Pakistan faces challenge in boosting rural savings

Pakistan's financial year which ended last month proved to be a period of high growth for the country's banking sector.

This is largely because Pakistan's commercial banks have seen an upsurge in profits during the past year, thanks to the reality of an economic recovery that has led to robust economic growth.

According to the central bank, the State Bank of Pakistan, deposits in Pakistani banks grew by a record 19 per cent during the last financial year.

This growth in deposits was driven by the improvement in net domestic assets of banks which led to their fast improving prospects.

The going has been good for Pakistani banks as many have seen customers line up to seek loans for a range of products, from automobiles and other consumer products to partially financing property purchases.

Largest borrowers

Ultimately, banks have to have their overall prospects closely tied to the extent to which they are able to give out loans. Some of the largest borrowers have come from such industrial sectors as Pakistan's large textile manufacturers who are eager to expand at a time when prospects for exports look good.

In recent months, such challenges to the Pakistani economy as fears of rising inflation and concerns over stability of the rupee's exchange rate, have failed to dampen prospects for banks. This is fundamentally due to two vital dimensions to Pakistani banks.

On the one hand, banks have found their prospects improve over time since Pakistan decided in 1997 to privatise most public sector banks.

The completion of that plan has essentially meant that banks are now up against tough competition as private sector enterprises ought to be. Indeed, for private sector banks, there's all the more pressure to aim for high revenues and quick growth.

Consequently, the staff of such banks have to aim for high profit margins unlike the days when modest growth or even continuing losses were all acceptable under the public sector.

On the other hand, Pakistan is indeed at the edge of a fast changing and corporatised world.

Unlike the past when average Pakistanis seldom reached out to banks in search for consumer loans, its hard to find anyone from the middle class who hasn't tried to venture out in this direction.

The fast rising car sales in the country indeed bear testimony to this trend truly catching on. In the long run, an increasing number of Pakistanis are now much more willing to be indebted is set to grow.

The new era of privately driven banks must come with an obvious down side for such individuals. Unlike the past when banks were driven in part by a social objective, the new era is indeed one of an increasingly cut throat environment.

In the long run, banks can just not afford to take what could best be described as low value customers.

This is exactly where the Pakistani state has a responsibility to step in to offering banking related services in ways not offered before.

Defunct network

For example an increasingly large network of grass root banking networks such as micro finance banks may well serve the needs of Pakistanis who are marginalised from mainstream banks.

There is also a case for giving impetus to the almost defunct network of post office saving networks which once served the needs of low income Pakistanis.

There can be no disagreement on the view that an increasing push towards larger savings must indeed be a cornerstone to improve prospects for any economy.

Even though Pakistan lives today with a robust economic environment, its long-term future must remain partially driven by its success in encouraging more savings at a national level.

Rather than a national push towards more banks lending for more cars, perhaps a more profitable undertaking would be to encourage borrowers to pay for quality education of their university going children.

The writer is a Pakistan-based journalist.