It is well known that income distribution in Pakistan is highly skewed. Nearly 40 percent of the people (about 70 million) are living below the poverty line.
While healthy developments, such as a dramatic increase in home remittances during the past decade are making a dent on poverty in many ways, the country's financial system comprising of nine categories of financial institutions and financial markets, dealing with resource mobilisation and resource allocation, are, by and large, serving the interests of population other than the disadvantaged class.
This article takes a look at how the principal components of the financial system, namely commercial banks, are aggravating the income inequalities in the country.
It needs to be understood that the banking sector in Pakistan is characterised by a lack of both breadth and depth. In a population of 175 million, the number of account holders in banks is 25.23 million or about 14.5 percent of the population, and borrowers are only 4.25 million or 17 percent of account holders and 2.4 percent of the country's population.
Total bank deposits, at Rs. 4,352.7 billion, are about 29 percent of the GDP. The number of bank-cheques issued everyday is about 30,000 as against 96,000 in Sri Lanka, a comparatively small economy. In this situation, the benefits of banking services are largely going to the well-off urban classes.
Aggravation of inequalities through the banking industry is reflected in the structure of deposits and advances (loans) as well as such aspects as loan write offs and non-performing loans etc.
STRUCTURE OF DEPOSITS
Take a look at the Figure 1, which indicates the structure of deposits in the country as of December 2009. The table shows that:
1. Deposits in the individual accounts of Rs5,000 or less, totalling around Rs5.62 billion, are held by 2.14 million account holders or 8.4 percent of total account holders.
2. Those holding deposits worth Rs100,000 or less are about 19.05 million or 75.57 percent of the total deposit holders. Their share in total deposits is 15.88 percent.
3. Holders of deposits at Rs0.5 million or less account for 38.93 percent of total deposits and their number is 24.45 million or 96.9 percent of total deposit holders.
4. Those holding deposits worth Rs10 million or above are only 0.107 percent of total depositors and account for 36.45 percent of total deposits.
The above deposit structure clearly shows that a fairly large chunk of bank deposits belongs to the relatively poor class who are getting a very small rate of interest. The average rate of return on deposits as of end December 2009 was 6.14 percent and highly negative in real terms.
STRUCTURE OF BANK ADVANCES
Figure 2 shows the structure of bank advances as of December 2009.
The above data are an unmistakable evidence of who is benefiting from the banking sector. It appears that the benefits of the banking sector are meant only for the privileged classes. More specifically, the latest available data shows that there are 4.255 million borrowers with total outstanding advances of Rs3.1 trillion.
No less than 75.3 percent of these advances were made to only 27612 borrowers, just about 0.65 percent of the total borrowers. Those borrowing five million or more are about 45133 or 1.06 percent of the total borrowers who account for 79.14 percent of total bank advances. Conversely, those borrowing Rs500,000 and less, equalling 94.2 percent of total borrowers, availed only 11.07 percent of bank credit.
While it is true that these big borrowers are making investments and generating production and employment, the fact that credit is concentrated around just 1 percent of borrowers who make use of nearly 80 percent of bank borrowing cannot be ignored.
At this point, a number of relevant factors need to be kept in view.
First of all, in Pakistan the corporate sector is virtually exclusively dependent on banks to finance their business activity. Unlike other countries, the corporate sector in Pakistan has hardly issued any bonds or debentures.
Corporations in Pakistan have the advantage of relatively easy access to bank borrowing, which can be rescheduled under difficult conditions and not infrequently written off. The burden of such borrowing is on depositors who get negative real rate of return on their savings.
Similarly, the banking business is skewed against the small borrowers. According to central bank data, a total of Rs74.384 billion was written-off by the banks during 2008 and 2009. Of the amount written-off, those who had borrowed more than Rs0.5 million benefited to the extent of Rs4.4 million per borrower, whereas those who had borrowed less than Rs0.5 million benefited only to the extent of Rs81,000 per borrower.
The impact of non-performing loans is also on the depositors since provisioning for such loans is made out of bank profits which in principle should be distributed among depositors.
This then poses an important question: why are depositors keeping their savings in banks if the rate of return is negative in real terms. The answer is that nearly 80 percent of bank deposits (demand deposits and time deposits with maturity of six months or less) are placed with the banks not for profitability consideration but for liquidity consideration. And the banks are making full use of this consideration and exploiting depositors.
The writer is the former Deputy Governor (Policy), and Chief Economic Advisor of the State Bank of Pakistan. Among other research work, he is the author of History of the State Bank of Pakistan Volume-III (1977-88) and Volume-IV (1988-2003). He can be reached at [email protected]
================================================================================
Figure 1: Structure of Deposits
================================================================================
Number of account holders Deposits
Size of Account million (% of total) Rs (million) (% of total)
================================================================================
Less than Rs 5,000 2.143 8.40 5,626 0.13
Rs 100,000 and less 19.05 75.50 691,458 15.88
Rs 500,000 and less 24.45 96.90 1,694,887 38.93
Rs 10 million or more 0.027126 0.107 1,586,439 36.45
--------------------------------------------------------------------------------
Source: SBP
================================================================================
================================================================================
Figure 2: Structure of Bank Advances
================================================================================
Number of Accounts Advances
Size of Account units (in million) (% of total) Rs (in million) (% of total)
================================================================================
Less than Rs5,000 0.097668 2.30 122 0.00
Rs 50,000 or less 1.59 37.40 37,106 1.16
Rs 100,000 or less 2.84 66.00 132,106 4.14
Rs 0.5 million or less 4.013 94.20 353,497 11.07
Rs 10 million or less 4.227 99.35 787,654 24.70
Rs 10 million and above 0.027612 0.65 2,404,237 75.30
--------------------------------------------------------------------------------
Source: SBP
================================================================================
Comments
Comments are closed for this article.