The corporate world is changing and noinstitution can afford to be complacent aboutit. The human resource managers have to trainthe available manpower to face the challengesand opportunities resulting from competition.

With financial liberalisation under the WTO,banks in Pakistan will have to benchmarkthemselves against the best in the world. Theywill have to tackle significant issues, whileachieving economies of scale throughconsolidation and exploring cost effectivesolutions.

As the first generation of reforms in the financialsector of Pakistan has been completedsuccessfully, the State Bank of Pakistan isplanning for the second generation of reformsto further deepen the financial sector andintegrate it into the global economy.

13


The contribution of services in most of thecountries’ GDP is significant yet neglected asfar as policy priorities are concerned. In Pakistanservices are around 53% of GDP. The share ofservices in world trade is increasing swiftly,however, most of the trade in services isamongst the developed countries. India andChina being the outsourcing hubs are there inservices markets too, as main suppliers fromthe developing world. There is a lot of potentialin exporting services for the developingcountries. Before the conclusion of Uruguayround of trade negotiations there was no formalinternational mechanism in place for trade inservices. It was the WTO that coupled the tradein services along with trade in goods.

General Agreement on Trade in Services (GATS)regulates and brings international trade inservices under the multilateral discipline of theWTO regime. It intends to secure progressivelyhigher levels of liberalization of trade in servicesthrough successive rounds of negotiations. Themember countries are required to specify intheir schedules of commitment under GATSthe terms, conditions and limitations appliedon various service sectors. The members havealso to specify in their schedule, the limitationson National Treatment, i.e., whether thetreatment extended to service suppliers of othercountries will be identical or different ascompared to the treatment given to the domesticservice providers.

When WTO Agreements came into operationon 1st January 1995, negotiations forliberalization of services sector were notcomplete and it was agreed to supplement thecommitments in 1997. So most of the membersscheduled partial commitments at that time in1994 which were improved upon in 1997.

The Services are classified into 12 broad sectorsand more than 160 sub-sectors according

WTO General Agreement onTrade in Services and Pakistan

to WTO Classification of Services. List ofbroad sectors are as under:

§ Business § Communication § Construction and Engineering § Distribution § Education § Environment § Financial Services § Health § Tourism and Travel § Recreation, Cultural and Sporting § Transport § Other

There are four recognized ways of exportingservices from one country to another under theAgreement. These are called modes ofsupplying service under GATS.

Mode l: Also called Cross Border Supply ofservices. This is supply of a service from theterritory of one Member into the territory ofanother, such as telephone call andcommunication services.

Mode 2: This is also known as ConsumptionAbroad of service and occurs when consumermoves to the territory of another country andbuys services there or when the property of theconsumer is sent abroad for servicing, as in thecase of ship repair, tourism and educationabroad.

Mode 3: Commonly known as CommercialPresence of service providers. This isestablishment of a business entity for thepurpose of supplying a service. Examples arebranches of the banks, insurance companies,engineering services, etc.

Mode 4: Also described as Movement ofNatural Persons. This is temporary presenceof an individual for the purpose of supplyinga service in the export market. This personcould be the service supplier himself or an

Ahmad Mukhtar *

Share ofservicesresing

GATS

The fourdifferentModes

* WTO Wing, Ministry of Commerce, Islamabad.

14


employee of the service supplier. In both case,the GATS definition covers only the temporarystay of such persons and is not the same asimmigrating to the country. Examples of suchservice providers are doctors, teachers,accountants, nurses or lawyers etc goingabroad to temporarily supply their services.

The 4th WTO Ministerial Conference held inDoha, Qatar in November 2001 authorized thelaunching of a new round of multilateral tradenegotiations. The agenda of negotiations or theDoha Development Agenda inter-alia includesfurther liberalization of trade in services andmandates the adoption of a request/offerapproach in this regard. In the first phase WTOmembers were expected to submit initialrequests to individual countries by 30th June2002. Thereafter, WTO members were expectedto respond to these requests by making initialoffers upto 31st March 2003.

It needs to be mentioned here that these dateswere indicative rather than limiting in nature.For instance, though 30th June 2002 was thedeadline for submitting initial requests, themember countries were not prevented frommaking requests as well as amending or addingto their request lists in terms of sectors orcountries at any subsequent time. In practicetherefore, only a few countries submitted theirinitial requests by that date. The same is truefor initial offers and it is visualized thatsubsequently we will continue to see requestsand offers till these negotiations are finallyconcluded. The negotiations on GATS aretargeted to be concluded by May 2005, althoughthere is widespread doubt that this time schedulewill be adhered to.

Under these negotiations, Pakistan has receivedrequests from various WTO member countriesfor liberalizing its services sectors. Most of thecountries are interested in liberalizations ofTelecom, Finance and Business services.Pakistan has also sent requests to variouscountries asking for liberalizations in theirservice sectors. Now, like other WTO member

countries, Pakistan has to come up with initialoffers followed by final offers (consequentlyto be taken as commitment) for furtherliberalization in its services sectors.

Pakistan has made commitments under GATSin the following service sectors:

§ Business§ Communication§ Construction and Engineering§ Financial Services§ Health§ Tourism and Travel Services

While making commitments in the abovesectors, Pakistan has placed horizontalrestrictions across all the service sectors whichare uniformly applied to all the sectors. Toquote some restriction as examples, it may bementioned that the foreign firms can have uptoa maximum of 51% equity in their localbusiness in Pakistan and 50% of the executivesor specialists in any company could beforeigners. Some other examples of theselimitations are that the local commercial officesof the foreign firms are required to meet theirlocal expenses by remittances from abroad.The acquisition of real estate is subject toauthorization on case-to-case basis.

As an illustration of Pakistan’s sectoralcommitments, it may be mentioned that thelicenses granted in banking sectors are on thebasis of reciprocity i.e. only to the banks of thecountries that also grant license to Pakistanibanks. We also give favorable treatment to thebanking institutions established as joint ventureunder the ECO framework and Islamicfinancing. Pakistan has made morecommitments regarding allowing the foreigncompanies/firms to establish their subsidiariesin Pakistan because this serves as an incentivefor foreign direct investment. In computer andrelated services, Pakistan has adopted liberalapproach in allowing consumption of servicesin other countries and has granted permissionto foreign companies to establish their affiliatesin Pakistan. In construction and related services,foreign firms are required to have partnership

Dohamandateon GATS

Pakis-tan’sexistingcommit-mentsunderGATS

Sectoralcommitments

15


and / or joint venture with Pakistan companies.In health services, we have imposed norestrictions in consumption of services in othercountries and have allowed foreign servicesuppliers to establish their commercial presencesubject to regulations of Pakistan Medical &Dental Council.

In the context of initial offer to be made byPakistan, a number of factors need to be keptin mind. Firstly, Pakistan has already madesome binding commitments in the servicessector during the Uruguay Round followed byadditional commitments in the financial andtelecom sector in 1997. Secondly, whateveroffers are now made by Pakistan in responseto the requests received or otherwise willautomatically be available to all WTO memberson most favored national (MFN) basis. Thirdly,Pakistan has to determine whether on balanceit would be better off going for maximumpossible liberalization or alternatively adopt adefensive posture and liberalize to the minimumextent in order to afford maximum protectionto Pakistani service providers in the domesticcontext.

Before coming to any conclusions on thegeneral posture to be adopted it would be usefulto consider the possible dangers of going formaximum liberalization. For one allowingeasier importation of services from ForeignService providers could displace domesticservice providers and thus createunemployment. Secondly, such a developmentcould increase the quantum of transfer ofresources abroad in the form of profits. Thethird result could be transfer of control ofservice delivery mechanisms and sectors fromnational to foreign entities, and this may createdifficulties and vulnerabilities in areas ofnational strategic importance.

On the other hand if viewed from the macroperspective, there may be much greater benefitsthan losses in adopting the liberalization option.

For one opening up the services sector will meanforeign service providers bringing in higher

quality services and this would inevitably leadto some transfer of technology.

Secondly, due to foreign competition domesticservice providers will be forced to becomemore efficient and upgrade their service deliveryresulting in benefits for consumers as well asproducers and better prospects for export ofour services.

Thirdly, due to foreign competition, availabilityof a higher quality, more efficient yet cheaperservice infrastructure will mean lowerproduction costs for our exporters therebymaking our exports more competitive.

Fourthly the dangers referred to in thepreceeding para may be significant and relevantfor the short term since in the longer termstructural adjustments would be able tocompensate.

Fifthly as it happens Pakistan has liberalizeda number of its service sectors already withoutany ill effects and what we would really bedoing is to bind ourselves that we will notrollback our existing concessions. Sixthly ofcourse the more we liberalize and bind ourselvesdown, the better prospects Pakistan will haveas a destination for foreign direct investment(FDI).

So far Pakistan has made commitments underGATS in a conservative manner with a view toaffording maximum protection to domesticservice suppliers. However, in practice, Pakistanis following a policy, which is much moreliberal than it is obliged to follow under GATScommitment. This autonomous liberalizationis clearly spelled out in the Investment Policyof Pakistan through which 100% foreign equityis allowed although we have committed amaximum of 51% in our schedule. Similarly,in the Education, Tourism and Financial Sectors,we are more liberal compared to our level ofcommitments. This liberalization has eitherbeen done under our structural adjustmentprogrammes with the IFIs or due to our ownassessment of our interests. One option maytherefore be to commit ourselves upto thelimit of our existing liberalization in theservices sector.

What dowe needbeforefurtherliberali-zation?

Pakis-tan’sautono-mousliberali-zation

16


So far around 72 countries have submitted theirinitial offers through the WTO Secretariat.These countries include developed countrieslike USA, Canada, Australia, New Zealand andJapan as well as the developing countries likeIndia, Paraguay, Uruguay, Panama, Argentina,Bahrain and Macao. All countries have madeconditional offers reserving the rights towithdraw, amend or reduce the offers or makingtechnical changes.

Some developed countries like USA, Japan,New Zealand and Norway have madesubstantial improvements in their schedules.These improvements are common in insurance,environment, and communication sectors. Someimprovements in mode 4 are also evident. Otherdeveloped countries like Switzerland, Canada

and Australia have liberalized their services toa lesser extent and have made more cosmeticchanges. Australia however has madeimprovements in Banking and Environmentsectors.

Developing countries have been more cautiousin making offers and have marginally improvedupon their existing schedules. Most of the offersare visible in Environmental, Tourism, Expressdelivery and Business Sectors. The Financialand Telecommunication sectors have not beenliberalized to a greater extent. Maximum offershave been offered under mode 2. Manycountries have made commitments in maritimetransport including developed and developingcountries.

Initialoffer byothercountries

17


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0.2

35.1

35.6

40.3

39.4

24.6

26.5

30.0

28.7

18.5

20.9

23.7

23.0

9.4

8.5

7.6

9.1

1.3

0.4

0.5

0.5

0.9

0.3

0.3

0.3

0.4

0.1

0.2

0.2

0.7

0.1

0.1

0.02 0.4

0.1

0.1

0.1

1.0

0.2

0.1

0.06 0.4

0.08 0.1

0.06

11.1

12.9

13.9

16.1

7.8

8.5

9.4

9.8

7.4*

8.5*

9.6*

11.1

*

1.2

1.5

1.2

1.2

0.4

0.1

0.1

0.1

0.2

0.05

0.05

0.06 0.2

0.05

0.06

0.08 0.3

0.07 0.1

0.07 0.3

0.07 0.1

0.1

0.2

0.05

0.06

0.05 0.2

0.04

0.06

0.04

83.7

86.9

95.7

99.5

67.9

69.7

74.9

82.0

39.9

43.8

50.4

49.0

15.6

15.7

21.4

15.0

3.8

0.7

0.8

1.0

0.9

0.1

0.1

0.2

2.9

0.6

0.7

0.8

1.6

0.5

0.6

0.5

1.8

0.4

0.4

0.5

2.7

0.6

0.9

0.8

1.7

0.4

0.6

0.5

61.4

58.5

67.4

69.4

39.7

39.7

39.7

48.8

25.3

25.1

24.3

28.9

5.2

3.9

5.9

3.2

3.3

0.7

1.4

2.2

1.3

0.2

0.4

0.6

2.0

0.5

1.0

1.6

2.3

0.5

1.0

1.6

1.8

0.5

1.1

1.7

2.4

0.4

0.8

1.4

1.3

0.4

0.7

1.9

46.0

45.7

54.4

55.3

37.7

39.6

43.8

44.0

23.4

25.5

27.0

29.0

9.4

8.2

8.8

6.5

2.1

0.4

0.5

0.6

0.7

0.08 0.1

0.1

1.5

0.4

0.4

0.4

0.8

0.2

0.2

0.2

0.9

0.2

0.2

0.2

1.3

0.3

0.3

0.4

0.8

0.2

0.2

0.3

10.0

8.4

10.9

11.1

5.1

5.4

5.8

5.4

2.4

2.2

2.2

2.2

2.3

2.5

2.5

2.9

0.3

0.05

0.05

0.06 0.2

0.02

0.02

0.04 0.1

0.03

0.03

0.02 0.3

0.08 0.1

0.06 0.4

0.1

0.1

0.1

0.04

0.02

0.02

0.02

0.08

0.02

0.02

0.02

32.9

36.2

38.3

38.3

22.9

23.6

25.2

27.1

17.4

20.0

21.2

22.9

9.9

10.7

9.4

7.4

1.6

0.3

0.4

0.4

1.1

0.2

0.2

0.2

0.5

0.1

0.2

0.2

0.4

0.07

0.08

0.08 0.4

0.1

0.1

0.01 0.4

0.1

0.1

0.1

0.3

0.09 0.1

0.08

10.1

10.4

10.4

12.1

7.3

6.3

6.9

8.3

5.0

5.1

4.7

4.8

0.2 0 0 0.5

0.3

0.05

0.06

0.07 0.1

0.02

0.02

0.03 0.2

0.03

0.04

0.04 0.2

0.03

0.04

0.04 0.2

0.05

0.06

0.05 0.2

0.02

0.00

70.

03 0.2

0.01

0.00

60.

02

1.8

1.9

2.0

2.0

0.7

0.8

0.7

0.6

0.3

0.3

0.6

0.5

0.1

0.1

0.1

0.09

0.08

0.01

0.01

0.01

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60.

005

0.00

4

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50.

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0.00

6

0.01

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20.

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0.00

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18


November and December 2004 marked theresumption of a bullish phase in the equitymarkets. After a prolonged period of flat tonegative movement that lasted just over 6months, the KSE-100 Index rose 236 points(4.4%) in November 2004, and an impressive650 points (11.7%) in December 2004. TheIndex opened November at 5332 points, roseto 5568 points by the month-end, and thenmanaged to close December at 6218 points.Average daily turnover jumped sharply as well,from 227m shares in November to 451m sharesin December. For the year as a whole (Jan.1-Dec.31, 2004), the Index rose 39% or 1746points, having opened the year at 4472 points.

Market Analysis

KSE-100 Index (Nov1-Dec31, 2004)

4,6004,8005,0005,2005,400

5,6005,8006,0006,2006,400

01-Nov 19-Nov 02-Dec 15-Dec 28-Dec

Inde

x

0

100

200

300

400

500

600

700

800

Turn

over

(m)

Volume KSE-100

Top gainers in the two-month Nov-Dec04period included Nishat Mills (up 52.7%) andGadoon Textiles (50.63%). Both stocksreflected overall bullishness in the textile sectorahead of the removal of textile quotas startingJanuary 1, 2005. While the sector will befacing new challenges in the post-quota era,textile manufacturers who have upgraded theirplants are expected to come out as winnersultimately with increased sales and production.

Other strong performers included FaujiFertilizer Bin Qasim (FFBQ), up 48% in thetwo-months on rumors of an expansion; FaysalBank and Union Bank, up 43% and 42%respectively, partly on speculation but also on

strong long term growth expectations; ShellPakistan and Pakistan Oilfields, up 30% and27% respectively on high international oilprices; and Honda Atlas Motors and IndusMotors which both gained 23% as investorsrecognized that valuations were attractive inthe auto sector given continued growthexpectations.

Amongst the worst performers in the Nov-Dec04 period were KESC, which shed 5.7%because its privatization did not happen asscheduled on December 6th, 2004, and alsobecause the expected sale price once thecompany is privatized is far lower than thec u r r e n t m a r k e t p r i c e . Wo r l d c a l lCommunications continued its lacklusterperformance with a 4.6% drop in share pricein this period, and Tri-Pack Films also lost2.8% in this period. The worst performerhowever was Meezan Bank which closed down12.4%.

The overall outlook is positive for the short-term. Momentum going into January 2005 wasstrongly positive, and this should continue atleast for the first 1-2 months of the year. Ourview on the market for 2005 as a whole isbullish, but there will of course be correctionsalong the way, mainly on technical groundsthough unforeseen surprises cannot be ruledout either given the local environment and pastexperience.

The primary drivers for share price growthcontinue to be strong corporate earnings, easyliquidity, and the generally positivemacroeconomic environment.

From a sectoral point of view, the outlook ispositive for most sectors. International oilprices appear to have peaked for now so furtherupside for OMCs and E&P company shares

MarketReview

TopPerfor-mers

PrimaryLosers

Outlook

19


may be limited, however, we still see opportunity inauto, banks, and the telecom sector. PTCL is slated forprivatization, and as its sale date approaches, thecompany should see considerable gain in its share price. The same should be true for National Refinery givenits upcoming sale. The cement sector should not be

Comparative Performance (November 1st to December 31st 2004)

36.0%31.6%

26.2%25.3%

14.6%13.8%

10.4%4.2%3.9%3.9%

3.4%1.9%

0.1%0.0%

-1.1%-1.1%

-1.8%-1.9%

-2.4%-2.6%-2.7%

-3.1%-4.3%

-5.2%-5.8%

-7.4%-8.1%

-8.8%

-16.1%-17.5%

-19.4%-21.2%

-22.3%

-15.8%

-40% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40%

Nishat MillsFauji Bin QasimFaysal BankUnion BankEngro ChemicalShell PakistanPakistan OilfieldsLucky CementMCBFauji FertilizerPak SuzukiBank Of PunjabDewan MotorsKSE-100P.T.C.L.Dewan SalmanNational RefineryFauji CementCherat CementOGDCD.G. Khan CementNBPSui SouthPSOAskari BankHubcoSui NorthernICI PakistanPak PTA Ltd.M. Leaf CementIbrahim FibersTri-Pack FilmsWorldCallKESC

Outperformers

Underperformers

(Contributed by Taurus Securities Ltd, a subsidiary of National Bank of Pakistan)

overlooked either. The market seems to view cementsas a “has-run” sector, but cement demand growth of24% in the last 6 months (Jul-Dec04) continues tosurpass expectation, and suggests that the sector supply-demand scenario in the future may not be as difficultas naysayers project.

20


Deposit RatesWeighted Average

0

2

4

6

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

-----------2004-----------

(%)

Public Sector Banks Private Banks Foreign Banks Specialised Banks

Lending RatesWeighted Average

Public Sector Banks Private Banks Foreign Banks Specialised Banks

02468

101214

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

----------2004----------

(%)

Inflation Indicators

0

5

10

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

-----------2004-----------

(%)

Consumer Price Index Wholesale Price Index

Sensitive Price Index

Currency Exchange Rate

2004 2003 Appreciation/Depreciation(%)

010203040506070


-----------2004-----------

-2-1012345

(Rs

Per

US

Dol

lar)

(%)

Workers Remittances

200

250

300

350

400


-----------2004-----------

($ M

n)

Trade & Payments DeficitBalance of Trade Current A/c. Balance

-5000-4000-3000-2000-1000

01000200030004000

($ B

n)

FY-0

4

FY-0

5(J

ul-N

ov)

FY-9

5

FY-9

6

FY-9

7

FY-9

8

FY-9

9

FY-0

0

FY-0

1

FY-0

2

FY-0

3

Foreign Exchange Reserves

11.2

11.4

11.6

11.8

12

12.2

12.4

12.6

12.8

-----------2004-----------

Jan

Feb

Mar

Apr

May Jun

July

Aug

Sep Oct

Nov

Dec

($ B

n)

The Year 2004

Exports & ImportsAnnual Growth Trend

ImportsExports

-40-20

020

4060

80100

(%)

Jan

Feb

Mar

Apr

May Jun

July

Aug

Sep Oct

Nov

Dec

-----------2004-----------

21


Deposits of Scheduled Banks

0

500

1000

1500

2000

2500

Jan

Mar

May

July

Sep

Nov

Jan

Mar

May

July

Sep

Nov

(Rs

Bn)

Total Advances of Scheduled Banks

0

500

1000

1500

2000

Jan

Mar

May

July

Sep

Nov

Jan

Mar

May

July

Sep

Nov

(Rs

Bn)

Banks' Non Performing Loans(Domestic+Overseas Operations)

NPLs Net NPLs

020,00040,00060,00080,000

100,000120,000

(Rs

Mn)

Pub

licS

ecto

r

Fore

ign

Ban

ks

DFI

s

Priv

ate

Ban

ks

Spe

cial

ised

Ban

ks

Pub

licS

ecto

r

Fore

ign

Ban

ks

DFI

s

Cash Recovery Against NPLs

0500

100015002000250030003500400045005000

(Rs

Mn)

Pub

lic S

ecto

rC

omm

. Ban

ks

Fore

ign

Ban

ks

DFI

s

Loca

l Priv

ate

Ban

ks

Spe

cial

ised

Ban

ks

Pub

lic S

ecto

rC

omm

. Ban

ks

Fore

ign

Ban

ks

DFI

s

Share Business/MarketCapitalisation

Shares Turnoverof (In Mn) Aggregate Market Capitalization(Rs Bn)

02,0004,0006,0008,000

10,00012,00014,00016,00018,000

020040060080010001200140016001800

(Mn

Nos

)

(Rs

Bn)

Jul-0

3A

ug-0

3S

ep-0

3O

ct-0

3N

ov-0

3D

ec-0

3Ja

n-04

Feb-

04M

ar-0

4A

pr-0

4M

ay-0

4Ju

n-04

Jul-0

4A

ug-0

4S

ep-0

4O

ct-0

4N

ov-0

4D

ec-0

4

9-Ja

n-03

6-Fe

b-03

6-M

ar-0

3

3-A

pr-0

3

2-M

ay-0

3

29-M

ay-0

3

26-J

un-0

3

24-J

ul-0

3

21-A

ug-0

3

18-S

ep-0

3

16-O

ct-0

3

13-N

ov-0

3

11-D

ec-0

3

8-Ja

n-04

12-F

eb-0

4

3-M

ar-0

4

31-M

ar-0

4

27-A

pr-0

4

26-M

ay-0

4

23-J

un-0

4

21-J

ul-0

4

18-A

ug-0

4

15-S

ep-0

4

13-O

ct-0

4

10-N

ov-0

4

8-D

ec-0

4

4-Ja

n-05

0

1

2

3

4

5

(%)

T-Bills Auction Weighted Average Yield (%)

3-Month 6-Month 12-Month

Karachi 100 Index

500

1500

2500

3500

4500

5500

6500

7500

Jul-0

3

Aug

-03

Sep

-03

Oct

-03

Nov

-03

Dec

-03

Jan-

04

Feb-

04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep

-04

Oct

-04

Nov

-04

Dec

-04

((K

SE

Inde

x)

22


We would like to introduce some of the newbooks available in the market on Pakistan’seconomy, which would be of interest to ourreaders.

A. Dollars, Debt and Deficits, byDr. Ishrat Hussain

Dr. Ishrat Husain, Governor State Bank ofPakistan has written a number of books. Thispublication is a compilation of articles thatwere published until 1999 and also comprisehis speeches, papers and addresses deliveredas Governor, of the Central Bank. As such itcovers a range of subjects, tackling some ofthe fundamental issues, focusing on factorsthat have a bearing on long term development,analyzing the problems in an objective anddispassionate way to identify pragmatic andworkable solutions and providing hard choicesto the difficult issues.

In the second part of the Book, the author hasadopted a more realistic approach to theproblems confronting Pakistan. In his preface,he writes “in practice, the real world does notoperate according to the simple analysis ofeconomic logic and there are many complexitiesand intricacies involved in arriving at adecision.”

Some of the topics covered in this section areof interest to the readers given their growingimportance in the economy. This includes theeconomic reforms and challenges confrontingthe economy, the SME sector, problem ofpoverty, the need for micro-finance, the bankingsector reforms, the changes introduced in theState Bank, the measures to be taken to startimproving our social and human developmentindicators, the essential ingredients to developa fair, efficient and equitable tax system in thecountry, and an interesting article on whyperceptions about Pakistan economy differ.

The book is a great addition to the literatureavailable on Pakistan economy.

Book ReviewsB. Social Development in Pakistan

Combating Poverty:Is Growth Sufficient – Annual Review 2004Social Policy and Development Centre

Social Policy and Development Centre is aprivate sector research organization thatundertakes policy relevant research on socialsector development. Over the last ten years ithas highlighted the problems of socialunderdevelopment and inequality and poverty.

The Annual Review – 2004, outlines a strategyfor poverty reduction. Poverty reduction cannotbe achieved through growth alone, but requiresa measure of equity as well. The strategyoutlined is built upon three pillars: acceleratedGDP growth, improved asset/incomedistribution; and enhanced human/socialdevelopment. It suggests a policy frameworkwhereby accelerated growth and rapid povertyreduction can be rendered complimentary andfeasible in the medium term.

C. Management Text & Cases – 2005, byProf. Dr. Khawaja Amjad Saeed

Dr. Khawaja Amjad Saeed, Principal, HaileyCollege of Banking & Finance University ofPunjab, Lahore has to his credit quite a numberof books; in diversified areas, the economy ofPakistan, Auditing, Management, Mercantile& Industrial Laws.

The contents of the above mentioned bookrecently published, contains lucid analysis ofthe basic concepts of management, a sectionwhich deals with contemporary issues in humanresource management and development,knowledge management, the rise ofreengineering, motivation etc., while the thirdsection has selected case studies oncontemporary issues in Management. Thesecases (12) have been authored by South Asianscholars and edited by the author. They coversuch themes as decision-making, PersonnelManagement, Industrial Relations, StrategicManagement etc.

23


D. Financial Management in Pakistanby Javed Ansari, Muhammad Naeem,Jamal ZuibairiOxford University Press

A book on financial management process inPakistan. It explains financial managementtheories and practices in the context of Pakistanilaws, business environment and institutions. Itgives an insight into understanding financialmanagement as practiced in Pakistan.

The first part of the book discusses the capitalistfinancial system, part two is about the tools,techniques and methods used in financialmanagement and the last section is aboutfinancial management practices, with casestudies on capital budgeting, capital structuring,working capital management and leasing.

As forecasting is an integral part of the planningprocess, there is a chapter on Financial Planning& Forecasting, which discusses cash flowforecasting and the forecasting of financialstatement, with a brief introduction to FinancialPlanning models.

E. Money & Banking in PakistanFifth Editionby S. A. Meenai, Revised and Expandedby Javed A. Ansari

A comprehensive book on money and banking,detailing banking sector developments inPakistan during the period 1947-2003. Thefifth edition has been extensively revised andupdated.

Part one deals with monetary theory and policy,presenting the major schools of monetary policyand assessing their policy recommendations inthe Pakistani context; with a chapter identifyingwhat monetary policy can and cannot do.

The second part of the book gives an historicalbackground to the development of the bankingsector, the institutional structure of the country,the growth of the financial markets in Pakistanand a period analysis of the monetary policypursued. It also includes a review of severalempirical studies on monetary and financialsector development in Pakistan.

F. World Development Report – 2005

This year’s World Development Report has asits central theme creating a ‘Better InvestmentClimate for Everyone’. It is only if theenvironment in which firms and entrepreneurs,farmers and small and micro-enterprises, largemanufacturing units and multinationals operateis conducive and offers opportunities forinvestment can each sector contribute towardsdevelopment and poverty reduction. Perhapsit may be considered as one of the centralchallenges of development.

The Report draws four major conclusions. First,the objective should be to create an investmentclimate that benefits all; firms of all sizes andtypes so that each makes a contribution togrowth and poverty reduction. Second, effortsto improve the investment climate need to gobeyond just reducing business costs. Third, theReport emphasizes that progress requires morethan changes in formal policies. TheGovernments need to bridge the gap betweenpolicies and their implementations. TheGovernments have to build credibility anddevelop public trust, to ensure their policyinterventions are crafted to local conditions.And finally the Report reviews strategies fortackling such a broad agenda. Everything cannotbe done at once. However, governments haveto address the important constraints so thatconfidence is built to invest and sustain aprocess of ongoing improvements.

24


Key Economic IndicatorsEconomy Size & Growth 2000-01 2001-02 2002-03 2003-04GNP - Market Prices Rs. bn 4108.2 4425.4 4973.1 5576.3GDP - Market Prices Rs. bn 4162.6 4401.7 4821.3 5458.1Per Capita Income Market Prices Rs. 29269 30910 34074 37495 Market Prices US$ 501 503 582 652Growth GDP % 1.8 3.1 5.1 6.4 Agriculture % (-)2.2 0.1 4.1 2.6 Manufacturing % 9.3 4.5 6.9 13.4 Wholesale & Retail trade % 4.5 2.8 5.9 8.0Rate of Inflation %Consumer Price Index** 3.6 3.5 3.1 4.2†

Wholesale Price Index 6.2 2.1 5.6 7.5†

Balance of Payment $mnExports (f.o.b.) 8933 9140 10889 9175‡

Imports (f.o.b.) 10202 9434 11333 9932‡

Trade Balance (-)1269 (-)294 (-)444 (-)757‡

Services Account (Net) (-)3142 (-)2617 (-)2128 (-)2260‡

Private Transfers (Net) 3898 4249 5737 4386‡

Current Account Balance (-)513 1338 3165 1369‡

Fiscal Balance % of GDPTotal Revenue (Net) 13.3 14.2 15.0 14.3Total Expenditure 17.2 18.8 18.6 17.5Overall Defict 4.3 4.3 3.7 3.3Domestic & Foreign DebtDomestic Debt Rs. bn 1799.2 1757.6 1879.2 2028.4 As % GDP 43.2 39.9 39.0 37.2†

Total External Debt & Liabilities $bn 37.139 36.532 35.474 35.846†

as % GDP 52.1 51.0 43.0 37.8†

as% of Foreign Exchange Earnings 259.8 237.0 181.1 168.7Investment & Savings % of GDPGross Investment 17.2 16.8 16.7 18.1Gross Fixed Investment 15.8 15.5 14.8 16.4National Savings 16.5 18.6 20.6 19.8Domestic Savings 17.8 18.1 17.4 17.6Foreign Investment $mn 182 475.0 820.1 629.0 Portfolio (-)140 (-)10 22.1 (-)131.3 Direct 322 485 798.0 760.4Monetary Aggregates %M1 3.0 15.2 26.2 17.5M2 9.0 15.4 18.0 12.3Literacy Rate % 49.0 50.5 51.6 54.0Foreign Exchange Reserves^ $mn 3220 6432 10719 12511†

Exchange Rate++ Rs./$ 58.4378 61.4258 58.4995 57.5378Stock Market Growth Rate %SBP General Index of Share Prices** (-)7.9 10.1 91.9 61.9†

Aggregate Market Capitalisation (-)13.4 20.0 83.1 96.7†

* Constant Factor Cost of 1999-2000 ** Base 2000-01† July-May ‡ July-March^ Excludes FE 13/CRR and includes Indian pending transfers, new FCA and Trade Nostro.++ Average during the year.M1 Outstanding stock of currency in circulation+demand deposits of

schedule banks+other deposits with SBP.M2 M1 +outstanding stock of time deposits+outstanding stock of FRCDs.

Source: Economic Survey 2003-04

contents...islamic banking has gained popularity not only in the muslim world but in the west also....

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