The Development Financial Institutions (DFIs) were created in Asian and other developing

countries mostly after 1945 being the post- world war era. The DFIs in the Asian countries had
greatly been supported by the International Agencies such as the World Bank and the Asian
Development Bank who not only extended Lines of Credit but also helped in the development of
institutional framework and criteria for viable project appraisal.

DFIs are different from commercial Banks by definition and scope of operations, the former
assume the role of stimulating the development with emphasis on industrialisation and growth of
the economy or social objectives. Most of the industries, small, medium, and large, in developing
countries were financed by DFIs.

Historically DFIs in Pakistan have common features; most of them were started with seed money
from the Government of Pakistan and support from the International Financial institutions. State
Bank of Pakistan has also played a pioneering role to structure these financial institutions and
was in the past responsible for providing Rupee lines of Credit. Some of the DFIs established in
the country are listed below:

1. Industrial Development Bank of Pakistan: it was set up in 1961. It was an important source
which supplied the funds for development. It provided medium term and long term credit
facilities. The loans were granted for the establishment of new Industrial units and for the
replacement needs of the old units. The major objective of this bank was to spread the benefit of
industrialisation in all the classes of the people. It issued the loans on behalf of the government
and provided finance in the form of equity. It also encouraged the establishment of industries in
the less developed areas of the country. It paid due regard to the export oriented industries and
those industries which were based on domestic raw materials. It was also acting as a monitoring
agency of World Bank and Asian development for small scale industrial units.

2. Pakistan Industrial Credit and Investment Corporation (PICIC): The Pakistan Industrial
Credit and Investment Corporation were established in 1957 with the help of Government of
Pakistan and World Bank. The private domestic investors held 65% shares and the remaining
35% was taken by foreign investors from Japan, UK, West Germany and France. PICIC was
financing large projects.

3. National Development Finance Corporation (NDFC): Its main objective was to promote
the industrial expansion and economic growth in the country. It provided technical and financial
assistance to the new and old projects. Railway, Airlines, Shipping, Ports, Steel Mills and textile
were financed by the NDFC.

4. Investment Corporation of Pakistan: It was set up in 1966. Its major objective was to
develop the capital market in the country. The Corporation had floated 25 Mutual Funds and a
State Enterprise Mutual Fund with a view to offer opportunities of pooled investment to
investors. The Corporation's market transactions for its own portfolio, investors' portfolio and
Mutual Funds' portfolios contributed towards strengthening activity on the stock markets.

5. National Investment Trust (NIT): The NIT was set up in 1963 as a Trust. It has acted as an
open end mutual fund it was established to mobilise the savings to invest in stock exchanges.

6. Equity Participation Fund (EPF): It was established in 1970. Its major objective was to
improve the growth of small and medium size industry in the private sector. It had given priority
to the less developed area.

7. Banker's Equity Limited: It started functioning in 1980. Its objective was to improve the
private sector investment and capital market.

8. Small Business Finance Corporation: It was set up in 1972. Its main aim was to provide
financial aid to the small business to increase the rate of production and employment in the
country to those people who had some technical know-how but they were financially poor.

9. House Building Finance corporation The House Building Finance Corporation (now known
as House Building Finance Company Limited) was established in 1952 to promote mortgage
finance in the country.

10. Pakistan Industrial Development Corporation of Pakistan (PIDC) This was established
in 1950 with the sole objective to promote industrialisation of the country .It was created to
establish various industries and then resale these to the private sector.

11. Agricultural Development Bank of Pakistan (Zarai Tarqiati Bank): The Zarai Taraqiati
Bank Limited (ZTBL) (formerly known as Agricultural Development Bank of Pakistan) is the
largest public sector financial development institution. This was established in 1952.

These DFIs were major channels for routing development funds to the private manufacturing
sector and achieving the desired socio-economic objectives, such as encouraging new
entrepreneurs, promoting industries in less developed areas and wider diffusion of industrial
ownership.

The DFIs were also assisting the Government in screening new development projects, framing
economic development plans or policies, rehabilitating sick or problem projects, administering or
supervising special loans provided by the government or foreign institutions and participating in
the promotion of other DFIs for achieving related socio-economic objectives.

Besides promoting establishment of import-substitution industries, the DFIs encouraged capital
formation by directly investing or underwriting shares and debentures issued by the local
companies. They also assisted Pakistani entrepreneurs in obtaining suitable foreign investment,
attracting foreign investors in formation of joint ventures with local partners and assisting in
obtaining technical / managerial advice for businesses and industries.

Many industries were made operational, enormous jobs were created both in the operational and
service sectors and the country was on the road to economic and social progress. However many
DFIs ran into problems stemming basically from poor management and excessive loans without
proper due diligence. Unlike the cases of certain commercial banks, neither there were efforts to
inject fresh equity or soft loans into problem DFIs, nor there was a serious attempt to restructure
them. The problem DFIs, were merged into other DFIs/commercial banks or were liquidated.

Pakistan, still a low income, developing country, badly needs the services and facilities offered
by the DFIs for achieving socio-economic objectives and well-being of the people, particularly in
the underdeveloped areas.

In India, IDBI and ICICI were two premier DFIs at a time when we in Pakistan had DFIs like
PICIC and NDFC. Unlike Pakistan, the role of these two institutions has been substantially
enlarged over the period. In order to further enforce their role, to supplement their low cost
funding sources and enhance their profitability they were granted licenses for commercial
banking business.

Both the institutions were restructured to keep them in line with changing market conditions.
IDBI Bank and ICICI Bank are profitably financing infrastructure and other development
projects in India whereas we have allowed PICIC and NDFC to whither away.

The financial sector in Pakistan comprises of Commercial Banks, Development Finance
Institutions (DFIs), Microfinance Banks (MFBs), Non-banking Finance Companies (NBFCs)
(leasing companies, Investment Banks, Discount Houses, Housing Finance Companies, Venture
Capital Companies, Mutual Funds), Modarabas, Stock Exchange and Insurance Companies.
Under the prevalent legislative structure the supervisory responsibilities in case of Banks,
Development Finance Institutions (DFIs), and Microfinance Banks (MFBs) falls within legal
ambit of State Bank of Pakistan while the rest of the financial institutions are monitored by other
authorities such as Securities and Exchange Commission and Controller of Insurance. Under the
Banking Companies Ordinance, 1962 the State Bank of Pakistan is fully authorised to regulate
and supervise banks and development finance institutions. During the year 1997 some major
amendments were made in the banking laws, which gave autonomy to the State Bank in the area
of banking supervision. Under Section 40(A) of the said Ordinance it is the responsibility of
State Bank to systematically monitor the performance of every banking company to ensure its
compliance with the statutory criteria, and banking rules & regulations. In every case in which
the management of a bank is failing to discharge its responsibility in accordance with the
applicable statutory criteria or banking rules & regulations or is failing to protect the interests of
the depositors or for advancing loans and finance without due regard for the best interests of the
bank or for reasons other than merit, the State Bank is empowered to take necessary remedial
steps.

Currently following DFis are being regulated by State Bank of Pakistan:

-- Pak Brunei Investment Company Limited

-- Pak China Investment Company Limited

-- Pak Iran (PAIR) Investment Company Limited

-- Pakistan Kuwait Investment Company Limited

-- Pal Libya Holding Company Limited

-- Pak Oman Investment Company Limited

-- Saudi Pak Industrial and Investment Company Limited

The above 7 Development Finance Institutions (DFIs) operating in Pakistan18 are all joint
ventures between the Government of Pakistan with Governments of Saudi Arabia, Iran, Brunei,
Kuwait, Libya, China and Oman. Both Pak-China Investment Company and Pak-Iran Investment
Company are relatively newer DFIs, having started their operations as recently as 2008. These
DFIs operate under the broad objective of facilitating investment in the country and improving
bi-lateral relations.

Key financial indicators of DFIs are presented in the table given below. In 2009, despite the slow
economic activities in the country, aggregate assets of DFIs grew by 33.7 percent to Rs 113.8
billion, as against negative growths in the previous two years. This growth was largely broad
based where almost all DFIs showed significant improvement in their assets (average growth 45
percent) in 2009.

The current strategic development plan of the banking sector adopted by SBP focus on
development finance.

In Pakistan the level of financial exclusion from the formal sector is dramatic, especially in rural
areas. The formal sector mainly means different types of banks (and other types of financial
institutions). Only 15% (25 million) of the population of 160 million has bank accounts and less
than 4% (5.5 million) are borrowers; only one quarter of households has a member with a bank
account. Moreover, while two- thirds of the population resides in rural areas, only 25% of total
bank depositors and 17% of total borrowers reside in rural areas; in value terms the shares of
rural customers are even smaller, only 10% and 7% of the total value of deposits and advances,
respectively. Limited access to services is also evidenced by the low level of branch penetration
in rural areas, where there are less than 2,500 branches for a population of 105 million people-or
an average of 42,000 inhabitants per branch. This has held back the growth of savings and access
to credit. There is an enormous pool of companies to be included in the formal financial sector.

To address these issues, SBP has established a Development Finance Group, which has
developed a comprehensive Financial Inclusion Program (FIP) aimed at promoting access to
development finance for all small and underserved companies and market segments. The FIP is
supported by UK DFID and other foreign donor agencies.

Elements of the Financial Inclusion Program (FIP)

In Microfinance, SBP and Pakistan Microfinance Network (PFM) has developed a multi-faceted
microfinance strategy to triple the number of microfinance (MF) beneficiaries from 1 million to
10 million by 2015. To support this program, SBP has encouraged commercialisation of the
microfinance industry so that it becomes financially and socially sustainable.

(i) A more flexible prudential regulatory regime for microfinance banks (MFBs) to allow
innovation and organic growth without abandoning prudential objectives.

(ii)Encouragement of MFBs to improve their earnings quality and asset portfolios through
improved risk management structures and practices, credit analysis and end-use monitoring.

(iii) Encouragement of MFIs to develop commercially viable and financially sustainable
operations, which will allow them to transform into MFBs to provide holistic services, such as
savings, credit and fund transfers.

(iv) Encouragement of partnerships between commercial banks and MF providers to help banks
enter into microfinance.

(v) Encouragement of a partnership between the post office (PO) network and MF providers. Pos
already manage over 4 million savings accounts, mainly small accounts below Rs 10,000,
through more than 12,000 branches.

(vi) Encouragement of mobile phone-based banking services which is a cost effective way of
bringing financial services even to the most remote areas of the country.

(vii) Banks, including MFBs, are encouraged to take advantage of SBP's recently introduced

Branchless Banking Regulations for enhancing the provision of financial services through
alternative delivery channels.

(viii) Development of domestic and international MFI partnerships.

(ix) Financial literacy and customer awareness programs.

In Islamic banking, SBP has been promoting Islamic Banks (IBs) to provide formal financial
services to the population that thus far has excluded itself for faith reasons. A separate Islamic
Finance Strategy paper has been developed which projects, based on the growth rate of IBs that
Islamic finance will grow to constitute almost 12% of the banking system within five years.

To encourage sound growth of IBs, SBP has laid out a separate prudential regulatory and
Supervisory framework that conforms to the framework of the Islamic Financial Service Board
(IFSB) 4 - in the development of which Pakistan has played a key role. To ensure proper due
diligence in the development of Islamic Finance (IF), SBP has constituted a Shariah Advisory
Board, which approves broad policy, the regulatory framework and new Islamic financial
products. SBP is working to develop a proper liquidity management framework and new
instruments to allow the IBs to grow and compete with conventional banks in a prudent and
sound manner. The establishment of Islamic MFBs has also been encouraged.

In SME financing, SBP plans to promote such financing through supportive mechanisms,
Conforming to best international practices. The SME sector faces a host of both demand and
supply side constraints that impede credit delivery. On the demand side, lack of planning and
entrepreneurial skills and various problems with the SME policy framework remain major
hindrances, while on the supply side banks perceive financing these entities as high risk in the
absence of credit history and collateral. This notwithstanding, the growth in SME credit has been
significant.

In addition, banks are being encouraged to facilitate program-based SME lending (in which
Banks establish the general criteria for meeting the specific financing requirements of
businesses) and lending based on cash flow rather than collateral.

Agriculture lending has received a significant boost with the banking system . Outstanding
agriculture advances account for only 6% of total advances and the current flow of credit meets
only 45% of the sector's credit requirements. SBP's strategy for agriculture credit seeks to double
the number of borrowers from 2 million to 4 million and to meet 75-80% of the agriculture credit
requirements within 3 to 5 years. SBP has encouraged a revolving three-year credit scheme
under which farmers can borrow for one year and continue to borrow without providing
documentation each year.

Banking in rural areas will be promoted by new innovative approaches to branching. Existing
SBP rules encourage banks to establish new branches in rural areas. As competition for deposits
grows and different types of rural lending are found to be profitable, it is expected that banks will
find their rural operations to be increasingly attractive.

SBP projects financial penetration ratios to be raised through an enabling policy environment
and the various outreach programs described above from a national coverage of 19,000 persons
per bank branch in 2007 to 15,000 in 2012 and 12,000 in 2017. The coverage of ATM outlets is
projected to increase from 57,000 persons per ATM in 2007 to 12,000 in 2017.


==================================
Key
Perf ormance Indicators of DFIs
==================================
Percent
==================================
CY06 CY07 CY08 CY0
==================================
Total
Capital RWA Ratio 17.2 32.9
54.7
Tier I Capital to RWA 15.1 30.4
57.3 54.7
Equity to Liability Ratio. 50.5 51.8
119.1 91.4
Equity to Assets ratio 34.6 35.2
54.4 47.8
NPLs to Loans (Gross) 49.4 1
20.9 21.5
Net NPLs to Net Loans 18.5 8
7.5 6.1
Provisions to NPLs 62.5 43.1
64 76.2
Earning Assets to Total Assets 86.8
91.8 92.4
Expense to total income 45.9 68
89.5 87.1
ROA (af ter tax) 5.5 2.6
1.3 0.9
ROE(af ter tax) 16 7.5
2.6 1.9
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Copyright Business Recorder, 2011