Financial Services Reform in Pakistan: Structures, Prospects, and Recommendations in the Context of the WTO Agreement

Abstract

(Pakistan’s financial services sector has undergone over two decades of radical reforms and liberalization supported by diverse international financial institutions. The result is a sophisticated regulatory framework comprising a modern suite of legal instruments and well-resourced institutions for rulemaking and supervision. Remarkably, the new instruments seek to address both modern Western and Islamic concerns, thus expanding the reach not only of the framework but also of the sector itself to those wishing to closely honour religious requirements.

One of the key elements of reform over the past twenty-five years has been the opening of the Pakistani financial services sector to foreign services providers. Pakistan encourages eligible foreign banks and banking services to enter the Pakistani market; there is no indication that the Ministry of Commerce or the SECP have, formally or otherwise, limited the access of insurance or other financial services providers to Pakistan.

Financial services trade is about the integration of the domestic economy into the global marketplace. With new modes of financial services delivery, many distinctions between domestic service provision and financial services trade are breaking down, making the modernization of the financial services trade framework both timely and essential.

Pakistan’s WTO Schedule of Specific Commitments (SoC) reflected a set of circumstances that no longer represent what appears to be a vibrant private sector-driven financial services sector in today’s Pakistan. In the light of the complex, ambitious, and wide-ranging reforms already undertaken in Pakistan, this might well be an opportune moment for Pakistan to crystallize the momentum through additional commitments.

Recommendation One: inscribe the full range of financial services and service providers in the SoC.

Recommendation two: reduce “unbound” commitments to those necessary for protective reasons.

Recommendation three: ensure that any terms and limitations are narrowly constructed to reflect real necessary derogations essential to achieve defined objectives.

Recommendation four: indicate a comprehensive review of the SoC in the course of Pakistan’s Trade Policy Review. – Author)

 

Introduction

The financial services sector is the backbone of a modern trading economy.¹

As multiple crises in the past quarter century have demonstrated, it is also the most sensitive conduit for the transmission of systemic shocks, both domestically and internationally. By some estimates, financial services comprise the most heavily regulated sector in most economies; at any rate, the sector is subject to complex and sophisticated regulation and ongoing supervision that at once protect it and its participants and render it difficult to navigate even by the most adept.

Financial services trade is about the integration of the domestic economy into the global marketplace. It enables banks to diversify their portfolios.² It helps domestic insurance companies gain added resilience by purchasing reinsurance from abroad. It allows domestic investors to hedge against wild movements in currency and the domestic economy. It helps the banking sector to reduce its risk exposure.³ It opens up new investment avenues for much needed infrastructure spending.⁴ It enhances the capacity of domestic industry to raise funds or credit.⁵

Liberalized financial services trade empowers domestic pension plans to benefit from external expert advice and management services. It helps ease international payments and transfers, for both consumers and trading enterprises; in this way, it also encourages tourism, education, health services, and other sectors of the economy that depend on international transactions and engagements. It could serve as a competitive catalyst for the flow of credit to underserved sectors, such as SMEs.⁶ By freeing up credit pressure elsewhere in the economy it could help ease housing finance,⁷ especially to lower income Pakistanis.⁸

Full integration with the global economy and enhancing competitive pressures could reduce both transaction costs and risks of settlement and fraud,⁹ and encourage more engagement by retailers and consumers alike in a cashless digital economy. With new modes of financial services delivery – as indeed recognized by the State Bank of Pakistan in its most recent communication on digital bank licensing¹⁰ – many of the distinctions between domestic service provision and financial services trade may well be breaking down, making the modernization of the financial services trade framework even more timely – and essential.

For Members of the WTO, trade in services, including in financial services, is governed by the General Agreement on Trade in Services (GATS). The GATS gives considerable latitude to Members in liberalizing trade in services.¹¹ And a Member may liberalize its services sector unilaterally, even if it has not made any commitments under the GATS.¹²

Making commitments serves three strategic objectives:

• In liberalized sectors, foreign actors will have a secure framework within which to make services offerings and investments in the domestic market.
• Domestic actors will have a concrete competitive framework within which to function.
• Political decision-makers will have an outside limit on future trade-restrictive measures, thus enhancing regulatory stability and reducing the public choice risks.

In this way, treaty-based engagements in the multilateral context of the WTO have the potential to limit the frequency – or, at least, the amplitude – of what the IMF has recently described in the context of Pakistan as “a long history of stop-and-go economic policies”¹³ and “lackluster progress in structural reforms.”¹⁴

This paper sets out Pakistan’s financial services commitments under the World Trade Organization, examines Pakistan’s financial services regulatory framework, and analyses reform options in the context of Pakistan’s existing and potential future international trade commitments.

 

PAKISTAN’S SERVICES COMMITMENTS UNDER THE WTO

The structure of the General Agreement on Trade in Services

The General Agreement on Trade in Services (GATS) comprises the set of rights and obligations under the WTO Agreement applicable to “measures by Members affecting trade in services.”¹⁵

The GATS defines trade in services as the supply of a service in four “modes.”¹⁶ As set out on the website of the WTO. These are:

“[Mode 1] Cross-border supply is defined to cover services flows from the territory of one member into the territory of another member (e.g. banking or architectural services transmitted via telecommunications or mail);

[Mode 2] Consumption abroad refers to situations where a service consumer (e.g. tourist or patient) moves into another member’s territory to obtain a service;

[Mode 3] Commercial presence implies that a service supplier of one member establishes a territorial presence, including through ownership or lease of premises, in another member’s territory to provide a service (e.g. domestic subsidiaries of foreign insurance companies or hotel chains); and

[Mode 4] Presence of natural persons consists of persons of one member entering the territory of another member to supply a service (e.g. accountants, doctors or teachers). The Annex on Movement of Natural Persons specifies, however, that members remain free to operate measures regarding citizenship, residence or access to the employment market on a permanent basis.”¹⁷

In broad terms, Members are subject to two sets of obligations.

Part II – General Obligations and Disciplines includes obligations concerning Most-Favoured-Nation treatment (Article II),¹⁸ transparency (Article III), monopolies and exclusive service providers (Article VII), and payments and transfers (Article XI).

Part III – Specific Commitments sets out market access and national treatment “commitments” – obligations and limitations – in respect of sectors inscribed by a Member in its Schedule of Commitments.

A services “commitment” under the GATS has four components:

1. Inscription by a Member in its Schedule of services sectors in respect of which it may make commitments;
2. Horizontal “terms, limitations and conditions” in respect of inscribed services;
3. Market access “terms, limitations and conditions” in respect of each of the four modes of supply for the inscribed service; and
4. National treatment “conditions and qualifications” in respect of each of the four modes of supply for the inscribed service.

Equally, in broad terms, in addition to the right of each Member to impose conditions on its market access commitments, the GATS sets out general and specific rights for Members. These range from “Domestic Regulation” (Article VI) and General Exceptions (for example, for public order, Article XIV) to sector-specific concerns such as prudential supervision in the financial services sector (Section 2, Annex on Financial Services). Measures that fall within the scope of these rights of a Member do not need to be listed as terms, conditions, or limitations in the Member’s SoC.

Pakistan’s Schedule of Commitments

Pakistan is an original Member of the WTO; its services commitments were made on 15 April 1994 and entered into force on 1 January 1995.¹⁹ Between 1995 and 1998, Pakistan submitted three supplements²⁰ to its SoC.

Horizontal “terms, conditions and limitations”

These are “commitments” that apply to all sectors included in Pakistan’s SoC. They are limited in number but potentially significant in impact.

Under mode 3, “commercial presence”:

Acquisition of real estate by non-Pakistani entities and/ or persons is subject to authorization on a case-by-case basis keeping into account the purpose and location of the undertaking.²¹

There are market limitations and commitments under both mode 3 and mode 4, “presence of natural persons”:

1. Commercial presence through incorporation with maximum foreign equity participation of 51% (subject to sectoral variation);
2. Expenses of “representative offices” to be paid by “remittances from abroad; and
3. Subject to specific limitations for “superior cadre”, commitment under movement of natural persons is “Unbound”.²²

Financial services

Pakistan’s initial financial services commitments under the GATS were slender in three distinct ways.

First, entire subsectors or services were not included. For example, Pakistan’s Insurance Ordinance 2000²³ makes a clear distinction between life²⁴ and non-life insurance.²⁵ However, in its SoC, under “Insurance”, only “life insurance” was inscribed.²⁶ Under “Banking”, there was no mention of settlement and clearing services, and derivatives, swaps, and “other financial assets, including bullion” were missing.

Second, most commitments were “Unbound”. The commitments indicated no limitations (“None”) in important areas: for example, for mode 2 (“Consumption abroad”) in respect of “Reinsurance services and retrocession” and “Services auxiliary to insurance”, and for mode 3 in respect of “Participation in issuance of securities”. At the same time, for these same services, mode 1 (“cross-border supply”) remained Unbound.

Third, there were only two significant specific limitations.

1. For life insurance companies, there may be up to 25% of foreign shareholding.
2. For banks, the following:

Subject to economic needs test, the Central Bank may grant licences to foreign banks to undertake permissible banking activities through establishment of locally incorporated subsidiaries with a maximum shareholding of the bank not exceeding 30 per cent of the total paid-up capital of the subsidiary. Prior permission of the Central Bank is required by any person for having beneficial ownership of shares of a banking company in excess of 4 per cent of paid-up capital of the banking company. [italics added]

After the entry into force of the WTO and with the advent of the first major set of reforms, Pakistan made additional commitments in its financial services sector in two supplements to its SoC issued in 1995 and 1998.

In the first supplement to its SoC, Pakistan provided additional precision for commercial presence of banks²⁷ and leasing companies, and in respect of foreign currency,²⁸ capital markets,²⁹ and asset management services.³⁰

In its third supplement, Pakistan inscribed non-life insurance³¹ and settlement and clearing services³² in its SoC, undertook additional commitments in respect of provision of data,³³ and set out specific limitations related to Islamic banking³⁴ and reciprocity.³⁵

 

THE REGULATION OF FINANCIAL SERVICES IN PAKISTAN

The Ministry of Finance is “in charge of overall financial sector policy.”³⁶ Two entities³⁷ are responsible for the regulation and prudential supervision of financial services in Pakistan: the State Bank of Pakistan³⁸ (SBP) and the Securities and Exchange Commission of Pakistan.³⁹

Banks and Banking

Overview

The SBP, established by the State Bank of Pakistan Act, 1956⁴⁰ is responsible for the supervision, regulation, and licensing of banks,⁴¹ which hold the vast majority of financial system assets,⁴² and certain other financial institutions.⁴³ Recent reforms have strengthened – at least on paper⁴⁴ – both the SBP’s independence⁴⁵ and the “financial infrastructure and regulatory framework.”⁴⁶ In addition to its basic responsibility for licensing banks, the SBP also oversees the privatization of public sector banks, and reviews and approves “mergers and acquisition schemes of banks and other regulated entities.”⁴⁷ The framework legislation and legal instruments⁴⁸ are further supplemented by rules, regulations, and directives issued by the SBP, especially in respect of consumer protection.⁴⁹

The SBP is institutionally well-resourced to meet its regulatory and supervisory objectives. The banking sector remains sound.⁵⁰ From a consumer perspective, the outlook is mixed.⁵¹ Market penetration of banking services remains thin.⁵² The cultural context could explain at least part of the market penetration issue;⁵³ structural problems are likely responsible for the rest.⁵⁴

Institutionally⁵⁵ and legally, consumer protection remains underdeveloped;⁵⁶ improving financial literacy remains an important objective.⁵⁷

Banks and Banking Services Regulation

The SBP has wide latitude in licensing banks.⁵⁸ It has issued a series of guidelines and criteria for the licensing of banks⁵⁹ and other financial institutions.⁶⁰ It has used its discretion to pursue multiple objectives – in particular, to increase access to financial services,⁶¹ but also broader objectives related to development and growth, housing credit, SME support, export incentives,⁶² and innovation.⁶³ Of note for the purposes of this review, in the context of the first wave of reforms to the Pakistani banking sector, the financial system was opened to foreign competition.⁶⁴

The best information available suggests that the SBP’s licensing requirements do not make distinctions between banks and banking services of different countries.⁶⁵ The “Guidelines” do make a number of express distinctions between Pakistani and foreign banks. Branch mode entry by foreign banks is generally not encouraged.⁶⁶

According to the Governor of the SBP, at least in respect of “commercial presence”⁶⁷:

• Foreign banks can either conduct business in branch mode or set up a wholly owned locally incorporated subsidiary provided they are member of a regional group or association⁶⁸ or if foreign banks have a global tier-1 paid up capital of US$5 billion or more.
• A foreign corporate entity⁶⁹ that wishes to conduct banking business in Pakistan could set up a local subsidiary with a maximum of 49% shareholding.⁷⁰
• Foreign interest in Islamic banks is quite strong with four of six banks being foreign owned.

Foreign banks may “open up to 100 branches as per Branch Expansion Plans submitted and approved by the SBP”.⁷¹ About 10% of Pakistan’s banking sector is Islamic banking.⁷²

Aside from establishment and branching limitations, a wide range of banking services have historically been subject to residence-based constraints, discretionary decision-making, or restrictions on transborder transactions.⁷³

Assessment

After the opening of the Pakistani market to foreign banks, a number of banks entered the market and engaged in highly profitable rupee business.⁷⁴  A variety of factors appear to have had an impact on the foreign banks’ capacity to operate profitably in Pakistan:

• Pakistan’s five major banks (Habib Bank, United Bank, Allied Bank, National Bank and Muslim Commercial Bank) have been effective in expanding and extending their network and outreach, effectively outcompeting foreign banks’ expansion attempts.
• Foreign banks entering a sclerotic and protected Pakistani market had an initial competitive advantage: technology and customer service. Their initial success did what competition is always expected to do: force innovation and reform.
• The most important factor, however, appears to be the cost of Pakistan’s high sovereign risk⁷⁵ and security concerns,⁷⁶ and their impact on the national currency: although foreign banks were doing brisk rupee business,⁷⁷ in dollar terms their position continued to deteriorate.⁷⁸

This latter factor, rather than regulatory or licensing issues, seems to have been the reason for the steady exit of key foreign banks from the market over the years. Issues with the banking sector in Pakistan appear to be structural and endemic to the economy, rather than regulatory or institutional.

Insurance and Related Services

Structure

Insurance companies are regulated and supervised by the Securities and Exchange Commission of Pakistan (SECP).⁷⁹ The administrative control of major public insurance companies remains with the Ministry of Commerce.⁸⁰

As with the banking sector, Pakistan’s insurance sector has undergone significant reforms over the past two decades⁸¹ and continues to do so.⁸² In 2007, Pakistan liberalized the insurance sector to permit 100% foreign ownership and control of insurance companies.⁸³

Overall, insurance penetration remains low. It is unclear whether this is because of religious concerns, market failure, or other reasons.⁸⁴ There is some market participation by foreign insurance companies; none by reinsurers,⁸⁵ although some have representative offices in Pakistan. Nothing in the definitions or the licensing requirements on their face differentiates applicants for an insurance license on the basis of origin.⁸⁶ This is also the case for insurance brokers.⁸⁷ As a practical matter, licensing of a foreign insurance company is subject to consultation and information exchange with the “home supervisor” of the applicant insurance company.⁸⁸ Foreign investors are also subject to “screening/ approval” by the Ministry of Interior.⁸⁹

Under the Insurance Ordinance, 2000, an “insurer” is defined in the following terms:

• any company or other body corporate carrying on the business of insurance, which is a company or other body corporate incorporated under any law for the time being in force in Pakistan; and
• any body corporate incorporated under the law of any jurisdiction outside Pakistan carrying on insurance business which carries on that business in Pakistan.⁹⁰

The Companies Act, 2017⁹¹ governs the formation of companies.⁹² It has specific provisions for local presence of places of business by “companies established outside Pakistan.”⁹³ There are evident distinctions related to certain aspects of the foreign origin of a company;⁹⁴ other distinctions exist as between different foreign nationals.⁹⁵ The Securities Act, 2015⁹⁶ regulates the issue of securities in Pakistan. In respect of the offer of securities and approvals for such offers, there is no distinction based on origin.⁹⁷ Amendments to the Public Offerings Regulation, 2017 included “A foreign company or any other foreign legal person” in the definition of “Institutional Investors”.⁹⁸ In any event, the literature does not suggest either formal or informal regulatory barriers to market entry by foreign providers. The low market penetration of foreign insurance providers likely reflects the overall configuration of the market rather than regulatory market barriers.

Assessment

There are no evident protective barriers to financial services trade in this sector.

Two different government ministries are responsible for the insurance sector: Finance and Commerce. In the view of some observers, this has had a negative impact on the domestic growth of the sector as well as market openings to foreign insurance providers.⁹⁹ (We note again how foreign banks spurred innovation and competition among domestic banks.) This is compounded by a regulatory decision not to have a mandatory insurance framework – giving rise to lack of incentives for market penetration.

Capital Markets

The SECP also regulates capital markets in Pakistan¹⁰⁰ through the Securities Act, 2015,¹⁰¹ Futures Market Act, 2016,¹⁰² Central Depository Act, 1997,¹⁰³ and Companies Ordinance, 1984 (Part VIII relating to NBFCs).¹⁰⁴ The licensing requirements for stock exchanges,¹⁰⁵ clearing houses,¹⁰⁶ depositories,¹⁰⁷ and securities activities¹⁰⁸ do not, on their face, demonstrate either origin-based distinctions or marketaccess¹⁰⁹ restrictions. The requirements of the Securities Act, 2015 are given additional¹¹⁰ precision through regulations on business conduct under s. 169 of the Act. The licensing or documentary requirements elaborated in the regulations¹¹¹ do not, on their face, demonstrate either origin-based distinctions or market-access restrictions.¹¹² Both local and foreign investors have access to Pakistan’s capital market, and may invest and divest without discrimination based on origin. Indeed, foreign investments benefit not only from the regulatory reforms to date, but also – potentially – from tax incentives.

Evaluation

Pakistan’s financial services sector has undergone over two decades of radical reforms and liberalization supported by diverse international financial institutions. The result is a sophisticated regulatory framework comprising of a modern suite of legal instruments and well-resourced institutions for rulemaking and supervision. Remarkably, the new instruments seek to address both modern Western and Islamic concerns, thus expanding the reach not only of the framework but also of the sector itself to those wishing to closely honour religious requirements.

Regulatory frameworks are not, however, an end in themselves. The state structures the financial services sector to achieve broader economic and social objectives. Among these is access, and the economic development it brings. From banking to insurance, penetration remains lethargic, both by the sector into the economy, and by foreign services providers into the domestic market. Although there are cultural explanations for this, at least part of the slow performance can be traced back to structural issues and problems endemic to the Pakistani economy and governance. Pakistan has already begun forging the difficult path in undertaking significant reforms and, as long as the reforms hold, the benefits will follow in due course; the regulators’ current focus is on increasing liquidity and resilience, especially in capital markets. In particular:

• The extensive reforms to date have, in the assessment of capital markets regulators, brought Pakistan largely in compliance with IOSCO principles and other international standards.
• Further significant regulatory and operational reforms are in process to attract investors.

Trade policy in itself is, at best, a blunt instrument for addressing structural problems. Trade policy instruments can, however, be highly effective in buttressing domestic reforms. Acceding to the WTO, undertaking negotiated obligations under international law, good faith implementation, and progressive liberalization provide security and predictability not just to a Member’s trade policy but also, given the broad range of measures covered by the WTO Agreement, its overall regulatory framework.

It is against this background that, in the financial services sector, the commitments of Pakistan under the GATS take on additional importance.

 

RECOMMENDATIONS

Pakistan was a founder Member of the WTO. Since 1995, when the WTO came into being, the financial services sector in Pakistan has undergone considerable change and reform.¹¹³ One of the key elements of reform over the past twenty-five years has been the opening of the Pakistani financial services sector to foreign services providers. Indeed, more than mere opening: the SBP encourages eligible foreign banks and banking services to enter the Pakistani market; there is no indication that the Ministry of Commerce or the SECP have, formally or otherwise, limited the access of insurance or other financial services providers to Pakistan.

To the extent that the market openings have not yet had the positive domestic competitive impact that the regulators and the government of Pakistan might have expected, the source of the mitigation appears to be a range of structural issues related to taxation, subsidies, balance of payments, and sovereign risk overall.

This study concerns Pakistan’s commitments under the WTO Agreement in relation to financial services. Of course, Pakistan’s international trade commitments do not, in themselves, change the basic dynamics of Pakistan’s economy; nothing in a WTO SoC directly addresses the challenges Pakistan faces. And yet, a modernized SoC serves, as explained above, an important signaling function to both investors and domestic service providers, and a forward-looking framework for regulators and policymakers. In addition, because a WTO SoC normally serves as a base upon which future trade negotiations and liberalizations are conducted,¹¹⁴ a modernized SoC itself becomes a driver of future possible liberalization and structural reform. And here, there is considerable room for improvement.

Pakistan’s SoC reflect a set of circumstances that no longer represent what appears to be a vibrant¹¹⁵ private sector-driven¹¹⁶ financial services sector in today’s Pakistan. In the light of the complex, ambitious, and wide-ranging reforms already undertaken in Pakistan, this might well be an opportune moment for Pakistan to crystallize the momentum through additional commitments.

Recommendation One: inscribe the full range of financial services and service providers in the SoC.

Some subsectors and financial services or activities are not in the SoC. Independent of any specific commitments Pakistan would make in respect of those areas, a modernized SoC should include the full range of subsectors, services, and services providers in the financial services sector. Pakistan has already done so in its free trade agreements.¹¹⁷

Recommendation two: reduce “unbound” commitments to those necessary for protective reasons.

Many of the inscribed sectors are “Unbound”. This does not reflect the reality of Pakistan’s financial services framework, where there are a few actual or potential market access or national treatment limitations; many of the formal distinctions appear to fall within the normal range of prudential regulation and supervision.

As a matter of WTO trade law and policy, no Member is required to commit to the liberalization of any sector in its SoC. Pakistan had the right, upon joining the WTO, to make commitments that reflected its national policy choices at the time and that also preserved a large margin of domestic regulatory flexibility. Over most of the intervening period, Pakistan exercised that domestic regulatory flexibility to liberalize its financial services sector. In two supplements soon after joining the WTO, Pakistan reflected some of that liberalizing effort in its SoC.

That effort, it has to be assumed, had the object and result of attracting foreign financial services providers into its market, with salutary effects – at least in the banking sector, its domestic providers are stronger, and the consumer base better served, as a result of those openings. The additional commitments do not appear to have had a negative impact on Pakistan’s capacity to regulate and supervise its financial services sector. To help further solidify these gains, and incidentally help the overall structural predictability and health of the Pakistani financial services sector – imperative for reducing sovereign risk – Pakistan might consider strengthening its international commitments in respect of the sector.

For example, it could be opportune, from a market- and investorsignaling perspective, to convert at least some of its “Unbound” commitments to more specific terms, conditions and limitations reflecting precise legitimate policy objectives, existing measures, or expected or planned policy direction.

Recommendation three: ensure that any terms and limitations are narrowly constructed to reflect real necessary derogations essential to achieve defined objectives.

Not all distinctions rise to the level of discriminatory treatment;¹¹⁸ and, as has been discussed above, Members of the WTO have rights¹¹⁹ as well as obligations, and measures consistent with the exercise of these rights do not need to be further inscribed in a Member’s SoC.

In this respect, it might well be useful for Pakistan to inscribe in its SoC the social policy objectives pursued by the SBP in its regulation and supervision of the banking sector. We understand these to be:¹²⁰

• Securing greater access to financial services in rural areas and among under-served populations, including incentives for micro-lenders;
• Incentives for Housing Finance;
• Incentives for SMEs;
• Measures aimed at securing and maintaining ties with overseas Pakistanis; and
• Enhancing digital financial services and fostering domestic innovation.

Few or none of these objectives require limitations on market access or national treatment for foreign service providers. However, a horizontal set of objectives can serve as an important signal to both domestic and international players that Pakistan’s SoC does not serve to protect Pakistani financial services sector from international competition.

Recommendation four: indicate a comprehensive review of the SoC in the course of the Pakistan’s Trade Policy Review.

A Member’s trade policy review serves three critical functions:

First, it is an opportunity for the Membership of the WTO (supported by the Secretariat) to review developments in the trade policy and practices of a Member, to evaluate a Member’s progress in the full implementation of its WTO obligations, and to identify areas where additional effort might be needed.

Second, a Member may use this opportunity – both proactively and in responding to the questions of other Members – to inform and educate the Membership about developments that affect its trade performance, the challenges it faces in its trade relations and, in the implementation process, the kind of capacity building or technical assistance it might need in cementing its progress, and the direction the Member wishes to take in elaborating its trade policy during the next period of review.

Third, the TPR also serves a domestic function. The coordination required internally to respond to the TPR is also an excellent framework within which to explore measures that could advance or cement reform and liberalization processes.

In the light of the foregoing, Pakistan has an excellent story to tell in its TPR, one that, coupled with a revised SoC, could help seal the existing reforms and drive future reform processes.

 

References

1. See, in particular, the National Financial Inclusion Strategy of the Ministry of Finance of Pakistan (NFIS): Access to finance is considered critical for achieving inclusive economic growth, as it is a prerequisite for equitable distribution of the economic opportunities, poverty reduction, and achieving financial stability. At 4. http://www.finance.gov.pk/NFIS.pdf
2. Ibid., at 71.
3. See, for example, IMF, 2021 Article IV Report: “[T]he banking sector remains highly exposed to the energy and textile sectors (each at 15 percent of outstanding loans) and the sovereign (70 percent of total credit).” At 18. https://www.imf.org/en/Publications/CR/Issues/2022/02/04/Pakistan-2021- Article-IV-Consultation-Sixth-Review-Under-the-Extended-ArrangementUnder-the-512715
4. See International Finance Corporation (IFC), “Creating Markets in Pakistan”, May 2021: “Low investment in infrastructure is the outcome of several constraints of which the lack of financing and especially long-term financing is implementation of its WTO obligations, and to identify areas where additional effort might be needed. Second, a Member may use this opportunity – both proactively and in responding to the questions of other Members – to inform and educate the Membership about developments that affect its trade performance, the challenges it faces in its trade relations and, in the implementation process, the kind of capacity building or technical assistance it might need in cementing its progress, and the direction the Member wishes to take in elaborating its trade policy during the next period of review. Third, the TPR also serves a domestic function. The coordination required internally to respond to the TPR is also an excellent framework within which to explore measures that could advance or cement reform and liberalization processes. In the light of the foregoing, Pakistan has an excellent story to tell in its TPR, one that, coupled with a revised SoC, could help seal the existing reforms and drive future reform processes. 37 Financial Services Reform in Pakistan CRITERION – July/September 2023 a serious one.” At 33-34. https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_ publication_site/publications_listing_page/cpsd-pakistan
5. Ibid.: Few businesses can access external finance so they tend to rely on retained earnings to finance investments. Women are particularly affected. Only 7 percent of the Pakistani businesses surveyed in the World Bank Enterprise Survey 2013 had a bank loan or a line of credit. But 43 percent said they needed a loan. The number is lower for SMEs with 3.4 percent of them having a loan or a line of credit. At 29.
6. “In 2019, credit extended to SMEs accounted for 7 percent of the total private sector credit portfolio of banks and DFIs.” Ibid., at 30.
7. This study presumes a certain level of mortgage limitation for non-resident providers.
8. “[I]t is predominantly the higher income groups who have access to housing finance.” Ibid., at 33.
9. Ibid., at 41.
10. https://www.spglobal.com/marketintelligence/en/news-insights/latest-newsheadlines/state-bank-of-pakistan-issues-licensing-regulatory-framework-fordigital-banks-68264647
11. See for example EU Commission, DG Trade, “Services and investment in EU trade deals Using ‘positive’ and ‘negative’ lists”, April 2016, at 3. https://trade. ec.europa.eu/doclib/docs/2016/april/tradoc_154427.pdf
12. https://www.wto.org/english/tratop_e/serv_e/sdr_factsheet_e_oct21.pdf
13. International Monetary Fund (IMF), 2021 Article IV Staff Report, at 4.
14. Ibid., at 6.
15. Article I; emphasis added.
16. Useful information about the origins of the four “modes” can be found in this recent exchange: https://twitter.com/AmyPorges/status/1492977501152419844.
17. https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm
18. Subject to exemption of specific measures.
19. Pakistan, Schedule of Specific Commitments (SoC), GATS/SC/67. https://docs. wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=Q:/SCHD/GATS-SC/SC67. pdf&Open=True
20. Supplement 1, GATS/SC/67/Suppl.1, https://docs.wto.org/dol2fe/Pages/SS/ directdoc.aspx?filename=Q:/SCHD/GATS-SC/SC67S1.pdf&Open=True; Supplement 2, GATS/SC/67/Suppl.2, https://docs.wto.org/dol2fe/Pages/SS/ directdoc.aspx?filename=Q:/SCHD/GATS-SC/SC67S2.pdf&Open=True; and Supplement 3, GATS/SC/67/Suppl.3, https://docs.wto.org/dol2fe/Pages/SS/ directdoc.aspx?filename=Q:/SCHD/GATS-SC/SC67S3.pdf&Open=True.
21. Real property is a matter of provincial jurisdiction in Pakistan.
22. This technical term is used throughout Schedules of Commitment and finds its roots in “bound” tariff rates under Article II. “Unbound” means that the Member does not undertake any commitments in the sector or subsector, or – as in this case – in respect of a specific issue.
23. https://www.secp.gov.pk/document/insurance-ordinance-2000/?wpdmdl=652&refresh=620a3bb9181b51644837817
24. Section 4(1).
25. Section 4(3):For the purposes of this Ordinance, the following shall be the classes of business into which non-life insurance business is divided:
26. (a) for direct and facultative reinsurance business;(i) Class 1 being fire and property damage business;(ii) Class 2 being marine, aviation and transport business;(iii) Class 3 being motor third party compulsory business;(iv) Class 4 being liability business;(v) Class 5 being workers’ compensation business;(vi) Class 6 being credit and suretyship business;(vii) Class 7 being accident and health business; and(viii) Class 8 being agriculture insurance including crop insurance;

    (ix) Class 9 being miscellaneous business;

    (b) for treaty reinsurance business:

    (i) Class 9 being proportional treaty business; and

    (ii) Class 10 being non-proportional treaty business.

    Emphasis added

27.  Compare with “Life, accident and health insurance” for Canada. Canada, Schedule of Specific Commitments, GATS/SC/16.
28. For example:(iii) Representation of foreign nationals on the Board of Directors will be allowed in proportion to their  shareholding.(iv) Foreign banks presently operating in Pakistan will be given adequate timeframe to convert their branches into locally-incorporated subsidiaries.
29. See:(v) Banks incorporated in Pakistan permitted to undertake all payment and money transmission services.The issue, sale and purchase of foreign currency and traveller cheques is allowed to commercial banks licensed as Authorized Dealers.
30. For example:(vi) No limitation on banks incorporated in Pakistan in respect of guarantees and commitments enforceable in Pakistan. Guarantees and commitments in foreign currency and those undertaken in favour or on behalf of nonresidents to be governed by foreign exchange laws.(vii) Only banks including investment banks incorporated in Pakistan permitted to arrange and participate in any public issue and underwriting of securitiesup to 30 per cent of the total paid-up capital of the issuer or 30 per cent of their respective paid-up capital whichever is less.As well:Banks incorporated in Pakistan will be permitted to undertake financial and advisory services through subsidiary companies set up for this purpose with shareholding up to 100 per cent provided that transactions undertaken/services provided by such subsidiaries do not create any financial obligations whether contingent or otherwise on the balance sheet of the holding company or otherwise.
31. See: “Bound for the existing foreign insurance services providers as to their scope of operations and equity structure.”
32. See: “All commercial banks are required to be members of the clearing system operated/approved by Central Bank to effect interbank settlements.”
33. See: “Unbound, except for the provision of publicly available data and financial information on corporate entities by institutional providers having commercial presence in Pakistan.”
34. See: “Provision of all banking and financial services in Pakistan are subject to the injunctions regarding Islamic banking as pronounced by the competent courts in Pakistan.”
35. See: The commitments in Financial Services are given to the nationals and financial institutions of the Members whose laws and policies do not bar the provision of similar commitments to the Pakistani nationals and financial institutions.
36. World Bank, Diagnostic Review of Consumer Protection and Financial Literacy, 2014, v. 1, at 5.
37. I have had the benefit of reviewing excellent work already done by the World Bank, Financial Sector Assessment – Pakistan, March 2005.
38. https://www.sbp.org.pk/
39. https://www.secp.gov.pk/
40. https://www.sbp.org.pk/about/act/SBP-Act.pdf
41. Sections 7 and 8 of the Banking Companies Ordinance, 1962.
42. Diagnostics, supra, at 4.
43. As well as development finance institutions (DFIs), microfinance banks (MFBs), and exchange companies. Diagnostics, ibid., at 5. See also the MicrofinanceInstitutions            Ordinance,        2001.    https://www.sbp.org.pk/l_frame/MF_Inst_ Ord_2001.pdf
44. Discussions with experts suggest that juridical independence has been a mixed blessing for the SBP. As an institution, being outside the government framework limits the SBP’s access to and integration in political and security discussions and could this have a limiting effect on its overall influence on broader government policy, including through regulatory activity. This can be balanced, to some extent, with the integration of the Governor of the SBP into government decision-making and economic planning. In any event, greater juridical independence has not fully insulated, or isolated, the SBP from broader government imperatives and policy objectives.
45. IMF Article IV Consultations, 2017, at 4.https://www.imf.org/-/media/Files/Publications/CR/2017/cr17212.ashx
46. Ibid. at 22.
47. https://www.sbp.org.pk/departments/bpd.htm.
48. Five basic legal instruments form the backbone of Pakistan’s banking regulatory framework: The State Bank of Pakistan Act 1956, Banking Companies Ordinance, 1962 (BCO), Foreign Exchange Act 1947, Payment System Act, and Microfinance Institutions Ordinance, 2001.
49. Diagnostics, ibid., at 6.
50. IMF 2017, supra, at 6.
51. Questionnaire responses (QR):Safety and soundness of the banking sector along with protection of depositors interests are the primary focus of regulatory regime. However, the regulator supports innovation and financial inclusion on consistent basis for improving quality of services on one hand and creating enabling environment for easy and cost effective outreach of banking services.
52. FSA, ibid.; Diagnostics, at 4. Arshad and Khan, supra, at 110-111. NFIS: “However, in case of Pakistan, the level of financial inclusion up until 2015 was one of the lowest in the world. Only, 16 percent of the adult population had a bank.” At 4. See also Creating Markets, supra: Pakistan has among the lowest levels of financial inclusion in South Asia. Sustained efforts to promote financial inclusion in Pakistan have yielded mixed results. Only 21 percent of the population has access to an account compared to a regional average of 70 percent. There are also large gaps with vulnerable segments having limited access at high prices. For example, microfinance clients often pay 30-40 percent interest. 7 percent of adult women have an account compared to 35 percent of adult men. [bold in original; highlights added] At 41.
53. State Banks of Pakistan, Banking System Review 2006, at 89. (Review) https:// www.sbp.org.pk/publications/bsr/bkg_system_review(2006).pdf
54. A new Deposit Protection Corporation was operationalised in 2017. IMF 2017, supra, at 6.
55. “SBP has encouraged the Pakistan Bankers Association to adopt a business code of ethics to be used a basis for committing all banks to fairness, disclosure, and proper ethical standards, but this has not happened.” Diagnostics, supra, at 11.
56. , at 5.
57. IMF 2017, supra, at 22.
58. Section 27 of the Banking Companies Ordinance, 1962.
59. Guidelines and Criteria for Setting Up a Commercial Bank, SBP. https://www. sbp.org.pk/bpd/2005/Commercial-Bank.pdf
60. Islamic banks: https://www.sbp.org.pk/ibd/2004/cir02.htm; Microfinance banks: https://www.sbp.org.pk/about/micro/criteria.htm; ForEx: https://www. sbp.org.pk/epd/2002/FE9.htm.
61. Review, supra: SBP has introduced the Annual Branch Licensing Policy with a road map for 2008 and beyond. This policy 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. In addition SBP is considering about allowing banks to establish sub branches, booth and service centre of commercial banks in inner regions where it is costly to maintain a full fledged branch. Since November 2005 all commercial banks operating in Pakistan are required to offer Basic Banking Accounts (BBA) to facilitate and provide basic banking facilities to the low income people in Pakistan. At 87.
62. QR.
63. Ibid.
64. International Monetary Fund, Pakistan – Financial Sector Assessment Program – Technical Note – Condition of the Banking System, May 2005 (Financial Sector Assessment), at 1. https://www.imf.org/external/pubs/ft/scr/2005/cr05157.pdf
65. QR. See also Guidelines, s. 4(ix): The following categories are allowed to conduct banking business in branch mode as well as a wholly owned locally incorporated subsidiary: – a) Banks from countries belonging to regional groups and associations of which Pakistan is a member. b) Foreign banks having a global tier-1 paid up capital of US$5 billion or more.
66. QR.
67. Shamshad Akhtar, then-Governor of the State Bank of Pakistan, “Pakistan – regulatory and supervisory framework”, at 2. https://www.bis.org/review/ r070319d.pdf
68. That is, “the foreign bank’s home country belongs to a regional grouping in which Pakistan is a member”. Pakistan’s 2015 Trade Policy Review (TPR), at 79. https://docsonline.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=t:/WT/ TPR/S311R1.doc&Open=True See also the 2022 report: https://www.wto.org/english/tratop_e/tpr_e/s424_e. pdf
69. “ABN-Amro, Citibank, HSBC, Saudi American Bank and Temasak all have an interest in expanding businesses and/or acquiring domestic stakes, while three banks are offering GDRs in international markets.” Akhtar, supra.
70. “Currently of the 39 banks in the country, almost 14 have foreign shareholding with few of them either fully or partially foreign owned or other smaller strategic stakes.” Ibid.
71. TPR, at 79.
72. Ibid.
73. See, for example, the freezing of up to $7 billion in foreign exchange accounts in 1998. Mohammad Zubair Khan, “Transforming Banking in Pakistan”, A Study of Financial Markets 37, at 39. https://aric.adb.org/pdf/aem/external/financial_ market/Pakistan/pak_bnk.pdf A number of exchange restrictions continue; see 2021 Article IV Report, supra, and in particular, insofar as these measures affect trade: Pakistan also continues to maintain an exchange restriction resulting from the limitation on advance payments for imports against letters of credit (LCs) and advance payments up to the certain amount per invoice (without LCs) for the import of eligible items (imposed in 2018). At 19.
74. QR.
75. Ibid.
76. Ibid.
77. Ibid.
78. Ibid.
79. https://www.secp.gov.pk/about-us/what-we-do/
80. QR.
81. See CMDP 2005.
82. https://www.asiainsurancereview.com/News/View-NewsLetter-Article/ id/72702/Type/eDaily/Pakistan-Regulator-proposes-changes-to-insurance-law
83. SECP, Guidebook for Licensing of Insurance Companies, at 5. https://www.secp.gov.pk/licensing/insurance-companies-licensing/guide-book-for-licensing-ofinsurance-companies/.
84. The Federal Insurance Ombudsman, 2020 Annual Report, at 37. https://fio.gov.pk/wp-content/uploads/2021/07/Annual-Report-Part-1-2.pdf
85. TPR, at 80. This could explain Pakistan’s “None” limitation for mode 2 (“Consumption abroad”) in respect of “Reinsurance services and retrocession”. 86 Licensing criteria are set out here. https://www.secp.gov.pk/licensing/insurancecompanies-licensing/insurance-companies/ See also SEC Insurance Rules, 2002. https://www.secp.gov.pk/document/sec-insurance-rules-2002/ 87 Guidebook, supra, at 12-14.
86. Licensing criteria are set out here. https://www.secp.gov.pk/licensing/insurancecompanies-licensing/insurance-companies/ See also SEC Insurance Rules, 2002. https://www.secp.gov.pk/document/sec-insurance-rules-2002/
87. Guidebook, supra, at 12-14.
88. Ibid., at 5.
89. Ibid.
90. S. 2(xxxi).
91. https://www.secp.gov.pk/document/companies-act-2017/?wpdmdl=28472.
92. The Guidebook still refers to the Companies Ordinance, 1984.
93. Ibid., Part XII. The scope of application is a classic definition of Mode 3:Companies incorporated or formed outside Pakistan which, after the commencement of this Act, establish a place of business within Pakistan or which have, before the commencement of this Act, established a place of business in Pakistan and continue to have an established either a place of business within Pakistan or conduct business in Pakistan through an agent or any other means at the commencement of this Act.
94. See for example s. 438:Every foreign company shall -(c) conspicuously exhibit on the outside of every place where it carries on business in Pakistan the name of the company and the country in which the company is incorporated in letter easily legible in English or Urdu characters […];Or s. 446: Issue of prospectus.—No person shall issue, circulate or distribute in Pakistan any prospectus offering for subscription securities of a foreign company or soliciting deposits of money, whether the company has or has not established, or when formed will or will not establish, a place of business in Pakistan unless authorised to do so by the Commission under the relevant law or as may be specified.This may be contrasted with s. 57: Prospectus.—(1) No prospectus shall be issued by or on behalf of a company unless on or before the date of its publication, a copy thereof signed by every person who is named therein as a director or proposed director of the company has been filed with the registrar.
    1. 15 of the Companies (Incorporation) Regulations, 2017:
95. (3) The Commission shall obtain security clearance from Ministry of Interior (MoI) in following cases and in the manner prescribed hereunder:(i) companies having foreign (other than Afghan and Indian national or origin) subscribers/officers will be incorporated on the basis of an undertaking of each foreign subscriber /officer and case shall be forwarded for security clearance: Provided that in case name of subscriber/officer is not security cleared by MoI, the subscriber/officer and the company, shall take immediate steps for replacement and shall transfer shares if any, held by the subscriber;(ii) companies having foreign subscribers/officers who are Afghan or Indian national or of Afghan or Indian Origin will be incorporated after receipt of security clearance;(iii) security services provider companies will be incorporated after receipt of security clearance from MoI.https://www.secp.gov.pk/document/companies-incorporationregulations-2017-as-amended-upto-april-17-2018/?wpdmdl=33600As of April 2022, the requirement for prior security clearance from MOI imposed on incorporation of companies with subscriber(s)/officer(s) having Afghan nationality or Afghan origin has been waived pursuant to amendments to sub-regulation 3(i) and (ii) of regulation 15 of the Companies (Incorporation) Regulations, 2017.
96. https://www.secp.gov.pk/document/securities-act-2015/
97. The basic requirements are as follows:
    87. Offer of securities […]

    (2) Subject to the provisions of this Part, no person shall make a public offer of securities unless the issue or offeror of the securities has submitted for approval to the Commissiom, and the commission has approved prospectus.

    88. Approval, issue, circulation and publication of prospectus

    (1) No person shall issue, circulate and publish prospectus including a shelfprospectus or supplement to the prospectus until it has been approved by the Commission which approval may be subject to such conditions or restrictions as the Commission considers necessary.

    1. 3(18) of the Public Offerings Regulation, 2017 provides that:

    (18) Securities of any company established outside Pakistan can be offered for sale to the public under sections 87 and 88 of the Act read with 1 [section 446 and 447 of the Companies Act]. [op. cit.]

    Provided such foreign company is compliant with the provision of Part 2 [XII of the Companies Act], these Regulations and meets requirements of regulations of the securities exchange for listing of companies and securities.

    https://www.secp.gov.pk/document/public-offering-regulations-2017-updatedseptember-15-2021/?wpdmdl=43440&refresh=6262542aa64081650611242

98. Ibid.
99. QR.
100. https://www.secp.gov.pk/licensing/capital-markets/
101. https://www.secp.gov.pk/download/securities-act-2015/?wpdmdl=648
102. https://www.secp.gov.pk/wp-content/uploads/2016/03/Futures-MarketAct-2016.pdf
103. https://na.gov.pk/uploads/documents/Central-Depositories-Act-1997.pdf
104. https://www.secp.gov.pk/document/companies-ordinance-1984-3/
105. Ibid., s. 4.
106. Ibid., s. 23.
107. Ibid., s. 47.
108. Ibid., s. 64.
109. These are set out in Article XVI:2 of the GATS:(a) limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test;(b) limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economic needs test;(c) limitations on the total number of service operations or on the total quantity of service output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test;(d) limitations on the total number of natural persons that may be employed in a particular service sector or that a service supplier may employ and whoare necessary for, and directly related to, the supply of a specific service in the form of numerical quotas or the requirement of an economic needs test;(e) measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service; and(f) limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment.

     [Footnote omitted]

110. See https://www.secp.gov.pk/licensing/capital-markets/
111. https://www.secp.gov.pk/document/clean-copy-of-securities-and-futuresadvisors-regulations-2017-updated-february-21-2018/?wpdmdl=30725; SECURITISATION (secp.gov.pk); https://www.secp.gov.pk/licensing/capitalmarkets/credit-rating-agencies/; https://www.secp.gov.pk/licensing/capitalmarkets/agents-and-brokers/; and https://www.secp.gov.pk/licensing/capitalmarkets/debt-securities-trusties-dst/.
112. See also, for example, s. 10(b)(iii) of the Credit Rating Companies Regulations, 2016: “foreign credit rating agency may hold up to 100% shares in credit rating company”
113. See in particular, Muhammad Arshad Khan and Sajawal Khan, “Financial Sector Restructuring in Pakistan”, 2007 Lahour Journal of Economics 97.
114. [Refer to Malaysia FTA]
115. Ibid., at 109.
116. See, for example, https://pakistanbanks.org.pk/members/. And ibid., at 99, 107.
117. See, for example, Pakistan’s Schedule of Specific Commitments in the MalaysiaPakistan Closer Economic Partnership Agreement. https://fta.miti.gov.my/ index.php/pages/view/malaysia-pakistan
118. Article XVII – National Treatment:3. Formally identical or formally different treatment shall be considered to be less favourable if it modifies the conditions of competition in favour of services or service suppliers of the Member compared to like services or service suppliers of any other Member.
119. For example, Article XIV – General Exceptions:Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures:(a) necessary to protect public morals or to maintain public order; […](c) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement including those relating to:[…](iii) safety;
120. QR.