Financial Stability Review 2007-08 2007-08 Presented By Presented By Shyam Kumar ID # 6137.

Financial Stability ReviewFinancial Stability Review 2007-082007-08

Presented ByPresented By

Shyam KumarShyam KumarID # 6137ID # 6137

Global and Domestic Developments :Global and Domestic Developments :

Financial Stability Implications for PakistanFinancial Stability Implications for Pakistan

Global And Domestic Developments…Global And Domestic Developments…

The benign global macroeconomic environment which The benign global macroeconomic environment which prevailed for an extended period until 2007, and was prevailed for an extended period until 2007, and was termed as ‘great moderation’, gave way to financial crisis termed as ‘great moderation’, gave way to financial crisis with global reverberations in Aug 2007with global reverberations in Aug 2007

The crisis originated in the sub-prime mortgage loan The crisis originated in the sub-prime mortgage loan portfolio and entered a chaotic new phase in Sep ’08 and portfolio and entered a chaotic new phase in Sep ’08 and badly shook the confidence in global institutions and badly shook the confidence in global institutions and marketsmarkets

The estimated loses from crisis currently stand at US$ The estimated loses from crisis currently stand at US$ 1.4 trillion1.4 trillion

Contrary to previous episodes of Financial Crisis, Contrary to previous episodes of Financial Crisis, developed economies were direct target marginally developed economies were direct target marginally influencing emerging economies of Asia & other regionsinfluencing emerging economies of Asia & other regions

Global And Domestic Global And Domestic Developments…Developments…

Rising Inflation in the worldRising Inflation in the world

Rising Inflationary pressures for Rising Inflationary pressures for

emerging economies due to emerging economies due to

rising food & oil pricesrising food & oil prices

Pakistan, which remained Pakistan, which remained

unhurt from direct impact of crisis, unhurt from direct impact of crisis,

has been more concerned with issues has been more concerned with issues

relating to monetary stability due torelating to monetary stability due to

rising inflation since before advent rising inflation since before advent

of the crisis of the crisis

Economic Growth OutlookEconomic Growth Outlook Growth in advanced economies Growth in advanced economies

expected to decline to 1.4 percent in 2008expected to decline to 1.4 percent in 2008

and -0.3 in 2009and -0.3 in 2009

Global growth expected to moderate Global growth expected to moderate

to 3.75 % in 2008, to 3.75 % in 2008,

& 2.2 % in 2009& 2.2 % in 2009

IMF forecasted Emerging IMF forecasted Emerging

Asia’s Growth in 2008 at 6.6%,Asia’s Growth in 2008 at 6.6%,

about 1.4 % lower than 2007about 1.4 % lower than 2007

Avg economic growth rate in Pak Avg economic growth rate in Pak

was 7.1% for FY04-08 & moderated was 7.1% for FY04-08 & moderated

to 5.8 % in FY08to 5.8 % in FY08

Macroeconomic StabilityMacroeconomic Stability

Macroeconomic stability in Pak has been under stress onMacroeconomic stability in Pak has been under stress onaccount of both domestic and external vulnerabilitiesaccount of both domestic and external vulnerabilities

After record borrowing of Rs 689After record borrowing of Rs 689Billion form central bank in FY08, GovtBillion form central bank in FY08, Govtborrowing continued to rise in FY09 asborrowing continued to rise in FY09 asIMF approved $ 7.6 billion loanIMF approved $ 7.6 billion loan External current account deficit External current account deficit remained at an unsustainable level remained at an unsustainable level of 8.4 % of GDP in FY08of 8.4 % of GDP in FY08

Net Foreign Assets (NFA) of the banking system have Net Foreign Assets (NFA) of the banking system have depleted bydepleted byRs 317.4 billion in FY08 and 346.4 billion in first few Rs 317.4 billion in FY08 and 346.4 billion in first few months of FY09months of FY09

Trade ProspectsTrade Prospects The drop in external demand from US & Western Europe hasThe drop in external demand from US & Western Europe hasaffected the Asian region foremost through trade channel, because affected the Asian region foremost through trade channel, because

ofoftraditional dependence of its exports on US & Euro Areatraditional dependence of its exports on US & Euro Area Pakistan’s primary dependencePakistan’s primary dependenceis still on the US (at 20% of totalis still on the US (at 20% of totalExports for FY08, average of 23.6 %Exports for FY08, average of 23.6 %from FY03-FY08), despitefrom FY03-FY08), despitegradual diversification of export gradual diversification of export destinations over the yearsdestinations over the years On the positive side, Pakistan’s levelOn the positive side, Pakistan’s levelof trade integration within and across of trade integration within and across Asia shows an encouraging and growing share of around 40.0 %Asia shows an encouraging and growing share of around 40.0 % While the exports figure for the first four months of FY09 has While the exports figure for the first four months of FY09 has

shown shown an increase of 16.3 percent YoY, continued downside risks to the an increase of 16.3 percent YoY, continued downside risks to the

growthgrowthof the exports base can be mitigated by focusing on high growthof the exports base can be mitigated by focusing on high growth

destinations, and striving to diversify the productdestinations, and striving to diversify the product base.base.

Dimensions of Monetary Dimensions of Monetary

&&

Financial StabilityFinancial Stability

Framework for Financial StabilityFramework for Financial Stability The framework for maintaining financial stability is still The framework for maintaining financial stability is still

evolving, largely because of the lack of consensus on the evolving, largely because of the lack of consensus on the varying institutional structures for banking supervision and varying institutional structures for banking supervision and central banking functions around the worldcentral banking functions around the world

Another point of divergence from the prevalent monetary Another point of divergence from the prevalent monetary stability regimes is that the objective of safeguarding stability regimes is that the objective of safeguarding financial stability does not have a single purpose which can financial stability does not have a single purpose which can be attained with a specific set of instrumentsbe attained with a specific set of instruments

The primary objective of financial stability policies and The primary objective of financial stability policies and assessment is to provide early warning signals in order to assessment is to provide early warning signals in order to help in crisis prevention as distinct from crisis mitigationhelp in crisis prevention as distinct from crisis mitigation

Stability of the financial system benefits and promotes: (i) smooth and efficient financial intermediation processes thatallocate savings to profitableprofitable investment opportunities, (ii) a relatively balanced development of different segments of the financial system, and (iii) proper transmission of monetary policy signals

SBP’s Existing Framework for Financial SBP’s Existing Framework for Financial Stability AssessmentStability Assessment

SBP’s existing framework for financial stability assessment SBP’s existing framework for financial stability assessment is primarily focused on the stability of the banking system is primarily focused on the stability of the banking system along with independent review of the Non-Bank Financial along with independent review of the Non-Bank Financial Companies, the Insurance sector, Pension Funds, and Companies, the Insurance sector, Pension Funds, and Capital MarketsCapital Markets

The assessment is undertaken as a shared responsibility The assessment is undertaken as a shared responsibility within the central bank: within the central bank:

The Banking Policy and Regulation (BPR) group The Banking Policy and Regulation (BPR) group undertakes policy formulation on the basis of the off-site undertakes policy formulation on the basis of the off-site examination of the banking sector in monitoring examination of the banking sector in monitoring developments and keeping an active dialogue with developments and keeping an active dialogue with banksbanks

The Banking Supervision group, on the other hand,The Banking Supervision group, on the other hand, undertakes both off-site enforcement and on-site undertakes both off-site enforcement and on-site

inspectioninspection

Stability of Banking SystemStability of Banking System

Profitability of the Banking SystemProfitability of the Banking System Despite the challenging domestic and international Despite the challenging domestic and international

economic environment, the banking sector in Pakistan economic environment, the banking sector in Pakistan has remained remarkably strong & resilient, on the has remained remarkably strong & resilient, on the back of a robust capital base and healthy profitabilityback of a robust capital base and healthy profitability

The net profit of the banking sector for The net profit of the banking sector for CY07 was Rs 73.3 billions, and decreasedCY07 was Rs 73.3 billions, and decreasedto Rs 63.2 billions for CY08to Rs 63.2 billions for CY08

The return on assets (ROA), declined The return on assets (ROA), declined during CY07 to more sustainable levelsduring CY07 to more sustainable levelscompared to the exceptionally high levelcompared to the exceptionally high levelin the previous yearsin the previous years

The return on equity (ROE) hasThe return on equity (ROE) hasexperienced a decline from 23.8 % inexperienced a decline from 23.8 % inCY06 to 15.5% in CY07CY06 to 15.5% in CY07

Assets and Funding Structure of the Assets and Funding Structure of the Banking SystemBanking System The assets of the banking system, grew by 18.8 % to The assets of the banking system, grew by 18.8 % to

reach Rs 5.2 trillion by the end of the yearreach Rs 5.2 trillion by the end of the year

A key characteristic of this growth wasA key characteristic of this growth wasthe huge expansion in the investmentthe huge expansion in the investmentportfolio, which surged to Rs 1.3 trillion,portfolio, which surged to Rs 1.3 trillion,with an annual growth of 53.0 %with an annual growth of 53.0 %

Loan expansion during CY07 was onlyLoan expansion during CY07 was only10.8% compared to annual average increase of 27.7% 10.8% compared to annual average increase of 27.7% for CY03-CY06for CY03-CY06

The share of the investment portfolio in the overall The share of the investment portfolio in the overall assets, which had increased to 24.7 % in CY07, declined assets, which had increased to 24.7 % in CY07, declined to 20.4% in H1-CY08to 20.4% in H1-CY08

Asset growth during CY07 and H1-CY08 was funded by Asset growth during CY07 and H1-CY08 was funded by substantial growth in the deposits (Rs 4.2 trillion by H1-substantial growth in the deposits (Rs 4.2 trillion by H1-CY08, showing an increase of 28.7 percent during the CY08, showing an increase of 28.7 percent during the 18 months of CY07 and the first half of CY08), well-18 months of CY07 and the first half of CY08), well-supplemented by the strong growth in capitalsupplemented by the strong growth in capital

Risk Assessment:Risk Assessment:Credit RiskCredit Risk

Non Performing Loans (NPLs) of the banking system increased by Rs 30.6 billion to reachRs 206.1 billion during CY07, and reached to

Rs 241.9 billion in H1-CY08 after having seena consistent decline during CY01-CY06

The NPLs to loans ratio (Gross) of the banking system saw an increase of 30 bpsduring CY07 to reach 7.2 % by end CY07,which increased by 50 bps to 7.7% in H1-CY08

Fortunately, this increase is not shared acrossthe industry, as banks with NPLs to loan ratioof less than 5.0 % own 97.7 % share of assets

Although indicators of asset quality do not pose an immediate threat to the stability of the banking sector, increasing NPLs give rise to concern about asset quality

Risk Assessment:Risk Assessment:Liquidity RiskLiquidity Risk

SBP continued with its tight monetary policy stance during CY07 and H1-CY08 by increasing the discount rate and reserve requirements

Considerable decline inexcess reserves especiallyfrom May CY08 onwards,indicating a more constrainedliquidity position

The liquidity position of the banking system went through a temporary phase of deterioration in October, CY08, due to decline in deposits and the surge in global commodity prices, with consequent impact on the external current account and the fiscal deficit, and finally on the foreign exchange reserves with the central bank

Liquidity risk also emerged given the increase in the profit rates on National Savings Schemes

Perspective on Consumer Finance in Perspective on Consumer Finance in PakistanPakistan

Consumer Finance in PakistanConsumer Finance in Pakistan

Banks’ consumer finance portfolio has grownBanks’ consumer finance portfolio has grown

at a rapid pace over the last few years , and itsat a rapid pace over the last few years , and its

share in overall credit of the banking systemshare in overall credit of the banking system

had risen to 13.8 % by end CY07, declininghad risen to 13.8 % by end CY07, declining

to 12.0 % by June CY08to 12.0 % by June CY08

It constitutes 3.6 percent of the GDPIt constitutes 3.6 percent of the GDP

While all categories of consumer finance havegrown substantially since the inception of thisproduct, the most significant increase hasbeen observed in personal loans

Consumer Finance–Myths and FactsConsumer Finance–Myths and Facts

Phenomenal growth in consumer finance has also raised a Phenomenal growth in consumer finance has also raised a debate regarding its downside risks and implications.debate regarding its downside risks and implications.

It is generally perceived that this particular asset product It is generally perceived that this particular asset product has:has:

given rise to consumerism in Pakistan, which has given rise to consumerism in Pakistan, which has contributed to the low level of national savings;contributed to the low level of national savings;

fueled inflation; andfueled inflation; and led to the rise in speculative activities in asset marketsled to the rise in speculative activities in asset markets

An analysis of actual facts and figures, however, dispels these notions:

Rather than promoting consumerism, this product has contributed in enhancing the standard of living of the middle class. Trends in savings of the household sector also do not support the perception of consumerism, as the average saving rate of the household sector is higher in the post-2000 period as compared with the ’90s.

Consumer Finance–Myths and Facts .....Consumer Finance–Myths and Facts ..... An analysis of inflation dynamics does not

support the claim that consumer finance isthe reason for fueled inflation. Core inflationwhich is more sensitive to the level of creditand associated increase in demand, hasshown quite contained growth over thelast few years. The recent rise in overallinflation is attributable to factors such as international price shocks

Personal loan‘s potential for spurring speculative activities is limited because of the fact that: this loan is priced competitively and is not an attractive

funding option for speculators; its main target market is mainly the fixed income / salaried

segment of individual customers who are generally risk averse and are not known to indulge in speculative activities;

such loans are relatively smaller in amount (average loan size Rs. 200000) than other categories of consumer finance, whereas speculative transactions in asset markets generally require larger sums of money

Major Issues and Challenges

The rising inflation rate, and certain degree of slowdown in economic activities, has constrained the consumer’s debt-servicing capacity

This weakness is further intensified by rising interest rates

The infection ratio has gradually risen to 5.5 percent of the total outstanding credit in H1-CY08, and the overall infection ratio of the credit portfolio at 7.7 %

Stability Assessment Of Financial Markets

Foreign Exchange MarketForeign Exchange Market The foreign exchange market in Pakistan faced a challenging The foreign exchange market in Pakistan faced a challenging

environment in FY08. While FY07 was characterized by record environment in FY08. While FY07 was characterized by record foreign inflows in the form of FDI, foreign portfolio flows, foreign inflows in the form of FDI, foreign portfolio flows, privatization proceeds, workers’ remittances etc., which helped privatization proceeds, workers’ remittances etc., which helped finance the current account deficitfinance the current account deficit

FY08, in particular from November onwards, saw a slowdown, FY08, in particular from November onwards, saw a slowdown, and even reversal, of some of these inflowsand even reversal, of some of these inflows

These developments were driven by a host of factors in the These developments were driven by a host of factors in the global and domestic markets, such as rising commodity prices global and domestic markets, such as rising commodity prices which added pressure to the import bill, an unstable political which added pressure to the import bill, an unstable political environment which carried with it a certain degree of environment which carried with it a certain degree of uncertaintyuncertainty

As a result, the trade deficit widened, foreign equity flows dried As a result, the trade deficit widened, foreign equity flows dried up, the privatization process was deferred and access to up, the privatization process was deferred and access to international markets was severely impacted, both due to the international markets was severely impacted, both due to the ongoing financial crisis, as well as the downgrading of ongoing financial crisis, as well as the downgrading of Pakistan’s sovereign rating by Moody’s(from B1 to B3) and S&P Pakistan’s sovereign rating by Moody’s(from B1 to B3) and S&P ( B+ to CCC) due to the weakening macroeconomic environment( B+ to CCC) due to the weakening macroeconomic environment

Foreign Exchange MarketForeign Exchange Market These developments exerted great pressure on the These developments exerted great pressure on the

external current account deficit and the rupee-dollar external current account deficit and the rupee-dollar parityparity

After a period of 4 years of relative stability in the After a period of 4 years of relative stability in the exchange rate, FY08 saw considerable volatility and exchange rate, FY08 saw considerable volatility and depreciation in the value of the Pak Rupee against depreciation in the value of the Pak Rupee against major currenciesmajor currencies

In particular, the PKR depreciated by 11.5 percent In particular, the PKR depreciated by 11.5 percent against the US$ in FY08, and 13.3 percent in the first against the US$ in FY08, and 13.3 percent in the first few months of FY09few months of FY09

Derivatives MarketDerivatives Market In Pak three types of derivative transactions are permitted:

a) Foreign Currency Options (FX Options),(b) Forward Rate Agreements (FRAs) and(c) Interest Rate Swaps (IRSs)

Cross-currency swaps on the other hand are approved on a case to case basis by SBP

Total volume of the derivatives market has reached Rs. 393.23 billion as of end-June FY08, from Rs. 212.61 billion as at end-June FY07, a growth of almost 85.0 percent in one year

Cross-Currency Swaps continue to have a dominant share (89.68 bn) in the volume of total outstanding derivatives, while FX options (42.56 bn) and Interest rate swaps (80.61bn) also have large shares

FRAs, however, continue to have a negligible share in total outstanding derivatives (300 mn)

Equity MarketsEquity Markets

FY08 and the first two months of FY09 wereFY08 and the first two months of FY09 were

particularly volatile for the stock market whichparticularly volatile for the stock market which

touched its peak level of 15,676 points as welltouched its peak level of 15,676 points as well

an all time low in trading volumes of 2.5an all time low in trading volumes of 2.5

million sharesmillion shares As against FY07, FY08 saw a net reversalAs against FY07, FY08 saw a net reversal

of the substantial Foreign Portfolio Investment (FPI) flowsof the substantial Foreign Portfolio Investment (FPI) flows Issues related to macroeconomic stability and political noise Issues related to macroeconomic stability and political noise

impacted investor sentiments and exacerbated the situationimpacted investor sentiments and exacerbated the situation To halt the continuing decline in value, the KSE management To halt the continuing decline in value, the KSE management

placed a floor of 9,144 points on the KSE-100 Index from placed a floor of 9,144 points on the KSE-100 Index from August 28, FY09 toAugust 28, FY09 to

Dec 15 2009 which served to prevent further decline and Dec 15 2009 which served to prevent further decline and insulated the market from all kinds of global and domestic insulated the market from all kinds of global and domestic developments, while also reducing trading to negligible levelsdevelopments, while also reducing trading to negligible levels

Islamic BankingIslamic Banking

International DevelopmentsInternational Developments The appeal and acceptability of Islamic banking has The appeal and acceptability of Islamic banking has

increased tremendously in recent years, particularly in the increased tremendously in recent years, particularly in the Gulf and in predominantly Muslim countriesGulf and in predominantly Muslim countries

According to an estimate by S&P’s Ratings Services, as According to an estimate by S&P’s Ratings Services, as much as 20 % of banking customers would now much as 20 % of banking customers would now spontaneously choose an Islamic financial product over a conventional one

Its presence in international financial hubs like London, Tokyo, Hong Kong and Singapore has increased significantly.

UK has shariah-compliant assets of US$ 10.4 billion, where London is now aspiring to be the emerging global hub for Islamic finance

Financial Services Authority (FSA) in UK has authorized 3 dedicated Islamic banks since 2004

Islamic Banking in PakistanIslamic Banking in Pakistan

Islamic banking has made swift progressin Pakistan since its re-launch in 2002 asevidenced by the commendable growthrate in excess of 60.0 percent per annumin both the assets and deposit base

At present there are six Islamic banks operating in Pakistan with a branch network of 228, and 103 stand-alone Islamic bank branches of 12 conventional banks, making a total of 331 branches by August, CY08

ROA and ROE for Islamic banks at 0.6and 3.3% for CY07 respectively arebelow the overall banking sector average

This decline is due to entry of four newbanks in CY06 & CY07, as in CY05ROA & ROE were higher at 2.6 & 16.3 % respectively

Risk Assessment Of The Insurance SectorRisk Assessment Of The Insurance Sector

Overview Of Insurance SectorOverview Of Insurance Sector

CY07 was an eventful year for the insurance sector, in particular for the general insurance companies

However, the insurance sector of Pakistan, being small and with little correlation with the developments of the international insurance market, managed to perform reasonably well in CY07

The insurance sector in Pakistan comprises of 1 general reinsurance company, 5 life insurance companies, 52 non-life or general insurance companies and 3 Takaful companies

The total assets of the insurance sectorhave increased by 32.1 % in CY07, ascompared with growth of 18.8 % in theassets of commercial banks over thesame period

Performance Review of the General Insurance Sector

The average paid up capital increased to Rs. 301 million during CY07, as compared to Rs. 252 million in CY06

Six companies fall short of minimum paid-up capital requirements.The operations of these companies have been suspended by the SECP

The profitability of the general insurance sector increased to Rs 56 billion in CY07, which was considerably high compared to Rs.15 billion in CY06

The premiums for motor insurance, which alone constitutes 50% ofthe total premiums, recorded a remarkable growth of 12% , against a 24% average growth in CY02-07

The general sector witnessed a very high claim ratio in CY07 (64.4 %) as compared to 57.1 % CY06. Much of the increase in claims has been due to motor and fire insurance. The claim ratio for motor insurance stood at 76.6 percent in CY07, which is rather high and raises some concerns

Performance Review of the Life Insurance Companies

Currently, there are two domestic,Currently, there are two domestic,

two foreign and one state-ownedtwo foreign and one state-owned

companies operating in Pakcompanies operating in Pak Although declining, the shareAlthough declining, the share

of state-owned company stillof state-owned company still

holds 91% of the total lifeholds 91% of the total life

insurance assets and 52.2% insurance assets and 52.2%

of total insurance assetsof total insurance assets The claims ratio (net claims/net premium)The claims ratio (net claims/net premium)

for the life insurance companies was 48.5%for the life insurance companies was 48.5%

during CY07, much lower than the 64.4%during CY07, much lower than the 64.4%

claims recorded by the general insuranceclaims recorded by the general insurance

companies during the same periodcompanies during the same period There is much rapid increase in premiums in There is much rapid increase in premiums in

comparison with claimscomparison with claims

Performance of Non-Bank Financial InstitutesPerformance of Non-Bank Financial Institutes

Non-Bank Financial InstitutesNon-Bank Financial Institutes

The group of Non-Bank Financial Institutions (NBFIs) includes the Non-Bank Finance Companies (NBFCs), Mutual Funds, Modarabas and Development Finance Institutions (DFIs)

The number of operative entities in FY07 was 209 which subsequently increased to 237 in FY08

NBFCs, Mutual Funds and Modarabas are regulated by the SECP, DFIs are regulated by the SBP

A public limited company engaged in the business of asset management, investment finance, leasing, housing finance, venture capital investment, discounting and investment advisory, or a combination of these services, is categorized as an NBFC

For each financial service that an NBFC provides, it needs a separate license from the SECP

Ownership Structure & Performance Review

The asset share of the domestic private NBFIs (excluding foreign-owned companies) reached 61.6% by end FY07compared to 50.5 % in the previous yearOn the other hand, the asset share of publicsector NBFIs declined to 21.6 percent,compared to 32.4 percent in FY06

Due to several mergers and acquisitionsthe number of operating institutions hasdeclined in almost every category,except Mutual funds

The mutual funds sector, has grown moreprogressively than the other financialinstitutions among NBFCs

Performance Review (contd)

During FY07, total assets of the NBFIs sector registered a relatively higher growth of 22.7 % to reach Rs 567.0 billion, compared to the YoY growth of 17.4 % in FY06

This growth in total assets largely came fromMutual Funds, which showed an exceptionalgrowth of 77% compared with 30.1% in the previous year, whereas all other sub-sectors,except for modarabas, depicted negative growth during the period

The share of advances in the total assets of NBFIs (excluding mutual funds and venture capital) declined to 48.6% as compared to the relatively high share of 51% in FY06

Payment And Settlement Systems

Payment And Settlement Systems

Smoothly functioning Payment & Settlement System reduces the cost of both real and financial transactions, minimizes the occurrence of financial risks related to transactions, and strengthens the confidence of the general public in the financial system.

To modernize the payment infrastructure in the country SBP facilitated the establishment of the National Institutional Facilitation Technologies (Pvt) Limited (NIFT) for automated conventional clearing services (for instance, overnight clearing, same-day high value clearing, inter-city clearing etc.).

The NIFT network currently serves over 4,500 branches of 40 banks (including SBP) in 100 major cities of Pakistan.

Launched on July 1 2008, and operated by the SBP, the Real-Time Interbank Settlement System (PRISM) is a systemically important payment system and is designed to settle all large-value payments in the country.

Retail Payment System

The Retail payment system (RPS) in Pakistan is still dominated by traditional paper-based transactions,driven by cheques for cash withdrawals,and funds transfers through Cheque-clearing

High, but declining share of paper-basedtransactions in the total number of transactionsis an indication of the increasing numberof electronic transactions

The number of electronic transactions hasincreased from 11.5 million in Q1-CY05 to33.9 million by Q2-CY08:

Impact on Risk Profile

Security Risk: It is generally believed that e-banking increases the security

risks as banks’ system are exposed to a more risky operating environment. The major types of security risks include: breaches with criminal intent; breaches by casual hackers; and loopholes in system design.

Strategic Risk: Lack of a clear understanding of risks associated with e-

banking activities among senior management may entail a strategic risk. Being relatively new, with a higher start-up cost, with different implications for early and late starters, e-banking activities can increase the institutions’ strategic risks.

Reputational Risk The decision to offer e-banking services can potentially increase

reputational risk, as issues such as the failure to deliver promised services, difficulty in using e-banking services, frequency of service disruptions, theft of confidential customer information; fraud etc. can affect the confidence of customers.

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