if we sift through the history pages we will come to know that 90% of development in any field came into

20 century whether it is science, technology,or buisness , politics, society and whatever. and as a social phenomena that inventtions and discoveries take place in a society where there are inventions and discoveries being taken place.due to these,as a result, another catalyst accelerate the phen omena and so on until new invention take place. but, on the other hand, one chan ge requires another and another requires another and the process continues until the end. as a evidence we can see around us, the process started where nobody k nows and when it will stop and where and how nobody has the answer. our society has been become so addicted to the inventions and development that we cannot eve n think about how the life will be without it. the process of development which started,in my opinion, when the first man on earth tried to make sure his existe nce by whatever means and accelerated after the second wave i-e in 19 century. a s a result of all this continous process every aspect of ours life has not been spared from being affected. the life become so uncertain that we cannot tell wit h certainty that how will be the life like when in the next moment another inven tion takes place. sitting in 2013 and thinking about how the life will be looking after,say, some 50 years or so, especially how will be the futre banking take place is a difficu lt task if not impossible. we don`t know what developments would take place in c oming future and how these developments would affect banking practices.here,in 2 1 century whose characteristics are uncertainty, risk, and fear and wars, like a chemical reaction life has become a product of easiness,hurriness,individualism and most importantly greediness. it is not difficult to say all the future poli cies will be made by considering all yhese factors.lets try to kook into the fut ure without timing machine by just anticipating with the help of established and benefical formula called PESTEL analysis. because by considering this formula w e will be atleast enabled to think about how will be these factors requiring ban kers to respond. it is extremely difficult,if not possible, to think about a country banking sect or by ignoring the overall plight of its political conditions. because a bank is an organization and as an organization it respond to its environment by taking inputs from and giving output to its environment and country`s politics is utmos t important for a bank to exisst. we know that our present is shaped by our past and future is dependent on our present. if we look through the perspective of P akistan, it is facing alot of problems . for the ease of understanding we develo p the possible scenarios nad then will look into the political future of pakista n through these scenarios. 2014 is the year of evacuation by the international forces in Afghanistan,as a n eighbour, it directly exerts it effect on pakistan`s politics, which is evident first by in 80 and second by in 2001.this event will have great repurcussion for Pakistan,in particular, and for the whole region,in general,which in turn great ly affect the economies as well. there are possible scenarios which can be drawn out and in each scenario the possible reactions will be differnt. lets build th e scenarios and then work through them. SCENARIO 1: it is assumed that Afghan taliban are influenced,to some extent, by pakistani es tablishment. 2014, american forces withdraw with the ignominious defeat by the backward talib ans. civil war break out in afghanistan and race to Kabul is started for which N orthren alliance and taliban fight with head and toe. eventually the political s tructure built in the era of occupiied forces fall and the taliban enter in Kabu l as victors. they set their govt and run the country as used to run before 9/11 . in Pakistan, TTP,which also share the view of afghan talibans and consider Mull ah Muhammad Umar as their commander, is pressurised by the aghan talibans to let the weapons down. but the differnces between apkistani and afghan talibans beco me obvious and Pakistani taliban refuse to drop their weapons and pursue their g

oal of imposing Shariah in pakistan and fierce war erupts between pak security f orces and TTP. backlash happens in urban areas in the shape of suicide bombings. pak army starts fighting to put the halt on TTP. afghan talibans help pakistani forces to eradicate this menace by putting cap on foreign assisance from afghan istan. war continues for the last time with limited foreign assistance for both sides and it takes pakistan army to end this war a long time supposedly 5-10 yea rs. this is the scenario which is less likely to happen as american forces will not want to go again as loser in their country. they will try their best effort to r each a seetlement between them and afghan talibs. on the other hand pakistan also do not want Amerrica to go by creating a long ga p in afghan society which would be harmful for pakistan as well. in this situation pakistan economy will grow as much as 3% per annum. this is th e situation which is not good for banks as well. banks to grow need, to perform their traditional functions with robust force, a conducive environment for the i nvestment,which is essential for lending the asset side of banks, and for deposi ts,which is life line for lending the liability side. now when economy is not performing well,growth stagnant,sick industries are on t he increase then where will the deposits come from and to whom the lending by ba nks will go. status quo will continue, banks will continue to invest in governme nt securities as they will think that private sector has no potential to lead th e growth. Scenario 2: america strikes a deal with afghan govt and afghan talibans with the help of pak istani forces. by virtue of this america gets success in building its some bases in afghanistan after 2014 and talibans agree to take part in the mainstream pol itics. as a result pakistan put the gear to end insurgency in pakistani tribal a reas with the help of american govt and talibs. in retaliation TTP again strikes in uraban areas before giving up. in this case also pak economy will suffer and the same above reffered situation will surface. whatever the situation will be in post 2014, for pakistan it would not be easy t o upbuild its damged economy. the need of the hour is that pakistan should accep t that ,in any case, damgage will happen to its economy and society as well and so should try to capitalize for the loss and make itself prepare for the conting encies, repurcussions and ramifications. banking sector should be conscious enough to make its strategies so that it can be prevented from the da mge.

Economy: It is extremely dif?cult, if not impossible, to discuss country's banking scene by ignoring the plight of the overall state of its economy. banking sector and rea l growth reinforces each other, in sense that absence of one contradicts other. pakistan economy is in shatter and growing at the rate of less than 3% for the 2 013-14. lots of reasons can be counted for this ranging from bad governance, cor ruption, terrorism, to most importantly energy and leadership crisis. if only the energy crises would have solved then economy could grow above 5%. du e to energy crises pakistan main exporting sector is facing closure of industrie s an dflight of capital from pakistan. it is estimated that only in Faislabad al most 2500 big and small industrial units have been closed down. more than 700 pa kistanis have gone to Bangladesh to start their buisness from there. It is interesting to note that in Pakistan's context it is generally believed that although the banking industry is highly pro?table, a number of banks are in tro uble and their existence may be under threat. These are small and medium sized b anks. This category of banks is said to be still facing acute problems in mobili sing deposits and are struggling to meet the minimum capital requirement set by the State Bank.there are lots of reasons for this:Agriculture, small and medium enterprises, housing sectors are underserved and the middle class and low income

groups have limited access to credit. Moreover, banks have been accused of focusing on trade and corporate ?nancing wi th a narrow range of products. They are criticized for their lack of will to div ersify into consumer and mortgage ?nancing for which there is ample unsatis?ed d emand and last, but not least, they are accused of suffering from poor quality o f human resources, weak internal controls, non-merit based recruitments, high ad ministrative costs and undue interference of unions in their decisions making pr ocess affecting the performance of public sector ?nancial institutions adversely . The country's economy is coping with a protracted period of stagnation mainly beca use of a consistently low level of credit availed by the private sector together with declining foreign investments. The question that even a 400 basis points r eduction in interest rates over the past 17 months has failed to whet the privat e sector's appetite remains partly answered. The oft-repeated, if not entirely pro found, reasons are chronic energy shortages that have caused considerable advers e impact on the utilization of productive capacity within the economy and a seri ous law and order situation that generally deters any established or prospective investor from entering or introducing new ventures or expanding the existing bu siness base. present government took loan from IMF under the stand-by agreement of $6.6billio n. it has promted state bank to purchase dollars from local financial sector whi ch caused to depreciate the rupee as more than 12%.it has also printed more than 500 billion rupees in their only 100 days or honeymoon period. as a result erod ing purchase power of consumers nad going through the roof inflation is haunting the present government.The two prime casualties of the situation are productivi ty and jobs. The latter in turn tends to exacerbate social tensions while the fo rmer gives birth to an environment in which efforts aimed at achieving revenue c ollection targets are fraught with uncertainty and hopelessness. now with all these situations banking sector has large potential to tap. up-to-d ate 10-15% of the population have entered to the formal financial system while r emaining continue to rely on informal lending sector. Bank deposits are a mere o ne-third of the size of the economy (GDP). Other developing countries have raced past these levels in recent years. Whats more, conditions have worsened over the last ve years as the transfer of in come from urban to rural areas has also led to higher ow of funds into the grey e conomy. Currency in circulation is close to one-third of the overall monetary as sets and that has substantially increased in this regime. If half of that money is bought back to the formal nancial system, the deposits-to-GDP ratio will be co mparable to that in India. the one possible solution to tap all informal sector is branchless banking which has been emerged in last 4 years as a largest contender to bridge the financial divide.The retail agent network of the four service providers has now expanded to over 32,000 agents; almost thrice the number of bank branches in the country. Of cial data indicates that over ten million transactions are now being generated every month in the BB system, with over a billion rupees owing through the syste m every day. Mobile wallets are expected to cross the two million mark any day n ow. In short pakistan has lot of potential to tap which can be done thr ough policies which boost the economy. SOCIAL: Currently the world Population is above 7 billion and according to the UN Mediu m Variant Projections it is expected that it will be above 8 billion by 2025 and above 9 billion by 2050. The probable increase in the population of developing countries over the period of 1995-2050 is 3.69 billion while less than 350 mill ion in developed countries during the same period. However it is important to n ote that all these UN Medium Variant Projections imply that Fertility level all over the world would be at replacement level of 2.1 children per woman by 2050. If this is not the case the actual population could be higher than the projected number. Countries such as India, Pakistan and Nigeria are currently far from at

taining the replacement level target. One of the interesting features of world population is its concentration in Asia . It is expected that this region will contribute above 50 percent (2 billion) of total increase in worlds population of 3.68 billion over the period 1995-2050. Asia will be followed by Africa (contributing 1.3 billion) while another 334 m illion are projected to be contributed by Latin America and the Caribbean. Howe ver Europe will observe a decline in its population by 91 million over the menti oned period. Over the period 1995-2050 the top ten countries contributing the m ost to worlds population will include India (1.18 billion), China (962 million), Pakistan (318 million ), Nigeria (+306 million ), Indonesia (+239 million ), Eth iopia (+194 million ), United States of America (+190million ), Brazil (+189 mil lion) Bangladesh (+176 million), Zaire (318 million ) and Iran (+153 million ). According to the projections of the Population Reference Bureau, Pakistan would be the 4th most populous country in the world (surpassing Indonesia and Brazil) by 2050 with a population of 295 million. This represents an increase of 130 mil lion people over a period of 43 years. The Government is aware of the issues fa ced due to unchecked increase in population and is therefore pro-actively taking measures to control population growth. Over the years, Pakistan has been recording a comparatively high population gro wth rate along with an increasing labor force. annualy in pakistan labor force 1 .5m labor is added. unemployment is on the rise which is touching the level of d ouble digit. poverty is also the charecteristic of pakistan society. high inflation should co mmensurate with the increase in income but here is opposite case where high infl ation is eroding the purchasing power of masses with low income sources. as a result there is increasing gap in rich and poors causing uncertainty and te nsion among the different classes.every now and day we listen about that bank ha s been looted, that bank branch has observed heist by the bodyguards of banks it self. it is the fashion of the present that in news we listen almost everyday th at rich industrialist,wealthy and famous doctors, sometimes their loving ones ha ve been kidnapped. in Karachi, the economic hub of the country,has a record that every person directly or indirectly have been looted in street crimes on gunpoi nt.the gist of the idea is that with the rising inequalities in the society is n ot good for the particular sector neither for the economy nor for anybody. it sh ould be addressed now by multifaceted policy to counter the ongoing threat and u pcoming social atomic bomb, which is not less harmful than any type of hydrogen and atomic bomb. to do this everybody should play its role whether it is the govt, army,media or banks. because in pakistan banking especially conservative banking is going to f ace alot of troubles as society of pakistan is moving towards exterimism and fan atism. in order to successfully integrate in society banks must ensure to take o n such policies which would become beneficial for their existence. on the other hand islamic banking would also not lay on bed of roses, for this to become succ essful it must come up with such policies which have bearing of islam not only i n relity but also in the perception of their come-to-contact. otherwise whole pa kistani society is sitting on the bomb which is ticking. with the every passin m oment it alarming to the everybody that repurcussion of this blast would not be good for anybody. TECHNOLOGICAL: if we say that everyting in society is going to become successful with the help of technology innovation then it would not be wrong. those who will adopt the be tter technology will exceed from their competitors and those who would not adapt theirselves with the technology will fall behind. same is the true with the ban king sector. in order to succeed banks must provide the best services with the l owest possible cost and this is possible through technology. in future future wi ll demand newly innovative products, better ways of satisfaying customers with t he keeping abreast with the new technology. among the possible technologies woul d be the following ones:

Fiber Broadband: A Foundation for Social and Economic Growth: Sustainable, long-term growth in the European Union (EU) is vital to the overall health of the world economy. For a developed region such as the European Union, a significant proportion of growth is likely to come from knowledge-based indus tries, underpinned by information and communication technologies (ICTs). Indeed, the European Commission's Europe 2020 vision describes such a future for the regi on in the Digital Agenda.1 The foundation for digital prosperity is fiber broadb and Internet access, often referred to as superfast broadband. In describing the economic benefits of Internet adoption, a report for the McKinsey Global Instit ute says: [broadband] infrastructure, the backbone of the entire Internet ecosyst em, is an irreplaceable prerequisite. It creates the platforms upon which users, and organizations experience the Internet, and upon which entrepreneurs and bus inesses innovate.2 Indeed, superfast broadband access has the potential to transf orm local economies, businesses, households, and public services. It will help i mprove the performance of existing firms, enable new businesses to emerge, and e ncourage flexible working patterns. Superfast broadband is key to opening global markets to regions previously denied access, providing new job opportunities, a nd boosting productivity. Statistical evidence of the positive economic impact o f broadband infrastructure has existed for some years. According to the Broadban d Commission, a joint body of the United Nations Educational, Scientific and Cul tural Organization (UNESCO) and the International Telecommunication Union (ITU), every 10 percent increase in broadband penetration results in additional growth of 1.3 percent in national gross domestic product (GDP).3 Similarly, in a 2011 study across 33 countries in the Organisation for Economic Co-operation and Deve lopment (OECD) by Chalmers University of Technology, consultancy Arthur D. Littl e and ICT vendor Ericsson found that doubling the broadband speed for an economy increases GDP by 0.3 percent.4 Investment in fiber broadband also has the potential to deliver social goods, fo r example by improving public service levels in areas such as health, education, e-government, and democratic participation at lower cost than would be availabl e offline. Evidence for social goods is anecdotal rather than statistical. The i dea that broadband infrastructure can drive economic development has been champi oned for some time. Indeed, broadband infrastructure, coupled with a functioning and fair market for access and services, is central to Europe 2020 and the Digi tal Agenda for Europe;6 it underlies similar strategies adopted by OECD governme nts, including the UK government; and is espoused on a global scale by the Broad band Commission. In 2010, the Guldborgsund Municipality in Denmark opened what is arguably the fi rst video-linked citizen services center in Europe.The center enables citizens i n the remote region to receive one-on-one advice from government officials at a much lower cost than a staffed center could provide. Without this cost savings, the center would have had to close, depriving the citizen of this service. Other Danish municipalities are looking to adopt the concept. On a more humble scale, the cost to the United Kingdom's Driver Vehicle Licensing Agency of issuing vehic le excise licenses has been cut by 45 percent since the process was transferred online, saving around 8 million a year. The new system was used by 18 million peo ple in 2008. Fiber broadband makes such systems intuitive and fluid to use. 3G technology: it is thought that by 2014 pakistan will have 3G technology. govt is going to au ction this technology contarct by the end of 2013. if it happens then mobile use rs would be able to make video calls from their smaartphones, live streaming, an d great internet speed. now the question arises what would be impact of all these on banking sector. one may think that mobile technology,in present, have enabled banks to serve unders erved population. to some extent it is true because more than 30000 retail outle

ts have been opened in the country more than double the branches of banks espe cially in areas where banks did not even consider to open their branches. and wh en advance technology will surface then more oppurtunities for the banks will al so arise to tap the whole population. in the end it can be concluded with the following note: As banks across the country put an increased focus on digital channels and sales outside branches, there is a greater need for closer exploration of the potenti al future role of the branch within the banking ecosystem. With margins squeezin g incessantly, it is imperative that banks come up with ways that can reduce the cost of this channel. While technology is set to be major enabler in transformi ng retail banking to re ect the changing economic environment of the country, loca l players also need to think outside the box in terms of their branch formats. U ltimately, it is essential that banks nd ways to manage successful delivery chann el integration and nd the optimal mix of leveraging technology to enhance the bra nch experience for both the Y generation and those who prefer things the old way . Moreover, while the case of branchless banking remains strong, real nancial inc lusion- which has been a buzz word this year- in a changing nancial landscape lik e Pakistan's cannot be obtained thorough mobile banking alone. Here it is importan t to re-iterate that the unbanked segment of Pakistani society remains unbanked for a reason; namely their inability to understand and conquer the seemingly imp enetrable maze of complex rules that govern the banking system. And all the talk of technology-enabled agility in the world is not going to make the `banking expe rience' easier for them. If anything, the complex morass of automated interaction that most deem our future is very likely to put them off for good. Therefore, fo r a developing market like Pakistan where the largest segment of the unbanked is concentrated within the technology illiterate rural areas; real and sustainable nancial inclusion can only come trough nding the right mix of alternative channel s combined with the more traditional forms of banking. Other possible Technologies: in future we might come across with the technologies such as the following: Electronic currency. Sophisticated Virtual branches with the interaction of robots providing service s to its customers. ETHICS: a society has two ways to enforce ethics i-e formal and non formal. former deals with the laws and regulation and the latter deals with the religion, norms, val ues etc. in future there would be a probable rising trend to enforce ethics towa rds formal ways as ,except religion to some extent, other non formal methods are loosin their grip on society in general and banking sector in particular. you c an estimate the seriousness of the situation by the following article written by former governor of SBP on "when banks ignore public duty, the cost of failed ma ndates". Regulators and national nancial authorities have to ensure that banks create thei r earnings by generating activity in the real economy. This challenge today is o f course most severe in US, UK and the Eurozone but it applies equally to develo ping countries, and to Pakistan. The public mandate for banks is to manage natio nal mechanisms for payments, and to increase national savings, and transform the m into investment for productive national enterprise. In the EMs, the intermedia tion role of the banking system is the central agent for economic development. G overnments back their banking systems with their own (Sovereign) credit as neede d, via Central banks and the national treasury. The general public's reliance on g overnment support allows banks to operate with very high leverage: every $100 on their balance sheet is supported by just $8 of their own shareholder funds (cap ital), against $92 of public funds (deposits). The counterpart of this public `tru st' is the implicit commitment of the banks to foster economic development, while preserving their capital through conservative risk management. But banks can fai l this trust. The public service objective can be compromised by private, purely nancial, pro t-maximising activity. Periodically, such `speculative' risk exposure can

- and does stretch too far, and losses force banks to fall back on Government fo r life-support. The speed with which crises spread across the banking system mak es `market' self- correction, or any kind of private, `market' solution, completely unvi able. If nancial crises and ensuing losses erupt from the drive for `excess' pro ts for banks shareholders, then Government is effectively complicit in allowing the pr ivatization of banking pro ts, while losses are passed on to taxpayers. That nancia l capitalism is prone to excess, and that banks can become the `Achilles heel' of ca pitalism, was known well before the onset of the current nancial crisis and illus trated starkly by the Great Depression. FDR`s reforms put a series of restrictions on what banks could do, focusing their remit to savings and loans. But the post Reagan market liberalization set aside a number of those restrictions. Banks di versi ed into much higher risk investment banking activities, became the darlings of equity market players, with pro t, dividends, and share prices soaring. Pro t-max imisation to create shareholder wealth seemed to have become an acceptable goal for the banking system whereas the implicit social contract would have required that banks be managed rather like public utilities i.e. aim for moderate return on capital through long-term, and stable, income growth, generated from producti ve lending. The counterargument of banks would have been that the high pro t expec tations of investors would have to be met. If they were not, banks' share price wo uld languish, and their cost of capital would rise, which would hamper their cap acity to grow. Therefore high-return, albeit higher risk, business lines needed to be pursued, alongside normal business. The 2007 nancial meltdown was the resul t. The US, UK and EU face huge, perhaps generational, costs, from the present na ncial crisis. While the current crisis may illustrate a multi-origin, `perfect sto rm', there is recurring international history of banks' regularly pushing the chase for higher yields to an unsustainable limit. The chain of such instance stretche s forward from the `70s accumulating momentum over time. The Latin American debt c risis, the S&L crisis, the extended Japanese crisis (banks led up the asset pric e in ation); the Tequila (Mexican) crisis; the Nasdaq crash; the Asian crisis; round s of crises in Argentina, Russia and Turkey; etc. Banks had to be supported by g overnments, or monetary and scal concessions had to be given to ease pressure on banks all of which had public costs. Looking forward: the reforms being undertak en aim to restrict the use of public deposits to mainstream banking activity i.e . savings products and balance sheet loans. Investment banking activity will no t be funded by customer deposits. Derivatives are not to be used for speculative positions. And so on If these reforms work, banks will indeed begin to look more like utilities, as mentioned earlier. But the reality is that power of banks ov er credit creation, including credit to Government itself, gives them immense ca pacity to negotiate greater freedom out of regulators. First, the sustainability of economic recovery in the US and Europe will depend critically on credit expansion by banks, to compensate for low private demand. S econdly, globalization and free ow of international capital has made banks a much bigger part of national economies than formerly. In the US, over the 50 years t o 2008, the share of the manufacturing sector in total economy-wide pro ts, droppe d from 49 percent to 15 percent; while the pro ts of the nancial sector doubled, fr om 15 percent to 35 percent. The nancial economy became much more pro table than th e real economy simply because it uses high leverage, with all its attendant risk . But nance, today, still holds the power, even though it has cost the developed world 2-3 percent of GDP for four or ve years, plus direct costs that may end up in trillions of dollars. That is the cost of the failed mandate. The banking sys tem in the Emerging Markets (EMs) has avoided the high-risk strategy of banks in the US, UK and EU. So, have they better achieved the `public purpose'? As domestic markets usually lack the full-blown array of specialized nancial services of the developed world, EM governments expect commercial banks to play a transformation al role, with respect to key development priorities i.e. nancing infrastructure; agriculture, SME and less developed regions. In consequence, governments have ta ken extensive ownership of their banking systems, and taken the lead in mobilizi ng the development of specialized lending capacity, in the public sector. In the BRICs, for example, government ownership in the banking system in China is 90 p ercent; in India, 70 percent; and in both Brazil and Russia, about 45 percent. I

n addition, BRICs have a range of Government-owned specialized institutions for long-term project development. A study at the Max Planck Institute at Bonn (Sept 2010, Kroner and Schnabel) argues that, given suf cient political maturity, socia l and development objectives have been met more successfully when public ownersh ip has been signi cant, with a demonstrable spillover into higher growth (this stu dy, among others on the same theme, counters the extensively quoted cross-countr y study by LaPorta et al in 2002, that documented a negative correlation between public ownership and economic growth). Public intervention in nance absolutely d oes not preclude private ownership, even extensive private ownership, of nancial services. With the possible exception of China, the nancial sector in BRICs is co mpletely open to the private sector. Public-sector banks both compete with, and gain management and product expertise from, the leading private sector banks. Th e greater bias on development, as opposed to pro t-maximisation, aligns public/mix ed ownership to accepting longer term, and sometimes lower, returns. Private own ers of banks may not share the same objectives. Nevertheless, an important issue does arise here. All banks employ predominantly public money. Is it reasonable for any, then, to opt out of a solid commitment to development nancing? Should a schematic of compulsory, `directed' lending for national priority sectors be laid do wn for all banks (e.g., as in India); and if not, should some form of `sanction' ap ply, if banks wish to opt out of directed developmental lending, such as a high er tax rate? However, regulatory compulsion is undesirable: if banks will not pa rticipate voluntarily, then the government has to set up its own capacity to add ress development nance. The duty must not lapse through default. In Pakistan, we have a well capitalized, professionally managed banking sector, with predominantl y (80 percent) private sector ownership. But the nancial sector as a whole, in Pa kistan, has not made noticeable progress against its development mandate. There are new forms of nancial services that hold promise for increasing nancial inclusi on. Branchless banking, and alongside it, the spread of mobile banking, is makin g steady inroads into the formerly unbanked. Pakistan well emerge as a regional leader in this area. In the longer run, the effort may achieve fast incremental integration of informal markets, into the formal banking system. But our mainstr eam commercial banking has lacked dynamism. The banking system has been stagnati ng. After a rapid growth in credit and deposits post privatization (after '99), bo th have as a proportion of GDP - shrunk. Bank deposits are now 28 percent of GDP , versus 34 percent in 1999. Private sector credit, after reaching 30 percent of GDP in 2007, is down to 16 percent now the lowest level in decades. Both ratios are well below that in other EMs, and much weaker than in the region. For India , deposits to GDP are 57 percent, in Bangladesh 54 percent; and loans are about 50 percent of GDP in both countries. Secondary markets in Pakistan remain stunte d. Common Money Market instruments Commercial Paper, Acceptances have failed to develop, and the Bond market is small and stagnant. Mutual funds have made some progress, but overall at Rs300 billion, remain only about six percent of bank de posits (compared to the global average of 30 percent). With respect to the prior ity sectors of infrastructure, SME, agriculture and regional lending, commercial banking activity has in fact declined. Our development nance institutions were c losed down, and at present, Pakistan lacks dedicated institutions for infrastruc ture and specialized project nancing. With respect to other priority sectors, ban k lending to agriculture, has been stagnant, at only seven percent of GDP (while the sector amounts to 23 percent of GDP), while the SME sector now draws only s ix percent of total credit, down from 17 percent some years ago. With respect to regional nance overall excluding Sindh and Punjab, the rest of Pakistan has abou t Rs700 billion in deposits, but loans to the regions are under Rs100 billion. B anks use the regions as sources of funds for their lending operations, mainly in Central Punjab and Karachi. While withdrawing from general development lending, banks have built up huge exp osure to the public sector to slightly over 50 percent of their credit books, fr om 32 percent in 2008. Most of this nancing supports government's power and PSE los ses, or commodity purchases a totally unproductive use of national savings, whic h does not increase the size of the economic cake. In holding government securit ies, the leading banks had been able to earn 2-3 percent more than the rate they

pay their depositors for similar maturities. Obviously, there is a big market a nomaly at work here: Governments should normally raise money at the lowest price in the market. But as heavily dominant buyers of Government paper, taking an 80 percent share, the banks use their buying power to turn Government into a `pricetaker'. It need not be so. A dynamic mutual funds market would have competed with banks for buying Government paper, with several virtuous economic effects compet ition for its paper would have reduced the Government's borrowing costs; with comp etition from the funds, banks would have to raise rates paid on deposits; and de clining holdings of Government paper would have forced banks to increase lending to the private sector. Without a banking sector that has the diversi cation to se rvice all parts of the economy, we will postpone the revival of national growth. And the public mandate of the banking sector will remain unful lled - albeit that banks will remain pro table, through their lending to Government. But not for lon g if national growth stays muted, government de cits are likely to increase. With domestic debt servicing already taking up half of national tax revenues and grow ing faster than tax revenues debt serviceability will impose extremely challengi ng burdens, even in the near future. What can be done is well known. It is tires ome to repeat initiatives that have seen stalled starts, over time, in the SBP, and at the Ministry of Finance. We need to set up project and infrastructure nanc ing capacity, and mortgage and agricultural lending, in specialized entities, mo st likely in PPP modes; build a proper Government debt market, so corporate bond markets can develop, on the back of it; we need to reengage with the SMEs, via vitalized institutional capacity, using venture capital and perhaps an alternate stock market for small companies listing; etc. If the private sector will not t ake the lead in developing appropriate initiatives, then let the leadership come from public-private initiatives just as long as the institutions are independen t of ministries, and have independent, and largely private-sector boards that ov ersee governance and that appoint CEOs. Our still maturing political institution s, and an underdeveloped nancial framework, will not qualify us for a Governmentled nancial sector as required in the Max Planck Institute study mentioned earlie r. Looking out a few years, Pakistan can achieve sustainable levels of GDP growt h rates of 6-8 percent, if it has been able to develop its infrastructure; its p ower capacity; its mining resources; its agricultural productivity; and develope d a new generation of businessmen from its SME sector. Major EMs pave the way fo r growth through technically strong and diversi ed nancial institutions nurturing t he priority sectors mentioned. We need to do the same. in future to succeed banking sector must ensure its following of ethical values oterwise the society is also loosing its grips on ethics which in result would b e catastrophic for banks as well as society. LEGAL: At present, non-performing loans stand around 16 percent, which is too high. Wh at is more, this proportion is still on the rise. It is particularly disconcerti ng that 37 percent of these NPLs are originating from the consumer lending portf olios of banks. But there are multiple factors contributing to the rising trend of NPLs, particularly wilful defaults. Firstly, the banking courts are severely understaffed. The PBA invested in educating the judges regarding banking procedu res, regulations and laws but about half of all positions for judges in the bank ing courts are still vacant. Due to such constraints, there is a lot of backlog in banking court cases. Secondly, it is absolutely necessary that laws such as CRA and the relevant NAB Ordinance are implemented. There should be no leniency in cases of wilful defaul t because those who operate with impunity from the law cause the most damage to the country's banking sector and also force banks to be shy of honest borrowers an d those with genuine problems who deserve a lifeline. so legal laws are not present at all somewhere if present then issue of reinforc ement arises.