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Summary of SOUTH ASIA PAYMENTS AND SECURITIES SETTLEMENT INITIATIVE (SAPI) - Payments and Securities Settlement Systems in Pakistan

Core Content

The South Asia Payments and Securities Settlement Initiative (SAPI) is a regional initiative launched by the World Bank in 2008, following a mandate from the South Asia Central Banks' Deputy Governors. It is funded by the Financial Sector Reform and Strengthening Initiative (FIRST Initiative) and aims to assess and improve the safety, efficiency, and integrity of payments and securities settlement systems in South Asia. The initiative includes public reports, confidential recommendations, workshops, and working groups to ensure sustained development.

This document provides an in-depth analysis of Pakistan's payment and securities settlement systems, as part of the SAPI series. It is prepared with the support of the State Bank of Pakistan (SBP) and includes legal, institutional, and operational frameworks.

Main Views and Key Information

1. Economic and Financial Market Overview

• Recent Reforms: The last decade saw significant economic reforms in Pakistan, including poverty reduction programs and market development, which boosted GDP growth, monetary stability, and the development of money and securities markets.
• Macro-Economic Performance:
  • Real GDP increased from USD 60 billion in FY01 to USD 170 billion in FY08.
  • Per capita income rose from under USD 500 to over USD 1,000.
  • International trade volume increased from USD 20 billion to USD 60 billion.
• Economic Slowdown (2008–2009):
  • Real GDP growth slowed to 5.8% in FY08.
  • Inflation rose to 25% (headline CPI) and 18% (core inflation).
  • External current account deficit widened to USD 14 billion (8.5% of GDP).
  • The fiscal deficit increased from 4.3% to 7.4% of GDP.
  • Foreign exchange reserves declined to USD 8.6 billion by end-June 2008 and further to USD 3.4 billion by end-October 2008.
• Policy Response:
  • The SBP took measures to reduce the cash reserve requirement and improve liquidity.
  • The SBA (Stand-by Arrangement) with the IMF helped stabilize the economy, leading to a recovery in macroeconomic indicators by 2009.

2. Financial Sector Overview

• Structure: The financial sector in Pakistan has evolved from a state-dominated system to a predominantly private sector system over the past decade, driven by government privatization and financial liberalization.
• Key Players:
  • Banks: Dominate the sector. As of end-June 2008, banks held 72% of the total financial sector assets.
  • Non-Banking Financial Institutions (NBFCs): Include leasing companies, investment banks, housing finance companies, and mutual funds.
  • SBP's Role: The State Bank of Pakistan has played a central role in reforming the sector, implementing Basel II standards, and developing a regulatory and supervisory framework aligned with international best practices.
• Banking Sector Performance:
  • Banks are generally well-capitalized, profitable, and liquid.
  • The SBP has implemented a 10-year Banking Sector Strategy (BSS) focusing on financial infrastructure, especially payment systems.
  • Over the past 7 years, the SBP processed 10 acquisitions and 40 mergers, mostly between investment banks and commercial banks.
  • Foreign banks now own almost half of the banking sector assets, introducing innovation and technology.

3. Capital Markets

• Market Development: The capital market in Pakistan developed alongside the banking sector, starting with state-owned companies and evolving into a more market-based system.
• Stock Exchanges: The Karachi Stock Exchange (KSE) is the most developed, with the Lahore Stock Exchange (LSE) and Islamabad Stock Exchange (ISE) also operating.
• Market Performance:
  • In FY08, the KSE recorded a total share trading volume of 63.4 billion PKR.
  • The KSE-100 index dropped by one third in 2008, leading to a price floor being imposed in August 2008, which was lifted in December 2008.
  • The index fell to 4,815 points in FY09 but recovered by 12% by end-June 2009.
• Government Debt Instruments:
  • The government issues Market Treasury Bills (MTBs), Investment Bonds (PIBs), and Market-related Treasury Bills (MRTBs).
  • In FY09, Shariah-compliant Ijara Sukuk bonds were introduced.

4. Payment and Securities Settlement Systems

• Payment Systems:
  • Include low-value systems (e.g., cheques, payment cards) and large-value systems (e.g., PRISM - Pakistan Real Time Interbank Settlement Mechanism).
  • PRISM is a Real Time Gross Settlement (RTGS) system that supports interbank transactions and manages credit and liquidity risks.
  • The Payment Systems Department (PSD) of the SBP has taken initiatives to improve payment card security.
• Securities Settlement Systems:
  • Involve stock exchanges, clearing houses, central depositories, and securities lending.
  • Central Depository System (CDS) is used for dematerialized securities.
  • Securities Clearing and Settlement Process includes straight-through processing (STP), settlement risk management, and operational risk management.
  • Guarantee schemes and international links between clearing and settlement institutions are being developed.

5. Role of the Central Bank and Regulator

• State Bank of Pakistan (SBP):
  • Plays a key role in monetary policy, payments system oversight, and banking supervision.
  • Has implemented Basel II and is planning to gradually increase capital requirements.
  • Has a regulatory framework that is being continuously improved to support the development of financial infrastructure.
• Securities & Exchange Commission of Pakistan (SECP):
  • Acts as the regulator of the securities market.
  • Overseen by the Securities and Exchange Policy Board.
  • Focuses on promoting a robust corporate sector, protecting investors, and mitigating systemic risk.
  • Has introduced Shariah-compliant instruments and improved market transparency.

Key Initiatives and Developments

• SAPI's Activities:
  • Preparation of public reports on payment and securities systems.
  • Delivery of confidential recommendations to country authorities.
  • Organization of workshops and promotion of working groups.
• Payment Card Security:
  • The SBP has taken steps to enhance security in payment cards, including EMV compliance and anti-fraud measures.
• Remittance Initiatives:
  • The Pakistan Remittance Initiative (PRI) aims to improve remittance services and reduce costs.
• International Collaboration:
  • The SAPI involves international experts from the BIS and CPSS through the International Advisory Council (IAC), including the Swiss National Bank, National Bank of Belgium, and Hong Kong Monetary Authority.

Conclusion

The SAPI initiative provides a comprehensive assessment of Pakistan's financial systems, emphasizing the need for institutional capacity building, regulatory alignment, and technological innovation. The SBP has been instrumental in reforming the banking sector and enhancing payment systems, while the SECP has worked to develop a robust and efficient securities market. Despite economic challenges in 2008, the reforms and policy responses have led to improvements in macroeconomic stability and financial market resilience. The SAPI report on Pakistan serves as a baseline for future improvements in the region's financial infrastructure.