This title is part of an initiative by the World Bank to develop standard indicators to measure the performance and soundness of the financial sector in the South Asia region and help pinpoint where performance is strong and where improvements are most needed. Phases I, II, and III, completed with active support and assistance from regulatory authorities in South Asia, compiled a standard set of finance indicators for five countries: Bangladesh, India, Nepal, Pakistan, and Sri Lanka. This first formally published volume encompasses Phase IV of the study, which updates all indicators under the four categories of access to finance, performance and efficiency, stability, and corporate governance, and adds two new categories: capital market developments, and market concentration and competitiveness. The addition of these measures provides a new and more holistic perspective on getting finance in South Asia, and also helps improve our understanding of the financial systems in South Asian countries.

Countries in South Asia have undertaken reforms to reduce government ownership of financial institutions, bring prudential regulations in line with international norms, and strengthen banking supervision. These reforms have borne results. This volume shows that commercial banks in Bangladesh, India, Nepal, Pakistan, and Sri Lanka generally expanded access to finance and improved their performance and efficiency, stability, corporate governance, and market concentration and competitiveness over the period from 2001 to 2006. But results vary widely across and even within these areas, as shown by the countries’ rankings on the indicators, which show that, with the notable exception of India, South Asian domestic debt markets are still at an early stage of development.

“The commendable initiative taken by World Bank to develop standard indicators for measuring the performance and soundness of the financial sector in South Asia has, over the years, served to strengthen the financial risk assessment framework in the region. These indicators have been of immense help to supervisory authorities in the region, including the State Bank of Pakistan, to monitor financial vulnerabilities and weaknesses, and also to draw comparative analysis with regional counterparts.”

- Dr. Shamshad Akhtar, Governor
State Bank of Pakistan

“The data, benchmarks and analytics contained in this volume provide a wealth of information on South Asian financial sector development and would undoubtedly be of much use to regulators, researchers and the general public.”

- Dr. Ranee Jayamaha, Deputy Governor
Central Bank of Sri Lanka

World Banks ranks Pakistan first in corporate governance

World Bank Report “Getting Finance in South Asia 2009″ (http://publications.worldbank.org/ecommerce/catalog/product?item_id=8612660) has ranked Pakistan first in the areas of corporate governance, performance and efficiency.

In the area of access to finance, Sri Lanka ranks first in South Asia, on capital market development and market concentration and competitiveness in the banking sector first slot is grabbed by India.

According to the detailed report on Pakistan the bond market is developing at a lesser pace. The
domestic bond outstanding was 25.16 percent of the GDP, equivalent to $32.41 billion. This consists of mainly government bonds, as the corporate market is yet to develop. The areas on which Pakistan needs to focus are access to finance capital market development, and market concentration.

Access to Finance: Pakistan needs to focus on improving financial outreach through its commercial banking sector. Demographic branch penetration is low with around five bank branches per 100,000 people during the six-year period. To promote branch openings in rural areas, the SBP has introduced the Annual Branch Licensing Policy, which requires commercial banks with 100 branches or more to open at least 20 percent of their branches outside big cities and set up branches in Tehsil Headquarters, where no branch of any bank exists.

Usage indicators showed mixed results. While deposit accounts dropped from 195.84 per 1,000 people in 2001 to 171.14 in 2006, loan accounts per 1,000 grew by almost 98 percent. One would have expected both ratios to grow, given the economic growth experienced by Pakistan over the last few years.

Pakistan is one of the few countries in the world that has a separate legal and regulatory framework for microfinance banking. Though in Pakistan the potential market size is huge (around 30 million), the penetration remains low. Despite a substantial increase in the number of borrowers (from 60,000 in 1999 to around a million in December 2006), huge portions of this potential market remain underserved.

Financial stability: Pakistani banks maintained the regulatory CAR well above 8 percent. Strong returns and fresh capital injections to several banks resulted in this positive trend. Over the six-year period, the ratio increased to 13.33 percent in 2006. Leverage ratio almost doubled to 8.94 percent in 2006.

The gross NPL ratio reduced progressively from 19.6 percent in 2001 to 5.7 percent in 2006. The NPL position of the public bank should be monitored continually, however, because any adverse movements in this sector could have a negative impact on the entire banking industry, as public banks hold a significant share of the lending portfolio.

Banks’ liquidity position should be monitored carefully using measures such as maturity gap analysis, to find out the presence of any liquidity mismatches. The SBP would adopt the Internal Ratings-Based Approach from January 1, 2010, with banks and development finance institutions (DFIs) permitted to implement it sooner if the SBP approves their internal risk management systems.
The Pakistan bond market is still at its development stage and is dominated by government securities at around 97 percent. The lack of growth in the bond market should be a concern, however, as this deprives the market of an alternate funding source.

Corporate Governance: Pakistan leads the region in corporate governance scores. Some of the amendments would improve the self-governance; others, such as seeking SBP approval for 5 percent or more shares, need to be reviewed. Other areas to focus on include greater transparency and disclosure, greater accountability, further disclosures on beneficial ownership, safeguards on stakeholder rights, further improvements to responsibilities of the board, and further emphasis on self-governance for the institutions.

The SBP requires disclosure of beneficial ownership of shareholders, with the threshold set at 3 percent.

However, this information is not available to the public. Investor rights relating to voting and shareholder meetings appear to be in place. The government can appoint directors to government-controll ed banks only by virtue of its shareholdings.

Provisions for transparency and disclosure have met the main criteria, but the internal audit function has room for further improvement. Disclosure of audit fees paid to external auditors is required. To attract and retain qualified and competent staff, a review of compensation policies is needed. Banks are required to disclose the compensation of directors in detail.

Although the guidelines have been issued, the success of the governance procedure largely depends on commitment by the banks. Their approach to corporate governance should extend beyond simple compliance with legal requirements. This is an evolving process and cannot happen overnight. As such, the regulatory authority surveillance and enforcement is important. staff report

TABLE OF CONTENTS

PART I: ANALYSIS

1. INTRODUCTION
Background
Development Dimensions and Micro Indicators
Access to Finance; Performance and Efficiency; Financial Stability; Capital Market Development; Market Concentration and Competitiveness; Corporate Governance
The Methodology
Development of Benhcmarks
Interpretation of Ranks
The Role of Microfinance in South Asia

2. THE GETTING FINANCE INDICATORS: COUNTRY PERSPECTIVE
Bangladesh
Access to Finance; Performance and Efficiency; Financial Stability; Capital Market Development; Market Concentration and Competitiveness; Corporate Governance
India
Access to Finance; Performance and Efficiency; Financial Stability; Capital Market Development; Market Concentration and Competitiveness; Corporate Governance
Nepal
Access to Finance; Performance and Efficiency; Financial Stability; Capital Market Development; Market Concentration and Competitiveness; Corporate Governance
Pakistan
Access to Finance; Performance and Efficiency; Financial Stability; Capital Market Development; Market Concentration and Competitiveness; Corporate Governance
Sri Lanka
Access to Finance; Performance and Efficiency; Financial Stability; Capital Market Development; Market Concentration and Competitiveness; Corporate Governance

3. COUNTRY RANKINGS ON THE GETTING FINANCE INDICATORS
Overall Rankings on Development Dimensions
Individual Rankings on Micro Indicators
Access to Finance; Performance and Efficiency; Financial Stability; Capital Market Development; Market Concentration and Competitiveness; Corporate Governance

4. AN INTERNATIONAL PERSPECTIVE
Benchmark Comparison (2006)
Access to Finance; Performance and Efficiency; Financial Stability; Capital Market Development; Market Concentration and Competitiveness; Corporate Governance
International Comparison of Financial Ratios—Benchmark Countries (2006)
International Comparison of Financial Ratios—Comparator Groups (2005)

5. FINDINGS AND OBSERVATIONS
Access to Finance
Performance and Efficiency
Financial Stability
Capital Market Development
Market Concentration and Competitiveness
Corporate Governance
Benchmarking and Comparability

PART II: INDICATORS

6. COMPILATION GUIDE FOR THE GETTING FINANCE INDICATORS FOR SOUTH ASIA
Access to Finance
Performance and Efficiency
Financial Stability
Capital Market Development
Market Concentration and Competitiveness
Corporate Governance

7. METHODOLOGY
Data Compilation
Choice of Indicators
Method for Country Rankings
Corporate Governance

8. MAJOR POLICY DEVELOPMENTS IN THE PRUDENTIAL REGULATIONS OF SOUTH ASIA, 2005-06
Bangladesh
Implementation of the New Capital Adequacy Framework (Basel II) in Bangladesh; Prudential Regulations; Other Policy Development
India
Implementation of the New Capital Adequacy Framework (Basel II) in India; Prudential Regulations; Other Policy Development
Nepal
Implementation of the New Capital Adequacy Framework (Basel II) in Nepal; Prudential Regulations; Other Policy Development
Pakistan
Implementation of the New Capital Adequacy Framework (Basel II) in Pakistan; Prudential Regulations; Other Policy Development
Sri Lanka
Implementation of the New Capital Adequacy Framework (Basel II) in Sri Lanka; Prudential Regulations; Other Policy Development

9. INTERNATIONAL BEST PRACTICES IN CORPORATE GOVERNANCE
Organisation for Economic Co-operation and Development
Basel Committee on Banking Supervision