Bank domination

PAKISTAN’S financial system is heavily bank-centric. Commercial banks account for over 80 per cent of total financial-sector assets. In a ma­­t­u­­re financial system, household and corporate savings flow through multiple competing channels — capital markets, pension funds, insurance companies, asset managers and private equity. But in Pakistan, many of the institutions that should compete with banks are themselves economically and financially connected to them. What appears to be institutional diversity is, to a large extent, concentration masquerading as diversification. Banks dominate for many reasons.

They possess advantages their competitors cannot easily replicate: large capital bases, extensive branch and distribution networks, long-standing ties with government, customer trust built through decades of deposit-taking, and access to millions of small deposits through everyday transaction accounts. This gives them balance-sheet strength, scale and a low-cost funding advantage. Their established relationships with borrowers, ability to demand collateral and capacity to monitor credit also make them natural intermediaries. These advantages are barriers to entry for competing financial institutions. But the most important explanation is the government’s persistent financing needs. Commercial banks have become the easiest channel through which government finances its fiscal deficit. Today, some 62pc of banking assets comprise government securities, while lending to the private sector accounts for a mere 22pc. Banks have become primary financiers of the state rather than intermediaries channelling savings into productive private investment. The incentives are obvious. Government securities offer double-digit, effectively risk-free retu­rns. Lending to private…