However, in case of Pakistan, there appears to exist a somewhat paradoxical situation, where banks are able to widen their spreads mainly because they enjoy comparative advantage in offering unique banking services, primarily because of the almost non-existent competition from nonbank finance companies and a dormant institutional finance industry as pension and insurance sector reforms have yet to catch up with other financial sector reforms.
However, the future promises emergence of competitive non-bank companies which offer alternative sources of investments. And banks will need to generate fee-based income to fill the gap created by declining interest incomes. Pakistan’s market has a huge room for the development of derivatives and synthetic products. The growing financial engineering of services and products requires greater attention to the hedging of risks.