Why Pakistani Banks Failed to Adopt Advanced Approaches of Basel Accord According to Road Map of State Bank of Pakistan

Abstract

Basel Accord has gained much importance all over the world through implementation of its different versions since 1988. Its different approaches have been adopted depending upon banking structures, riskiness of banking structures, development of financial structures and economic development in respective geographic territories. Developing risk environment in banks therefore has long term impact on their assurance and reliability of operations and their ultimate results. The adoptability of accord largely depends upon amongst others the availability of human and technological resources as well as the national culture of financial liberalization and accountability. Evidences from around the world suggest that even advanced countries failed to implement the Accord in true letter and spirit despite having adequate resources due to several domestic and international reasons. Pakistan started implementing Basel environment in the year 2005 with the deadline of full fledged adoptability up to December 2009 which was latter extended for indefinite period of time. In this thesis we have endeavored to find out technical and human resource availability analysis of banks regarding their existing risk management and Basel Accord structures using mixed method approaches on primary and secondary data collected through questionnaires and annual reports of the banks to arrive at any conclusion. The purpose of our thesis is to find out the resource availability and capacities of Banks in Pakistan for moving on to the advanced stages of Basel Accord by reviewing their capacities under III Pillars of the Accord as well relating their capacities to the trends of their respective capital adequacy ratios and a newly developed ratio used in this analysis showing relationship between Credit Risk Employees to Risk Weighted Credit Assets. The results show that Pakistani Banks lack the required technical and human resources for risk management under Basel Accord as well as they are also reluctant to adopt the accord. Also the results show that the banks with the higher CR Employees to RWCA ratio have higher inclination towards Basel Accord and have better Basel Accord implementation resources than others. Also there is a lot of work required to be done in the field of Supervisory Review as well. Therefore additional legislation is required for improving implementation of all the three pillars in Pakistani banking environment incorporating the provisions of Basel III in the additional Minimum Capital Requirement document issued for Banks and FI’s by the State Bank of Pakistan.