Impact Story

In 2003, commercial banks were by far the major players in the Pakistani financial sector and they varied considerably in sophistication of systems and procedures, bookkeeping and accounting practices. Most banks had unique systems and procedures for compilation of information for statutory reporting to the State Bank of Pakistan (SBP) and for preparation of their annual financial statements. Consequently, significant issues with regard to credibility and quality of data reported in statutory returns and annual financial statements had arisen. The standardization of the process for compilation of accounting data at the level of commercial banks and development financial institutions (DFIs) was to address these issues. The FIRST project aimed to contribute to this standardization.

At the time of the project, the banking system in Pakistan comprised of 40 banks, 6 development financial institutions (DFIs) and 2 micro-finance banks. A major portion of banking sector assets was concentrated in 5 large banks, all of which were state owned and which were at varying stages of privatisation.

SBP started improving the supervisory framework for the banking system in the early 1990’s. These initiatives included restructuring within SBP, induction of qualified staff and in-house and overseas training programs.

The banks operating in Pakistan not only differed significantly in size, nature and complexity of business, but also in systems in place. While the banks were generally compliant with IAS, there were significant variations in accounting practices and maintenance of banks’ books. More or less all the banks had their unique systems and procedures for compilation of information for statutory reporting to SBP and for preparation of their annual financial statements. Consequently, significant issues with regard to credibility and quality of data reported in statutory returns and annual financial statements have been raised.

The project was an initiative of SBP’s Banking Supervision Department (BSD) as part of its effort to improve information disclosure and ensure integrity and consistency of data reported by banks. The quality of on-going monitoring of financial institutions depends upon the accuracy and homogeneity of data being reported to SBP. The project was to improve the quality of data and hence bring improvement in the quality of supervision of financial institutions.

In order to make statutory data reporting accurate, easy to understand and analyse, and to bring uniformity in the disclosure of financial information, it was felt necessary to have a standard chart of accounts for all banks and DFI’s. As banks in Pakistan are generally compliant with IAS, the project would mainly focus on account classification of assets and liabilities, income, expenditure and contingent assets and liabilities.

The project was approved in December 2003, and the implementation was completed in November 2005.

Lessons learned:

This type of project is very complex and the amount of effort required from consultants should not be underestimated. Use of local offices of accountants who are fully familiar with financial institution reporting in their country has the advantage of keeping costs at an affordable level and ensuring quality delivery. International expertise is only required in the initial stages of the project to provide expert advice on the international methodologies in use and trends.

Reports:

There are quite long spread sheets that are likely to be of value to the accounting or financial controlling departments of other central banks where reporting inconsistency delays and complicates effective bank supervision. However, these are too long and complex to be disseminated on this site. The document shared here gives an excellent overview.

• Preamble and Definitions- this document is especially useful because it explains the whole system and lists each proposed account e.g. advances and explains what data should be posted to that account.