KARACHI, Nov 26: Corporate sector received the largest chunk of 54 per cent of the total credit extended by the financial sector in 2003, followed by small and medium enterprises or SMEs that received 19 per cent.

According to a report titled Pakistan: Financial Sector Assessment 2003, agriculture and consumer finance sectors each received about 8 per cent of the banking system credit in the last year.

The report prepared by the State Bank was released to the press here on Friday. It can also be accessed at the SBP's website. An accompanying press release, quoting from the report, said that Pakistan's financial sector grew robustly during last year adding Rs.542.7 billion worth of assets which represent an increase of 15.3 per cent over the base of 2002 and now account for almost 85 per cent of the country's GDP.

Fixed investment during 2003 formed 26.2 per cent of total credit to the corporate sector. Rapid growth took place in 2003 both in SME financing and agriculture credit. SME financing registered a growth of 72 per cent and rose from Rs145 billion to Rs251 billion by June 2004.

Agriculture credit disbursements grew in the same period by 27 per cent increasing the outstanding loan stock from Rs804 billion to Rs846 billion, says the report.

For the second year in a row, the country's financial savings growth rate was in double digits. The last fiscal year witnessed 15.8 per cent growth in financial savings on top of a 10 per cent growth in the previous year. As a result, financial saving as a percentage to GDP increased to 70 per cent.

Almost one half of national savings are now generated by the financial sector. Three years ago, this ratio was only 28 per cent. This remarkable achievement has been possible because of the improved efficiency and soundness of the financial sector.

This can be seen from the fact that the average spread earned by the banks has declined to 4.4 per cent in 2003 from 7.1 per cent in 2001. The decline took place despite a much larger fall in the average return on advances and investment (from 13.3 per cent to 6.6 per cent - 670 basis points) earned by the banks compared to the lowering of the deposit rate (from 6.2 per cent to 2.1 per cent - 410 basis points), the report added.

The report is the third in its annual series of assessments. Earlier two reports gave the assessment for periods 1990-2000 and 2001-2002. The salient feature of FSA report for 2003 is that in addition to banking and non-bank institution provides an enhanced coverage of insurance industry and social protection funds which were not covered in earlier assessment.

The report highlights and makes an assessment of the rapidly changing environment of the financial sector in Pakistan and presents an overall picture of its performance for the year ending 2003.

The report says that different indicators of financial sector development and depth have shown improvement in recent years; ratios of M2, financial assets and stock market capitalization to GDP have increased. "These indicators are also positively correlated with GDP growth, total factor productivity and incremental capital," says the report.

"This indicates that both the quantity and quality channels are functional in our economy. In fact, the quality channel that works through the impact of financial development on increases in productivity and capital intensity is quite strong in our economy. This again shows that our potential GDP is much higher than the actual level and financial development will go a long way in realizing this potential."

"A comparison with select peer countries (India, Bangladesh, Sri Lanka, Philippines, Thailand, Turkey, Malaysia and Korea) indicates that the financial sector still needs to be developed further."