This article was first published in the July/August 2017 international edition of Accounting and Business magazine.

A clear sign of sustainable development in any country is a switch away from a cash-based economy towards formal banking – it is a sign that companies and their employees expect their earnings to continue, and that they are prepared to pay tax. For accountants such a change is good news indeed, and as a result the profession in Pakistan is looking for growth.

Senior bankers in Pakistan foresee a very positive outlook amid phenomenal year-on-year overall growth in business of 16% during the country’s last fiscal year, which ran from 1 July 2015 to 30 June 2016. This, according to the State Bank of Pakistan, the south Asian country’s central bank, included a doubling of private-sector credits, reflecting Pakistan’s overall 4.7% GDP growth in the last fiscal year. Banking industry experts say the growing popularity of Islamic banking in the country and the opening of banking channels with neighbouring Iran after the lifting of economic sanctions not only had a positive impact on the banking industry, but on the country’s formal economy as well.

‘Expansion of the formal economy is directly linked to [the work of] two key regulators – the Federal Board of Revenue (FBR) and the Securities and Exchange Commission of Pakistan (SECP) – and their investment/business-friendly policies,’ says Sajjeed Aslam, head of ACCA Pakistan. He told Accounting and Business that these had been encouraging employees and businesses to document their activities and access funds through banks and the capital markets. As a result, accountants in Pakistan have an increasingly important role in advising and creating awareness about the advantages of the formal economy in generating actionable financial data. They can also help companies develop a strategic drive to raise funds from multiple sources, while complying with the law: ‘Accountants can enhance their role in negotiating with the banking industry and regulators’ policy decisions which encourage new business and ventures in Pakistan,’ says Aslam.

Tariq Saeed, a retired professor of accounting, believes that while accounting is not directly linked with all banking issues, it has a very important role to play in the management of bank balances and liabilities, which are far stricter than for cash-based business: ‘Bankruptcies occur as a result of over-supply of credit, plus bad money/financial management; thus one of the major roles of senior professional accountants is to oversee financial feasibility,’ he explains.

It would appear, however, that Pakistan business is ready to take the leap into banking. According to a report from the State Bank of Pakistan, in fiscal year 2016, the Pakistan banking industry’s asset base was PKR1.74 trillion (US$16.65bn), and it held PKR1.46 trillion’s (US$13.94bn) worth of deposits. According to the report: ‘The outreach of Islamic banking has also expanded considerably, with its branch network increasing to 2,146 branches in 98 districts across Pakistan.’ This, says the report, comfortably surpasses the target of 2,000 branches set in the central bank’s second strategic plan for the Islamic banking industry, which covers 2014-18.

A respectable option

One senior commercial banker, who wished to remain anonymous, says: ‘Islamic banking over the years has gained momentum, attaining international attention on the back of its robust growth and its pliability during financial crises.’

Moreover, Dr Ayesha Ghaus Pasha, finance minister of Pakistan’s Punjab province, speaking at the fifth global forum on Islamic finance held by the COMSATS Institute of Information Technology in Lahore in January, stressed the respectability of Islamic finance and how it has gained International Monetary Fund recognition for promoting macroeconomic and financial stability. ‘Pakistan’s Islamic banking industry has been growing at over 30% a year over the past five years, which is above the average global rate,’ she said.

According to Aslam, the current boom in Pakistan banking is the result of the expansion in available current accounts, the low cost of making deposits and increasing confidence in using banks to make and secure investment. ‘We have started to see some evolution towards private-sector lending, which is currently relatively small,’ he says. Addressing private companies, especially family-owned businesses, Aslam believes they need to be better organised to deal with banks and that more standardised financial reporting is required, ‘which is good for business owners/managers and also for the economy’. Large listed companies have already developed adequate financial reporting capabilities but they number fewer than 600, he says. To move forward, these smaller companies need professional accountants to ensure the correct financial reports are submitted to the relevant regulators, which will improve trust in financial reporting at all levels and across all industries, he says.

A key segment in banking growth has been in agriculture, according to the central bank report. Across Pakistan, agri-financing expanded 16% in the last fiscal year, compared with the preceding 12 months, to reach PKR599bn (US$5.71bn). ‘Encouragingly, the agri-finance sector added over 200,000 new borrowers during the last [2015-16 fiscal] year, thus increasing the total outreach of the sector to 2.4 million active borrowers from 2.2 million in the previous year,’ the report claimed. There has also been encouraging growth in Pakistan’s formal house financing sector, with 17% annual growth in 2016. Expansion in formal financing in both sectors has been fuelled by interest rates that are low for Pakistan – the existing base rate is 5.75%.

With the formal economy growing, professional accountants now have to work hard to ensure their clients thrive in this new environment. ‘It means being more agile and thinking ahead in terms of business opportunities and equipping themselves. Being proactive, technology-savvy and forward looking are key qualities accountants should live and breathe,’ says Aslam. 

Mirza Munawar Hussain, a teacher at an accounting institution in Lahore, agrees that the banking boom should force accountants to raise their standards in Pakistan. ‘They need to demonstrate high standards of skills in financial reporting as well as [following] international standards,’ says Mirza. 

Finally, the Pakistan government itself should play a role by ensuring businesses and individuals comply with the law when adopting formal banking. He says the government provided for sanctions including fines and jail sentences in its Income Tax Ordinance 2001 and Sales Tax Act 1990, to encourage a switch from cash handling to the documented economy. But police and regulators failed to apply such punishments even when businesses were clearly flouting the law. As a result, Mirza says, ‘a reasonable number of people remain outside the documented economy regime’ – even if they are now a declining proportion of Pakistan’s businesses and residents. 

Saeed A Baloch, journalist in Lahore