Banking System in Pakistan: Is Your Deposit Safe? (2024)

Introduction:

Recent statements by the State Bank of Pakistan (SBP) and the Deputy Governor, Inayat Hussain, regarding deposit protection have raised concerns among ordinary citizens. The SBP's assurance of a sound banking system in Pakistan may leave many wondering about the safety of their hard-earned money in the banks. In this article, we aim to shed light on the intricacies of the banking system in Pakistan, the protection it offers to depositors, and what happens if you have more than 500,000 PKR in your bank account.

The Nature of Deposits:

To begin with, it's crucial to understand that when you deposit money in a bank, your funds are not physically stored in a vault with your name on it. Instead, the bank takes your deposit and lends it to others in the form of loans, generating income in the process. This fundamental aspect of banking means that the money in your account isn't sitting idly in the bank; it's being utilized to facilitate economic activities.

Capital Adequacy Ratio in Pakistan:

As of June 2023, Pakistan's Capital Adequacy Ratio stood at 17.8%, indicating the bank's capital reserves as a percentage of its total risk-weighted assets. This ratio is a measure of a bank's financial strength and its ability to absorb losses. In simpler terms, only 17.80% of the money reflected in your account statement is actually kept as reserves by the bank. The remaining 82.20% is put to work through loans and investments.

The 500,000 PKR Limit:

The recent statement from SBP Deputy Governor Inayat Hussain emphasizes that depositors in Pakistan are legally protected up to 500,000 PKR. If a bank were to fail, depositors with balances exceeding this amount may not be guaranteed full compensation. It's important to note that 94% of account holders in Pakistan have deposits less than 500,000 PKR, while only 6% have more.

What Happens If You Have More Than 500,000 PKR in the Bank?

If you find yourself in the 6% of account holders with more than 500,000 PKR in your bank account, and the bank faces financial troubles, the excess amount over the 500,000 PKR limit becomes a claim against the bank. In the event of bankruptcy, the bank's assets will be liquidated, and unsecured creditors, including those with deposits exceeding 500,000 PKR, will be paid to the extent possible. While larger depositors may eventually recover most or all of their funds, there is a degree of uncertainty and potential delays in this process.

Should You Withdraw Your Money from the Bank?

The short answer is no; there's generally no need to withdraw your money from the bank. The SBP assures that deposit protection is one of the key safety nets in place. The Deposit Protection Corporation (DPC) ensures that the amount insured becomes immediately available to depositors in case of a bank failure. Additionally, remaining amounts of deposits are recoverable through a regulatory-assisted process. Currently, 94% of depositors are fully protected under the Deposit Protection Act of 2016.

Conclusion:

While concerns about the safety of your bank deposits are natural, it's important to trust the banking system and the regulatory mechanisms in place. The SBP and the DPC are dedicated to safeguarding depositors' funds and ensuring the stability of the financial sector in Pakistan. For the majority of account holders, the 500,000 PKR limit offers a considerable level of protection, and withdrawing your money from the bank is generally unnecessary. It's vital to stay informed and continue to have faith in the resilience of the banking system.