Banking for success

Pakistan’s return from deep economic slumber will continue and succeed, mainly with the private sector assuming its role as a cornerstone for the future. In this background, Pakistan’s banks will this month seek to showcase their success stories at a first-of-its-kind event in the country’s history. The occasion – Pakistan Banking Summit 2025 – planned to be held in Karachi not only promises to bring together a range of stakeholders from the banking industry.

It is set to be an event that will further highlight the many existing and newly emerging opportunities, in a country feared to be on the brink of default not too long ago.

The journey undertaken by Pakistan’s economy since last year in part has been centrally supported by the banking sector. Prior to last summer’s approval of a $7 billion loan from the IMF for the next three years, Pakistan was surrounded by the fear of a coming default, emulating the fate of Sri Lanka, the South Asian island nation to face a sovereign default in 2022.

Yet, the road ahead offers both challenges and opportunities. Centrally for the future, Pakistan’s federal and provincial authorities must stay the course and comply with conditions already agreed with the IMF. Any deviation from this road that raises the risk to the future of the IMF loan, carries tremendous risks for Pakistan’s stability and outlook.

Some of the key policy choices centre around the matter of reforming Pakistan’s tax collection systems. The country continues to remain in a narrow band of sources for tax collection, though conditions of the IMF loan require a significant shift towards broadening the tax collection base.

Yet, Pakistan’s ability to mark a credible change also requires avoiding some of the mistakes of the recent past. One case in point that’s worth remembering was the undue haste by the federal government, seeking to impose a hefty penalty on banks if the loans they extended to the private sector fell below a certain level.

Though the government eventually retreated from forcing banks to lend more to the private sector under their advance-to-deposit ratio or ADR – a measure of the proportion of their total deposits given as loans, there are lessons to be remembered from that case. At the very least, penalising banks due to their success will defeat the purpose of creating a more progressive economy.

On the contrary, as some of the planned events around the banking summit will highlight, there is ample reason to encourage the growth of banks as leaders of Pakistan’s future success. Innovation through the use of progressive means for broadening their lending portfolios is an essential way forward for the future.

As Pakistan struggles with the fallout from climate change and the urgent need to reverse food insecurity, the country’s banks have a key role in resolving such profound challenges. Going forward, the government can well support this journey by undertaking timely action on three related fronts.

First, a broadening of the national tax base while shifting away from an over-reliance on existing sources must be at the centre of Pakistan’s future economic agenda. The case of the ADR-related controversy highlights the importance of embracing a far more progressive economic agenda for the future.

Second, innovation by the banking sector through widening their involvement in newly emerging areas of Pakistan’s economy, notably information technology and agriculture must be supported by the ruling authorities. In the distant past, private banks in particular remained wary of extending loans to the agriculture sector, mainly as enforcing foreclosures marked uphill battles.

Yet, the growing exposure of banks notably to the agricultural sector is an often ignored story. The change has followed progress in securing agricultural loans not witnessed before. The key to diversifying the involvement of banks with new areas of the economy requires the widening of the state’s backing for loans extended in this area.

Finally, the journey undertaken by banks must highlight the importance of Pakistan’s private sector in the country’s overall economic direction. In sharp contrast to the 1980s and the 1990s, Pakistan’s economic outlook is just not overshadowed by poorly performing banks.

Back then, the ever-growing mountain of ‘bad debts’ owed to banks by influential borrowers, frequently unleashed warnings over Pakistan’s economic health. Today, that era is safely far behind. Yet, the legacy of that area also serves as a memorable lesson for the present and the future.

Going forward, the messages emanating from the upcoming banking summit must be followed up by the government through absorbing lessons for future economic policies. Evidence of innovation by Pakistan’s banking networks has brought up many elements of impressive progress. These range from the sheer expansion of branch networks to the expansion of online services that facilitate growing numbers of customers daily.

Going forward, newer innovations and progress across the private sector notably banks will inevitably take Pakistan towards the consolidation of its recent economic gains.

The writer is an Islamabad-based journalist who writes on political and economic affairs. He can be reached at: farhanbokhari@gmail.com