Services sector’s contribution to the economy

By Shehzad Ahmed

The services sector has been making enormous contribution to the economy of our country. Banking, telecommunications, transport and hotels, to name a few, have played a vital role in economic development and are the major growth drivers of our country in a number of ways.

Almost a decade ago, share of services sector was 50.7 per cent of the total GDP in 1999-2000 which increased to 53 per cent in 2007-08 and then further on to 53.8 per cent in 2008-09, partially owing to dull performance of the industrial sector.

The banking industry which eventually took off after its privatisation process became effective in the year 1991 and since then, even under some difficult times, managed to perform well.

During privatisation, total number of major banks in Pakistan totalled up to a meagre figure - 5 and then within a decade and a half, number of commercial banks rose to 36 (As per PBA) published in Oct 2008, not including specialised or micro financing banks). Presently, banking sector alone contributes about 19 per cent to the direct taxes, contribution to GDP ratio is 55.6 per cent and more than 130,000 people are employed in all the scheduled banks.

Foreign banks, sensing an opportunity started venturing into the market by investing heavily in the industry, amounting to US$ 1,864.90million in FY’08, thus providing us with the much needed FDI for purposes of investment. As such total number of foreign banks as per PBA report stood at 7 in Oct’08-09. New ventures of attracting investment under the Islamic banking system for the banking industry is fast gaining grounds in Pakistan and in most Islamic countries.

Pakistan’s banking sector has made its name in international ratings ranking 25th amongst banks in the Financial Intermediation Pillar and has been ranked 2nd in performance and efficiency indicators among the South Asian countries by the World Bank. Pakistan’s banking sector has remained remarkably strong and resilient during the World Financial Crisis in 2008-09.

The industry turned profitable in 2002 where the profits continued to rise for the next five years and peaked to Rs.84.1 billion ($1.1 billion) in 2006. It is indeed surprising that pre-tax profit of the banking system rose from a mere Rs4.5 billion in 2000 to Rs123.6 billion in the year 2006, showing a phenomenal rise of 2646 per cent. The success of the industry can be attributable to the abnormal profits it started making with the inception of new consumer products, targeting SMEs and charging of high spread over commercial lending rates and reducing the rate of returns paid to depositors.

Consumer banking

Over the last 5 years, Pakistan witnessed a sizeable growth of consumer banking and this unprecedented upward spiral has followed privatisation of nationalised banks, banking reforms by SBP and an increasingly marketing-oriented approach aimed by banks. Be they large or small, multinational or local, each one of them is geared towards making its mark in an already competitive environment. Hot on the heels were the newly privatised banks, UBL, HBL and MCB which have embarked in the consumer market in not just big cities but smaller ones too, by virtue of a huge branch network. For instance, HBL’s consumer portfolio increased from less than a billion rupees in 2002 to Rs 17 billion in 2004. Similarly other banks launched different products including car financing, credit cards, personal loans, home financing, etc. Within consumer finance, the highest share is of personal loans at 40 per cent, car finance at 28 per cent, housing finance at 20 per cent and credit cards at 12 per cent as at end December 2008.

Back in 1990’s, when consumer banking was still in its undeveloped phase, only 3 multinational banks offered credit cards and the size of portfolio was a mere 0.2 million cards, but this scenario, all of a sudden changed when Bank Alfalah launched a no fee credit card and its consumer base ballooned to 0.1 million new consumers. The success of a no fee credit card was followed by low interest packages on automobiles and home loans.

It has not only helped the banking industry but has driven the whole economy towards prosperity by increasing money supply with the public adding greatly to the level of aggregate effective demand for industrially manufactured products and retailers in the country. Greater the aggregate effective demand, the greater is the growth of the economy and volume of employment and vice versa (Keynes).

Remittances

Overseas workers’ remittances in real terms, is almost equal to entire exports of Pakistan. If re-routed from hawala/ hundi system to banking channels, it has the potential to convert the balance of payments to surplus, increase our forex reserves, thus avoiding further foreign loans and pay off Pakistan’s foreign debt in real terms through our own sources. According to the Bureau of Emigration and Overseas employment, there are approx 4.5 million registered overseas workers and the official remittances sent through banking channels have reached approx $6.5 billion annually. According to SBP, Pakistan received the highest ever amount of over $7.8 billion as workers’ remittances in 2008-09 as compared with $6.451 billion in 2007-08.

Other sectors

Banking services have greatly benefited other important sectors such as industrial and agricultural. Total financing of banks to agriculture is still not sufficient due to structural shift towards industrialisation. Agriculture sector, being the largest sector of the economy, has a deep impact on socio-economic set-up. It is a source of livelihood for at least 45 per cent of the total employed labour force in the country and despite having a 22 per cent contribution to GDP, it has only a 4.6 per cent share in banks’ credit portfolios. The major bottlenecks in agricultural financing include high agriculture NPLs and lengthy and cumbersome procedures for lending. However, in absolute terms, banks disbursed Rs 233 billion in FY’09 with an increase of Rs 21.4 billion or 10 per cent over the disbursement of Rs 211.6 billion in FY’08. In this regard, the government has started launching various micro financing schemes to encourage small farmers to achieve higher production and incomes.

Commercial banks provide funds that the agricultural industry needs to expand and develop. Banking has invested heavily in industrial sector as compared with agriculture. However, the share of industrial sector to the GDP has declined recently. Due to persistent power shortages and other factors, its share declined from 25.7 per cent in 2007-08 to 24.3 per cent in 2008-09, which has made hundreds of thousands of labourers jobless. Despite various financing schemes on soft terms by SBP for export oriented industries, the export-oriented industrial sector has witnessed harsh times. This is both due to domestic structural constraints like power and gas shortages and the international scenario which does not bode well for this vital sector as the financial crisis has jolted the economies of EU and US, which are the major demand drivers of Pakistan's export-oriented industries.

Trade financing

Exports and imports of the country are being routed through the banking channel. In a milieu where a developing country is struggling to maintain its balance of payments, ever widening trade deficit and dearth of raw materials and machineries, it is the banking industry facilitating the smooth flow of imports and exports across the borders. Total exports routed through the banks estimatedat $20.62 billion in FY’08 and total imports of $35.38 billion. In this regard, SBP has been offering export refinance scheme to exporters to boost exports on subsidised mark-up rates and other long term financing (LTF) for export oriented programmes (EOP) in collaboration with the commercial banks.

Finally, there is no question that economic growth is linked with the development of banking system; more vibrant the banking system more will be the economic growth of the country. The banks should be pressed upon to revamp and re-structure their agricultural lending mechanism by adopting modern and innovative techniques to boost agro-financing.