Scenario:
In Pakistan, average lending
rate of banks is reported at 13.06 % while the deposit rate was at 5.82% in
first half of FY2012. This higher spread in the banking sector has increased
the banks’ income rapidly. But, this increased spread has been discouraging
potential savings and also a constraint on investment activities. As a result,
this higher cost of funding to the private sector has been reducing the
potential growth of the economy with reduction in the business activities. This
has an outcome of high rate of unemployment in the country.
According to State Bank of
Pakistan (SBP), interest spread in Pakistan has mounted from 4.63% in FY2003 to
7.24% recently. Whereas, this spread is only 2% to 4% in others developed
countries. The year-on-year growth in loans to private sector businesses has
declined from 22.4 percent in FY08 to 0.7 percent by the end of recent year.
Still, an increase of 269% in deposits base and 268% increase in bank assets
has increased the banks’ pre-tax profit by 9,991%. A deposit rate of 5.82% and
inflation rate of 12% depicts that real rate of return (inflation adjusted) is
actually -6%, whereas it was 3% in 2001. This means that the depositors have
been forced to lose their money due to the negative returns.
Required:
1. Discuss in detail the three most appropriate measures to be
taken by State bank of Pakistan in order to control or bring down the higher
spread in Pakistani banking sector.
2. Discuss in details any two
factors inducing this higher banking spread in Pakistan.
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