Banking on Our Banks Keynote Speech
During the Banking on Our Banks Keynote Speech event in collaboration with CERP and Alchemy Technologies Pvt. Ltd., Zafar Masud, Chairman – PBA, gave an overview of Pakistan’s current economic landscape and highlighted the critical role being played by the banking sector despite numerous challenges.
The Chairman stated, “Banks globally face unreasonable expectations, and Pakistan is no different. What sets our banking sector apart is its resilience in operating within an economy where 52% is undocumented, and many sectors avoid taxation. Despite these challenges, the banking sector continues to contribute generously to the national exchequer and fiscal deficit, with a willingness to do even more through income-based taxes than a tax on the balance sheet like the ADR. This level of commitment is rare, especially in emerging economies like ours, and deserves recognition and applause.”
Source: PBA LinkedIn – Banking on Our Banks Keynote Speech
Banking on Our Banks Keynote Speech by Mr. Zafar Masud – Summary
The speaker, Chairman of the Pakistan Banks Association, Mr. Zafar Masud, addresses an audience about the challenges and opportunities facing the Pakistani banking sector in Banking on Our Banks Keynote Speech. He emphasizes the sector’s deep understanding of the current landscape and highlights key issues. He points out the discrepancy between the banking sector’s contribution to GDP (52%) and the much smaller deposit contribution (16%) from untaxed sectors like retail, real estate, and agriculture, which are ironically considered priority sectors. He criticizes the lack of data sharing from other sectors, hindering banks’ ability to lend effectively, particularly to SMEs and in agriculture. He stresses the concentration of formal credit among a very small number of borrowers, while SMEs, despite their significant GDP contribution, receive very little credit.
Mr. Zafar Masud in his Banking on Our Banks Keynote Speech argues that informality and high interest rates make lending difficult and that the government’s heavy borrowing (“bottomless pit”) crowds out private sector credit. He defends banks’ investment in government securities as a necessary measure to prevent economic collapse, while acknowledging the criticism that banks are becoming overly reliant on this. During Banking on Our Banks Keynote Speech, Mr. Zafar Masud mentions the PBA’s efforts to develop an ecosystem for priority sector financing, including initiatives for SMEs, agriculture, and digital finance. He advocates for government support for these initiatives, citing examples like Tesla’s government loans. He also discusses distortions like ADR tax and the positive impact of MDR adjustments, while calling for clarification on its application to Islamic banks and private entities. Finally, he highlights the banking sector’s significant tax contributions and calls for fair taxation policies that don’t distort the market. He concludes his Banking on Our Banks Keynote Speech by emphasizing the need for continued dialogue and understanding of the banking sector’s complex situation.
Banking on Our Banks Keynote Speech
Banking on Our Banks Keynote Speech – Introduction
It is evidence of the banking sector having a deep understanding of the opportunity and the challenge that the industry faces today. And no one could offer better insights into these matters other than the Chairman of the Pakistan Banks Association, Mr. Zafar Masood, who is present here with us today.
Mr. Masood, who is also the CEO of the Bank of Punjab, is a dynamic banker, an empire and a public sector leader with over 30 years of experience across international banking, development finance, and corporate governance. In addition to PBA, he is also the Chairman of Oil and Gas Development Company, playing a vital role in shaping the nation’s financial and energy sectors. Please join me in welcoming Mr. Zafar Masood to the stage to deliver his keynote address.
Mr. Zafar Masud’s Banking on Our Banks Keynote Speech
Ladies and gentlemen, I’m very excited to be here. It’s always healthy to have a dialogue and discussion and debate. I’m also very glad to hear that, you know, Maru said this is the continuation of a series of such forums and discussions. It is an interesting situation in which the banking industry is in, but in order to have done a holistic and unbiased assessment of the situation, we must appreciate some facts on the ground and also try and decipher the mystery element “x,” in the words of Jawad and Rimal.
At the outset, one is to register that banks operate in the economy, 52% of GDP, compared to the sectors which are untaxed, with a deposit contribution of 16% from the infamous and famous, as you like to say, retail, real estate, and agriculture sectors. The analogy that Maroof was showing just now, the banking performance is 68%, that is in a big developed environment. Here, I think our share will be the opposite, it will be minus, maybe because of the factors I’m going to outline to you. Now, these facts happen to be priority sectors of any economy and pose the biggest opportunity for the banking sector to ramp up assets, particularly mortgages and their related deposits, but unfortunately, consequently, fundamentally misaligned with economic growth.
The banks in Pakistan have tried very hard to have their hands on to the proxy data, telcos, power utilities, etc., to extend credit in these sectors, particularly SMEs in agriculture, in the absence of verifiability, who have the repository of this data, reliabilities like these sitting snakes, and these snakes who they are not ready to share the data. Our Prime Minister used to hold a meeting every Tuesday. One of these was for the private priority sector. He got upset and went away. His time was over and the data was not found. I am telling them this about the Prime Minister. Telco data was not available. In Munir Kamal Sahab’s PBA, the banks together spent about two and a half lakh dollars to create this, you know, digital scorecard data was not available. Aamir knows the resultant 80% of the formal credit is concentrated among just 25,000 rupees, while SMEs contribute 40% of GDP and receive only 6% of total credit, in contrast to 15 to 20% of the peer economy. Now, if we plot Pakistan on that, then I would find that number very bad otherwise.
Informality, interest rates in double digits, makes the lending totally unviable to any sector, but one sector in particular, because of the risk factor on top of it, with a fact perspective, how you expect banks to lend and align its growth? I have repeatedly said that this is what the name is, Jawad raised the issue with the economic growth and played part in pushing the economic growth. For that matter, is the result of the private sector credit to GDP ratio is only 18.4%, starkly lower than India at 55, Bangladesh at 48, Vietnam at 73. The funding requirement of the dominant force, the government of Pakistan, is a bottomless pit, and other regions are facing a crisis, crowding out the credit to the private sector. Interesting in that it’s a market equation whereby taxing the untaxed sector would reduce the burden of the dominant burden from the banking sector and as a result, availability of liquidity to lend to the underprivileged private sector for the banks. This shows a very clear picture of where the core nuisance rests in the system.
Please appreciate this. This is a circular type of issue. You should tax these tax sectors. When you tax these sectors, these documents will be available, and then we will have them. Liquidity will also be available, there will be no need for government borrowing, and we will be able to lend to them. So while it’s fashionable to criticize the banks, and it’s true that banks are on the dart board all the time, particularly these days, but the fact is that we have to go into a little bit of detail and see where exactly the nuisance is, where the banks are being accused of becoming lazy and turning into a hedge fund, virtually soliciting cheaper deposits and investing them in risk-free government securities. While this criticism, to the extent of banks becoming lethargic and making no effort to be creative in supporting various growth facets of the economy, may be factored in, however, the flip side is that the banks have no choice on the matter. I repeat, no choice on the matter.
In reality, despite the risk of sovereign restructuring on extremely unreasonable and loss-bucking terms, as the banks were subjected to in the case of PIA earlier this year, for example, the banks can’t stop meeting the fiscal deficit requirements of the government. It’s just not possible. Currently, according to an estimate, fund over 85% of the total fiscal needs of the government. My own estimate is 93, but nevertheless, just imagine a situation where banks stop lending to the government. You know what will happen? Unimaginable. Nothing would move and the economy will come to a standstill, no gas, no electricity, food security issues, and soon a sovereign default, both on the local and the international debt, is guaranteed. There will be no opportunity to lend to the private sector. So while we keep on campaigning that we have to lend to the private sector, the problem is that we have to save this big elephant in the room, the government of Pakistan, to make sure that the private sector continues to operate. If you pull the plug, the private sector will disappear.
If anything, banks are doing a great service to the nation by lending to the government and supporting their fiscal needs by taking on the excessive risk of restructuring, and this is a very real risk we are aware of, but unfortunately, there is a limited choice on the matter. However, the industry is very well aware of the situation, actively working on the development of an essential ecosystem to support financing to priority sectors, that is, SMEs, agriculture, and digital, to attract face flows through remittances, foreign direct investment, and becoming part of the global supply chain, as we witness it in the case of Singapore. The Pakistan Banks Association is focused on developing, building a more inclusive and sustainable financial environment by advancing initiatives such as Electronic Warehouse Receiving Financing, rolling out SME Perception Index, developing Corporate Farming Prototypes, establishing cooperatives, and setting up financial data exchange. The initiative marks substantial steps towards ecosystem evolution, with full impact to be realized in years to come.
Projects, while progressing well, require time to mature and deliver tangible benefits. Efforts by the industry towards achievement of digital transformation and technology results in too late. There are very statistics which I am skipping right now. We must appreciate and shall not shy away from asking for government support. See, this is also a big, third most important point which I want to highlight to you is that do not worry about the government’s support. You should not be worried at all that you have to ask for government support for priority sector financing. What is the problem in this? If Tesla can go and take a concessional loan from the US Department of Defense’s Energy Fund in their initial years, then what problem do we have? America is the Mecca of free economy and different level of maturity life cycle. If that support, we have been doing this till date, I don’t know what our problem is. A narrative has been created that no, we don’t want to take money from the government, we don’t want to take support. We definitely want to take it, it’s their right, it’s our right, but we need to be taken in the right sector and we need to have a positive impact on it. It will be long term and concessional financing which must be time bound and performance based so that we evaluate the impact of it.
PBA in this respect actively working with the federal government that you give us subsidy, give us first loss guarantee, we will provide two-wheeler, three-wheeler EV. We will also do end-to-end digitization for energy guzzler fan financing and we will also do solarization of tube wells which is off-grade and on the other side of the equation there are serious distortions like ADR tax for example which will disk the deposits and sin opportunity of lending are few and far between as I just told you. Thank God SBP realized side effects of MDR and have it ration eyes. This will help in discreetly the large liquid assets and corporates to place money with banks, arbitrating them for rent-seeking returns instead of reinvesting them in their own related diversified businesses to spur economic activity and create employment for their excess liquidity is the normal course of their active treasuries and they should go and invest directly in the government. Today, in open market operations, banks as a conduit are used. You pay us two rupees on top of that. Why are you paying us? You should go and directly put the money into the government.
The recent move of MDR will protect the individuals, small depositors, and soon continue with the savings with the banks. However, its applicability to Islamic banks needs to be reviewed. The private entities have been kept out; they need to be brought in as well. And what clarification is needed is whether the federal and provincial governments are involved or not. We are working very actively with the State Bank of Pakistan. We’ll get it sorted out.
The banking industry paid Rs. 1618 billion as tax last year, and this year it will increase even more. Despite all of this, take more tax. Tell me which sector of this economy is it where all the sectors are trying very effectively that we have a—we should not have to pay tax on rupees. Here, a banking sector is standing and telling you to take more tax from us, but for God’s sake, take it in the right item which is related to our income. Do not distort the market by having ADR-type taxes, tax on 49. It is in the bracket which is the highest tax bracket of any sector and in the entire region. The highest tax is in the banking industry. In this region also, our objective is to reduce taxation and reduce the requirement of the government. Documentation should be increased, and they should go to the private sector and land them.
But some kind of engagement is necessary, and forums like this—I am very thankful to Jawad and Maroof for giving the opportunity for every talk about this—will be such an engagement discussion. So, we will present our side of the story, and I also told us that we are not perfect, we also need improvement, but please try to understand our situation. It’s not that simple.
Banking on Our Banks Keynote Speech – Closing
At the end, it is not difficult to understand at the end, you know, what the general contribution to the public exchequer, contribution to the fiscal deficit, and of course, even the other way round, CSR to keep going on. It is something unusual, a herd of merging economies, particularly in our beloved country, on which the banking sector deserves to be uploaded.
Thank you very much.
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