Role of Financial Institutions in Pakistan Role of financial institutions in development of rural areas of Pakistan In Pakistan, the poor usually

acquire loans from informal sources. According to NHDR/PIDE Survey 2001, friends and relatives are the major sources of loan followed by shopkeepers and landlords. Thus, there remains a great need and potential for growth of microfinance sector in Pakistan. Some initiatives have already been taken by the non-profit organizations to provide small loans to the poor to enable them to start small businesses. The Pakistan Poverty Alleviation Fund (PPAF) was also established to provide credit and loan to partner organizations or NGOs for further lending to the poor individually or in groups. In Pakistan, microfinance is gaining importance as an effective tool of social mobilization and poverty alleviation. Currently in Pakistan, a variety of institutions ranging from NGOs to private and government sponsored rural support programs are delivering microfinance services to the poor. Two Commercial banks i.e. First Women Bank and Bank of Khyber are also providing lines of credit for the microfinance sector. Rural Support Programs (RSPs) Rural Support Programs aim to modify the entire economic system in a way that the poverty alleviation becomes the focus of all development activities. Some of them are written below:

Aga Khan Rural Support Program Sarhad Rural Support Program (SRSP) National Rural Support Program (NRSP) Punjab Rural Support Program (PRSP)

Microfinance Institutions (MFIs) Presently two specialized MFIs i.e. First Microfinance Bank Limited (FMFBL) and Khushali Bank (KB) are operating in the country. As awareness about the MFIs framework grows, microfinance banks are likely to be established in the foreseeable future. In this regard, licenses have already been issued to Network Microfinance Bank Ltd and Rozgar Bank by State Bank of Pakistan, which are expected to start their operations in the near future. Rural Finance Sector Development Program ADB approved a loan assistance package of $250 million to the Government of Pakistan in December 2002 for the Rural Finance Sector Development Program. The Program has been designed to assist the Government in accelerating rural economic growth by addressing key constraints in rural finance to attain self-reliance in agricultural commodities, ensure food security and generate more employment opportunities.

CONTRIBUTION OF SOURCES OF AGRICULTURAL CREDIT All the less developing countries are facing capital shortage problem. In Pakistan, our farmers condition is also very poor and he is unable to use the modern technology. So credit is playing important role for the development of rural areas. Sources of Rural Credit Following are the main sources of agricultural credit: Village Shopkeeper and Middleman In our villages shopkeepers commission agents in the market provide loan to our farmers. They charge very high rate of interest. There terms and conditions are also much tied. Landlords In Pakistan there is a landlord system the tenants borrow the money from the lords and they receive heavy charges. They also misuse them during the selection of the Assembly members. So many problems take place in the way of democracy. Friends Relatives Friends and relatives also provide loan in the rainy days. It has been estimated that 25% of the total demand of the farmer is met by these above three sources. Tactical Loans These were provided by the government to purchase machinery, cattle's, seeds, rebuilding of houses destroyed by the floods. These were issued by the revenue department. These are playable within one to 8 years. But in fact the practice of these loans has been finished. Commercial Banks In the early years, independent commercial banks ignored the agriculture sector. But after nationalization now proper attention is paid to the agriculture. Now the 45% of the total rural credit is issued by the commercial banks. Even commercial banks are providing interest free loans to the small farmers for the improvement of agricultural output. State Bank The state bank does not directly finance the agriculture. It provides loan at concessional rates for this sector to the cooperative banks and ADBP (Agricultural development bank of Pakistan). National Bank Role In 1972 national bank of Pakistan started first time a surprised credit scheme for the farmers and later it was adopted by all the commercial banks. Now various other schemes have been introduced for the farmers.

National Credit Consultative Council The government of Pakistan established the national credit consultative council in 1972 to review the overall credit in the economy. It makes recommendations to the government with regard to the credit expansion among various sections. Agricultural Credit Advisory Committee It was also set up 1972 its objective was to watch the credit provided to this sector. It had also improved the credit availability for the agriculture sector. Cooperative Banks It is the oldest source of agriculture credit. The loan is supplied to the framers through the credit societies. This source provided 15% of the total rural credit which is issued in Pakistan. Agricultural Development Bank of Pakistan The ADBP provides short term, medium term and long term loans to the agriculture sector. Loans are granted in cash and in kind. It provides loan for the purchase of inputs, machinery, and for cottage industry in the rural areas. It is specialized institution for the rural credit. Role of financial institutions in the development of economic condition Financial institutions play an extremely important role in economic development such as:

Financing developmental projects as well as small ventures Development of industrial and agricultural sectors Credit Availability Transference of money Overcome the problem of unemployment Encouragement to young entrepreneurs

Banking system and the Financial Institutions play very significant role in the economy. First and foremost is in the form of catering to the need of credit for all the sections of society. Financing developmental projects as well as small ventures The modern economies in the world have developed primarily by making best use of the credit availability in their systems. An efficient banking system must cater to the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors. At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units.

Development of industrial and agricultural sectors This lies in the category of banks that looks after the credit and banking needs of the people living in the rural areas, particularly the farmers. Regional Rural Banks (RRBs) have been sponsored by many commercial banks in several States. These banks, along with the cooperative banks, take care of the farmer-specific needs of credit and other banking facilities. Credit Availability The success of any financial system can be fathomed by finding out the availability of reliable and adequate credit for infrastructure projects. Transference of Money The banks and the financial institutions also cater to another important need of the society i.e. mopping up small savings at reasonable rates with several options. The common man has the option to park his savings under a few alternatives, including the small savings schemes introduced by the government from time to time and in bank deposits in the form of savings accounts, recurring deposits and time deposits. Another option is to invest in the stocks or mutual funds. Therefore whether as saving, deposit or other investments the financial institutions serve as means of transference of money. Overcome the problem of unemployment The financial institutions especially the banks have the capability of overcoming the issue of unemployment by means of offering respective employment opportunities at their end. These employment opportunities may be in the form of either the jobs offered within these financial institutions or jobs created by means of investments in other sectors. Encouragement to young entrepreneurs The financial institutions can be taken as a way of encouraging the new young entrepreneurs. This is because for these entrepreneurs, the only way of obtaining capital is the financial institutions mainly the banks. Therefore the more suitable the terms and conditions of the banks or other financial institutions, the more encouraged the entrepreneurs may be and the higher the growth opportunities in the economy due to new investments. Current status of financial development institutions in Pakistan Nowadays banks and financial institutions are working to increase credit money in the country and to make more use of banking sector so that they can earn well. Their main emphasis is to

expand credit money in the country. The current status of the financial development institutions in Pakistan is as follows: Most of the financial assets and deposits are owned by nationalized commercial banks (NCBs) which suffer from a highly bureaucratic approach, overstaffing, unprofitable branches and poor customer service. NCBs along with specialized banks such as ADBP, IDBP and Development financial institutions such as NDFC have a high ratio of non-performing loans. Banking industry faces a high tax rate which affects its profitability and attractiveness for new entrants. There is a proliferation of banks and some of them are undercapitalized, poorly managed with a scanty distribution network. Agriculture, small and medium enterprises, Housing sectors are underserved and have limited access to credit. Banks have typically focused on trade and corporate financing with a narrow range of products and have not diversified into consumer and mortgage financing for which there is an ample unsatisfied demand. Financial sector in Pakistan has gone through a number of changes during last two decades. These include, Liberalization of bank opening policy which resulted with the reemergence of private banking sector in the economy, Strengthening the role of controlling authorities such as the State Bank of Pakistan and the Security and Exchange Commission of Pakistan. Financial sector reforms changed the ownership structure of the banking sector during the two decade. Earlier banking sector was dominated by the state owned banks. Now share of public sector banks has declined. There are only four purely state owned banks are operating in Pakistan. Efficiency of all public sector commercial banks such as ABPL, MCB, UBL and HBL that are privatized during the reform process has been improved. There is overall improvement in the efficiency of commercial banks. It means financial sector reforms improve the efficiency of the banks. Financial sector reforms are successful in improving the efficiency of the domestic commercial banks as an intermediary in Pakistan.